[R-G] Russia's Collective Farms: Hot Capitalist Property

[Yoshie Furuhashi]

<http://www.nytimes.com/2008/08/31/business/worldbusiness/31food.html>
August 31, 2008
The Food Chain
Russia's Collective Farms: Hot Capitalist Property
By ANDREW E. KRAMER

PODLESNY, Russia — The fields around this little farming enclave are
among the most fertile on earth. But like tens of million of acres of
land in this country, after the collapse of the Soviet Union, they
literally went to seed.

Now that may be changing. A decade after capitalism transformed
Russian industry, an agricultural revolution is stirring the
countryside, shaking up village life and sweeping aside the collective
farms that resisted earlier reform efforts and remain the dominant
form of agriculture.

The change is being driven by soaring global food prices (the price of
wheat alone rose 77 percent last year) and a new reform allowing
foreigners to own agricultural land. Together, they have created a
land rush in rural Russia.

"Where else do you have such an abundance of land?" Samir Suleymanov,
the World Bank's director for Russia, asked in an interview.

As a result, the business of buying and reforming collective farms is
suddenly and improbably very profitable, attracting hedge fund
managers, Russian oligarchs, Swedish portfolio investors and even a
descendant of White Russian émigré nobility.

Earlier reformers envisioned the collective farms eventually breaking
up into family farms. But the new business model rests on a belief
that Russia's long, painful history of collectivization is destined to
end in large corporate factory farms.

These investments are also a gamble in a country accustomed to
government control of business. Some officials have hinted at the
prospect of a government takeover of the farming industry reminiscent
of the Soviet era.

And Russia's minister of agriculture, Aleksey Gordeyev, speaks often
of food in terms of national security. "Russia is very often perceived
throughout the world as a major military power," he told a food summit
in Rome early in his tenure. "At the same time, and perhaps above and
beyond anything else, Russia is a major agrarian power."

Russia occupies an unusual niche in the global food chain. Before the
Russian Revolution and the subsequent forced collectivization of
farming under Stalin, it was the largest grain exporting nation in the
world.

Today, roughly 7 percent of the planet's arable land is either owned
by the Russian state or by collective farms, but about a sixth of all
that agricultural land — some 35 million hectares — lies fallow. By
comparison, all of Britain has 6 million hectares of cultivatable
land.

Even excluding the slivers of land contaminated by the Chernobyl
disaster or by industrial pollution, Russia also has millions of acres
of untouched, pristine land that could be used for agriculture.

Yields in Russia, however, are tiny. The average Russian grain yield
is 1.85 tons a hectare — compared with 6.36 tons a hectare in the
United States and 3.04 in Canada. (A hectare is about two and a half
acres.)

If Russia could regain its old title of leading grain exporter, it
would significantly relieve strained world markets and reduce prices,
Mr. Suleymanov said. It could also reduce malnutrition and starvation.

What is more, a significant expansion of farming capacity could add to
Russia's heft as a world power, much as its prowess in oil and natural
gas aided its resurgence in recent years.

"The great story of this land is how big it is," said Kingsmill Bond,
chief analyst at the Troika Dialog brokerage in Moscow. Troika is
closely watching the transformation of the Russian countryside into an
investment opportunity. "You can't buy anything like it anywhere else
in the world," he said.

Analysts say the new companies dedicated to breaking up and reforming
collective farms hope to bring huge tracts of land into production —
tracts that can take advantage of economies of scale.

Financiers See Potential

The last attempt at decollectivization, under the government of
President Boris Yeltsin, failed in part because collective farms
devolved into small holdings. Those who made the leap to become
private farmers failed. The rest remained in the collective farms.

Some trade and agriculture experts say there is still a danger that a
country like today's Russia, which jealously guards its natural
resources, could one day renationalize farms or form a cartel that
dictates to landowners.

Clearly, that fear is not foremost in investors' minds. Land prices
have roughly doubled in the last two years, according to Troika. The
average price a hectare was $570 in 2006 and is now $1,000, Mr. Bond
said.

