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‘We have to work hard to achieve the zeroing of the duty by the end of 2021’

13 April 202118 min reading

“The floating grain export duty is perhaps the most controversial measure of recent times that has had a significant impact on the global market. We see it as our task to limit the application of the floating duty to the new season, or rather to the 2021 calendar year. I do not think that its zeroing is possible earlier than the 4th quarter of 2021. If we restrict ourselves to 2021, then the losses of the farming sector from falling prices will be localized and will not affect production plans and crop rotation in 2022. For the world market, the effect of the floating duty will reduce the supply from Russia. The level of world prices will depend on the situation with the new harvest and grain supply from the EU and Ukraine, our traditional competitors.”

Eduard Zernin

Eduard Zernin
Chairman of the Russian Union of Grain Exporters
RUSGRAIN UNION

Export duty on Russian wheat has been doubled to €50 ($60.44) per ton from March 1. It will remain in force until a permanent floating tax is imposed in June. The levy was introduced in February in a bid to protect domestic supply and stabilize the prices for flour and bread and will be applied for certain grains under an export limit of 17.5 million tons for the remainder of the marketing year during the current season.  While these measures caused a price shockwave through the grain markets, the Russian government’s decision to impose a floating wheat export tax from July 1 made the markets more uneasy.

Under the floating tax system, the base price indicator for wheat has been fixed at $200 per ton, so it will kick in only if the calculated market benchmark price is above the $200-per-ton threshold.  According to the government, the scheme will minimize the negative impact of the price fluctuations seen globally on Russia’s domestic market. However, the new tax mechanism caused heated discussions in the grain market.  The market speculates on the impacts of the recent restrictive export measure.

In an interview with Miller Magazine, Eduard Zernin, Chairman of the Russian Union of Grain Exporters, gives insights into Russian grain trade policies.

Mr. Zernin, first of all, I want to thank you for accepting our interview request. Could you please tell us about your background? How did you get into the agribusiness?

Despite my surname, which in Russian is consonant with the word «grain», I am an investment banker by origin, who received professional certification in 1993 among the first 100 Russian capital markets specialists. After graduating from Chicago Booth School of Business in 2007, I took up private equity and turnaround projects.

Agribusiness was one of our areas of interest. We have made several deals in this sector. As a result, BIO-TON Agri Corp. was born, one of the largest crop production companies in Russia with its own land bank of over 450 KHA, a leader in wheat and sunflower production. I gave up my turnaround advisory practice and focused entirely on my company. I am its sole shareholder at the moment. As a public duty, I accepted the invitation from the largest Russian grain exporters and in 2019 created and headed RUSGRAIN UNION, the Russian Union of Grain Exporters.

Your association is a newly founded union. What did lead up to the Russian Union of Grain Exporters’ founding?

Indeed, RUSGRAIN UNION is a new organization created in 2019 by the four largest grain exporters - private TD RIF and Aston, multinational Glencore Agriculture (now Viterra) and state-owned United Grain Company (UGC or OZK). The composition of the founders quite accurately reflects the balance of power in the Russian market, where companies of different forms of ownership compete with each other.

I was just finishing my last turnaround project at UGC. I knew my colleagues and their plans well, but did not think to participate in the new project. However, a series of interviews with candidates for the leadership role, most of which are well known to the market, ended in failure. And then the offer was made to me. I accepted it after some thought. The fact is that by this time I had already firmly decided to focus on developing my own business. Any new project brings new professional contacts and connections but takes up a significant portion of the time, the most valuable resource. In addition, at that time I believed that any of the interviewed candidates were stronger than me. Now I understand that I was wrong. Vanity and excessive personal ambition did not allow them to earn the trust of the founders and take the place of the leader of RUSGRAIN UNION. I will not disclose their names for ethical reasons.

