Russian food industry’s pivot to China sows rewards and risks

MOSCOW — Food trade with China is generating billions of dollars worth of business for Russia and quietly becoming a major part of President Vladimir Putin’s drive to tighten ties with Beijing. Central to the strategy is the Russian Far East, a region in the spotlight this week as Vladivostok hosts the Eastern Economic Forum to drum up investment.

Over the past several years, Russia has more than doubled its food exports to China amid rising trade tensions between Washington and Beijing. Moscow has also leased out hundreds of thousands of hectares of Far East farmland to Chinese companies.

All this has brought a wealth of opportunity but also new risks, from ecological damage caused by soy overproduction to excessive dependence on the Chinese market.

For China’s leaders, decades of rapid economic growth have presented a dilemma: how to feed a population of 1.4 billion people that is only growing wealthier. The country has less than 0.1 of a hectare of arable land per person, according to the U.N. Food and Agriculture Organization, and production capacity has been undercut by environmental degradation and a shrinking rural workforce.

Friction with Washington has not helped. For years, the U.S. consistently ranked as China’s largest or second largest food supplier. But during the countries’ tit-for-tat tariff battle in 2018, China imposed levies against more than 800 U.S. food and agricultural products. This triggered a significant drop in farm imports from the U.S., especially soybeans.

Russia has been eager to fill the void.

The Kremlin was already keen to transform Russia into an agricultural powerhouse, deploying state investments as well as a 2014 ban on all agricultural imports from the European Union. In 2020, Russia exported a record $30.7 billion worth of agricultural goods overall, becoming a net food seller for the first time in its post-Soviet history.

The U.S.-China trade war provided a clear boost: Russian food sales to China soared by 123% to nearly $4 billion in 2020, from $1.77 billion in 2017, according to data from Russia’s Federal Customs Service. The momentum continued into the first quarter of 2021, with 57% growth on the year.

Russia’s Ministry of Agriculture estimates that food sales to China could exceed $7 billion by 2030.

The Far East is sure to feature prominently in those ambitions. The region shares a 4,000 km border with China and offers a favorable climate and soil for growing a wide range of crops — including soybeans, corn, wheat, rice and barley. Perhaps even more significantly, the Far East has an abundance of available land. In 2020, the region had 2.5 million hectares of cultivated area and another 4 million hectares of pastures and hayfields. These figures are expected to rise in the coming years as Russian farmers restore fields that were abandoned following the collapse of the Soviet Union.

Some local agricultural producers contend that the Far East is uniquely positioned to provide China an alternative to U.S. soybeans. Alexander Generalov, the general director of Arnika Holding, one of the region’s largest agribusiness companies, argued that with the proper investment the region could boost its soybean production to 15 million to 17 million tons per year, a quantity he claimed would be sufficient to completely squeeze U.S. soybeans out of the Chinese market.

“Russia has the land and equipment to make it happen,” he said. “It is just a matter of getting the necessary money.”

For now, the Far East is far from reaching such output levels. In 2020, the region grew just over 1.5 billion tons of soybeans. Indeed, Russia as a whole still accounts for only 1% of China’s total soybean imports.

Nevertheless, there are signs of progress. Far East soybean production is steadily increasing, with a large percentage of it going to China. Some local companies have also begun developing higher-end soy products aimed primarily at China.

One is Soya ANK, a soybean oil producer based in the border town of Blagoveshchensk. Victoria Vitvitskaya, a representative of Soya ANK, told Nikkei Asia that the company opened its first soybean processing plant in 2014 and was operating at full capacity within a few years thanks largely to Chinese demand. Today, the company produces up to 15,000 tons of soybean oil annually and employs over 120 people.

“Historically, soybeans have been like gold for our region because we have excellent conditions for growing them,” Vitvitskaya said. “But the recent development of Russian-Chinese relations has undoubtedly provided a boost to our region’s agricultural sector. We’ve started seeing a lot more farmers, a lot more variety in the types of soybeans being grown, and a lot more companies engaged in trading.”

Russian companies are not the only ones moving to grow soybeans in the Far East, however.

Authorities have sought to entice Chinese investors to the Far East by offering them large plots of land on leases ranging from three to 49 years. In 2018, the Far Eastern Investment and Export Agency, a state-backed nonprofit, announced that Russia was prepared to lease out 1 million hectares of arable land in the region to foreign investors, with half expected to go to Chinese companies.

There is no official figure showing how much farmland in the Far East currently belongs to Chinese investors. But an analysis of data from Land Matrix, a European land monitoring organization, found that Chinese companies had acquired over 215,000 hectares. A 2019 investigation by BBC Russia, meanwhile, calculated that at least 350,000 hectares of farmland had been bought or leased by Chinese nationals. Most of the land is being used to grow soybeans.

Russian President Vladimir Putin has made tightening ties with Xi Jinping’s China a foreign policy priority.
  © Reuters

Some experts warn that rapidly increasing soybean output could come at a heavy ecological price.

Vadim Zausaev, an independent economist in the Far Eastern city of Khabarovsk, explained that growing the crop in the same location for more than three years seriously damages the land. He said the risk can be managed with proper crop rotation but that many Russian and Chinese farmers in the region neglect to do so, seeking quick profits instead.

“The Russian entrepreneur who leases out farmland is interested in making a good profit, and the Chinese will give him that for up to three years,” Zausaev said. “But the great misfortune of Russian business is that it still does not see beyond tomorrow.”

Soy is not the only area where the Russian food industry’s pivot to China has run into problems.

In December, China closed its ports to Russian fish products after reportedly discovering traces of COVID-19 on several packages. The ban delivered a heavy blow to Far Eastern producers, who exported nearly two-thirds of their fish to China. By the first quarter of this year, sales to China were down to $138.9 million, from $333.3 million in the fourth quarter of 2020. Months of negotiations have failed to resolve the matter.

Artyom Lukin, a professor of international relations at Far Eastern Federal University, warned the standoff reveals the danger of overdependence on China as a food customer. “Russia is seeking to expand and deepen economic cooperation with China in the Far East,” he said. “But Russia is trying to avoid a situation in which China becomes a monopoly external player in the development of the Far East.”

In a sign of China’s interest, President Xi Jinping is due to address the Vladivostok forum on Friday by video link, according to state media CGTN. Yet there are broader economic barriers to greater cooperation.

Alexey Simonov, head of the Vladivostok-based Deita information and consulting agency, told Nikkei that many Russian food producers lack the financial resources to enter the Chinese market. He explained that many of his clients are startled to learn the high costs of conducting market research and running an advertising campaign in China. Moreover, Chinese distributors often demand far larger output levels than most Russian companies are able to supply.

“To even get your foot into the Chinese market,” Simonov said, “you have to make colossal investments and changes to your production model.”

He added that even though geopolitical shifts have benefited Russian-Chinese food cooperation in recent years, they could just as easily become a source of uncertainty. At the height of the U.S.-China trade war, he recalled, the Chinese unexpectedly came to Russia to request several million tons of soy. “It was already late in the farming season, so Russia was quite obviously unable to provide such a large amount on such short notice,” he said. “However, when Russia asked whether the Chinese needed several million tons of soy the following year, they weren’t able to give a definitive answer.

“After all, who knows, by that time maybe Xi Jinping will become friends with the Americans again.”