Despite a huge drop in the 1990s, Russian agricultural machinery production has both survived and even demonstrated significant growth since 1998. This was caused by positive developments in the agriculture and timber sectors, a corresponding increase in demand for machinery, and Russian technology’s heightened competitiveness due to the devalued ruble. However, by 2003 growth had significantly slowed and in certain areas production output had dropped. The current level of industry guarantees that companies will be able to break even, with the surplus production capacities existing today were not being utilized entirely.
The industry is experiencing intensive integration. Three major agriculture machinery producer conglomerates have been formed; together they control more than 95% of combine output and more than 65% of the output of tractors for agriculture. Two conglomerates are attempting to become full-liners and considering strategies for expanding throughout the CIS. This could considerably increase their size and attractiveness to investors.

The Domestic Agricultural Machinery Market

The economics and political reforms in the early 1990s harmed the market for agricultural machinery production and sales. Agricultural manufacturers, who previously had received machinery on a free or discounted basis, found themselves unable to obtain needed products by themselves. As a result in the mid 1990s purchases of basic types of agricultural machinery decreased in comparison with 1991 figures. Ten years after 1991 the combine fleet had decreased by half and approximately 50% of these were inoperable. The machinery became incredibly outdated and an analogous tendency occurred among agricultural tractors. At the present time 80% of the combines and tractors suffer from serious wear and tear.
As a result the provision of sowing by running tractors has decreased and is approximately 40% of the norm, while provision by operable harvesters is 35% of the norm. By these measurements Russia is 4-5 times behind the US and Germany. These figures suggest the scope of potential demand for agricultural machinery, a demand that can increase by several times under better finance condition of agricultural companies or increased credits for machinery purchase.
1998 witnessed the lowest level of Russian domestic production and purchases of combines and tractors. The improved economic and financial state of agricultural manufacturers following the devaluation of the ruble created increased demand for agricultural machinery. In 1999, for the first time since the economic reforms had begun, production ceased falling and rose by 1.6-2 times. This trend continued in 2000-2001, with the result being that in 2001, by comparison with 1998, tractor production increased 1.5 times to 15,200 units. The production of harvesters rose 9 times, with 9,063 produced. The growth in sales of tractors and harvesters ended the problem of inoperable machines.

Harvester imports increased slightly (from 804 in 1998 to 904 in 2001) but their shares in the overall number of Russian market sales steadily decreased from 44% to 10% during this period. The overwhelming portion of imported combines was made by the industry’s ‘Big Three’: Case New Holland, CLAAS, and John Deere. The portion of imported new combines decreased and the portion of used combines quickly rose. Because of this the average price of an imported combine fell from $154,000 to $114,000 during this period.
According to preliminary data, in 2002 the number of imported harvesters significantly fell in comparison with 2001. This is a result of the Rosagroleasing activity, which works only with domestic machinery. In addition, the industry’s experience is proving the advantages of Russian domestic technology (lower exploitation expenses, reliability, cheaper repairs, and lower price).
A somewhat different situation has developed in the feed-harvester segment. In 2000 Rostselmash resumed production of the Don 680 feed-harvester with an output increasing at a very fast pace (7 times more in 2001 than in 2000). However in this sector imports still comprise more than 60% of total sales in Russia, and second-hand machinery takes 80% of imports. It should be noted that in 2001 imports of feed-harvesters reduced for both new and used machinery. This may be caused by increased production of the Don 680. These trend continued in 2002: in the first 7 months 241 of these combines were shipped, that is more than in the entire previous year.

The Russian tractor market, in contrast to that for combines, is strikingly more oriented towards imports, particularly from other CIS states. This can be explained by the fact that two of the largest combine factories are being located in Kharkov (Ukraine) and Minsk (Belarus), especially with the latter being the largest of tractor factories in the former USSR. In general tractor sales in Russia have risen by 56% within 1998-2001. In this same period the share of domestic tractors produced in general sales for the Russian market decreased from 32% to 21%, while the Belarusian share during the same period rose from 39% to 44% and the share of imported tractors from non-CIS countries rose from 19% to 26%.
Within the context of the domestic market’s fairly rapid growth, the domestic tractors sales have not appeared to be increasing over the past 6 years and in 2001 fell to the 1998 level.
One of the reasons for domestic tractor producers’ misfortune is the lack of models in several key market segments, which are being covered by CIS and foreign producers.
Russian tractor factories have proven to be more successful in raising exports, which increased by 2.9 times in 1998-2001. In 2001 exports of Russian tractor producers for the first time surpassed the level of sales on the domestic market. 53% of exported tractors in 2001 were destined for CIS nations.

