While the Russian government has largely banned the import of U.S. food products since 2014, agricultural machinery and food- processing equipment is generally allowed to be sold without restriction.

Russia’s agricultural market has immense potential, with 220 million hectares, and could potentially feed two billion people, according to the Food and Agriculture Organization of the United Nations (FAO). However, this potential is not fully developed, as only 38 percent of Russian land is fertile and 13 percent is cultivated. Four regions (Central, North Caucasus, the Urals, and Povolzhie) produce 73 percent of agricultural output in Russia.

Growth in the agricultural sector continues to outpace that of the broader Russian economy. Unlike other sectors in the economy, the agricultural sector registered a 4.8-percent growth in 2016, and 2.4 percent in 2017, largely driven by a weak ruble and the food import ban imposed by the government in August 2014.

Today, Russia is the world’s largest producer of barley; the fourth-largest producer and the largest exporter of wheat in 2017; the second-largest producer of sunflower seeds; the third-largest producer of potatoes and milk, and the fifth-largest producer of eggs and chicken meat. In addition, agriculture has been one of the fastest growing segments of the Russian economy in recent years, with gross output up 2.4 percent in 2017 to 5.1 trillion rubles. This transition from import dependence toward self-sufficiency can be traced back to 2005, when Russia launched agricultural support policies on a meaningful scale as part of National Priority Projects, which then converted into multi-year programs for agricultural development. From 2014, these were supplemented by protectionist counter sanctions and sanitary and phytosanitary (SPS) measures, including an SPS ban on U.S. soybeans. As a result, Russia has transformed its agriculture sector from a modest level of production in the 2000s to a significant contributor to the economy and a growing global player, competing with the United States in the global wheat market and regionally in poultry markets.

Recently, the most significant growth in Russia’s agricultural production has been in the livestock sector. Traditionally, most animals were produced in small farms or backyard holdings. Today, the industry is shifting toward large agro-holdings. Of note, however, is the fact that while the production of poultry, pork, and eggs has increased in the past 10 years (by 6.9, 4.8, and 3.1 percent, respectively, according to Rosstat), the long-term trend in the cattle sector is downward. The total number of cattle decreased by 0.4 percent to 18.7 million in 2017 (in agricultural enterprises, to 8.252 million heads, a 1.2-percent decrease compared to the previous year). The production of meat, including beef, pork, as well as goat, horsemeat, and venison, grew by 7.7 percent compared with 2016, to 2.3 million metric tons (MMT). The production of poultry increased by 7.4 percent to 4.8 MMT. According to Rosspestmash and Russian Customs statistics, the Russian agricultural equipment market grew 13 percent in 2017. Sales of foreign and Russian tractors increased by 20 percent, while sales of self-propelled combines decreased by three percent.

Prospects for foreign manufacturers in the Russian market are mixed. There are extremely promising trends and structural challenges that weigh on demand for new agricultural equipment and force agricultural producers to delay capital investments or look for cheaper options from local agricultural equipment producers. Recently reduced subsidies to local equipment producers and increased government support for priority projects are levelling the playing field for some foreign equipment.

The Russian government has made it a priority to increase domestic production of agricultural equipment and provides manufacturers incentives to localize as part of its strategy to produce 80 percent of agricultural machinery in Russia by 2021, triple equipment production, and increase exports of agricultural equipment by a factor of 12 compared to 2017 levels, by 2030. Currently, domestically-manufactured equipment represents over 50 percent of the Russian market.

Since 2013, Russia has maintained several federal programs offering subsidies to local equipment producers. However, there have been concerns that not all manufacturers receive equal treatment under the law and certain producers are excluded from these programs despite having localized manufacturing.

There is an acute need for modernized agricultural machinery in Russia, but equipment purchase growth is constrained by high credit costs and geopolitical uncertainty. The government is attempting to compensate for these challenges and stimulate investment in capital purchases by offering various subsidies for strategically-important subsectors, including meat and milk production.

Per a study by J’son and Partners Consulting, in the last 10 years, the Russian fleet of tractors decreased 51 percent, with similar reductions in the number of plows (-57 percent), and cultivators (-47 percent). Other experts also note a decrease in seeders (-52 percent), grain harvesters (-50 percent), and forage harvesters (-49 percent). Almost 60 percent of tractors owned by Russian farmers exceed the typical service age of 10-12 years. On average, one tractor in Russia serves 247 hectares, compared to 38 in the U.S. and 14 in France. Russia’s Deputy Minister of Agriculture Petr Chekmarev stated that the sector needs 56,000 tractors totaling USD5.5 billion, 16,000 harvesters totaling USD2.2 billion, and 2,400 forage combines totaling USD167 million annually. Russian agricultural companies buy approximately 12,000 tractors annually, a third of the number required to maintain an efficient and up-to-date equipment pool. Market players and experts have consistently expressed the view that there is a significant need for large-scale replacement of old agricultural equipment in the next few years.

U.S. firms interested in the Russian agricultural machinery market may wish to consider exhibiting at one of the key Russian agricultural trade shows or working with the U.S. Commercial Service to organize a booth at the same. Such events often lead to direct sales and are powerful marketing tools that serve to reassure Russian buyers that the U.S. supplier is committed to establishing and maintaining a presence in the market. U.S. companies may also find opportunities as financially healthy Russian companies seek to expand in order to satisfy a growing demand for domestically-produced food. Increasing sales of meat, fruits, and vegetables are driving corresponding equipment sales in these sectors. Over the long-term, it is important to remain connected with potential customers and use every opportunity to maintain a presence in the market.

Although there are prospects for market growth for certain types of equipment in Russia, there are also serious issues in the market:

(1) High interest rates for purchasing agricultural equipment. Current interest rates for the purchase of foreign equipment from Rosselkhozbank, Rosagroleasing, and Sberbank vary from 25 to 27 percent, and a new proposal will further restrict purchases and prohibit Rosagroleasing from financing foreign equipment.

(2) Reduction in government subsidies for agricultural producers;

(3) Low growth in foreign investments in the sector;

(4) Unstable demand for agricultural equipment, due to the financial instability of Russian farming enterprises; and

(5) A utilization fee introduced in February 2016, which imposes prohibitive costs for agricultural equipment older than three years.