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**July 1995**
AGRIBUSINESS IN SOUTHERN RUSSIA
by Bill Raisner

The phenomenal growth in U.S. food exports to Russia since 1993 has tended to
obscure promising investment opportunities for U.S. companies in Russian
agriculture and food processing.  This is especially true with respect to the fertile
"black earth" regions of Southern Russia including Krasnodar Krai, and the
Voronezh, Saratov, Volgograd, Rostov, and Stavropol oblasts. The growing
consumer market for food products in Russia, and the recent imposition of higher
tariffs on imported foods there underscore Southern Russia's enormous investment
potential for U.S. companies with long-term interest in the Russian market. 

Demand for High Quality Food Products

A steady decrease in Russian food production since 1992 has provided an
incentive both for foreign importers and for private Russian producers to compete
with inefficient, state-owned domestic growers and food processors.  Russian food
production fell an average of 15 to 20 percent per year in both 1993 and 1994. 
Current prospects are equally poor, with shortfalls in the first five months of 1995
ranging from 17 to 35 percent in meat and dairy production, and averaging 12
percent for other staples.  In the case of producers, shortfalls have been due to
arbitrarily low prices offered by state-owned food processors, coupled with
increasing costs for inputs and decreasing state subsidies.  Local food-processing
companies, in turn, suffer from outdated equipment and structural inefficiencies
which prevent them from offering adequate incentives to growers.

To date, higher-quality, better-packaged imports have moved into the vacuum
created by the decline in domestic food production.  In 1994, Russia was the
leading market for U.S. poultry meat, with exports valued at over $300 million. 
Russia also ranked in the top 10 markets for U.S. exports of dairy products,
alcoholic beverages, and snack foods.  Large U.S. food processors such as Tysons,
Mars Inc., and Nabisco International have all done quite well in Russia.  According
to an estimate published in the Economist magazine, Masterfoods, a Russian
subsidiary of Mars Inc., sold $450 million in chocolate bars and pet foods in 1994,
35 percent of the entire market for those products. 

Agriculture in Southern Russia

Blessed with deep, rich top soil, southern Russia's "black earth" region currently
produces more than 10 percent of Russia's total annual farm output.  Just as they
do elsewhere in Russia, both the farming and food processing sectors suffer from
financial and structural deficiencies that often pose problems for foreign investors. 
Nevertheless, the superior quality of farmland in Southern Russia and the
possibility of locating food-processing facilities close to agricultural producers make
the region an ideal location for foreign investment.  

The priority which food production enjoys in the minds of local officials can also
improve the environment for foreign investors.  During a recent visit by
representatives of the Commercial Service of the United States to Voronezh
Oblast, the Chairman of the Oblast Committee for Foreign Economic Relations
placed the improvement of  food processing and storage facilities as his first
priority in terms of investment projects. 

In recognition of these advantages, a number of U.S. companies have already
established agricultural ventures in Southern Russia.  Nebraska-based ConAgra is
presently growing potatoes in Krasnodar for use by Macdonalds as french fries. 
Monsanto, Cargill, and Petoseed are also active in a variety of agricultural
enterprises including corn, sunflower, soya, popcorn, and vegetable seed
production.  In terms of food processing, Heinz has been at the forefront with a
$20 million baby food plant in Stavropol. 

New Taxes and Import Duties on Food Products

Another factor which is likely to make Russian-based food production more
attractive to U.S. companies is the considerable increase in taxes and other fees on
food imports which took effect July 1, 1995.  Higher tariffs, combined with a
newly imposed 10 percent value added tax, have raised overall taxes on food
imports an average of 15 to 18 percent, with taxes on a few items increasing as
much as 30 percent.  Urban regions including Moscow and St. Petersburg, which
are primary destinations for exports of high-value food products, have tried but
failed to obtain  exemptions to these taxes. 

While the current value of the ruble vis-a-vis the U.S. dollar will compensate
somewhat for higher costs to importers, U.S. exporters have reason to be
concerned about the long term.  The ruble's recent past, notably its crash last
October, does not inspire confidence that it will sustain its current standing
without fluctuation.  The effects of the IMF-imposed stabilization package which is
a principal source for the ruble's appreciation are still too new to be entirely
predictable.  Secondly, if food prices increase as expected (irrespective of the
ruble's value) companies importing high-value foods will not be able to count on
the consistent demand for their products enjoyed by those importing staples. 
Reflecting these concerns, a spokesman for Nabisco International, which has
generated 80 percent of its sales in Russia through the import of nuts, commented
in May 1995 that a proposed 19 percent increase in import taxes was prompting
the company to reconsider its entire market strategy.

For more information on agribusiness opportunities in Southern Russia, call BISNIS
at (202) 482-4655, or e- mail at [email protected].

Bill Raisner covers agribusiness for BISNIS.
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