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. Last Updated: 07/27/2016

Farmers Offered $3.5Bln State Rescue

In an attempt to prevent spring sowing season from turning into spring default season for grain farmers, Agriculture Minister Alexei Gordeyev announced Tuesday that state-controlled banks would provide farmers with 120 billion rubles ($3.45 billion) in short-term loans for spring sowing.

The amount is more than double what Gordeyev announced would be forthcoming after a meeting with Sberbank chief German Gref on Saturday, signaling growing concern about a looming crisis in agriculture, which employs about 10 percent of the population.

Of the promised short-term loans, 65 billion rubles will be provided by Rosselkhozbank and 55 billion rubles by Sberbank, the Agriculture Ministry said Tuesday.

"120 billion rubles will be sufficient to implement all that is necessary within the spring sowing campaign," Gordeyev said in a statement.

His ministry said farmers have obtained nearly all the seeds needed for spring sowing and are now acquiring fuel, pesticides and fertilizers.

Although the agriculture sector turned an overall profit of 115 billion rubles last year, farmers face trouble preparing for the harvest because of a lack of credit lines from struggling banks and high interest rates.

"Many farmers have been left unable to pay off their loans from last year," said Ivan Nikolayev, an agriculture analyst at Renaissance Capital. "Now the banking system is locked, and that will have a huge impact on spring crops."

Grain farmers face some of the biggest worries after grain prices tumbled by more than 50 percent between May and December, when grain-producing countries reaped record-breaking harvests.

With world supply far outstripping demand, Russia's own bountiful harvest of 108 million metric tons -- the largest in the country's history -- worked against both farmers and exporters, who posted little profit last year.

To stabilize prices, the government has conducted numerous intervention purchases, spending 32.8 billion rubles since August on more than 7 million tons of grain.

In January, prices began to pick back up from their December lows. But as of Jan. 15, Russian class-3 hard wheat was priced at 5,950 ($164) rubles per ton, down 28 percent from mid-May.

"Low prices and very limited access to the credit market is making it difficult for farmers to buy fertilizer, fuel, and to rent or buy equipment this spring," said Alexander Kovalov, a commodities analyst at KIT Finance. "Some [farmers] are going to have to reduce acreage."

The Agriculture Ministry on Tuesday did not provide a forecast of the area to be sown with spring crops this year, but it said on its web site that farmers have sown 17.1 million hectares with spring grains, an increase of 300,000 hectares from last spring.

It also said farmers would need 1.7 million tons of mineral fertilizers for spring sowing and that 554,000 tons had been stockpiled by Feb. 1.

Agriculture and forestry together make up the third-largest area of economic activity in the country, employing 10 percent of the economically active population, according to the Federal Statistics Agency. This makes it a priority for authorities worried about a sharp increase in unemployment and the potential of accompanying social unrest.

Despite the high employment in the sector, agriculture and food exports account for only 2 percent of Russia's total exports. In the first 11 months of last year, Russia imported $32.3 billion worth of food, nearly four times more than the $8.4 billion it exported.

With a nervous eye on spring sowing, the Agriculture Ministry has been persistent about re-establishing broken credit lines between farmers, banks and other agriculture creditors. Gordeyev announced that Sberbank would provide 55 billion rubles in loans for spring sowing after the meeting Saturday with Gref.

"Sberbank based this amount on the number of loan applications it received from the regions," Gordeyev said, according to the ministry's web site.

He said Sberbank's interest rates would not exceed 18 percent.

Sberbank and Rosselkhozbank, the agriculture sector's two main creditors, have received 500 billion rubles and 25 billion rubles, respectively, in subordinated loans from state-controlled Vneshekonombak, or VEB. VEB is one of the government's principal bailout vehicles for industry.

On Feb. 4, the government issued an executive order to increase Rosselkhozbank's charter capital by 45 billion rubles ($1.2 billion), coming from budget funds. The capital injection aims at making it easier for the bank to credit the agriculture industry, large farms, small family farms, agriculture consumer cooperatives and grain interventions.

The first funds appear to be trickling down to the real sector. Last week, Sberbank reported lending a total of 2 billion rubles ($56.7 million) to agriculture, which has been designated by the government as a "priority sector" for economic development.

In December the government produced a list of 295 strategic companies deserving priority government aid and loan support. The list includes 34 agriculture and food production companies.

But with this representing only a fraction of the country's agricultural businesses, Gordeyev has had to actively lobby banks in recent weeks to expand credit lines for the sector as a whole.

Speaking to a working group on agriculture credit concerns on Feb. 5, Gordeyev asked banks to increase their loan activity to ensure that spring sowing began on time this year.

"Making sure we are prepared for spring sowing season is one of our top priorities at the moment," Gordeyev said in the presence of Sberbank and Rosselkhozbank representatives.

He described agriculture as "a kind of locomotive for the Russia economy" and touted the 98 percent loan repayment rate at Rosselkhozbank.

His words seem to have made an impression.

On Feb. 9, Sberbank awarded the grain-processing company Pava a 150 million ruble loan ($4.16 million) to buy grain, repayable in 12 months. Pava is not on the government's list of strategic companies. Sberbank also opened a three-year, $128 million credit line for fertilizer producer Akron, which is on the list.

To help offset high interest rates of 17 percent to 18 percent for the agriculture sector and encourage companies to borrow, the government has set aside 60 billion rubles from the federal budget for interest-rate subsidies. The measure involves compensating agricultural borrowers for up to 80 percent of the banks' interest rates.

The program works like this: After a company takes out a loan, it must document what it spent the money on and then can submit an application to the government for interest-rate reimbursement.

"The government will then review their application and, if everything is in order, they will give them back the money," said Alexander Korbut, vice president of the Russian Grain Union.

But the conditions attached to the government's interest-rate reimbursement program will make it difficult for companies to meet all their financial needs for the season, said Dmitry Rylko, director of the Institute of Agricultural Market Studies.

"The only expenditures that qualify for interest-rate subsidies are those that will be directly used for production purposes: equipment, fertilizer, grain and so on," Rylko said.

"Salaries and other operating expenses do not count," he said, and to pay for such expenditures, farmers will "have no choice" but to take out loans at the full 18 percent interest rate.

Despite the credit problems, the 2009 grain harvest is expected to be bountiful, with an estimated harvest of 85 million to 96 million tons, according a recent forecast by agriculture-market research agency Sovekon.

But a large harvest means could mean more government grain interventions.

The Agriculture Ministry says the country's grain reserves could reach 28 million metric tons, or 150 percent more than typically required, by July 1.

Last week, the government bought 128,400 tons of grain for 582.5 million rubles, 45 percent less than the week before, according to data from the National Commodities Exchange on the MICEX. Gordeyev said his ministry may purchase 18 million to 20 million tons of grain this year.