For Mikhail Orlov, founder of Black Earth Farming, the revival stirring in the neglected farming sector is a vital part of the transition from Communism.
“There have been no farmers in Russia. These people – in the sense of landowners who take responsibility for everything – have been eradicated. And whatever might have been the new seeds have been allowed to wither in the past 15 years,” he says. “There was a total absence of political support. It was a vacuum.”
Mr Orlov’s grandparents were big landowners until they were forced to flee Russia during the revolution. But his creation three years ago of Black Earth farming, which has since become a pioneering big crop grower, is about a great deal more than going back to his roots.
Mr Orlov, a former private equity chief who headed Carlyle’s and Invesco’s offices in Moscow, sees the recent burst of growth in the Russian agricultural sector as an opportunity for increasing asset value and yields.
“I am a modern businessman,” he says. “I am a boring private equity long-term value creator and I am always trying to find an asset play together with a cash flow play. The trick here is not just to harvest crops but to harvest money.”
Under Vladimir Putin’s presidency and now under his successor, Dmitry Medvedev, investors have started to do just that.
As grain prices have climbed, the government has made the sector a priority. It has committed $3.3bn in federal funds this year, plus about the same amount from regional governments.
Foreign investment nearly tripled between 2005 and 2007 to reach $458m. Overall, the level of investment soared last year, as locals ploughed funds into technology and land after record grain prices last year.
With the help of unusually good weather, Russia is set for the biggest grain harvest this year since 1992, with up to 105m tonnes, according to Andrei Sizov, managing director at Sovecon, a leading consultancy on the agricultural sector. The record was in 1978, when Russia produced 127m tonnes.
President Dmitry Medvedev has ambitions to cultivate the enormous amount of land lying fallow in order to make Russia a vital part of the solution to a looming global food crisis.
The potential is enormous because a large portion of agriculture land lies fallow, Mr Orlov said. “It is abandoned, yet we are importing 45 per cent of our milk, 55 per cent of our meat and 66 per cent of our sugar. I could go on for hours. It is absurd.”
Russia is now utilising 76.4m hectares of agricultural land compared with 115m hectares during Soviet times. However, this year saw the first small increase in the amount of land used since the beginning of the 1990s, Mr Sizov says.
Furthermore, Russia’s agricultural sector is still fragmented, and great gains could be made from consolidation. The average farm is only 2 hectares, compared with 16 hectares in Europe and 180 hectares in the US, says Mr Sizov.
With a land bank of 331,000 hectares and 243,000 hectares under cultivation in the rich black earth regions of central Russia, Black Earth Farming is one of the biggest croppers.
“You have to invest about $1,200 per hectare on top of buying the land. But after that, you start to get profits,” says Mr Orlov, stressing that much depends on close management of projects.
Land prices are still cheap, despite rising over the past few years as investors have moved in.
In the European part of Russia, it now costs anywhere between $300 and $2,000 a hectare, Mr Sizov says, compared with $4,000 to $7,000 in central and eastern Europe and $7,000 to $15,000 in western Europe.
The reason for the low prices, Mr Orlov says is the bureaucracy that is making the Russian agricultural sector unnavigable for many.
After buying land from villagers to whom the rights have been transferred since the Soviet collective farms were shut, it can still take up to two years to transfer those rights into ownership title, Mr Orlov says.
“The biggest question is relations with the local governor,” Mr Sizov adds. “Unless you agree with the governor, you can’t register any land. I think this is problem number one and why the agricultural sector is still so fragmented.”
Clouds on the horizon are rising costs and the impact of the global credit squeeze, which will make it harder for the bigger Russian operators to raise cash for growth.
The government is trying to stimulate growth by threatening to impose higher export tariffs on fertiliser producers.
Dmitry Mazepin, chairman of Uralkhem, one of Russia’s biggest fertiliser producers, says his company and the five other biggest ones are preparing to sign an agreement with the government to increase supplies to the domestic market by 30 to 40 per cent.
They are also planning an agreement that will fix domestic fertiliser prices at a discount of 10 to 30 per cent on the export price depending on the type of fertiliser, he says.
He believes such measures are necessary to ensure further growth in the Russian agriculture sector, which he thinks wil continue to grow by 8 per cent a year.
Mr Mazepin has had to postpone a planned initial public offering of up to 20 per cent of his company because of the global financial crisis.
But he says the cash flows generated by his company mean he will not have to slow growth, just delay some acquisitions.
As for Mr Orlov, farming is a welcome relief from the perils of Wall Street. “When you see what is happening in the US today, I like real stuff because it is real.
“It is a question of doing something which is creating value, including in the environment.”
