Financing Agricultural Production and Trade in RussiaGlenn Kolleeny, Partner, SALANS

December 12, 2011, NEU.S.- Russia Business Council Agribusiness ForumOmaha, NE

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How the state supports the development of agriculture in Russia

The agribusiness sector can receive loans from a special state credit institution – OJSC Russian Agricultural Bank

Leasing with federal budget financing through the state company OJSC Rosagroleasing

Subsidies for the development of agriculture (from federal budget through the Ministry of Agriculture)

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Agribusiness Sector in Russia

2010-2011 Development of Agribusiness in Russia:

In 2010, the agribusiness industry maintained its upward growth, increasing by 2.9%. In 2009 the sector grew by 1.2%, despite the financial crisis.

Significant growth was registered in animal breeding in 2010, including meat production, which grew by 7%.

In 2010, the Russian grain yield amounted to 60.9 million tons (97 million tons in 2009), the decrease being the result of a drought in Russia in the 3rd quarter of 2010. In 2011 with available grain reserves at about 90 million tons, the total amount will exceed domestic needs.

In 2011, the forecast for total crop area is 77 million hectares, 2 million hectares greater than 2010. The grain yield forecast for 2011 is 85 million tons. Exports are expected to exceed 20 million tons.

In 2010 federal subsidies to the agribusiness sector amounted to RUR 107.6 billion, and the volume of loans with subsidized interest rates increased by 30% – up to RUR 80 billion. 

The planned amount of annual state support to agriculture from the federal budget is RUB 150 billion.

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Russian Agricultural Bank (Rosagrobank) (1)

Established in 2000 at the initiative of the President of the Russian Federation, the Russian Agricultural Bank is a 100% state-owned bank regulated by the Central Bank of Russia. Rosagrobank is one of the leading financial institutions providing lending support to Russian agribusiness.

Rosagrobank is a State Agent for agribusiness sector development. Its mission is to implement

governmental finance and credit policy in agribusiness and rural areas in the Russian Federation.

Rosagrobank:

Ensures the availability of affordable banking products and services to agribusiness enterprises and the rural population of the Russian Federation

Contributes to the development and operation of a national credit and financial system for the agribusiness sector in the Russian Federation

Contributes to the development of agribusiness and rural areas of the Russian Federation

Rosagrobank plays a key role in the implementation of the state program on agribusiness development.

Rosagrobank ranks number four among the largest banks in the Russian Federation by assets and capital according to RBC and Expert RA, and Rosagrobank is number 212 by capital in the world according to the July 2011 issue of The Banker magazine.

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Russian Agricultural Bank (Rosagrobank) (2)

(1) Loans to fund: Seasonal field work Procuring feed Insurance premiums Acquiring livestock Other goals connected with financing recurring needs

In addition, Rosagrobank has a program of loans for seasonal work secured by a pledge of the future crop harvest, and also provides overdraft loans.

Key terms and conditions of loans for recurrent goals: No credit limit. Term of loan – up to 2 years. Interest paid quarterly/monthly. Security — pledge, bank guarantee, surety. State guarantees from RF constituent subjects and municipalities are also possible.

(2) Loans for investment: Financing of expenses connected with modernization of production and construction, reconstruction, and modernization of real

estate; Acquiring equipment, transportation vehicles, and agricultural equipment Implementation of new technology

Key terms and conditions of loans for investment: No credit limit. Term of loan  — up to 10 years (depending on the purpose and terms of the loan). Interest paid quarterly/monthly. Security — pledge of liquid assets of the borrower or a third party, state guarantees of RF constituent subjects and municipalities,

state and municipal funds for the support of small and mid-size businesses may act as guarantors. Provided as: a one-time loan, an open credit line with a drawdown limit, an open credit line with both a drawdown limit and a

maximum debt amount. The grace period, deferring repayment of the loan’s principal, may be up to 24 months from the date the loan is extended.

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OJSC Rosagroleasing (1)

Established in 2001, OJSC Rosagroleasing is 99.99% state-owned. Rosagroleasing was created to implement programs in support of agricultural producers.

Rosagroleasing’s main activity is investing in the acquisition of equipment and machinery, and breeding stock, and leasing them to agricultural producers.

