The fastest growing company in the world is located in the Far East of Russia
"We are ready to increase our production capacity"
Maksim Basov, CEO of the agro-industrial group Rusagro: “We are ready to increase our production capacity as soon as we are able to boost our export opportunities in the Asia-Pacific Region”
– Mr. Basov, there was a case reported by the media not so long ago about Rusagro’s intention to give up a hog farming project in Mikhailovsky Advanced Special Economic Zone which was aimed at flooding the Russian Far East with the cheap pork. Did you really have to choose whether to go ahead with the project or to quit it?
– Nothing of the sort. We do not count on the Russian traditional “avos” for success, which is the habit of relying totally on chance, on good luck. On the contrary, we always make logical assumptions of economic rationality to be able to operate in real time framewok. The work is in progress and we are now negating the terms with the federal and regional authorities. It was simply an exaggerated reaction from the media when we expressed our concerns about delays in conveying governmental decision on the amount of work to be financed from the federal budget. None of the documents had been signed until last December, but we finally managed to sign an agreement with the Far East Development Corporation at the end of last December. Recently there are two enterpises which are engaged on a contract with the Far East Development Corporation. To facilitate pork production we need to have three core infrastructure elements: gas, electrical grids and roads. Neither Rusagro Corporation, nor the Primorsky Krai local authority could provide our hog farms with gas, as this energy source supply is totally regulated by the Russian natural gas monopoly giant Gazprom. Thus, we developed and agreed some specific infrastructure projects with both Public Joint Stock Company Gazprom and its’ subsidiary, Gazprom Mezhregiongaz. With respect to roads and electrical grids, these infrastructure elements will be provided by the Far East Development Corporation. Part of the required infrastructure will be financed by the federal and local authorities and we will also pick up a share of expenditures. All the activities are going to be conducted simultaneously and in parallel.
– When is it going to be completed?
– Within the next three years – 2016, 2017 and 2018, we will have to complete developing the required infrastructure. We plan to be fully facilitated with gas by the year 2019. Unfortunately, Mikhailovsky priority development territory was not previously included into the regional gasification program of Gazprom, so we are now working with the local authority in order to update the plan appropriately. In case we are not able to add new locations to the plan which is already available, we will have to build the required gas facilities at our own expense. Alternatively, we can use liquefied natural gas (LNG). But I am sure we will be able to handle all the expected challenges.
– Do the Federal and regional authorities support the implementation of your project?
– Yes, definitely and it should be noted here that the Far Eastern Federal District Plenipotentiary Envoys and the Ministry for the Development of the Russian Far East provide us with active and visible support and we always have ready access to the Federal District top leadership. We really appreciate their support as while facilitating long time projects, you sometimes need to make on the spot decisions and keep the project moving ahead as soon as possible.
– What is the project's total investment volume?
– The currency exchange rate changes, so it impacts the nominal volume of rouble investments into the project. That’s why I can’t give you the exact amount but I can say that the project implies three phases and Rusagro have committed about 22-25 billion rubles in the first phase completion. The overall investment volume for both the second and the third phases is about 30 billion roubles. But we will be able to launch the second and the third phases of the project only provided that the company gets permission to supply our products to some other countries, which include China and Japan. Rusagro will produce enough pork within the next two years to meet domestic demand and only after that we will start producing pig meat for export. Of course, we will face some hurdles here as the Federal Service for Veterinary and Phytosanitary Surveillance of Russia and the State Food and Veterinary Service of China will have to sign all the required agreements on the export of pork to China. Foreign importers should be convinced that we (as producers) have eliminated the threat of any diseases. Every object within our complex development project, especially our slaughterhouse which is being built now, has to be certified according to relevant phytosanitary requirements and regulations of China. Pork producers in Russia are prohibited to contract directly with Chinese customers, so we have to arrange it with the help of external intermediaries. Although, we hope that within this year, two Russian meat producers, including our company, will pass the required certification. Undoubtedly, it will take much time and effort. Everywhere around the world, meat market is tightly regulated by strict rules and permanent veterinary surveillance. Nevertheless, pork and poultry meat are very profitable businesses for export, so we intend to further develop them. China and Japan are the world's largest producers and consumers of pork, but their prices are much higher than the ones we are able to offer. That’s why we are building our hog breeding complexes in Primorsky Krai – this will open the gates to our low-cost chilled meat to the countries with the most expensive meat on the market.
