By Katrin Pudenz
In 2017, 500 million euros worth of tractors, combine harvesters, plows, cultivators and forage harvester produced in Germany made their way to Russia. But the fact remains that the actual demand for machinery in the country is far higher than this. And this demand should be met by the domestic industry as Russia continues to use trade barriers to protect its domestic manufacturers. As described by VDMA free trade expert Oliver Richtberg in his text "Trade policy reaches a crossroads" (VDMAimulse 02-2018), state bodies and companies generally give preference to Russian products in procurement, while subsidies for Russian products in certain sectors distort the market. Russia has created far-reaching rules which determine whether a product or a machine can be recognized as Russian.
VDMA Russia expert Monika Hollacher emphasizes that in view of the high level of state participation in the Russian economy, developments in Russia are problematic for many sectors of mechanical engineering. This is how "a maze of hard-to-grasp rules is created," she explains. "The issue of the Russian origin of a product is particularly problematic because it remains open in many regulations as to which rules of origin can be applied and when."
It is also difficult to apply a regulation on the origin of the goods in technical manufacturing steps. According to Hollacher, this interference can be counterproductive to technical developments.
Protective tariffs, temporary import quotas, a sustained policy of discriminatory state subsidies
Anthony van der Ley, CEO of the agricultural machinery manufacturer Lemken, explains in an interview with VDMAimpulse that the crisis and sanction policies from the previous years have resulted in uncertainties for exporters to Russia. "Many sectors had to accept drastic losses." Despite the fact that "the general geopolitical situation only had a very small effect on our sector from the very beginning", there is still 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."
Michail Mizin, VDMA Agricultural Machinery political advisor in Moscow told VDMAimpulse that "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.
While Russia subsidizes up to 20 percent of the sale price for the purchase of "domestic machines", western manufacturers are faced with more restrictions and limits. "Even though this means that agricultural productivity is not growing as it could," emphasizes Mizin. "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. "The goal is for a market share of 80 percent by 2021. “Exporters and foreign manufacturers with local production facilities will lose out."
Russia and the CIS countries are an important test bed for the agricultural machinery industry
Despite this, Russia remains an important market for agricultural machinery, not least because Russia and the CIS countries are an important test bed for the industry, explains Anthony van der Ley. Farms measuring hundreds of thousands or even millions of hectares, an unforgiving climate and heavy soils are not unusual here. "If a machine works in Russia, it will work anywhere," explains the CEO of Lemken. "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."
VDMA Russia expert Monika Hollacher also confirms that Russia is an interesting patch for mechanical and plant engineering. "In general, among the mechanical engineering companies located in Germany, the willingness to localize production has increased over the past few years. The key factors for this are market size and customer proximity." However, "the value creation in a country can only be consolidated if a sufficient number of reliable, qualified supplier structures have been established. Until now, this has not been the case in Russia," she explained. Even Russian companies have been largely forced to buy their components abroad and will thus struggle to fulfill the requirements for their Russian products.
VDMA Foreign Trade | VDMA Russia | VDMA Agricultural Machinery | VDMAimpulse 02-2018: "Trade policy reaches a crossroads" | VDMAimpulse 02-2018: "Trade after Brexit: A matter of cake and cherries" | VDMAimpulse 02-2018: "Sanction policies have let to uncertainty for exporters to Russia" | VDMAimpulse 02-2018: "Buy Russian regulations do not make life easier" | VDMAimpulse 02-2018: "China on course for expansion, but more openness needed" |