Industry Problems

The disruption of cooperative networks after the fall of the USSR and the attendant catastrophic drop in demand for agricultural machinery have left the industry’s companies in an extremely weak state. During most of the 1990s they were operating at a loss and the most positive moment of this period was that companies preserved their industrial potential. The increase in demand, which followed crisis of 1998, revived industry and allowed several factories to become profitable and even begin to invest. Nonetheless, a host of problems remains, general for all factories that will impede industry if not resolved.

• The outmoded and worn-out industrial technology of domestic factories which necessitate modernization and restructuring. Inadequate regional industry structure.
• The years-long lack of investment and innovation have led to 1980s models still dominating the market.
• The fragile state of the market and service infrastructure sectors.
• Lack of full line of agricultural machines types. .

A limited demand for agricultural machinery within the next two years will sharply limit the financial resources for factories’ restructuring and updating technology. After the 1998 default vertical holding companies quickly began to develop in agriculture, becoming new and major buyers of agricultural machinery. They have a fleet of machines acquired within the last 3 years: new demand will arise either only after these machines have aged or these firms’ business expands. The demand of older companies with their worn-out fleets is limited by their financial constraints.

Soviet tractor and combine factories were made for mass production. The Rostselmash factory alone had a projected capacity that allowed producing three times as many combines as the world leader John Deere. The same is true for tractor factories. Under current effective demand the factory capacities utilization is not above 20% of their potential. One possible way out of this situation is cooperation between producers, which would allow restructuring capacities. Mutual distrust and fear of depending on competitors pose an obstacle for implementing this option.
At the present moment three major players have developed in the industry.

• The Tractor Factories Group, which includes the Vladimir and Lipetsk tractor factories, as well as the Promtraktor in Cheboksary.
• The New Alliance Industrial Group, which contains the industry’s largest combine producer (Rostselmash) and other firms.
• Agromachholing, created in 2003 after the merger of Sibmachholding (whose main assets were the Krasnoyark combine factory and Altaidiesel, the Nazarov machine-building factory) with the Volgograd Tractor Factory, Orlov Tractor Factory, and the Kazakhstan-based Kustanaisky Diesel Factory.

