The floodgates have opened for U.S. investment in Russia. U.S. companies are moving quickly to carry out investment plans they made in anticipation of Russia’s joining the World Trade Organization, but they are still finding it a challenging market.
Although Russia joined the WTO in August, the last significant barrier to U.S. investment didn’t fall until this month. Congress passed legislation in November establishing permanent normal trade relations with Russia and removing it from the list of countries covered by the Cold War-era Jackson-Vanik Amendment, and President Obama signed the bill into law on Dec. 14.
But the path to foreign investment in Russia is still a rocky one, because, although political barriers have fallen, Russia remains a difficult market from the standpoint of logistics and bureaucratic delays, even if it is no longer an emerging market in the sense that Africa is.
One of the U.S. companies that is moving quickly to invest is AGCO, the Atlanta-based manufacturer of agricultural equipment, which is investing in its own new plant in the Moscow suburb of Golitsyno. The plant will assemble row-crop tractors with components imported from AGCO’s plant in France and combines with components from Italy.
AGCO previously assembled tractors and combines in Russia through joint ventures with two local companies that use components imported from its plants in Finland and Italy. “Over the last three to four years we’ve been making more inroads into bricks and mortar in Russia in terms of training facilities, and most recently in terms of manufacturing,” said Eric Raby, AGCO’s vice president of global marketing and commercial development.
AGCO is investing in its new plant because duties that were previously assessed on imported components were lifted under WTO rules, but it is now facing other costs. “WTO solved a lot of problems, but it created a few others,” Raby said. “We got rid of some of the import duties on farm machinery, but now there’s talk that they are going to impose a recycling or utilization fee that, ironically enough, is equal to the duty that was lifted when they acceded to WTO.”
AGCO uses a combination of ocean, rail and truck transportation for its imported components. It prefers to use rail where possible, largely because trucks carrying imports from Finland encounter “miles and miles” of delays at the border due to congestion and red tape.
It imports some U.S.-made components in containers by ocean; these are transshipped at Zeebrugge in Belgium to smaller feeder vessels bound for St. Petersburg. It also imports fully assembled heavy tractors and rotary combines directly from the U.S. via St. Petersburg on roll-on, roll-off vessels.
AGCO’s new investment is expected to fuel the growth of containerized imports for the new plant, at least initially, until AGCO can find local suppliers of those components that can meet its quality standards and start manufacturing products there from scratch. “We will source wherever possible with local components, but therein lies the challenge,” Raby said. “The challenge is that from the supply-chain standpoint, we still have to bring a lot of the components in from outside.”
Once AGCO finds reliable local sources, it will rely less on imported components. “Our number one criteria is quality for those components, and secondly is a stable supply and thirdly is cost,” Raby said.
AGCO also faces logistics challenges in distributing its equipment to the Russian market. While the rail infrastructure is relatively good, the road network requires substantial investment to upgrade it. “From a logistics standpoint, it’s not that bad, especially if we use rail, although certainly it needs some repairs and upgrading,” Raby said. “A lot of the units we’re shipping are oversized, and we can ship them a lot more successfully on rail than on truck.”
He said that operating in Russia is “a constant challenge,” but that AGCO is investing for the long haul. “We want to upgrade our local content, but it becomes difficult for the government agencies to define what that local content is. It’s still an emerging market from an infrastructure standpoint and from the standpoint of governance, procedures and policies.”