INTERVIEW: Salad days for Rusagro

INTERVIEW: Salad days for Rusagro
Rusagro is an “agricultural octopus”.
By Ben Aris in Moscow March 17, 2016

Russia’s counter-sanctions on European food imports have given a huge leg-up to its agricultural industry, which was the only significant sector to grow last year amid the deep nationwide recession.

A few large agricultural companies have emerged over the last few years and are now consolidating the sector and making a pretty penny in the process – a trend that has not gone unnoticed by investors. While Russia's stock market has fallen to levels last seen in the noughties, a few stocks – mostly supermarkets and agricultural companies – are soaring.

“Russia has always been a good investment for agriculture and food,” Maxim Basov, CEO of Rusagro, the country’s second largest agricultural group, tells bne IntelliNews in an exclusive interview. “There is a large market for food with relatively high prices, as a lot of the food has been imported. And the country has all the basics – wheat, barley, corn, sunflower – that can be produced at a low cost, processed and sold retail at high prices to the local market.”

Russia’s famed “black earth” regions are amongst the most fertile on the planet, but in 2008 the country was still the biggest importer of food in the world. Since then, however, heavy investment by the state and farming businesses has pushed crop yields up, giving the country a bumper harvest of more than 104mn tonnes of grain last year and making it the fourth largest exporter of grain in the world in 2014. It has also been self-sufficient in poultry and eggs for several years; will be self-sufficient in pork next year; and should be self-sufficient in beef in the next couple of years.

Russia’s long-overdue access to the World Trade Organization (WTO) in the summer of 2012 should have been a setback, as it gave Western European producers unfettered access to Russia’s market with their cheaper and higher-quality imports. But President Vladimir Putin’s sanctions, imposed in 2014, have swept European competition from the market. Putin has called for the country to be entirely self-sufficient in all food products by 2020, a goal that looks achievable.

With sanctions on the import of EU food products, followed recently by barriers on Turkish imports after the downing of one of its military jets, Russia's domestic agricultural sector is hot, with revenue growing 3% last year. Moreover, even without foreign competition, exports means local prices for locally produced goods remain benchmarked against the now non-existent imported rivals. Russia’s farmers have costs in rubles, but their revenues are effectively indexed against the euro.

Rusagro Group, which was listed in London in April 2011, together with its main rival, the unlisted Miratorg, have been big winners from the Kremlin’s politically motivated drive to make the country self-sufficient in food. Rusagro’s revenue soared by 29% on year in the fourth quarter of 2015, according to the latest company financials, giving it a 6.5% market share compared to Miratorg’s 13%.

Rusagro, described by VTB Capital as an “agricultural octopus”, has become a market darling and its London-listed GDRs have doubled in value since October last year. They are up 25% so far this year, outperforming the RTS index which was up 10% as of March 8.

VTB Capital marked the stock up to “Buy” at the start of March, valuing it at $19.5 per GDR, implying a 21% further potential upside. VTB Capital analyst Nikolay Kovalev pointed to the combination of better-than-expected revenue growth, new sugar beet processing capacity coming online, a fall in the net debt position over the last year, and especially the company’s ambitious acquisition and expansion plans as the main reasons to invests in the company.

Gazprombank chose to initiate coverage of the company in the middle of February and also estimated the share price could rise 21%. “The company is a play on rising exposure to lucrative segments of Russia’s agriculture sector, which became attractive on the back of the food embargo and the government’s focus on import-substitution in food and soft commodities,” Gazprombank analyst Sergey Vasin said in his first research note on the company.

Vasin went on to highlight the company’s plans to expand its profitable sugar business, continue its consolidation in the pork business, which “remains highly fragmented”, and its “rising presence in the Far East” as being the most attractive elements of the business.

One-stop food shop

Rusagro has become a vertically integrated producer of food from the field to the shop shelf. It has investments in grain, beef, poultry and pork, running right through to branded bags of sugar and processed meat available in supermarkets throughout the country. 


Currently, sugar is the most profitable business and made up about half the company’s revenues in 2015 and an even bigger share of its profits.

Sugar is the only market that is still protected under WTO rules with an import duty of $140-$230 per tonne, says Basov, who graduated from New York University in 1996 and today, just 40, is running a corporation with $2bn of revenues. Russia imports half a million tonnes of sugarcane a year from a total domestic sugar consumption of 5.5mn tonnes a year. Rusagro controls about 15% of the market, which makes it the second largest player in the sugar business, producing some 600,000 tonnes of sugar beet and 200,000 tonnes of cane sugar a year. “The devaluation of the ruble has boosted this business, as sugar prices are linked to the global price and we had a very good harvest in terms of both volume and quality,” says Basov, sitting on the edge of a sofa in Moscow’s Four Seasons hotel, where he has been meeting some of his biggest foreign investors.

