Geopolitics still loom over resurgent ex-Soviet markets

Agriculture in Russia and Ukraine seems to be back in robust shape. For foreign investors looking to make the trip, however, factors to consider run beyond economics.

Geography dictates both Russia and Ukraine will play crucial roles in any serious effort to meet global food demand in the decades ahead.

That long-term importance has been further underscored in recent years: while most international investors have exited both markets – worried by worsening security in Ukraine and Russia’s souring relations with the West – the two countries’ agriculture production has boomed.

Could this herald a return of FDI to the region? Earlier this month, a subsidiary of Saudi Arabia’s state-owned agriculture unit announced its acquisition of a local company that farms 165,000 hectares in Ukraine. But a source familiar with the deal told Agri Investor that geopolitics remain a key variable in any farmland deal done inside the former Soviet republic.

“Because of the conflict, there has been a separation of Russian interests and Ukrainian interests, in many cases,” the source explained.

If the Saudi acquisition comes at a time when international capital is once again showing “very, very modest” interest in Ukrainian farmland, as the source suggested, recapping how the overall picture has changed since Russia’s 2014 annexation of Crimea can provide a helpful reality check.

A Beijing bounce?

As Europe imposed sanctions on Russia following its move into Crimea, Moscow set out to implement policies designed to boost its ag production potential. At around the same time, it also engaged in efforts to limit its overreliance on oil and gas by modernizing agriculture.

The success of those efforts was on display earlier this month, when US Wheat Associates announced plans to close the Moscow office it opened in 1992 to encourage sales of American wheat to a country that is now the world’s largest exporter of the grain. Russia’s newfound ag leadership would seem to provide fertile ground for foreign investment. But there are caveats.

Take the China factor, for a start. With trade negotiations between Washington and Beijing reportedly stalled, Moscow’s own evolving relationship with Beijing could get tighter.

That would only accelerate a pronounced trend: in the early 2010s, most observers greeted initial signs of renewed partnership between Russia and China with skepticism, but the years since have seen coordination of industrial, economic and even military policy that has largely exceeded expectations.

Earlier this year, the USDA predicted that Russia was likely to be among the countries China might rely on to replace soybean supplies previously sourced from the US. Shortly after, Russia announced it intended to lease as much as 2.5 million acres in its Far East to foreign investors – a move widely interpreted as designed to make way for Chinese investment.

It is easy to see why institutional investors might want to watch this very closely: as two countries better known for favoring the state’s role in the economy nurture closer links, private players from elsewhere may find the playing field tilted against them.

The swing factor

Speaking with Agri Investor in January, TRG’s Eva Greger held up Ukraine as an example of a market where political risk can determine, as opposed to just influence, the profitability of an investment. Greger, who said then that her firm was looking for deals in both Russia and Ukraine, lamented the “unfortunate truth” that limited partners often need more convincing at exactly the time when a market is offering the best deals.

Almost 10 months later, Ukraine’s agricultural performance is improving; fluid developments and dislocations on the ground suggest that time may have come. Yet, the unfortunate truth is that geopolitics, which may be just as fluid, will for some time continue casting uncertainty over the opportunity.

Write to the author at chris.j@peimedia.com