Olam Insights

with Raj Vardhan, Senior Vice President and Regional Controller, CIS Region

Over the last 18 months, the Russian economy has witnessed capital flight, depreciation of the ruble, rising inflation, high interest rates, consumption decline and budgetary pressures. But some sectors of the economy continue to be transformed. Many people may not realise that this transformation involves imported western dairy products being rapidly replaced by locally produced ones – which is good for consumers and for the local dairy farming industry.

Russia is supportive of greater investments in the local farming sector as it reduces dependence on imports and conserves precious foreign exchange. The Chairman of the National Dairy Producers Union of Russia (Soyuzmoloko) Andrey Danilenko has said it is a top priority for the Ministry of Agriculture to develop self-sufficiency in food production and that milk is high on the priority list. However, for domestic produce to completely replace imports, local operations must increase yield, productivity and quality. Doing so requires investment support from the state, financial institutions and other multi-lateral agencies.

The government is cognisant of the agriculture investment challenges faced by operators like us. Infrastructure costs and lending costs in Russia are significantly higher than in competing regions. There is a need to build support structures and change current mindsets to improve manpower training, manufacturing and logistics efficiency and increase investment in R&D. Some 1.5 trillion rubles or US$42 billion of state funds have been earmarked to support farmers between 2013 and 2020, which will reap positive results when allocated and used to support the government’s long-term objectives.

To encourage growth in the dairy sector, the federal government has announced a subsidy of up to 20% on various new investment initiatives. It has also earmarked significant funds to subsidise cost of capital, purchase of agri machinery, import of cows, genetic research and promotion of high quality milk, with subsidies linked to farm size. This bodes favourably for Olam’s expansion plans.

While the support structures are strong, long term success remains dependent on investors proving their mettle. To succeed, corporate investments should be directly aligned with the objectives of the Russian government. Our investments in dairy and crop farming are a case in point. Since 2012, Rusmolco has invested 7.4 billion rubles or approximately US$120 million in the construction of a new modern dairy farm in Arshinovka for 4,600 cows and the expansion of our agri-base in Penza with new grain dryers, elevators and storage capacity.

The country’s infrastructure and logistics network require new investments to update and upgrade to support the large agricultural manufacturing base. Olam has made significant investments in building logistics infrastructure for both dairy and crop farming operations. We have also made investments outside of Rusmolco such as our acquisition of the Azov shallow water port terminal and have a continuing interest in additional port facilities.

Rusmolco’s key performance indicators have improved significantly as we overcame barriers and established a leading position in the domestic industry. As Chairman and founder of Rusmolco Naum Babaev says, agriculture is one of the few sectors in the Russian economy which demonstrated a positive trend even in a recession. Given the importance of agriculture to the Russian economy and the government’s support and focus, there is massive potential for profitable growth in Rusmolco.

Local partner privileges

Rusmolco’s progress and success to date could not have been achieved without our joint venture partners. They play a vital role in the business with their very strong contextual knowledge of the agri industry and a clear understanding of government policies and their implementation. Naum and former Rusmolco CEO now President Rashid Khairov are veterans in the Russian agri industry with decades of experience. Rashid is also the CEO of Damate group. They bring to the table a strong configuration of assets – land bank, farming operations, logistics, customer and banking relationships and strong government relations. We share common aspirations in the development of the dairy and agri business sectors in Russia.