Russia, agricultural machinery market slowing. Italian exports holding out

Recovery over the past three years is being followed by a decline in tractor sales in the Russian Federation where, however, units moved in 2013 came close to 40,000. The Russian machinery inventory is obsolete and not up to the requirements of modern and competitive farming

Another slowdown in agricultural mechanization has come along for the Russian Federation following the steep decline in the two-year period 2009-2010. Agrievolution, the association of agricultural machinery manufacturers in the leading countries around the world, reports the estimate that tractor sales in 2013 slipped into the red with a 4% decrease under 2012. In spite of the brake applied on the Russian market, with an estimated 40,000 units moved, the figure is not far off the 41,827 units sold in 2012 to confirm the progress of 3% compared to five years before when international turbulence had not yet hit the sector.

 

Relaxation of customs barriers penalizing Russian manufacturers

The new decline has struck domestic manufacturers especially. According to ICE, the Italian Foreign Trade Promotion Agency, their turnover experienced a substantial drop, 12% under 2012 to 22.5 billion rubles, equal to 490 million dollars, with tractor sales down 42% and combine harvesters plunging 40%. Also imports declined but to a lesser degree in percentages compared to those named for the federation's manufacturers. Analysts for VDMA, the big German engineering industry association which systematically monitors  the nearby Russian market, pointed to conditions resulting from a framework of overall deterioration in which the federation's economy is linked too closely to the trend of raw materials. Another factor named is Moscow's entry to the World Trade Organization on 21 August 2012 which led to lightening protectionist barriers and state subsidies allocated for the agricultural machinery sector. For some products duties have been lowered and in other cases they will totally disappear gradually over a two to three-year transition period. For tractors, for example, the shift is from duties of 15% before WTO membership to 13.3% to drop to 10% in 2015. For some models of seed drills, on the other hand, WTO trade requirements already applied in 2014 mean duties declining from the present 3.5% to 2%, from 5% ahead of August 2012. Combine harvesters are an exception. An import quota for 2014 has been set at 424 units against the great increase in these imports in the five-year period 2009-2012. According to business people cited by ICE, lowering the import barrier could results in losses of the federation's manufacturers of five billion rubles, more than 108 million dollars, mainly due to outdated technologies compared to those of Western enterprises. 

 

Russian machinery inventory feeling the weight of the years

In this connection, with great weakness of Russian mechanical engineering in the primary sector is technological inadequacy leading to the inability of manufacturers to meet the demand for machinery for modern and competitive farming. For this reason, a seven-year plan was put forward in 2012 for the renewal and modernization of the machinery inventory. ICE data disclose that a sub-plan was opened in 2013 with overall funding of 23.6 billion rubles up to 2020, more than 510 million dollars, with diversified distribution over the period for facilitating sales of some 128,000 tractors and more than 52,000 combine harvesters. According to ICE, the allocation for 2014 came to 2.3 billion rubles, about 50 million dollars, but Arkady Dvorkovich, the deputy prime minister of the Russian Federation, has recently aired the idea of boosting funding to no less then five billion rubles per year for the acquisition of Russian machinery to strengthen the plan's impact on modernizing the decidedly obsolete machinery inventory. In fact, the Russian Ministry of Agriculture has estimated that included in this inventory are 35,000 tractors in the 250 hp category with ages greater than ten years. In like manner, according to the Ministry of Industry and Trade there are totals of 80% of tractors and 63% of combine harvesters over the same age in this inventory. On the other side of this picture is the generalized contraction of renewal coefficients caused in part by spinning out the life cycles of machinery to up to twenty-five years which led to the 2012 downturn of units in the federation's tractor inventory to 301,000 units from 319,000 in 2011, according to ICE. This development can be apparently explained by the drastic 50% reduction in the use of tractors in Russia from 2000 to 2009. For combine harvesters, which did not fare any better, the shift was from 199,000 units at the beginning of the period to 86,000 in 2009, a census figure reported by Rosagromash, the Russian association of agricultural machinery manufacturers. Thus most analysts are on solid ground in indicating this obsolescence as one of the leading factors in the weakness of the Russian primary sector which – other than the mechanization deficit signalled by only 4.3 tractors and one combine harvester for 1,000 hectares under crops – must come to terms with climatic and environmental conditions which are often prohibitive, due to extreme weather and reduced croplands, and a credit system unfavorable for agriculture.  

 

Italian machinery putting in appearances

In a market scenario featuring a decline in demand, especially for tractors, Made in Italy units demonstrated an ability to hold out to a degree with the 2013 export of 77 tractors. The number is well off the historic high of 156 units achieved in 2008 and sound 2012 exports of 119 tractors but confirms the vitality of Italian exports to Russia which have decidedly gained ground on average over the past ten years. Also to report for tractors is that the decrease in exports from 2012 to 2013 did not, however, correspond to a drop in value, which rose from 5.5 to 6.2 million euro apparently as the result of dynamics favorable for higher powered categories. On the other hand, the 2013 export trend for agricultural equipment and implements was strongly positive in showing a 15.8% increase over 2012. Data from ISTAT, the Italian Statistics Institute, elaborated by FederUnacoma, disclosed a marginal slowdown in exports of equipment and implements in the first quarter of 2014 and a slight dip for tractors which is not seen as as much off the trend for the period over the past three years. Available forecasts for the following months, especially that of the German VDMA, are particularly cautious. This view is dictated by the sensitivity of a trend which could be influenced by international political factors linked to the evolution of the crisis in Ukraine and economic counter-measures Moscow might apply against a possible step-up of targeted sanctions against individuals holding key roles in the Moscow establishment. In this case, the heightening of tensions would hit Italy especially, one of the federation's major trading partners and currently Russia's third largest supplier of mechanical engineering products and components.