To understand the reasons for the emergence of RUSGRAIN UNION, one must understand the mentality of Russian business. Almost any branch of agribusiness today is represented by several professional unions and associations, most of which are phantom entities. These organizations have long ceased to represent the interests of their industries, but claim rent from them. This phenomenon can be explained by the absence of the practice of succession and turnover of business leaders, which we inherited from Soviet times. Many professional organizations are associated with their leaders. Together with them, they grow old and decrepit, losing touch with the real world and turning into their lifelong retirement plan. It seems that the Western business world does not

understand this phenomenon. Many foreign companies join such organizations, considering their membership as a confirmation of their professional status. But the truth is that these organizations no longer exist for the Russian business community, they no longer represent anyone's interests except the private interests of their bosses.

Grain trading in general and export, in particular, is an extremely dynamic business area. Russia has succeeded in this direction, having been the world leader in wheat supply for several years. Russian exporters are large trade and logistics organizations integrated into the world market and successfully competing in it. They need a capable professional union that is able to defend their interests both within the country and abroad. Grain exporters already had the bad experience of organizing a union in 2011 called the National Association of Agricultural Exporters (NAESP).

However, due to the already described phenomenon, the old leadership of the Association stopped responding to the requests of its members, but actively held on to power. Under these conditions, grain exporters preferred to create a new Union and not go into conflict with the leadership of the old one. There is nothing unique about this solution; exporters prefer to focus on business rather than intrigue. In addition, the process of creating new industry organizations was actively supported by the Ministry of Agriculture of Russia, which was led by a team of young pragmatists in 2018. In particular, the Ministry of Agriculture supported the creation of our Union, since it was critically important for it to have constructive relations with the grain industry, the flagship of Russian agriculture.

Today our Union unites 25 member companies exporting more than 70% of grain from Russia. We consider the number of our members to be close to optimal and do not plan to actively expand further.

What are the mission and objectives of your association? Could you tell us about your activities as an association in the grain industry?

The RUSGRAIN UNION mission is to promote Russia's sustainable leadership in the world grain market. We achieve this by developing a constructive dialogue with Russian authorities, international organizations and importing countries.

RUSGRAIN UNION is a full member of the International Grain Trade Coalition (IGTC), where it represents the Russian business community. It is extremely important for us to introduce modern business practices and technologies into the Russian business environment. At the moment, we are negotiating to participate in a number of international projects aimed at the digital transformation of the international grain trade. By the way, the high level of digitalization of agriculture is one of the factors of Russia's high competitiveness in the world grain market. I am sure we have something to discuss and share with colleagues from other countries.

As for the Russian domestic market, we are participating in the emergence of the grain exchange market. In a strange way, being the world leader in grain exports, Russia still does not have its own grain exchange. I can only explain this paradox by the incapacity of old organizations, which lacked the motivation to successfully implement this project. Indeed, why make an effort if it does not affect the size of their rent from the industry? I can understand this, but I will never support this approach.

Our Union is fundamentally different. Being practitioners and understanding the needs of the Union members, we initiated a dialogue with the Moscow Exchange in order to revive the exchange grain trading project. This is also facilitated by the new role of the Exchange, which, by decision of the Russian Government, was included in the mechanism for calculating the floating export duty on grain.

Can you tell us Russia’s position in global agribusiness? How do you define Russia’s importance in the world grain trade?

Russia is one of the global leaders in grain supplies to the world market. This overwhelming success was achieved as a result of tough competition with yesterday's leaders. The role of Russia in the world market will only increase. This is facilitated by global climate change, which adversely affects the traditional farming regions of southern Russia, but at the same time creates favorable conditions in a much larger area - in the Central and the Volga regions, as well as in the Urals and Siberia. Additionally, the Ministry of Agriculture plans to put into circulation 13.6 million hectares of currently unused agricultural land.

