Dialogue with Russian agrochemical enterprises: Accelerating the process of capacity expansion, adjuvant supply chain may be rebuilt

It has been over a month since Russian President Vladimir Putin ordered a "special military operation" in Ukraine on 24th February. Due to the impact of the war, the series of economic sanctions imposed by the US and the European Union (EU), along with Russia's countermeasures, have caused a tsunami to happen in international relations in economic and political areas. This tsunami has had an impact on every one of us. 

Russia is one of the top 10 destinations for Chinese pesticide exports. Since the start of the Russian-Ukrainian conflict, Chinese and Russian enterprises have worked hard to communicate and find solutions to the problems of logistics and financial settlement. Spring planting in southern Russia begun in March. Is Russia's local agrochemical market stable during the crisis? What is the current overall status of the business operations of Russian agrochemical enterprises? What measures and preparations have been made? What future plans will be established to maintain industry development and food production? With these questions in mind, we interviewed several agrochemical companies in Russia. 

Companies interviewed:

     Avgust                                        GC “Shans”                                 Agro Expert Group

2022 planting season secured, adjuvant supply chain may be restored 

Currently, the importation of raw materials for the 2021 season by major Russian agrochemical companies has been completed. In general, 70% of the market’s total procurement has been completed.

Mikhail Danilov, general manager of Avgust, one of Russia's largest agrochemical companies, said  95% of Avgust’s pesticides sold in Russia are produced at factories located within the Russian Federation and the Republic of Belarus. Normally, Avgust plans production well before the upcoming planting season. Due to the logistical challenges caused by the COVID-19 pandemic, such as the shortage of containers, increased delivery times for active ingredients and other components for formulations, the company began to complete contracts even earlier than usual. Therefore, in late 2021 and early 2022, the company’s factories have acquired all the necessary raw materials necessary for production. Currently, the delivery of goods from Europe has certainly become more complicated, but products can be sent to China through European ports.

Kseniya Polyakova, registration director at GC “Shans,” said with the exception of logistical difficulties associated with the global economic situation, there are no problems with the supply of raw materials to Russia, but all agreements with suppliers are implemented and all products necessary for production have been received, adding the production capacity of of GC “Shans” is 99% and it has all the necessary raw materials for the production of pesticides and micro-fertilizers in the current season. Therefore, customers will be fully supplied with products for the 2022 planting season. In addition, from the point of view of logistics and pricing, GC “Shans” is already considering the most efficient ways of interacting with suppliers of active ingredients, surfactants and solvents, as well as laboratory samples for the next season.

An agrochemical adjuvant supply crisis will eventually occur. At present, the main international suppliers of high-quality adjuvant are mostly European and American companies, such as Solvay and Clarient, who have expressed their intention to suspend operations in Russia. Polyakova stressed that if the situation does not change in the near future, all Russian manufacturers of plant protection products will have to look for affordable manufacturers of high-quality surfactants. If this scenario occurs, it will take time to create new supply chains and integrate new raw materials into production, as their compliance with standards and quality requirements must be checked. At the same time, government agencies are ready to support Russian manufacturers by organizing logistics corridors, increasing subsidies and assisting in communications with foreign partners at state level.

Solvay is one of the partners of the RusVinyl Joint Venture in Russia

Source of picture: ZUMA Press/Newscom

RMB settlement process accelerated: "Right and Timely Decision"

After the outbreak of the Russia-Ukraine conflict, seven major Russian banks were kicked out of the SWIFT payment, which was followed by the collapse of the rouble, which created obstacles for Russian companies to conduct transactions with foreign suppliers. 

Danilov said there is indeed a problem in terms of making transfers to European banks, but Avgust has managed to solve this. It is worth noting that Avgust has switched to RMB with Chinese partners some time ago and is collaborating with partners from the US and the EU through banks that are not subject to sanctions. If the US and the EU impose sanctions on all banks and payment of accounts in euros and US dollars, Avgust will switch to trading in other currencies, primarily in RMB and roubles. 

Since the US froze foreign-exchange reserves of the Russian Central Bank\ denominated in dollars, the process of switching to RMB and other monetary units in international trade has sharply accelerated. Discussions have been held between Russia and China on trading in domestic currencies. Avgust has realized that the dollar has few future prospects and has followed this advice from the leadership of the two countries. Now it is obvious that it was the “right and timely decision.”

Polyakova said that GC “Shans” is communicating with foreign suppliers and is considering ways of interacting with them regarding payments, including by increasing the installment period for payments, as product delivery times have increased due to the current situation. 

Source of picture: Russia Briefing

It is noted that business has been, in general, reoriented towards interactions with Asian countries. GC “Shans” has been collaborating with suppliers of raw materials in China, India and other countries for some time, so all industries in Russia have now turned their eyes towards partner countries in the east. Accordingly, logistical routes are now experiencing heavy traffic. “We hope that the Ministry of Transport of the Russian Federation, together with the Ministry of Industry and Trade of the Russian Federation, is already working on additional logistic schemes and transport interchanges that will help avoiding a logistical collapse,” Polyakova stressed. 

In the short-term, the prices of agricultural materials will not fluctuate too much, but the future is unpredictable 

Since the second half of 2021, the prices of pesticides and fertilizers have been increasing in Russia for several reasons, such as energy and logistical crises, raw material shortages in China, and the current rouble fluctuation. Prices of all necessary manufacturing resources are rising. The logistical service price in Russia rose 30%, with trucks from the EU rising in price and taking longer to be delivered, as well as several pesticide companies from the Europe and the US refusing to fulfill part of their contracts, citing problems with logistics. The biggest companies in the Russian market, such as Avgust, Syngenta and Schelkovo Agrohim, have sufficient production quantity for crops in 2022. Therefore, in the short-term, there will not be a major price fluctuation. 