These major players control more than 65% of the Russian domestic tractor market and more than 90% of combine production.
The Tractor Factories group is a producers’ non-commercial partnership. This is a manufacturing cooperative, joining sales and service networks of the Vladimir and Lipetsk Tractor Factories. These two facilities produce a compatible nomenclature of tractors and use the Promtraktor construction office, the most effective in the industry. From its inception Promtraktor has had a more modern technological foundation because it entered the industry later than other tractor factories and could conserve its engineering and technology potential. Promtraktor completely revised its range of models and widened its pool of tractors produced, making use of the most current strategies on the domestic engineering.
S. Mlodik, the general director of Promtraktor, does not see any expediency gained from centralized control over the company’s factories. This, he believes, would in fact lead to less flexibility and management efficiency while not providing any concrete advantages.
New Alliance Industrial Group and Agromachholding seek to improve their positions on the market by expanding into CIS markets and increasing their production nomenclature. The strategy goal is to become full-liners by forging alliances with already existing tractor factories in the CIS.
New Alliance Industrial Group is attempting to reduce two thirds of the existing production capacities at Rostselmash that would satisfy all CIS demand within the foreseeable future. At the same time it is allocating its non-profile -businesses, which should allow its largest factory to focus on the more complicated production of harvesters and feed-harvesters. There is ongoing investment in innovative production technologies.
Another aspect of New Alliance Industrial Group strategy is expansion into the most important CIS agricultural machinery markets. In 2002 Rostselmash’s share of the Ukrainian harvesters was 37% and 28% of the Kazakh market. The corporation plans to control 70% of the CIS agricultural machinery market.
According to mass media announcements, The New Alliance Industrial Group conduct negotiations on merge with some tractor factories, in particular, Kharkov Tractor Factory.
Agromashholding has already taken the first real step towards turning into a full-liner, merging “Simbmashholing” and the Volgograd Tractor Factory, Russia’s largest producer of caterpillar tractors used in agriculture. Acquiring the Kustanaisky Diesel Factory (Kazakhstan) is essential to Agromachholding’s strategy, as are partnerships with CIS financial structures that guarantee the fiduciary resources needed to obtain new technology. It is natural to expect that using local factories will make these machines produced in cooperation more attractive to the CIS markets.
Agromachholding president Yu.Koropachinskii considers it both expedient and inevitable that in the nearest future all major players of CIS agricultural engineering unite into a single public “super holding company”. Only this will permit the rational organization of production cooperation, reduce superfluous capacities with minimal costs, update technology, and prepare the industry for the avalanche growth in demand expected in 2-3 years and caused by necessity to replace old machines
While admitting the importance of the integration process, key industry players and experts disagree about how many ‘leaders’ the industry can support. There are also opinions concerning both the necessity and the slim likelihood of creating a “super holding company.” There has also been discussion of the possible survival of either the two leading companies or indeed all key industry players. In any case, the creation of full-liners would make sense given the current state of global agricultural machinery. Creating such companies would solidify Russian companies’ positions as competitors with their Western counterparts.

Competitiveness of the Russian Agricultural Machinery

Producers and consumers agree that the main advantages of Russian agricultural machinery are its cheapness, the availability of parts and services, compatibility with local fuels and lubricants, and its higher efficiency given the typical crop capacities in Russia.
Western machinery possesses better quality, ergonomics, reliability, and design, yet is much more expensive to service and repair. In addition, when used on fields with a harvest of up to 2 tons per hectare Western machinery’s expenses are significantly higher than that of Russian technology. The significant position of foreign tractors on the Russian market is due to the lack of the medium-powered wheel tractors and high-powered caterpillar tractors in domestic producers’ line, both of which are needed for agriculture. The Minsk and Kharkov tractor factories and also Western models fill these niches.
According to K. Babkin, the president of the New Alliance Industrial Group, Russian combines work just as long as imported models (including repair time) but are three times cheaper. When harvesting less than 2 tons imported combines do not cover its costs but when the harvest increases new combine models will be introduced by local producers.
Yu. Yudin, Agromachholding commercial director, considers that imported combines are built for large harvests. In Russia they are thus efficient on no more than 0.5% of farmland: in Rostov, Kuban and Stavropol regions. These combines are also partially used in Ukraine, where a significant amount of land yields harvests higher than 4 tons per hectare.
Comparison tests between foreign and domestic combines have established the fact that Russian harvester combines are more efficient. As a rule, foreign harvester combine production is greater than that of domestic models. However, Russian combines are 3-4 times cheaper. The effectiveness of capital returns when using domestic combines is thus twice as high as that with foreign combines when both are used on fields with average crop yields.
There is a general consensus is that, for the moment, new Western combines are not threatening the position of their domestic counterparts. Second-hand Western combines, however, do present a potential threat. Iu.Koropachinskii sees a threat in the large foothold gained by used Western machinery if it is accompanied by increasingly advantageous conditions for obtaining it. For Iu.Iudin, even ten years old second-hand foreign combine costing $80,000 is a better investment than a new $65,000 Don.
The advantages of domestic combines are apparently in great part due to the undeveloped Russian agricultural sector, particularly when there is a grain yield of less than 2 tons per hectare. On the contrary, larger future harvests could lead to not only the growth of demand for domestic machinery but to a shift to demand for imports. Even if such a tendency will be only a possibility, there will be a risk that Western companies will expand their position on the Russian market and, in order to take it over, will introduce more measures to make purchasing their machinery more attractive.
Russian tractor manufacturers now find themselves in a less stable position than combine manufacturers, because the price differential between foreign tractors and new Russian models is not great. The cost of one Russian tractor is now approximately $20,000-25,000, while its imported counterpart is $30,000-50,000. However, used foreign machinery that is comparable in price to Russian technology is a serious threat: the cost to quality ratio of used foreign tractors is more appealing than that of domestic models. However, foreign tractors remain expensive to service.
NATI (technology development institute) director N. Sheltsin notes, that the competitiveness of machinery on the market should be considered in a wider context: the completeness of the model-line offered by the manufacturer, servicing of machinery, and the financing of its purchase. Russian manufacturers’ lack of some tractors’ types decreases their competitiveness. It could further decrease if CIS-produced tractors fall under the conditions of the Russian leasing programs. The Belarus tractor has made progress on the Russian and CIS markets since 2002 by using companies to assemble its tractors in Russia.
The problem of competing with Belarusian tractors is unique. The Minsk Tractor Factory has technological advantages connected with its enormous production output vis-à-vis Russian facilities. It also uses the support garnered from the Belarusian state in the form of an entire series of privileges that also lower expenses.
S.Mlodik considers that buyers’ shift in interest to the more reliable and comfortable Western models could be very quickly revealed while manufacturers gain financial resources. In his words, “demand for the technical level will grow every year and when the long-awaited moment of growth occurs, the gap between our agricultural machinery and that of the Western will be simply unbridgeable. In addition, when fleet expansion becomes a necessity to afford further growth of agricultural production, there will be a sharp increase in demand for the quality of the machinery.”
The further strengthening of the ruble provides an additional threat, raising the expenditures of Russian manufacturers and lowering the price difference between domestic and imported machinery.
The abovementioned trends in the losses of the Russian tractor market testify to the fact that Russian tractor factories must intensively focus on producing competitive models. In this respect the 1.4 class plow-tractors and the universal class 3 and 5 pulling tractors are the most important.
Russian tractor factories are intensively attempting to raise the quality, reliability, and comfortableness of domestic agricultural technology, thus bringing them closer to their Western counterparts. To this end the Rostselmash combine assemblers in the past two years have produced a small number of the 6 class Don 2600 rotor combines, and the Krasnoyarsk Factory has produced the new Ruslan combine.