I think, even during our lifetime, Russia will unconditionally dominate the supply of grain both for food and feed purposes. In such a situation, I believe it extremely important to create a new framework for the Russian grain trade, both in the legal field and in the field of physical supplies and logistics. It is not in vain that I put the legal field first, because for sustainable leadership, we need to learn to guarantee the volume of supplies to the countries - the key consumers of our grain. This will encourage other countries to switch to grain of Russian origin in order to enter the list of key consumers and receive those guarantees. Of course, an equally important aspect will be the growth in the production of grain and other crops within the country. This will be facilitated by both the previously mentioned extension of arable land and the intensification of processes in Russian breeding and seed production. With regard to logistics, the experience of the 2020/2021 season shows that the capacity is close to what is required at the moment, even at such high pace and volumes as we have in this marketing year. Further development of logistics corridors is seen rather in the East of Russia. But without sufficient growth in crop production in the Far East region, the feasibility of such investments is still controversial.

Russia sets a floating tax system for grain exports to come into force from June 2021, following a wheat export tax and a grain export quota in December 2020. How have these measures affected the pace of the Russian wheat exports? How will the new tax system change the wheat market in the short and long term?

The floating grain export duty is perhaps the most controversial measure of recent times that has had a significant impact on the global market. To understand the situation, it is not enough to express your position on this issue. It is undoubtedly negative, as with any market participants and near-market "experts". However, expressing your negativity will definitely not solve the problem. In general, I do not like protests and see in them rather a demonstration of the inability to think flexibly and find a compromise. And in order to find a compromise, it is necessary to understand the nature of the introduced export restrictions.

The current season is characterized by an exuberant demand for Russian grain due to a shortage in the world market. After the actual withdrawal from the EU and Ukrainian markets due to a poor harvest, Russia remained virtually the only supplier of grain of the Black Sea origin both at the key tenders GASC and TMO, as well as at other public and private tenders for the purchase of wheat and barley. In addition, such a large buyer as Pakistan entered the market, again due to a poor harvest.

In parallel, China began to increase its national grain reserves. And although Russia practically does not supply grain to China (it is possible to carry out supplies only from 7 border regions, which do not differ in high yields and are remote from ports), the Chinese increased demand attracted volumes from the countries of North and South America, which could become an alternative to the Russian grain.

As a result of the above, the pace of export and the price of grain from Russia jumped sharply, which turned out to be a complete surprise for consumers within the country - millers and livestock breeders. Many of them, against the background of forecasts of a high harvest, were in no hurry to purchase and form stocks of raw materials. Therefore, they were shocked by the rate of price growth and their inability to compete on market terms with exporters. In this situation, they preferred to apply to the Government with a request to impose export restrictions to reduce domestic grain prices. By that time, the government had already seen an upward price trend for key foods, which could not but worry it. The decision was made quickly. RUSGRAIN UNION was the only one to oppose the export restriction proposal. It's funny, but true, some of today's critics of the duty, at the time of the decision, worked on the side of the initiators, helping them with argumentation. Probably, they absolutely did not realize what measures the Government was ready to take in order to ensure the country's food security.

The fact remains. The decision to impose a duty on grain exports was made. We managed to protect the interests of our members, who at the time of the decision were signed contracts for the volume far exceeding 5 million tons. It is easy to calculate how much losses would have been recorded if the initial decision had been made to introduce the duty from 01/01/2021. The gradual schedule of duties was the result of a compromise between the authorities and exporters. As for the floating duty, many players and "experts" at that time simply lost sight of the fact that it exists and that its zero rate will expire from 01/07/2021. I believe that a high proportion of the emotions of some commentators is due precisely to the fact of their professional error in this matter. Working for the initiators of the restrictions, they did not take into account that the Government is unlikely to extend the zero floating duty rate, limiting exports to only a few months. On the contrary, the formula for calculating the duty has been refined in such a way as to add uncertainty to pricing and increase the risk of export transactions.

Traders will have to transfer this risk to their suppliers, which will contribute to a further decrease in prices on the domestic market, as the initiators of the duty sought.

As for the question whether everyone understands the destructive nature of the duty, the answer is obvious - yes. Today it is already useless to discuss this issue, especially with those who by their actions contributed to the emergence of this mechanism.

