'Dear Vladimir': VTB asks for Putin's help to create Russian grain champion

Kernel Holding SA

23/08/2019 11:40

* VTB has been buying grain sector infrastructure
    * VTB has expanded into physical grain exports
    * Bank sees itself as driver behind Russian grain expansion

    By Polina Devitt, Gleb Stolyarov and Tatiana Voronova
    MOSCOW, Aug 23 (Reuters) - Russian state-controlled bank VTB
 VTBR.MM  has asked President Vladimir Putin to help it create a
Russian grain champion to curb the role of foreign traders and
give the state greater control over exports, a letter seen by
Reuters shows.
    The letter from VTB Chairman Andrey Kostin dated June 26
made the case for why the Kremlin should give VTB the go-ahead
for its plan, which would weaken leading Russian grain traders.
Along with local firms, global giants Glencore  GLEN.L ,
Cargill, Louis Dreyfus and Cofco all trade Russian grain.
    VTB and the Kremlin did not respond to requests for comments
about the letter. 
    Russia has become increasingly concerned about food security
and reducing its reliance on imports since Western sanctions
were imposed in 2014 following Moscow's annexation of Crimea so
has an interest in having a tighter grip on its grain markets.
    Moscow has also been concerned about getting the right
balance between domestic consumption and exports to avoid sharp
rises in prices at home which would be unpopular, especially
with the country's meat industry which depends on Russian grain
to feed its livestock.
    Hand-written notes on the letter made on July 11 show that
President Putin told the government to consider the proposal by
VTB, Russia's second largest bank.
    "Dear Vladimir Vladimirovich," the letter starts. "Given
Russia's agricultural export potential (the equivalent of $45bn
in 2024) and also the importance of ensuring reliable grain
trade in the context of national food security, VTB has drawn up
a plan to create a national leader, a vertically-integrated
operator that would be called 'United Grain Holding'."
    The new holding company would consolidate a raft of assets
related to grain exports and storage and "take on the role of a
leading Russian wheat trader", VTB said.
    VTB, whose traditional banking business has come under
pressure internationally after it was hit by Western sanctions,
urged the government to support upgrading infrastructure around
two strategic Black Sea ports: Novorossiisk and Taman.
    
    MORE ASSETS
    The letter lifts the lid on the extent of VTB's plans. It
has already transformed itself into the largest operator of
grain infrastructure in Russia over the past year and now wants
to become a leading grain exporter.
    It said in the letter it would need another two to three
years to consolidate and acquire more assets.
    Russia has boosted production and exports of wheat in recent
years due to favourable weather and a weaker rouble currency to 
become the world's largest exporter, competing with the United
States, France and Canada.
    But Putin wants to go further. A year ago he set a goal of
boosting Russia's exports of agricultural products to $45
billion by 2024 from $26 billion in 2018. About $10 billion of
the 2018 total came from grain exports.
    The U.S. Department of Agriculture (USDA) expects Russia's
wheat exports to total 34.0 million tonnes this season, down
from 35.7 million in the 2018/19 season.
    VTB's push to consolidate assets into a single holding
company effectively controlled by the state is reminiscent of an
approach taken in other sectors such as civil aircraft
manufacturing and shipbuilding with mixed success.
    VTB First Deputy CEO Yuri Soloviev told Reuters in June that
the bank believed its move into grain would increase the
competitiveness of Russian agricultural products abroad. 
    "A local and international trading platform, logistics, and
transhipment (facilities) have been created. In general, our
strategy is to achieve synergies by combining assets in export
transportation logistics and trade," Soloviev said.
    As of early June, VTB had invested about $1 billion in its
grain projects, Soloviev told Reuters.
    
    TERMINAL MOVES
    VTB has already taken major strides by buying stakes in two
Black Sea grain export terminals at Novorossiisk, Russia's main
deep-sea grain export hub. These deals gave VTB control of 25%
of Russia's grain export capacity at ports.
    VTB has also bought part of Russia's largest grain
rail-wagon owner Rustranscom (RTC). And this month, VTB fleshed
out its portfolio of grain assets by buying a controlling stake
in major local grain trader Mirogroup.  urn:newsml:reuters.com:*:nL8N25B2IU
    U.S. global trader Cargill has a stake in another grain
terminal in Novorossiisk, while its rival Glencore owns half of
a terminal in the nearby Black Sea port of Taman.
    In its letter, VTB asked the government to approve a change
of ownership in the Taman grain terminal, which is now linked to
the Crimean peninsula by the new Kerch Bridge.
    Half the terminal is owned by Ukraine's Kernel group
 KER.WA , VTB said, noting the firm was under Russian sanctions.
It said it had already struck a preliminary deal with Kernel to
acquire its stake, but needed the government's sign-off. 
    VTB said combining Taman with a terminal in Novorossiisk
into one cluster would bring synergies and greater capacity. 
    VTB told Putin it would also need the government to support
the state-financed modernisation of worn-out rail tracks and
roads to improve access to Novorossiisk and Taman.
    It also asked the government to consider privatising a 25%
stake in United Grain Company, an existing state-owned grain
trader in which VTB already has a stake of 50% minus one share.
    
    'SMILE AND WAVE'
    In the same letter to Putin, VTB took aim at international
grain traders to bolster its case. 
    The foreign firms continued to play a key role in servicing
Russia's grain exports, it said. Citing expert estimates, it
said they controlled 25% of grain transhipment capacity in sea
ports and about half of Russian wheat trade in global markets.
    VTB said the traders did not always carry out their
functions with "optimal conditions for Russia", and accused them
of leaving a significant part of the added value offshore.
    Traders have been keeping a wary eye on the march of a
powerful Russian bank into the grain sector. For them, it means
tougher competition in ports and traditional markets.
    "Smile and wave," one trader said when asked what his
strategy to deal with competition from VTB was for the 2019/20
season, which started on July 1.
    VTB's newly-acquired trader, Mirogroup, plans to export 6
million tonnes of grain, including 5 million tonnes of wheat,
from Novorossiisk in the 2019/20 season, one source familiar
with its plans said.
    Last season, Mirogroup exported 2.5 million tonnes of grain,
the source said.
    If Mirogroup succeeds in more than doubling its exports, it
would become one of Russia's top three grain exporters,
alongside local trader RIF and Glencore. 
    Mirogroup is targeting Egypt, including state grain buyer
GASC, Turkey and other traditional markets for Russian wheat.
    The aim of VTB's proposed grain holding company is to
control the supply chain from producer to consumer and to become
a multinational giant in a market where Russia already
dominates, the source said.
    "This does not mean that VTB wants to monopolise everything
using state influence," the source said.
    "The grain market is quite chaotic, and it is likely that in
the near future it will acquire the outlines of a civilised
industry. It will be in the Russian legal sphere, will be paying
taxes, and creating jobs."

 (Reporting by Polina Devitt, Gleb Stolyarov and Tatiana
Voronova; editing by Andrew Osborn, Veronica Brown and David
Clarke)
 ((Polina.Devitt@thomsonreuters.com; +7 495 775 12 42; Reuters
Messaging: polina.devitt.reuters.com@reuters.net))