Russia: chilly winters but a hot farming opportunity

A renewal of that spirit was called for yesterday in Edinburgh by Vasily Bochkarev, the governor of the Russian province of Penza, which lies about 500 miles south of Moscow.

He wants to revitalise the agricultural industry in his region, which he says enjoys many climatic advantages - winter temperatures seldom drop below -30C .

Following the collapse of the Soviet Union, millions of hectares formerly run collectively and hugely inefficient farms simply went out of business. The land has mostly lain fallow for many years. But that is changing fast, says Richard Willows, the general director of Heartland Farms, an English company that set up a large scale business in Penza in 2002.

Heartland now leases 12,000 hectares of prime arable land, growing a wide range of crops, including wheat, malting barley, sunflowers and sugar beet, for the Russian market. The prospects are encouraging, according to Willows.

He said: "Russia's food import bill is a massive 6 billion, a huge percentage of which could be produced domestically. That is where the state's schemes have set their objectives."

But his next comment got the audience of leading Scottish arable farmers on the edge of their seats. He said: "There is probably no other country in the world which has the potential to significantly increase food production as much as Russia."

It is not quite as simple as it may appear, however. Foreign investors are, for the time being, not permitted to make outright purchases of land in Russia. Willows and his fellow UK investors had to negotiate with a staggering 1,200 former tenants and their successors, who held rights dating to before the collapse of the Imperial regime in 1917.

That took the better part of two years, the investors now having leases extending for 49 years. In addition, the authorities have simplified the system to the extent that any new investors will be spared that complex process.

The Heartland enterprise is developing rapidly. Of the 12,000 hectares currently leased, only 8,000 hectares is in production.

It takes time to restore land that has been idle for so long. To date the total investment runs to more than 4 million, and that is set to double over the next three years as more land is acquired.

The company employs 65 full-time workers with wages ranging from 120 to 180 per month. In Soviet times farm workers on arable collectives were laid off during the winter months. Willows admitted that at first it was problematic to develop the work ethic, but said that the staff were now very focussed and were coping well with modern machinery and the associated technologies.

There is a range of incentives for foreign investors, not least a favourable tax regime. At the outset the tax rate is zero, but this will progressively rise to 18 per cent by 2014. VAT is applicable on both inputs and outputs, but the net effect is invariably that the farming business will receive a substantial refund. However, Russian bureaucracy means this process can be protracted.

The seminar inevitably resulted in many questions, many on how to get money repatriated. The answer from Vitaly Charushin, the deputy chairman of the Penza government, was that there are no problems provided tax is pre-paid on profits.

But what of the performance of the crops? That was answered by Colin Hinchley, the operations director of the Heartlands enterprise. He said: "With bread-making-quality wheat we have had yields up to 6.5 tonnes per hectare, leaving a gross margin of not much short of 200 per hectare.

"The demand for malting barley is growing all the time and we have been achieving margins of over 165 per hectare. The economics of sugar beet are also good and will get better as Russia seeks to reduce its import bill."

As for product prices, Russian agriculture is now operating at world values, which is much the same as in the UK. However, there are no production subsidies. That appealed to the Scottish farmers, some of whom have been invited to Russia, in late spring. The Scotsman hopes to join that party.