The company had already modernised its sugar beet processing plants before the ruble crashed at the end of 2014, and it further increased profits by a number of branded sugar products sold directly to supermarkets. Its brands run from the cheap “Russian Sugar” through to premium brands such as “Mon Café” and “Brown” that dominate their various niches.

The company is also the biggest margarine producer in the Commonwealth of Independent States (CIS) and the biggest mayonnaise producer in Russia – both of which are processed using Rusagro’s own raw materials.

The other mainstay of the company’s business is the grain and animal complex: Rusagro grows grain for sale, but also uses it as feed for its pork and poultry businesses. This vertically integrated chain gives Rusagro a considerable cost advantage over its foreign competitors. “Feed grain is one of the main costs in pork production,” says Basov. “The other costs are soya, which is more expensive, and people. We are investing in our soya production and hope to become self-sufficient soon, and the cost of labour has fallen dramatically. If the ruble stays this low, then even the cheapest imported pork will not be able to compete, as we will always be able to undercut them.”​

Devaluation and politics

The Kremlin’s sanctions on European food have been particularly helpful for pork producers, as Russian farmers were not ready to face Western competition. “The significant import duty on pork was demolished to 0% [under the WTO rules]. There was a short lift in prices for Russian producers, as all the EU importers held back until the WTO agreement went into effect, but then the prices of pork plunged, though soon stabilised,” says Basov. “However, a year later pork was included in the agricultural product bans on imports to Russia due to concerns about infection from African flu. This was the same ban the EU had imposed on Russian exports of pork a year and half earlier. Again the prices jumped, but the EU imports were quickly replaced by pork from Brazil and South America.”

Those food bans hurt Russia, as they have kept food-related inflation running at more than twice the rate of the headline consumer price inflation. However, they have also boosted producers’ margins. “In the last year margins have doubled from 15% to about 30%, and in the third quarter [of 2015] they were up again to 36%,” says Basov, who previously was the general director of Metalloinvest Group and prior to that worked for Ukrainian oligarch Viktor Pinchuk.

But stellar financial results are partly because of the bubble the state has created around the agricultural sector. While the Kremlin fiercely denies it, the current policy is one of autarchy when it comes to essentials like food. The state has been pouring money into the sector and handing out cheap loans to anyone with a chicken or a flowerpot in an effort to make Russia self-sufficient in agricultural products. And it is easy to make money when you don't have to pay taxes. “The profit tax on agricultural companies is zero, not the 20% other companies have to pay, and VAT is 10%, half the rate for everyone else. Meat also has 0% profit taxes,” says Basov.

There are a few exceptions to this rule – sugar and oil or fat products are taxed at 20% – but in general the government identified agriculture as a strategically important sector and slashed taxes to the bone. “If they increase the taxes, then the big companies will disintegrate. Only small farms will be left and those will avoid taxes so the government won’t get any tax anyway,” notes Basov.

Many of these ‘political’ benefits could (and should) disappear in the near future. Yet Basov insists his company is already efficient enough to be able to undercut any Western competitor, especially when transport costs are taken into account. Even so, Russia’s current economic and political problems present a uniquely profitable situation for Rusagro, he admits.

Eventually the row with the West will die down and both sides will drop sanctions, allowing the more efficient and higher quality Western producers back into the Russian market. Likewise, the super-profits earned from the cheap ruble will be worn away as oil prices rise, lifting the currency with it; the consensus is oil will return to an average of $70 sometime in the next three to five years. And the subsidies could disappear very soon, as the government is already strapped for cash and facing a deficit of around 5% of GDP this year.

But as always in Russia, success comes with risk. Rusagro makes a tempting target for a greedy Kremlin-connected oligarch – though the risk remains remote. While agriculture is a high-volume, low-margin business that requires coordinating hundreds of thousands of workers efficiently, it is an “apolitical” sector, like supermarket chains and mobile, and so not an obvious takeover target.

Rusagro is 75% owned by the Moshkovich family, with management owning another 6.8%, another 1.8% is treasury stock and the remaining 16.7% is free float. Vadim Moshkovich is the patriarch of the family and a self-made businessman who made his initial money in real estate and vodka in the 1990s before moving on to invest in land and then farming.

