INTERVIEW: NAMIK KEMAL PARLAK

In an exclusive interview with Miller Magazine, Eduard Zernin, Chairman of Rusgrain Union, proposes alternative payment methods in the trade of Russian grain and pulses. He introduces the idea of establishing a BRICS Grain Exchange, emphasizing, “This will make it possible to resolve controversial issues and solve at the strategic level the problems that have arisen in the trade of agricultural products between countries.”

Eduard Zernin, the Chairman of Rusgrain Union, gave an exclusive interview to Miller Magazine after the Grain Forum 2024 held in Dubai. Delving into various facets of the grain industry, Zernin outlines a visionary path for Russia’s role in the global agricultural arena. Zernin commences the interview by highlighting the triumph of Grain Forum 2024, attributing its success to the global interest in obtaining firsthand insights into Russia’s agricultural landscape.

He discusses the evolving nature of the Russian export quotas, portraying them as export targets stimulating activity rather than restrictive measures. He anticipates a quota redistribution mechanism to further enhance export dynamics. Zernin outlines an ambitious vision for the current season, setting a goal to elevate Russia’s influence further by aiming to provide every fourth ton of world supplies.

The interview also delves into the broader dynamics of the world grain market, acknowledging the pressures on profitability faced by the crop growing sector due to escalating production costs. However, he underscores Russia’s advantageous position, particularly in terms of self-sufficiency in fertilizers, offering a unique edge in the competitive market.

He identifies major barriers in bank settlement, trade finance, and insurance, particularly related to payments for Russian grain and pulses. He contends that banks, despite formal exemptions from sanctions, refuse payments, suggesting a political motive to reduce the competitiveness of Russian grain on the global market. Zernin proposes alternative payment methods, suggesting urgent discussions under the BRICS umbrella or exploring the option of agro-export trading on Russia’s commodity exchange for Rubles.

Mr. Zernin, first of all, we would like to congratulate you on the success of the event. There are almost a thousand delegates, including top officials from Russia, Turkey, India, Morocco and Saudi Arabia. How do you personally evaluate the outcomes of this gathering?

I attribute the tremendous success of Grain Forum 2024 primarily to the heightened interest of the global professional community in Russia’s agricultural prospects and its significant role in global grain market trends. The recent unsuccessful attempt to cancel Russian grain has certainly played its role as well. This sad example of political interference in the grain market led not only to a sharp rise in wheat prices but also interrupted the flow of reliable information from the Russian agricultural sector. The acute phase of the cancellation has been overcome, but many invisible barriers still remain. That is why we decided to hold a major public event on an international scale. The result exceeded expectations. The attempt to cancel led to the exact opposite. Our partners want to receive first-hand information, appreciate live communication and open professional discussion without political slogans, and I think this is why they attended the Forum.

All business people are well aware that it is impossible to remove Russia from the world grain and pulses market. Last season, we supplied every fifth ton of milling wheat to countries in need. This season, we have set a goal of every fourth ton of world supplies being of Russian origin. We are consistently moving towards this goal, as we are experiencing record harvests and government policy does not limit our opportunities.

QUOTAS AS CATALYSTS, NOT CONSTRAINTS IN EXPORT DYNAMICS

You mentioned government policy. What about export quotas and taxes?

For the second season in a row, the quota is more of an export target than a restrictive measure. It does not limit us but rather stimulates export activity, especially in the first half of each season. From this season, a quota redistribution mechanism will be introduced, which will allow weaker exporters to give up excess volumes in favor of stronger players, which will also stimulate export activity. From next season, liability will be introduced for non-use of quota, so that it will be economically costly to hold and not use quota volumes.

The export tax has a different nature. It was introduced to protect the local market from global volatility generated by aggressive financial speculation on commodity exchanges in third countries. This is how the old-fashioned or “traditional” grain market works, with world prices set and manipulated in third countries. This looks absurd. That is why we came out with an initiative which, in our opinion, will resolve the current situation in favor of real grain producers and consumers, not financial speculators. Our experience of the last two years has clearly shown that the structure of the world grain market is not just old-fashioned, but hopelessly outdated and dangerously vulnerable, it needs a reset.