New areas of activity of Rosagroleasing: logging machinery and equipment to timber processing enterprises, production equipment for storage and processing of fish products, irrigation and soil improvement equipment as well as vegetable storage facilities and fire fighting equipment, all under a system of federal leasing.

Since 2008, Rosagroleasing administers the state program for development of agriculture and regulation of agricultural goods, raw materials, and food markets for 2008-2012 (State Program) to provide Russia’s regions with breeding stock, equipment for livestock maintenance, and agricultural equipment.

The main goal of Rosagroleasing’s activity is implementation of measures set forth in the State Program in support of Russian agricultural producers. Rosagroleasing finances only Russian produced equipment.

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OJSC Rosagroleasing (2)

Key terms and conditions for leasing with Rosagroleasing

Agricultural equipment and machinery: Advance payment not less than 20% (uncollateralized) or not less than 7% (with collateral) Leasing term up to 5 years (uncollateralized) or 7-10 years (with collateral) Leasing payments – quarterly (semi-annually, annually) Equipment rises in price for 2% per year on average Rosagroleasing’s fee – 3.5% annually of the value of the leased equipment

High-yield breeding stock: Advance payment not less than 20% (uncollateralized) or not less than 7% (collateralized) Leasing term up to 5 years Leasing payments – quarterly (semi-annually, annually) Breeding stock rises in price for 1.8% per year on average Rosagroleasing’s fee – 1.5% annually of the value of the livestock Note: Terms and conditions apply only to cattle, sheep and goats, pigs, horses, deer, and

fowl

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OJSC Rosagroleasing (3)

Main differences between leasing and loans

Leasing: Advance of only 7%, accelerated amortization Security depends on the size of the advance and the lease term (20% advance for a term of

5 years or 30% advance for a term of 10 years, additional collateral is not necessary) Lease payments are fixed Equipment acquired under the federal leasing program rises in price for approx. 2% per year Additional expenses are included in the lease payments such as insurance premiums.

Loans: Advance of up to 10%, standard amortization Additional collateral for the loan may be required Loan interest rates are based on market rates and fluctuate Equipment acquired on credit rises in price for approx. 5% per year In using the loan, expenses for delivery of the equipment, property insurance, etc. must be

taken into account.

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Subsidies for the development of agriculture

Within the framework of a state program, the state supports the agribusiness sector by providing subsidies from the federal budget to the budgets of RF constituent subjects to:

Support of livestock breeding Acquire equipment for spraying agricultural chemical Support reindeer and sheep husbandry Insure the harvest Offset part of the interest expense on loans Development of plant cultivation

Authority over provision of state support to producers of agricultural goods is given to the RF constituent subject

Subsidies are provided to RF constituent subjects whose regional programs have been successfully reviewed according to a procedure established by the RF Ministry of Agriculture

Conditions for provision of a subsidy: approved regional programs; the budget law of the RF constituent subject containing expenditure obligations and budgetary appropriations for financing regional programs in a given year and planning period, taking into account the established level of co-financing.

The total volume of budget allocations for development of agriculture in 2011 is 149.7 billion rubles

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Other financial mechanisms for agribusiness sector

Loans from International Financial Institutions (IFIs) Export financing under a guarantee from national Export Credit

Agencies (ECAs), limited to financing equipment, machinery and technology produced in the country of the ECA

Producer credit agencies Producers of agricultural equipment and vehicles have established special

purposed finance companies to provide financing and lease financing of agricultural equipment supplied by the producer, ordinarily from outside the Russian Federation, to end-user customers in Russia.

Loans from commercial banks secured by pledges of inventories in warehouses or silos and assignment of export contracts.

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Loans from International Financial Institutions (IFI)

The European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the International Finance Corporation (IFC), the Overseas Private Investment Corporation, and the Nordic Investment Bank (NIB) are examples of international financial institutions.

In Central and Eastern Europe, the most active of these is the EBRD, whose goal is assisting in the creation of a market economy and supporting private enterprise.