Worth an estimated $2.4bn by Forbes magazine, he is one of a new generation of wealthy Russians who made their money from just doing business rather than leveraging close connects with the state or president. That means his political krysha (the system of political patronage that is essential to keeping control of your business) is based only on the strategic importance of Rusagro to the Kremlin’s plans to become self-sufficient in food.

Tourist stock

All this good news has tempted investors into the stock, helped by the company’s efforts to court more foreign investment, such as Basov’s meeting with investors in the Hyatt hotel on the day of the interview. But more importantly the company pays its investors money; the company has been paying out 25% of net income as dividends, yielding a handsome 7% for the last two years, one of the highest rates on the market.

However, the company’s healthy, at least by Russian standards, price/earnings ratio of 7.5 is already up from the 3.4 that it finished 2015 at. This begs the question of whether the stock’s rapid rise has already run its course; VTB estimates the company will finish the year at a p/e ratio of 7.7.

Much will depend on whether Rusagro becomes one of the so-called “tourist” stocks. Despite Russia’s poor image, a few stocks, mostly in the consumer sectors, continue to attract foreign investors, who ignore the rest of the market. Foreign investors are currently overweight in Russia versus the MSCI Emerging Markets index and almost all of this overweight is found in the leading supermarket chain Magnit, which had a p/e ratio of 23.9 as of the end of 2015.

Selected leading Russian companies p/e ratios



p/e end 2015

p/e forecast 2016

RusAgro GDR













Surgutneftegas pref.




Gazprom Neft ord.




Bashneft pref.





Phosagro GDR

raw materials



Norilsk Nickel ord.

raw materials



UC Rusal ord.

raw materials



Evraz ord.

raw materials




Globaltrans GDR









Yandex ord.







Magnit GDP




Lenta ord.




X5 Retail Group GDR




Source: VTB Capital

In the short term the stock could take a hit after the company announced on March 9 it would issue 10mn new shares, equivalent to 42% of its existing share capital. The issue will be approved at an EGM on April 8. The company has yet to explain the reason for the issue. However, if all the shares are issued, the company will raise RUB65bn ($930mn), which will presumably be used for more acquisitions to grab an even bigger share of the market.

However, Vladimir Sklyar of Renaissance Capital speculates that the issue could also be to facilitate the entry into the company of a new large shareholder, either “an Asian partner to facilitate Far Eastern development and market access, or a domestic/international strategic investor to finance accelerated company growth in the current favourable environment”.

Even without new capital, Basov says the company will continue to expand, with a planned RUB15bn ($197mn) of capital expenditure in 2015 rising to RUB20bn in 2016, mostly funded out of retained earnings, but with some borrowing on the domestic market. The company has a cash pile of RUB15bn and gross debt of RUB30bn, a large part of which was incurred by recently taking over the smaller troubled Razgulay Group. The three sugar mills that come with the deal will increase the Rusagro’s production capacity by just over a third (35%) as well as adding another 70,000 hectares to its existing land bank of 500,000ha.

The company also has plans for three giant greenhouses of 100ha each (equivalent to 100 football fields each), made possible by cheap loans from VEB, a 20% of capital expenditure subsidy from the state and special low electricity tariffs. Russia currently imports nearly all its fresh fruit and vegetables. “The greenhouses will be very hi-tech and fully automated to produce the regular variety of fruit and vegetables. What we miss is the sunlight so they will be lit using electricity, but power is cheap in Russia,” says Basov, adding that a final decision on this project will be made in March.

However, a question hangs over this project, as VEB is almost bankrupt and has been asking the state for a RUB1 trillion ($12bn) bailout that the government can ill-afford right now. VEB’s problems mean all its lending plans are in question.

Rusagro also has grand plans for the Far East region of Russia, a key government strategic development goal, where it wants to produce corn and soya for export to China, Japan and South Korea. The Kremlin has thrown itself into developing a joint Sino-Chinese complex; of all areas of cooperation, agriculture is the most active. “We already export soya and corn to China, and now have started building a vegetable oil plant for the same markets,” says Basov. “But what we would really like to do is export fresh meat production to Asia. We are literally next door, but as everywhere else is so far away all their meat imports are frozen. No one else can do this and we can do it at very low cost.”

Talks have already begun between Rusagro and the Russian government on investing in the Far East, as little of the supporting infrastructure is in place: no gas, no electricity, no roads – “only tigers”, quips Basov. 


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