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By John Helmer, Moscow

President Boris Yeltsin presided over the greatest slaughter of Russian livestock since Adolf Hitler crossed the Soviet frontier in the summer of 1941. In the five years between 1992 and 1997 19.6 million head of cattle were killed. That compares with 2 million killed during Hitler’s initial invasion, and 16.6 million culled during Stalin’s collectivization experiments in the decade before the war.

Russia’s accession to the World Trade Organization (WTO) was another of Yeltsin’s ideas – and with much the same purpose. If implemented, that idea would make Russia dependent on imports of foodstuffs and just about everything else the exporting countries would like to sell against their Russian rivals, after the latter were to give up their competitive price advantages, such as cheap energy, cheap land, cheap transportation, cheap fertilizer, etc. So, if Russia were a democracy, the WTO terms of accession for Russia – now 18 years in the negotiation – wouldn’t have a chance of acceptance.

But wait – isn’t Russia a constitutional democracy? And aren’t Russian pigs a part of that democracy? Are they obliged to die and fail to reproduce, so that North American and European pig farmers should dance over their graves?

Responding to these questions, the Russian government has just published a resolution anticipating that the import quota for pork will be cut for next year to 320,000 tonnes (plus 30,000 tonnes of trimmings), down 152,000 tonnes, or 32%, from this year’s quota of 472,100 tonnes (plus 27,900 tonnes of trimmings). The move, which Russian trade officials say is intended to support the rise in domestic pork production, is fiercely opposed by US and European pork producers, and is a sticking-point in Russia’s negotiations for accession to the WTO. The US in particular has demanded the dismantlement of the pork and poultry import quota.

In recent remarks, Prime Minister Putin has defended protectionism for the revival of Russian farm production, and made WTO accession dependent on the former, and not the other, the Yeltsin way round.

On July 15, he defended domestic content requirements for the Russian car manufacturing industry.

On July 22, he addressed the pork problem: “In 2011, Russia will consume some three million tonnes of pork, and we produce some 2,400,000 tonnes. So this year we will import some 600,000-650,000 tonnes. And next year…we will see a considerable increase in pork production, because we have been launching new livestock production facilities, pig farms. According to a preliminary estimate, we shall produce an additional 300,000 tonnes of pork. That is to say, next year we will import 350,000 tonnes of pork.”

With a little help from the Russian Meat Union and its dominant corporate member Cherkizovo, the WTO tradeoff has been calculated by the government, according to this supply-demand tradeoff. Currently, Cherkizovo is reporting it will produce 94,000 tonnes of pork this year, but at roughly 4% of the domestic aggregate it is far from exercising oligopolistic control in the market place. With a profit margin of 35% to 40%, the profitability of the pork line of business is unusually high, according to company reports and Renaissance Capital (RenCap) analyst, Natasha Zagvozdina. As the Russian grain harvest rolls in at better than normal volumes, and grain prices fall, the feedstock cost to pork production is falling, so profits will continue to rise. And so should Cherkizovo’s share price:

Cherkizovo share price – 6-month trajectory

According to the latest assessment from Rencap’s Zagvozdina, “we see a number of positives for Cherkizovo here: 1) the Mosselprom acquisition and Elets project should secure sizeable volume growth in the medium-to-long term (through both organic expansion and M&A); 2) meat prices (especially pork prices) are trending upwards; 3) assuming an 85mnt grain harvest in Russia this year, grain prices should reduce, hence we think the outlook for Cherkizovo’s margins is favourable. The market is failing to price-in these positive developments, in our view. The stock trades at 9.1x P/E and 7.7x EV/EBITDA 2011E, indicating an 8-30% discount to the EM peer average.”

Is it likely that the oinking from Washington and Brussels can be as persuasive for Kremlin policy as that?

According to President Dmitry Medvedev, the answer is no – Russia’s food security requires the protection of domestic food production growth. “First of all,” Medvedev said at a meeting in Belgorod on July 15, “and this has already been said, we need to reduce the dependence of our meat market on imports. Russia still buys much of its breeding and high-yielding animals abroad…Second, and this might be most important, is increasing the volume of domestic production, and thus, increasing domestic consumption and export opportunities for our products. Our success in poultry farming and pork production allow us to count on this in the future. Naturally, our priority is domestic consumption; that is what we must focus on. Therefore, we need to work on preparing long-term meat consumption forecasts with due regard to the food security doctrine.”

“Thanks to these measures, including a government programme for agriculture development, the production grew (40 percent for pork and 76 percent for poultry) and exceeded the 1990 level. Time has shown that these measures were effective, and the sector reached a turning point. My talking points say ‘radical change,’ but I cannot state that. A radical change has not yet occurred, as we all know. But we have seen a turning point, and our task is to maintain what has been achieved in this period, understanding that we still have problems with financing, as well as other problems. Nevertheless, our spending here proved to be fruitful. In the short period of time between 2005 and 2009, production grew by 29 percent. This is a good result, especially given the rather sad history of livestock farming during the Soviet era.”

Medvedev’s criticism of Soviet farm policy, and his silence on Yeltsin’s, add a touch of charming naivety to the political debate. On the detailed disagreements in the WTO accession negotiations, Medvedev has also kept silent, while Putin does the tough talking.

“During the WTO negotiation process,” Putin said on July 22, “we are also considering different [quota] parameters. But they can be used and approved only in case of full Russia’s accession to the WTO and only starting from that moment. If there is no agreement with WTO, we will use these numbers [for quotas]. We will keep import duties for quota products at 15 percent and 75 percent for out-of-quota volumes. In fact, these are prohibitive quotas and we do this for the interests of our producers. All these numbers will be valid until we reach a ‘package’ agreement with the WTO, which will consider the interests of all our other producers. We have been negotiating accession to the WTO for 15 years and intend to seek compromise.”

The dominant exporter of pork to the Russian market for the time being is the European Union; it is selling about 48% or 225,000 tonnes of this import quota volume. The US is selling 57,500 tonnes, 12% of the total this year; other suppliers around the world provide 189,600 tonnes. Washington trade negotiators have asked that this year’s number remain the same in 2012, and that the quota cut, if and when it comes, should be taken out of other exporters.

Whether the pork cut is proportionate or selective is thus a major foreign political issue right now, just as the quota aggregate is a priority domestic issue in the Russian parliamentary election campaign. US exporters will earn more than $170 million from this year’s sales to Russia; the European exporters, almost $700 million. Altogether, the imported pork business generates almost $1.5 billion per annum.

A leading meat importer in Moscow told Fairplay the latest government resolution on pork import volumes is not the final order for the quota; that will not be issued until November. “It appears to be a final victory for the anti-import lobby as it’s signed by Putin, but the debate will continue until November. It ain’t over until the fat lady sings. Russia’s stance may change depending on WTO negotiations. Most likely, this resolution is a strong signal to US and European trade negotiators that Russia takes this bargaining chip very seriously and that any concessions on the issue of quota volumes would require serious concessions from Russia’s interlocutors.”

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