One of the first investors to see value in the Russian countryside was
Michel Orloff, a former director of the Carlyle Group's Moscow office
and the scion of a White Russian noble family. He said a visit to
Argentina in 2004 inspired him. He saw large landowners making profits
without government subsidies, and envisioned a similar model for
Russia that would hark back to the noble estates of his family
history, only lubricated by modern finance.

"In Moscow, they said I was crazy for going into agriculture," Mr.
Orloff recalled on a visit to one of his factory farms outside
Podlesny — formerly the Sunrise of Communism collective farm. "Now,
they all envy us."

His model rested on the idea that the collective farms should not be
broken up into smaller plots but consolidated into larger factory
farms, able to achieve economies of scale. (He calls the new corporate
farms "clusters.") Using John Deere tractors and Western-trained
agronomists, he has nearly doubled yields.

Last year, Black Earth Farming fields yielded 3.3 tons of wheat a
hectare, and the company says it is on track this year to reap 4.4
tons a hectare.

To be sure, this is Russia. Though many investors are piling in, their
investments remain small relative to the size of the huge agricultural
sector. Black Earth, Razgulai and Cherkizovo are large public
companies involved in buying and reforming collective farms.

(Many Russian oligarchs and regional elites have bought land, too, but
their holdings are not generally public.) While Westerners have
invested in the companies, the businesses are all local, requiring a
Russian connection, as most Russian commodity investment does.

That requirement, as well as the possibility that Russia could become
a bigger supplier of food, gives pause to some Europeans. They are
concerned about Russia's new assertiveness diplomatically and
militarily.

Provincial Attitudes

Even before the recent discord between Russia and the West, the
obstacles to tapping Russia's vast farmland were substantial.

The rural population has declined precipitously as young people fled
to the cities. The title to land, after the failed decollectivization
of the Yeltsin era, is often unclear. Rural Russians' work ethic has
been shaped by decades on collectivized farms that offered little
reward for individual effort.

"We see an increasing number of entrepreneurs coming to us with
business plans trying to convert this land," Mr. Bond said. "Some will
be successful, but most will not be able to do it."

Some investors have resorted to hiring psychologists to untangle the
village culture and determine how best to instill a work ethic. The
best way to motivate the Russian farmer, according to one investor, is
not higher salaries for individuals, which tend to create resentment,
but rewards emphasizing the team nature of the work, like group
bonuses.

Outside this village of log homes with decorative wooden trim, with
piles of birch firewood in the yard, and where investors have bought
several surrounding collective farms, a drunken man slept on a pile of
sawdust one recent afternoon. A cow meandered nearby munching grass.

Specter of State Control

This latest headlong wave of privatization has gone too far and too
fast for some in government here. Officials, as is often the case
these days, have floated the idea of forming a state monopoly. They
would create a Soviet-style grain trading company out of an existing
regulatory agency, a notion that has alarmed agricultural experts,
though the seriousness of the idea is unclear.

Such a monopoly could control domestic grain prices by limiting
exports, benefiting low-income consumers but discouraging investment
in agriculture.

That is not stopping entrepreneurs — yet. Mr. Orloff's model is
spreading quickly. By this year, about 14 percent of Russia's
agricultural land had undergone this process of greater consolidation,
according to an analysis by Vedemosti, the business newspaper.

"In 10 or 15 years, Russia will be the leading force in world
agriculture, just because of its mass," Mr. Orloff said.

That is if the land rush does not bring muscular government
intervention from Moscow or set off rural resentments here.

For instance, each member of the Sunrise of Communism collective farm
was offered about $100 a hectare. Three years later, the land is worth
about $1,100 a hectare, based on Black Earth Farming's stock market
value.

Mr. Orloff said the collective farmers did not own title to the land,
and that the value of management expertise and capital outlays were
included in the valuation of his company.

Still, Vasili I. Kapechnikov, who sold his shares to Mr. Orloff,
considers himself to have been on the losing side of the transaction.
Interviewed outside the village store, he explained what he did with
the money he received for his land: "I bought a new pair of pants."