We see it as our task to limit the application of the floating duty to the new season, or rather to the 2021 calendar year. I do not think that its zeroing is possible earlier than the 4th quarter of 2021, based on the calendar of social life in Russia. If we restrict ourselves to 2021, then the losses of the farming sector from falling prices will be localized and will not affect production plans and crop rotation in 2022. As for 2021, I do not believe in major changes in the crop structure, since the main players bought seeds and fertilizers even last year, before the restrictions were even introduced.

For the world market, the effect of the floating duty, or rather the risks associated with it, will reduce the supply from Russia. The level of world prices will depend on the situation with the new harvest and grain supply from the EU and Ukraine, our traditional competitors.

Do you think Russia can maintain world leadership in wheat exports despite export restrictions?

World leadership is not an end in itself. The Government has clearly announced that national food security is a priority over agricultural export revenues. In the longer term, as I said, global climate change plays into the hands of Russia. With the growth of the harvest, we can easily restore all lost positions.

Russia is the world's top wheat exporter. And Turkey is the world leader in flour exports. Russia is the main wheat source for Turkish flour industrialists. How the export restrictions have influenced the grain shipment between the two countries?

This is a very good question. My company recently acquired a mill for the first time. We have never dealt with processing, but now we believe that the time has come. The Russian government has repeatedly pointed out the need to move away from the export of raw materials towards products with high added value. Even if restrictions on grain exports disappear, there will be measures to stimulate the production of flour and higher value-added products. I would advise Turkish millers to carefully study the possibilities of being present inside Russia, so as not to lose their business at one point.

Russian Agriculture Minister Dmitry Patrushev said Russia would be ready to stop interfering in the regulation of grain exports when the market stabilizes. When do you think Russia will lift the wheat export tax? Do you think the floating tax mechanism will be lifted soon? And how will Mr. Patrushev’s statement influence Russian farmers’ decisions?

I think the Minister's words were not interpreted accurately enough. There was no talk about any quick abolition of the floating duty. We are talking about the conditions for its cancellation in the future. This requires a significant reduction in domestic grain prices. A similar situation is possible only when the grain of the new harvest is under pressure on the supply. Therefore, before the second quarter of the new marketing year, there are no prerequisites for abolishing the floating duty at all. We have to work hard to achieve the zeroing of the duty by the end of 2021.

I believe that a reload of the state intervention fund would seriously help our goal. We came out with such a proposal to the President of the Russian Federation at a meeting on agriculture back in May 2020, with an eye to domestic millers and other consumers. We believe that without solving the problems of the local market, it is not serious to talk about sustainable leadership in the world market. According to our estimates, Russia needs an intervention fund of about 3-4 million tons of grain. Unfortunately, our colleagues from industry unions of processors missed out on this initiative. We see the benefits of the intervention fund for the market so we will more strongly seek a positive decision.

The outbreak of the coronavirus has caused one of the most significant macroeconomic shocks of the early 21st century. How COVID-19 pandemic has affected the global grain trade?

We are seeing increased activity from our traditional buyers. Many of them form additional reserves for a more painless passage of possible local crisis situations. In terms of logistics, fortunately, we did not notice any major disruptions in the supply chain in Russia. We promptly resolved issues of internal auto and rail logistics. As for maritime transport, during the quarantine period, the ships defended in the roadstead. Now this restriction has been lifted, the loading of ships is carried out in a mode close to regular. I know this is not the case in some countries, but Russia has managed to avoid serious consequences. As for business life, it has practically returned to normal. Offices and restaurants are open; business events are being held. We have certainly acquired something new, unleashed the potential of doing business online. I am confident that humanity will learn the lessons and draw the right conclusions from the pandemic. Personally, I have already done this - I spend more time with my family, I do sports, I have transferred a significant number of business negotiations and speeches online. By the way, quarantine contributed to the disclosure of my culinary talents. I find it fascinating to cook my favorite dishes and select wine for them, the offer of which from Russian producers has grown significantly.

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