According to Danilov, by the end of February, Avgust will normally have its availability of inputs at a level of at least 80% of its sales plans, and problems with logistics due to the military conflict and sanctions by the US and the EU concern not the most significant concern in terms of supply. Moreover, none of its European partners refused to supply Avgust with products for political reasons. Avgust will not revise prices for completed contracts and already shipped products, but it will ask partners to make payments under loan agreements ahead of schedule and keep prices in roubles. “Everyone understands that, taking into account the situation, this is a very good offer, and they will meet us halfway.” 

Avgust has raised prices for new pesticide contracts, and other companies are doing the same. Danilov said that because the costs of Avgust's products are pegged to the RMB, US Dollar and Euro, the depreciation of the rouble will have a greater financial impact on the company. If the rouble’s exchange rate does not fall, Avgust will be forced to raise the price of its products. 

In general, the supply and price of pesticides or fertilizers have been secured for this season. However, in terms of future market trends, respondents from several companies said that prices will increase with the rising cost of production. The level of increase is unpredictable, due to the existence of multiple factors and the changes to the global economic situation. 

Danilov believes that there may be problems with micronutrient fertilizers caused by logistics, as the same chelated forms of micro and meso-elements are supplied by both Europe and Israel, which, in turn, will have an impact on pricing. Agro Expert supplies about a quarter of all sugar beet pesticides in Russia, and its managing director, Aleksandr Zhelonkin, said its upcoming raw material prices are decreasing because active substances are supplied from China, which, in general, has remained stable. However, in terms pf pricing, the company needs to consider the increasing trend in logistical costs. The currency rate is also an important factor. Previously, the Russian Federation's trade gap made the country's Ministry of Finance force businesses to sell 80% of foreign exchange earnings, which could bring the exchange rate down to the level before the start of Russia’s military operation in Ukraine. 

Multinationals suspending new businesses and operations, local enterprises to accelerate process of capacity expansion

The 2023 season must really be planned for, as the Russia-Ukraine conflict has divided the western world and Russia. After the conflict, compared with the rapid follow-up actions on oil and gas industries, agricultural companies seem to be more ‘humanitarian’ and have tried to ensure their existing businesses would not be affected. However, new businesses or investments have been suspended. 

Syngenta, Bayer and BASF are the three pillars of the top five agrochemicals in the Russian agrochemical market. Syngenta announced a non-stop supply of seeds and fertilizers to Russian farmers; BASF has suspended new business operations in Russia and Belarus but will not shut down existing business activities; and Bayer issued an announcement to stop investment in Russia and Belarus for an indefinite period but has already delivered supplies to Russian farmers for the 2022 season. Bayer will decide whether to supply or not supply for the 2023 season, according to developments to the Russia-Ukraine conflict. 

As well as agrochemical companies, among the four major grain vendors, LluisDreyfus has announced its intention to suspend its business in Russia. Cargill and ADM said they would cut down business operations in Russia but will continue to operate “basic” food facilities in the country. 

The Russian agricultural market is a vast one, with enormous potential for growth in terms of agrochemical products, likely becoming the world's fifth largest pesticide market. If US and European pesticide companies leave the market, the agricultural materials required by domestic agricultural production may face a shortage. Therefore, existing Russian plant protection product vendors are must assume responsibility to secure supplies of agricultural inputs needed for the country's agricultural production. Meanwhile, a larger market share is allocated to local companies that are ready.

Russia’s local enterprises have been making continuous improvement to their productivity, while the process of product expansion of has accelerated, especially under the present circumstances. 

Avgust has three formulation factories in Russia and  Belarus. Its most modern plant is Avgust-Alabuga, which began production in the summer of 2019 and has not yet reached its design capacity. Avgust has significant reserves for increasing its production of formulations, both for itself and for other pesticide companies on outsourcing terms. In addition, Avgust’s Russian-Chinese joint venture, Hubei Avgust Pesticide Co., which is located in Hubei Province and manufactures active ingredients, started production about two years ago. In the near future, the factory will produce more than 30 types of pesticides, but in the meantime, Avgust is expecting timely deliveries from its Chinese partner. 

The Avgust-Alabuga plant in the Alabuga Special Economic Zone of the Republic of Tatarstan, Russian Federation

Source of picture: Ministry of Commerce of the Republic of Tatarstan

In terms of agricultural production and supply, Avgust is an agricultural holding in possession of some 250,000 hectares of land, being also engaged in dairy farming. Avgust’s agro-industrial complex will not only ensure Russia's food security, but it will also maintain the exportation of crop products.

The production plant of GC “Shans” in Russia, Shans Enterprise, began production in 2020, with a production potential of 50 million liters of plant protection products per year. Since the opening of the plant, the company has planned to gradually increase its production of products. In the 2020-2021 season, more than 5 million liters of plant protection products were produced; in 2021-2022 season, the production of 10 million liters of products is predicted; and in 2022-2023 season, the production of 20 million liters of products is planned. 

Shans Enterprise in the Lipetsk Special Economic Zone

Image source: Fertilizer Daily

Polyakova stated “GC ‘Shans’ mission is to ensure the food security of the country. Therefore, now we are purchasing additional volumes of raw materials for the production of products that our farmers are in dire need of.” The planned production figures of the Shans Enterprise plant have already been increased by 11% this season. The company will continue to follow the situation closely and, if necessary, increase production volumes.

Aleksandr Zhelonkin says Agro Expert has been continuously increasing its production capacity. Currently, the company is assessing the possibility of earlier deliveries of raw materials, in order to quickly respond to new demand from the market. “Even if some big market players suspend their activities on the Russian market, we will be able to cover customers’ needs,” he said.