© Lemken

27.03.2018

"SANCTION POLICIES HAVE LED TO UNCERTAINTY FOR EXPORTERS TO RUSSIA"

As the largest agricultural country in the world, Russia’s demand for machinery is extremely high. The Kremlin wants to cover this demand using domestic technology. How can innovative manufacturers survive there? An interview.

By Christoph Götz

Anthony van der Ley © LemkenThe continuing protectionist policies in Russia have hit the agricultural machinery industry particularly hard. In 2017, 500 million euros worth of tractors, combine harvesters, plows, cultivators and forage harvester produced in Germany made their way to country on the Volga. But the fact remains that demand for machinery in the world's largest agricultural country is far higher than this. If the Kremlin has its way, domestic technology will cover this demand. In an interview, Anthony van der Ley, CEO at an agricultural machinery company, and Michail Mizin, who represents VDMA's political interests in Russia, explain how innovative manufacturers can gain a foothold in the market there.

Mr. van der Ley, how would you assess the current situation of business in Russia regarding the agricultural machinery industry?
Anthony van der Ley: Demand for efficient agricultural technology is higher than at almost any other time in history, particularly in the large states of Russia and Ukraine, where we achieved growth of 20 percent or more last year. In 2017, German exports to Russia grew to around 500 million euros, allowing us to record excellent growth for the second year running. An important reason for the current boom is the increased income for farmers, which has resulted from the growing domestic demand for agricultural products. This is joined by the Russian government's subsidy policy, which has had a very positive effect for us, due to the high level of self-sufficiency that agricultural production now has to support. We are therefore expecting to maintain this high level of growth in 2018.

Despite continued isolationist tendencies, European agricultural machinery and tractor manufacturers are enjoying great success in Russia. Why is this and where is the problem?
Anthony van der Ley: Russia is and will continue to be one of the top markets for manufacturers of innovative agricultural machinery and tractors. The market potential is huge - not only due to the sheer size of the country, but also due to the modernization and productivity boom which has taken agribusiness by storm. However, ability to invest remains the Achilles' heel in many places. Farmers between Moscow and Vladivostok are struggling to understand the politically-motivated obstacles that the government has placed in their way with regards to financing, and are rightfully frustrated. After all, government programs which award low-interest loans and funding programs for investments in technology from "Mother Russia" restrict farmers' choice of agricultural machinery.

Michail Mizin © VDMAMichail Mizin: Entrepreneurial companies suffer the most from this isolationism, as they must accept substantial losses of prosperity for no reason. The fact that many businesses are pulling out all the stops to increase their productivity with efficient, high-end machines, just goes to show how much potential there is for us in Russia.

Many view the situation in Russia as particularly volatile, not only due to the protectionist aspect, which has many different facets, from financial hurdles to tariffs. Where does the agricultural machinery sector, one of the largest machinery exporters, currently see the most need for action?
Anthony van der Ley: The crisis and sanction policies of the previous five years have inevitably led to uncertainty for exporters to Russia. Many sectors had to accept drastic losses, although fortunately these were limited in the agricultural technology sector. The general geopolitical situation therefore only had a very small effect on our sector from the very beginning. And yet, there is a large fly in the export ointment. Protective tariffs, temporary import quotas and a sustained policy of discriminatory state subsidies show that Moscow is ready to use every trick in the protectionism book, if necessary. To some extent, a gradual improvement is on the cards, but there is no reason to celebrate yet - Russia's economic and industrial policies are aiming towards self-sufficiency, particularly in agribusiness.

Michail Mizin: Putin's commitment to self-sufficiency and resolute adherence to this idea has not only had the generally positive effect of increased capacity in primary agricultural production, but has also led to a noticeable increase in the market share of Russian machinery manufacturers, for example in combine harvesters or for soil tilling. It is not yet clear whether this will turn out to be a sustainable development step or just another flash in the pan. However, it is certain that the Russian industrial policy has firmly on the side of domestic manufacturers for some time now. Subsidies of up to 20 percent when purchasing a machine made in "Mother Russia", low-interest loans and much larger state budgets for industrial research leave no doubt about where Russia is heading.

Western manufacturers, on the other hand, are being subjected to considerably more restrictions and limits - even though this means that agricultural productivity is not growing as it could. In 2017, the government announced its "Agricultural Machinery Strategy 2030", which unmistakably pursues the goal of increasing the market dominance of domestic manufacturers even further. A market share of 80 percent by the year 2021 is the target, ensuring that exporters and foreign manufacturers with local production facilities will lose out. At no point does the paper mention the transfer of technology or the development of pragmatic cooperation solutions - two aspects which are urgently needed.

