Cablegate: Russian Agriculture Jolted by Financial

VZCZCXYZ0000
PP RUEHWEB

DE RUEHMO #3151/01 3011426
ZNR UUUUU ZZH
P 271426Z OCT 08
FM AMEMBASSY MOSCOW
TO RUEHRC/USDA FAS WASHDC PRIORITY 5392
RUEHC/SECSTATE WASHDC PRIORITY 0523
INFO RUEHGV/USMISSION GENEVA 5222

UNCLAS MOSCOW 003151

SENSITIVE
SIPDIS

USDA FAS FOR OCRA/ KUYPERS; OSTA/HAMILTON, BEAN;
ONA/SALLYARDS, MURPHY
STATE FOR EUR/RUS
STATE PASS USTR FOR PORTER, HAFNER, KLEIN

E.O. 12958: N/A
TAGS: EAGR ETRD ECON WTO RS
SUBJECT: RUSSIAN AGRICULTURE JOLTED BY FINANCIAL
CRISIS AND ECONOMIC SLOWDOWN

REF A: GAIN RS8078

SENSITIVE BUT UNCLASSIFIED

1. (SUB) SUMMARY. Russia's agriculture sector has
begun to feel the impacts of the global economic
crisis. With some 40 percent of investments in
Russian agriculture financed by loans, many
observers believe that as many as 20 percent of
Russian agricultural enterprises may go bankrupt
by June 2009. Those most vulnerable to the
credit crunch are small producers of crops and
dairy products. The Ministry of Agriculture has
vowed to continue to support priority projects
and fund production. However, inflation in foodstuffs,
production costs and an expected decline in
agricultural imports in 2009 will continue to
exert economic pressure on the Russian Ministry
of Agriculture,consumers,farmers,and importers. END
SUMMARY.

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EFFECTS ON PRODUCERS AND IMPORTS
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2. (SBU) In the wake of the global financial
crisis, Viktor N.Khlystun, Deputy Head of
Rosselkhozbank, and the Chairman of the
Agribusiness Club, recently stated that the
shrinking availability of credit is the main
existential threat to the development of Russian
agriculture and the Russian food industry.
Russian bakers are complaining that they cannot
receive short term loans for working capital.
Many producer groups have reported that Russian
farmers have stopped buying equipment. For
instance, Arkadiy Zlochevskiy, the head of
Russia's Grain Union, told us on October 24 that
wheat farmers have been unable to buy
agricultural equipment, because of a lack of
credit.

3. (SBU) The crisis has already affected the
financial plans of some big agricultural holdings.
"Agroholding", one of the biggest poultry
producers, after a technical default, declared
that the company will freeze 5 billion rubles
($188 million) worth of investment projects that
are less than 90 percent complete. Another
agroholding "Razgulay" (grain processing and
trade, sugar production and refining, and land
ownership businesses) has declared that it will
freeze 5 billion rubles worth of investments in
the construction of 5 regional elevators and
grain export terminals. Rosselkhozbank has
stopped financing new projects. Sberbank has
also stopped all loans to agricultural producers,
according to the rumors circulating in the
Russian agribusiness community.

4. (SBU) Importers, who receive one third of all
Russian agricultural credits, are also suffering
from the financial crisis. Euroservice, a large
poultry importer and local poultry producer,
declared bankruptcy due to the inability to pay
back $646 million in government subsidized
loans. This company held 130,000 MT of the U.S.
poultry quota for 2008, but managed to import
only 30,000 MT before filing for
bankruptcy. Cargill representatives in Moscow
recently reported that the majority of their
poultry, pork and beef contracts for October,
November and December have been canceled due the
tight credit market. In contrast, both Tysons
and Smithfield report that business continues as
usual, although they are concerned about the
impact that the financial crisis may have on
their 2009 sales to Russia.

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MINISTRY OF AGRICULTURE'S REACTION
----------------------------------

5. (SBU) Russian politicians recognize that the
disruption in the supply of agricultural or food

products will have a dramatic effect on the
economic and social stability of the country. In
efforts to restore confidence, on October 18,
Agriculture Minister Aleksey Gordeyev took charge
of a working group consisting of the six largest
banks that finance the agriculture sector. The
working group agreed that banks will reduce
funding, but priority projects and funds to
support production will continue. The group is
continuing to identify anti-crisis measures to
stabilize the funding of agricultural producers.
First Deputy Prime Minister Viktor Zubkov has
pledged, "In case of failures, the government
will intervene. We have to prevent failures on
the foodstuffs market, as any failure means
increased consumer demand and tension in
society."

6. (SBU) Russia intends to continue to subsidize
the interest rate that financial institutions
charge for agricultural loans. In September, the
government issued legislation providing for feed
subsidies to swine and poultry breeders. As a
result, 10 billion rubles (approximately $376
million) will be allocated to compensate for the
increased costs of feed from the fall 2007
through spring 2008 (Ref A). The government also
intends to provide up to 21 billion rubles ($790
million) for diesel subsides to farmers.
Subsidies for fertilizer have not yet been
announced, but have also been promised for this
year.

7. (SBU) The personal opinion of one Ministry of
Economic Development official is that the GOR's
stabilization measures, including the Central
Bank's injection of liquidity into Russia's
banking system, have not yet reached the Russian
economy, and the declared funds are lower than
what is needed to support Russian banks, and to
stimulate the continued financing of short term
debts and obligations.

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COMMENT
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8. (SBU) Despite the recent effects of the
financial crisis on agricultural financing in
Russia and the recent weakening of the Russian
ruble by 5-10% versus the Euro and dollar, we
still believe that 2008 will be a record year for
U.S. agricultural exports to Russia. Agriculture
will likely remain a priority sector for Russia,
and the food industry and importers will
continued to receive support from the GOR budget
to meet the industry's short-term debts and
obligations. Still, financial pressures mean
that investment in agriculture will be lower in
2009 than in 2008. We believe that the financial
crisis and further ruble depreciation will
result in inflation and a decline in overall
agricultural and food imports in 2009.

BEYRLE

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