State Support of the Industry

The common opinion of the leading Russian producers of agricultural technology is that improving the manufacturing conditions of agricultural production and strengthening the financial position of its producers are the main factors behind growth in demand for machinery. State support of agricultural production is thus crucial.
K.Babkin believes that the machinery demand depends on the price of grain, legislation on agricultural land property, protective measures for the grain market, and the situation in the livestock and poultry businesses. If these branches expand, grain consumption in Russia will rise 30-50% and have a positive effect on demand for tractors and combines. However, falling prices on grain due to the large 2002 harvest immediately decreased demand for combines.
The following possibilities exist within the issue of support for the domestic agricultural machinery sector.
In the foreseeable future demand for grain is limited by domestic consumption and export possibilities. Facing overproduction of grain, Russia has a new problem: exporting. The infrastructure, oriented toward importing agricultural products, is not capable of exporting excess grain that could be consumed by the global market. Developing this infrastructure would be a valuable contribution to strengthening the position of domestic agribusiness. A number of experts consider that supporting exports (creating an effective infrastructure or paying a bonus to exporters for each ton of exported grain) are more effective than spending funds on developing the livestock business.
It is essential to have a policy of actively supporting domestic agribusiness and grain exporters through state price interventions. In the past two years such interventions has begun in the grain market, which stabilized the price for grain but was problematic in terms of scale or technology.

Industry companies advocate raising import duties on used machinery from abroad. It is especially important to be ready to institute prohibitive duties in case of dumping, when a massive import of used machinery at lowered prices is accompanied by discounted shipping. Raising import duties, however, is not as important as improving the situation in agriculture.
K.Babkin considers that the duties on second-hand imports could have an effect, but less so than if agriculture is strengthened by increasing the profitability of the grain and livestock businesses.