Apart from pure numbers, why is Russia such an important market for your sector?
Anthony van der Ley: Russia and the CIS countries are an important test bed for our industry. Farms measuring hundreds of thousands or even millions of hectares, an unforgiving climate and heavy soils are not unusual. If a machine works in Russia, it will work anywhere. Succeeding in this demanding environment is the best proof of quality for an agricultural machine or tractor, and is better than any possible stress test under laboratory conditions. As the largest exporters of innovative agricultural machinery, the manufacturers organized in VDMA have long passed the test in Russia.

Increasingly extreme weather and fluctuations in the climate mean that agribusiness is harder for farmers to predict than in the past. Thanks to our innovative hardware and software solutions, we primarily view ourselves as strong partners for farmers. Mature, quality products reduce risks to a minimum and enable countermeasures to be taken in good time. Windows for sowing and harvesting are getting shorter all the time, demanding the highest standards from the technology. The same goes for farm management, which can be optimized significantly using intelligent networking ideas.

What is VDMA Agricultural Machinery doing to facilitate market access to Russia for its members? What has been achieved so far?
Michail Mizin: We are very concerned about the ever-increasing tendencies of isolationism and renationalization, which are in no means solely restricted to Russia. To interfere in the regulatory principle of free trade is to shake the foundation of our economic system and our prosperity. This is our regulatory compass, but what does it mean in practice? The successful dismantling of particularly serious trade barriers over the last few years has proven that the continued efforts to establish a constructive dialog with all relevant stakeholders in government, agriculture and industry, combined with clear and reliable demands, have paid off. Compared to the allocation of a defined number of combine harvesters for import, as was enforced between 2014 and 2016, the current situation is far more relaxed. The intervention at WTO level, which we formulated together with the EU Commission and was supported by intensive meetings with top representatives from the Russian government and authorities, was not the only factor, but did play an important part. It was supported by a very productive, trust-based cooperation with the Eurasian Economic Commission at all levels, which has contributed to preventing excessive regulations, particularly in the technology sector.

Anthony van der Ley: Despite this, we are not in the clear yet. The Russians have now recognized that "local content" - the proportion of added value from local product manufacturing - is a potent control tool which they can use to their advantage. The government is attempting to create added value from within the country through very ambitious and often unrealistic regulations. Regulations that target the use of key components from Russian suppliers cannot be adhered to in many cases, as they would prevent us from reaching anything like the levels of innovation and quality expected by our customers.

Which strategies is the agricultural machinery industry pursuing to remain in business in the future?
Michail Mizin: In complicated conflict situations, as is currently the case in Russia, the only way to move forward is to be prepared to take a multi-pronged approach. The foundation for this is a full range of instruments for political representation of interests, which VDMA has at its disposal both in Moscow and elsewhere. There can be no success without regular conversations or personal trust, although this does not automatically mean that results are immediate or reliable. After all, Russia is now applying far more astute methods to favor the domestic industry than in the past. Instead of risking an obvious WTO infringement, Putin has introduced a scrap charge for autonomous agricultural machines that applies to all models without exception. However, the introduction of clever subsidy programs means that Russian manufacturers will receive compensation. Due to the opacity of the regulations in Russia, the advice provided by VDMA is growing in importance, which is why we have set ourselves the standard of being even more available in the country.

With our Russia topics, we are continuing to contribute on a domestic and EU-level, for example with parliamentary evenings, which bring politicians of all parties together and increase their awareness of the situation. Our strategy of dialog also aims to build up local value creation in an appropriate scope, help people find jobs, and thus make a visible contribution to welfare economics.

Anthony van der Ley: Our decisive assets are and will remain our products, our machinery, and our services. Progressive farmers and agricultural entrepreneurs in Russia have long realized this, relying on professional structures with innovative technology and first-class service. Russia's potential remains huge. Large, often still extensively farmed areas and high-quality soils make the country one of the most important agricultural regions worldwide. Introducing innovative technologies and operating approaches here holds enormous potential, both today and in the future.

Further Information

VDMA Agricultural Machinery   |   Lemken   |   VDMA Foreign Trade   |   VDMA Russia   |   VDMAimpulse 02-2018: "Trade policy reaches a crossroads"   |   VDMAimpulse 02-2018: "Trade after Brexit: A matter of cake and cherries"   |   VDMAimpulse 02-2018: "Buy Russian regulations do not make life easier"   |   VDMAimpulse 02-2018: "China on course for expansion, but more openness needed"   |   VDMAimpulse 02-2018: "Moscow is ready to use protectionism" 

 

© VDMA
Contact
Christoph Götz, VDMA Agricultural Machinery.