– What makes Russia one of the world's lowest cost producers of pork?
– Affordable supplies of the cheapest feed wheat in the world and high transportation costs to overseas markets make our pork exports competitive. The cost of raising one pig for slaughter in Russia does not include any transportation expenses, i.e. on average it takes 3 kg of feeding-stuffs to produce 1 kg of pork and the final amount of money should be tripled because of high transportation costs of feeding-stuffs. Thus, we have a clear advantage here – we don’t have to spend money on the feeding-staff transportation and delivery. Russian meat production is the second cheapest after the Brazilian one and Russian meat industry has achieved profitability of about 30%. Russia produces 90% of pork to meet domestic demand and less than 10% - for export, depending on the level of domestic consumption. Consumption has been falling amid a recent economic slump in Russia, so reduced domestic demand has also eased the burden on imports. Russian cheaper pork and other food items may boost international trading. It was economically shameful for the country to import that much in the past. The situation has changed, so we are now gradually becoming active food suppliers and we are opening the gates to our food products to the world markets.
– Why hadn’t you tried to launch any similar ambitious projects before the “Turn to the East" policy was announced and territories of priority development were created?
– We were tied up by the lack of infrastructure to facilitate pork production: gas, electrical grids and roads. I have already mentioned that at the beginning of our interview. Such projects would not be commercially viable without government support. Only private investments are not enough, as to launch complex and successful projects, we need such tools as Federal targeted programs, tax credits, etc. investment in modernized production facilities are huge. Even big businesses can’t bear the burden of all the implied expenses and social obligations. On the other hand, if I try and answer your hidden reproach, before we launched this project, we had never asked for help from the country’s government. Within a long period of time, we have been engaged in agriculturally related crop production business. Although we have only 28 thousand hectares of agricultural land in Primorsky Krai, we are aimed at increasing arable land by a few hundred thousand hectares more. The overall area of our arable land available in Russia is five hundred thousand hectares and we are planning to expand the business. Last year, for instance, we grew 15 thousand tons of corn on all of our farms in Primosky Krai and 10 tons out of these 15 were exported to Japan. The result doesn’t look extremely impressive because we wrongly took a wait-and-see strategy and thus delayed the development of the project at its’ initial stage. But if we come back to the positive results, we made a record profit on soya beans at the domestic market and we hope to enter new markets and find new customers in the near future.
– What are your most beneficial or important projects in the Far Eastern Federal District and within the territories of priority development in particular?
– We have three businesses in Primorsky Krai: the first one consists of three crop-growing farms and I have previously told you about them; the second one is oil-and-fat production plant in Ussuriisk city (Ussuriysk MZhK) which employs 400 people on a full-time basis. It produces a dietary supplement for animals which is called soybean meal. We sell it mostly in the Ural region and in the European part of the country. Our oil-and-fat plant also produces bottled oil which is exported to China and mayonnaise for the domestic market. Our third business is being developed now and within three years we are planning to complete the construction and further launch of three meat-processing plants. We are constantly monitoring and analyzing the market tendencies that allow our strategy to be flexible and our businesses to adapt quickly as markets evolve. For instance, we decided to abandon the fish farming project idea, but to grow greenhouse vegetables instead. We are currently developing our greenhouse farming project in the European part of Russia, but if we attract Chinese customers, we are able to extend the business to the Primorsky Krai. We can easily build greenhouses anywhere, but we are interested in large and ambitious projects, so again the main issue is connected with creating the powerful energy infrastructure. Thus I would like to reconfirm the fact that the territories of priority development and other forms of government support can help businesses stand their best chances of continued success and achievements.
– Do you plan to enter the Asian sugar market?