EBRD: EBRD loans usually mature in 5 to 15 years, 7 years on average. Loans are made in any freely convertible currency The minimum loan for large-scale projects is from 5 to 15 million EUR, although in certain cases it may be less. Loans for small and mid-size businesses are from 50,000 to 200,000 USD (for a term of up to 5 years). The EBRD offers both fixed and floating interest rates:

loans with a fixed interest rate set on the basis of a floating rate, such as LIBOR; loans with a floating interest rate and fixed maximum and minimum interest rates.

A margin is added to the base interest rate, which is calculated based on the country risk and the risk for the specific project.

After the EBRD has obtained all necessary information on the project being financed, the loan processing usually takes from 3-5 months.

Loans secured by a pledge of agricultural equipment. Development of loans for agricultural producers secured by a pledge of agricultural production (future harvest).

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Export financing under a guarantee from a national export credit agency (ECA) (1)

A national export credit agency (ECA) is a specialized agency intended to assist exporters from that country to sell equipment, machinery and technology. Thus, for an ECA to be involved in a transaction, a significant part of the delivery must be made from the country in which the agency is located.

An ECA typically does not provide finance, but rather guarantees or insures the risks of the bank that is financing the purchase of imported agricultural equipment. As a rule, the financing covers up to 85% of the cost of the equipment.

The most well-known export agencies working with Russian banks are: HERMES (Germany), US Ex-Im Bank (USA), COFACE (France), Finnvera (Finland), ERG (Switzerland), and EGAP (Czech Republic), among others.

Russian banks such as VTB and Gazprombank also participate in financing models that include guarantees from ECAs.

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Export financing under a guarantee from a national export credit agency (ECA) (2)

Traditional model (sequence) of attracting funds with assistance from an ECA:

1. The Russian importer, having entered into a foreign trade agreement with an exporter, requests that its bank organize the financing with an ECA.

2. The bank suggests financing the project (purchasing the agricultural equipment) to the western bank and the export credit agency.

3. The exporter contacts the export credit agency. 4. Loan agreements are entered into between the two banks and between the Russian bank and the importer . 5. The ECA insures the loan agreement between the western and Russian banks, insuring the western bank’s risk. As

a rule, 85% of the contract price is covered by the export agency, and the Russian importer must pay for the remaining 15%.

6. The exporter’s bank transfers to the exporter’s account the funds for the equipment to be delivered, and the exporter supplies the equipment to the importer.

For the exporter this model minimizes the risk of non-payment, and for the Russian and foreign banks it minimizes the risk of non-target use of the loan.

The cost of an export loan for the Russian importer is comprised of the following:

the base financing – based on a financing rate used in international markets (LIBOR) the foreign bank’s margin (usually from 0.5% to 1%) the foreign bank’s commission for organizing the financing and for the obligation to provide the loan the ECA’s commission (insurance premium) (calculated based on the amount of the loan, and

depends on the term of repayment as well as the country risk of the importer country).

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Export financing under a guarantee from a national export credit agency (ECA) (3)

Advantages of financing using an ECA: The cost of financing is lower than the cost of services of Russian banks. Loan terms are longer (from 5 to 10 years). Fixed interest rate Supports the long-term development of the agricultural enterprise.

Disadvantages of financing using an ECA: ECAs only finance equipment or technology produced in the country in which it is located.

When using an ECA, a significant part of the delivery must be of goods/technology from the ECA’s country.

The decision on whether to grant the loan takes a long time (2-5 months or more). If the importer’s bank is not capable of meeting its obligations, the liability to the western bank

may pass to the importer.

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ALMATY BAKUBARCELONABEIJINGBERLINBRATISLAVABRUSSELSBUCHARESTBUDAPESTFRANKFURTHONG KONGISTANBULKYIVLONDONMADRIDMOSCOWNEW YORKPARISPRAGUESHANGHAIST PETERSBURGWARSAW

Contact information: Glenn S. KolleenyPartner, Salans LLP

gkolleeny@salans.com

SALANS St Petersburg Salans Moscow36, Moika River Embankment, Ul. Balchug, 7,191186 St. Petersburg, Russia 115035 Moscow, RussiaT: +7 (812) 325 8444 T: +7 (495) 644 0500F: +7 (812) 325 8454 F: +7 (495) 644 0599

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