But let’s get back to export taxes. There was a time when the state invested intensively in grain production, using all available instruments of state support, primarily subsidies. Now, when grain production reached high levels, they decided to “collect stones”. For the past 10 years, Russia’s grain harvest has been above 100 million tons; for the last five consecutive years, it has been consistently above 120 million tons. In the 2024/25 season, we also expect the gross harvest to seriously exceed 120 million tons, and the market expects 130-140 million tons. The state wants to get its share of such an obvious success and is acting with its fiscal instruments. It is difficult to say whether this is bad or good unequivocally. The funds received from export taxes do not go to the general state revenues basket, but directly to the Ministry of Agriculture, which redistributes them to the industry in accordance with its strategic goals. These include breeding and seed production, local grain processing and a number of other goals aimed at strengthening Russia’s food security and export potential. The interests of traditional grain producers look a bit disadvantaged, but this is only at first glance. Russian agriculture would benefit from increasing the sustainability of the national grain value chain - from high-yielding seeds to its own powerful flour milling industry.

World crop growing sector profitability is currently under pressure from the global rise in production costs. But Russian grain producers have serious advantages over their foreign colleagues: it is self-sufficient in fertilizers, the costs of which are controlled quite effectively by the government through export quotas.

In addition, we are in dialogue with the Ministry of Agriculture on the export tax formula update to reduce the fiscal burden on grain exports by the beginning of the 2024/25 season.

CHALLENGES FACED BY RUSSIA IN INTERNATIONAL GRAIN TRADE

You mentioned the remaining barriers. What are they?

We see major barriers in bank settlement, trade finance and insurance. Despite formal exemptions from sanctions for agricultural products, banks refuse payments for Russian grain and pulses. We are already past market conditions for trade finance, only private arrangements work. All this ultimately leads only to higher trade costs and prices of Russian agricultural products for countries in need. Perhaps this is the purpose of the imposed bank over compliance - to reduce the competitiveness of Russian grain on the world market. We see this as a political issue since no market institution will voluntarily give up the legal and profitable business of servicing our supplies.

Officials throw up their hands and say that these are private initiatives of banks, but we do not agree with this. All banks in the country cannot stop servicing grain contracts at once without having the relevant instructions from their regulator. In informal conversations with our customers, they directly talk about it and draw attention to the unofficial nature of such instructions. The people giving them are well aware of the consequences of their instructions, so they do not want to leave official traces.

They try to control the world grain market through unofficial messages. When they succeed, serious humanitarian incidents occur. A striking current example is Nigeria, one of the fastest growing economies in Africa, which a few years ago purchased 1.3 million tons of Russian grain. Our plans were to increase supplies to 2 million tons at a minimum. But today, Nigerian flour millers simply cannot pay for our supplies, and local banks refuse to pay for grain of Russian origin. As a result, Nigeria has a sad record of increasing hunger among the population. The country was the first in the world to cross the threshold of 100 million starving people. This is open data from the World Food Program, which we process and publish on a monthly basis in our World Hunger Monitor.

Another surprise that shocked us was the recent refusal of banks from Turkey and some other countries to make payments for Russian agricultural products. In the situation with Turkey, one of our largest agricultural trading partners, this could quickly lead to a collapse of supplies. Turkish buyers of Russian grain and pulses could lose us as a strategic supplier and suffer enormous economic losses. This cannot be allowed to happen.

BRICS GRAIN EXCHANGE INITIATIVE

If the pressure of third countries is really so serious, let us urgently discuss alternative forms of payments. This can be done, for example, under the BRICS umbrella. We have recently come up with an initiative to create a BRICS Grain Exchange, for which we intend to develop a trading and settlement mechanism that is transparent to all parties. This will make it possible to resolve controversial issues and solve at the strategic level the problems that have arisen in the trade of agricultural products between countries. In this project, we see a unique opportunity to reset the global grain market under the changed world, to create prerequisites for sustainable growth of agricultural production in BRICS countries, which today are already the world’s largest exporters of rice, wheat, corn and soybeans. At the same time, many of the largest importers of these crops are also BRICS members. Such clear and precise preconditions have never been seen before. This is a unique chance for all of us to create a modern high-tech agri commodities market, free from the accumulated mistakes and failures of the past.

However, this is not the only possible solution. Russia already has an advanced solution in the case of agro-export trading on its own commodity exchange for Rubles. The government has approved a special regulatory framework necessary for the simplified opening of bank accounts for foreign grain importers, and the Moscow Exchange has adapted trading rules to accommodate the participation of foreign buyers in its commodity market. The Exchange has the necessary technological platform, so only a final decision is needed to launch trading. I hope that if such a decision is made, our buyers will be sympathetic to the transition of settlements for Russian agro exports to Rubles. We understand that this is a less flexible solution than the BRICS Grain Exchange. However, the adaptation of this particular scenario will be dictated solely by external factors and barriers. We simply do not have the right to stop the flow of grain and food from Russia to the people of countries in need.