– Here we deal with the same problem as faces the pork market. First, you need to find ways to enter the Chinese and Japanese market, to open the gates for our Russian sugar to these markets. As soon as you achieve that, your sugar has to be certified according to relevant phytosanitary requirements and regulations of China, Japan and the other Asian countries. In the past decades, Russia didn’t export sugar to Asian countries, so there was no need to deal with any sanitary or veterinary regulations. Thus, the Asian sugar market is closed to us at present, but in case we overcome regulatory barriers and enter the Asian food market, it will promote great opportunities to develop our agricultural projects in the Far East of Russia. It is definitely one of our strategic priorities.
– How are you going to deal with shortage of a qualified workforce? Do you think you can attract enough skilled people to move to the Far East of Russia on a massive scale?
– It's hard for me to judge the term “on a massive scale”, I can only judge it based on our company’s experience. We have a huge pool of candidates who would be glad to be employed by one of our businesses in Primorsky Krai. I need to mention here that we really had some recruitment problems when we launched our first businesses. But soon people realized that we were able (and are able) to provide them with not only employment, but also with their own homes with modern conveniences. We build flats and houses for our employees based on the Dutch architectural design. Currently, we can’t offer a great number of vacancies available as our businesses are still developing and they are now relatively small. But as soon as we launch our pig-breeding complexes, we will have to hire thousands of specialists. Thus, I am very positive about our ability to attract qualified workforce and our ability to hire the best people. Just let me add one more thing – lots of people who are now employed by our enterprises in the Volga region, in the Ural region and in European part of Russia, appreciate the aquatic and maritime environment of Pimorsky Krai. Proximity to neighboring Asian countries favors closer trade and economic ties with them. In view of this, we believe that the country government, local businesses and ordinary people have extensive common interests in this region and so we are ready to provide capabilities to achieve all our most ambitious goals.
– The year 2015 was very difficult for the Russian economy. What about your company? How satisfied are you with the results?
– For Rusagro the year was rich in the events. Despite the unstable economic situation in the country and in the world, the company improved its’ business performance, significantly increased the assets and became one of the unquestionable leaders in the food production segments. The company's shares price increased 100% and the company topped the list of the world businesses with the fastest growing profits. With respect to increase in assets, we can name our oil-and-fat production plant (Ussuriysk MZhK) which works at its’ full power and produces 450 tons of soybean meal a day. Our Maslava trademark is officially registered in China. Therefore, we are full of optimism about our plans to enter the Asian food market and realize our export potential to a maximum.
According to Rusagro’s operating results report, the company’s unconsolidated revenues grew by 25% to RUB 82.5bn in 2015. Though, the company’s growth rate was more than two times lower than in the year 2014, when the company's revenue increased by 57%. Sugar sales made the greatest contribution to the company’s revenue growth in 2015 year. Sugar sales increased by 46%, to 32.9 billion rubles, providing more than a third of the company's unconsolidated revenues. Grain sales increased by 32% (compared to their growth by 23% in 2014) to 14.2 billion rubles. Fat-and-oil sales slowed four times compared to the previous year and increased only by 16% (+67% a year earlier) to 17.3 billion roubles. Consumption in Russia was hit, creating a downbeat profile for pork demand in 2015. Meat products sales increased only by 2% to 18.1 billion rubles, and revenues in the fourth quarter even dropped by 6% compared to the same period of the year 2014. Rusagro takes the fourth place in the ranking of the largest Russian agricultural holdings established by BEFL according to the results of the year 2014.
Sugar business of the company is represented by six sugar factories in Tambov and Belgorod oblasts. Rusagro meat business is presented in the Russian market by two enterprises LLC «Belgorod bacon», having manufacturing facilities in Shebekinsky and Volokonovsky districs of Belgorod region and LLC «Tambov bacon» – in Zherdevsky, Znamenskoye and Sampursky Districts of the Tambov region. The oil and fat business of Rusagro is represented by three enterprises: OJSC “Zhirovoy kombinat” (Ekaterinburg Fat-processing Integrated Works) in Ekaterinburg city, Oil Extraction Plant in Bezenchuk settlement of Samara region – CJSC “Samaraagroprompererabotka” and LLC “Primorskaya soya”. Rusagro owns 75% of LLC "Primorskaya soya”). Rusagro is one of the largest agricultural companies which produces sugar beet food and fodder wheat, fodder and malting barley, field pea, high-protein soya, fodder corn, food sunflower.