The state system of supporting purchases of agricultural machinery takes the form of discount credits for agriculture manufacturers and leasing from the state.
Machinery leasing began in 1994. The role of state procurer of agricultural machinery was given to Rosagrosnab, whose system encompasses 118 leasing companies throughout Russia. From 1994-2001 demands for machinery delivery increased by an average of 12% when the provinces are taken into account.
In June 2001, in accordance with government regulations, a new monopoly was formed: Rosagroleasing, which was given Rosagrosnab’s duties. The 2001 leasing program was essentially abandoned. Only in the second quarter of 2002 did Rosagroleasing begin distributing the components needed to lease under the new system. These components, guaranteed by regional governments, fell into the hands of the large regional companies that themselves are lessees working in the interests of developing agriculture. Contracts are valid for up to 5 years. The leases’ percentage rate is 7.7% annually (two times lower in 2003), with a 2% insurance premium, advance payment of 10%, a company margin of 1.5% annually, and an average machine value appreciation rate of –6%.
It should be mentioned that manufacturers of agricultural machinery believe the state leasing program positively influences demand. In the opinion of Iu.Koropachinskii, during the recession the large sum given to leasing agricultural machinery supported the market. Without these money in the past year the decrease would have been 40%, not 13%.
However, monopolization of the state credit resources through Rosagroleasing has several drawbacks.

Rosagroleasing has not broadened its client base, but instead redistributed existing financial networks in a manner favorable to the company. This leads to ‘squeezing out’ regional markets.

Rosagroleasing’s efficiency in the provinces depends on its relations with local governments.

The state company could be exposed to serious political pressure during the elections.

The state leasing company possesses advantages that make commercial leasing impossible.

One alternative to Rosagroleasing could be subsidizing the leasing interest fee and down payment on machinery bought by any leasing company from any lesser.
Overcoming the problems of the state leasing system could occur within the framework of a Federal program for investing credit in agricultural manufacturers. In 2002 the national government approved the rule on compensation for partial percent of three-year credits, which were given to agricultural manufacturers by Russian banks in order to obtain parts and machinery. Subsidies comprise up to 2/3 of the Central Bank’s refinancing stake and are paid monthly. This program’s conditions are much more advantageous for manufacturers than those of the state leasing program. The new program will probably lead to growth of mid-term investment in agribusiness and support updating the industry technologies.

The Industry Prospective

In the next two or three years manufacturers will not see a significant rise in demand for agricultural equipment.
K.Babkin notes that there is a great potential for growth, they cite a figure in the tens of thousands for combines. However, in the nearest year prospective there will be no radical increase: the CIS market will remain at the level of 7,000-8,000 units.
Iu.Koropanchinskii sees a steep rise in demand after 2005 linked to the widespread aging of equipment produced during the last years of the Soviet period. This will depend on the political and economic situation in the CIS: some areas could see dramatic growth in demand while others may witness a catastrophic decline. Nonetheless, there will certainly be an increase due to the age of the units. This will first influence combines and then the market for tractors. In an optimistic scenario, the market will be ready to absorb this jump in demand and for the ensuing 4-5 years could lead to the complete retooling of equipment in the CIS. The accumulation of profits from this process could create the foundation for updating the industry and preparing it for the next stage.
In the opinion of Koropanchinskii, the main issue for the industry is to ready itself for this expected increased demand by preparing new, competitive models: the industry’s future will be decided within the next 5 years and is being decided even now.
Other industry leaders and experts agree with this analysis of revitalized demand in the near future. They describe two divergent scenarios, depending on whether the industry can survive and keep its competitiveness until this new demand begins.
N.Shcheltsin believes that, under the optimistic scenario, within the next 10 years the industry will develop to the point of selling approximately 100,000 tractors and 20,000-25,000 combines in Russia. These mainstays of agricultural equipment will be produced by 2-3 large companies, which will have a technology development center and an effective dealer network throughout the country. Western companies will definitely be involved in the market and will expand the presence as demand increases. Under the pessimistic scenario there will be a crisis. The best factories will be taken over by Western companies, and the others will simply cease to exist. When demand eventually increases the only companies remaining in Russia will be those merged with Western full-line companies.

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