BITTER HARVEST: JOHN DEERE ON RUSSIAN TRADE CASE

C O N F I D E N T I A L MOSCOW 002315

SIPDIS

USDA FAS FOR OCRA (FLEMINGS, KUYPERS) AND ONA (SALLYARDS,
MURHPY)
COMMERCE FOR MAC (MATT EDWARDS, JACK BROUGHER)
STATE PLS PASS USTR (BETSY HAFNER)

E.O. 12958: DECL: 08/07/2018
TAGS: ETRD EAGR EINV ECON RS
SUBJECT: BITTER HARVEST: JOHN DEERE ON RUSSIAN TRADE CASE
AGAINST HARVESTERS

Classified By: Economic Minister Counselor Eric T. Schultz, Reasons 1.4
(b,d).


1. (C) SUMMARY: Deere & Company Russia Country Director
Sidney Bardwell told us August 5 that Deere believes the
Ministry of Economic Development (MED) and the Ministry of
Industry and Trade (MIT) have conducted a fair investigation,
but will likely determine that domestic producers have been
injured by increasing imports of harvesters. The company
believes there is a disagreement within the GOR about the
investigation. The Ministry of Agriculture is concerned that
the imposition of tariffs or quotas on imported harvesters
could harm Russia's agriculture sector. The Ministry of
Industry and Trade, on the other hand, favors an import quota
to help domestic harvester producers, regardless of the
economic cost and impact on food prices. Bardwell said the
GOR will likely impose some sort of remedy to protect the
domestic industry. Deere is hoping that the GOR will opt for
a modest increase in duties and stop short of an import
quota. He said Deere also believes foreign producers will
continue to be pressured to set up tractor and harvester
production operations in Russia. END SUMMARY.

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SAFEGUARDS ACTION AGAINST GRAIN HARVESTERS
--------------


2. (C) On August 5, Deere & Co. Russia Country Director
Sidney Bardwell provided ECON, USDA and FCS officers an
overview of the ongoing safeguards investigation of combine
harvesters that the GOR initiated on February 15, 2008.
Combine harvesters are used to harvest major grains and
certain vegetables, including wheat, corn, barley, oats,
beans, peas, oil seeds and millet. Bardwell noted that the
three major importers to Russia (U.S. producers Deere and
Case New Holland, and German producer Claas),had all entered
the case as interested parties, as had U.S., EU and German
trade associations representing agriculture equipment
manufacturers.


3. (C) At a hearing on June 26, Russian combine harvester
producers made the same basic arguments they had aired when
the Ministry of Economic Development launched the
investigation in February. Imports increased by over seven
percent from 2004 to 2006, and rose by 80 percent during the
first half of 2007 compared to the first half of 2006,
causing domestic producers' sales and market share to
decline. Looking at full year 2007 data, the rise in imports
had not been as dramatic as during the first half of 2007,
according to Bardwell, though he believed imports had been
rising year-on-year by an average of about 16 percent from
2004 to 2007. (There are no publicly available statistics on
the level of harvester imports and domestic sales in Russia.)


4. (C) At the hearing, Baldwell said importers and foreign
producers disagreed that rising imports had injured the
domestic industry. They argued that the Russian market for
combine harvesters was bifurcated. Domestic producers held
the lion's share of sales of small harvesters of less than
250 horsepower. No Russian company produced large harvesters
of 250 horsepower or greater, and that segment of the market
was supplied by the major foreign producers. Far from having
been harmed by imports, domestic producers had actually been
able to introduce annual price hikes of three to five percent
and still controlled over 70 percent of the overall market.


5. (C) Bardwell said that in response to foreign producers'
arguments about a bifurcated market, domestic producers
countered that they should also be given an opportunity to
develop a domestic industry producing larger and more
efficient harvesters over 250 horsepower. That was the
future growth area of the market, but the dominant position
of imports prevented domestic producers from entering that
segment.


6. (C) According to Bardwell, overall demand for both
domestic and imported harvesters was growing well beyond the
supply capacity of domestic and foreign producers. He noted
that Deere was operating at or near maximum production
capacity worldwide and now had a one-year waiting list in

Russia on harvester orders. He believes that at a minimum,
the Russian agricultural sector needs 8,000 additional
harvesters per year, but Russia could absorb up to 15,000
units per year if all of the arable land in Russia was
farmed. Bardwell predicted there would be almost 3,000 new
harvesters imported into Russia in 2008, plus an additional
1,000 imports of used and resold harvesters. The domestic
producers would be challenged to produce as many as 7,500
harvesters per year.


7. (C) Bardwell noted that the Ministry of Economic
Development and Ministry of Industry and Trade (which
inherited the case after the May 2008 government
reorganization) appeared to have been conducting a fair
investigation. Both domestic and foreign parties had been
afforded the opportunity to file opening briefs, participate
at the hearing, and to file post-hearing supplemental briefs.
Deere's only procedural complaint was that the Ministry of
Industry and Trade (MIT) had not yet distributed to the
parties a sanitized version of the domestic industry's
600-page opening brief.

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INTERNAL GOR DISAGREEMENT OVER INVESTIGATION
-------------- Q --------------


8. (C) Bardwell said Deere and other foreign producers
believe, based on information from government sources, that
there is a disagreement within the GOR about the wisdom of
the safeguards investigation. The Ministry of Agriculture
recognizes that the imposition of an import quota or high
tariff could hamper the development and modernization of
Russian agriculture.


9. (C) Bardwell said Industry and Trade Minister Khristenko,
however, favors an import quota of 1,500 harvesters per year,
regardless of the short to medium term effect on the
agriculture sector and the potential impact on food prices
that would result from a sharp drop in imports. This would
allow domestic producers the opportunity to develop the
capacity to produce larger and more efficient harvesters
above 250 horsepower.


10. (C) To save face, Bardwell said the GOR will likely
impose some sort of remedy, but he is hoping that it will be
only a modest tariff increase, rather than the imposition of
a steep duty or an import quota.

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PRESSURE ON FOREIGN FIRMS TO ESTABLISH DOMESTIC PRODUCTION
-------------- --------------


11. (C) Bardwell also believes the investigation was launched
to pressure Deere and other major foreign producers to set up
tractor and harvester production operations in Russia.
During Deere CEO Robert Lane's most recent trip to Russia,
Agriculture Minister Gordeyev had urged the company to set up
tractor and harvester production in Russia.


12. (C) Bardwell said Deere took the offer seriously and had
performed a thorough economic analysis, but had informed
Gordeyev that the company could not set up such a venture in
the absence of tax incentives or lower tariffs on agriculture
equipment components. These measures would be necessary to
make such a venture economically feasible. Since the
exchange with Gordeyev, Deere had also "been told" by the
Orenburg and Kaluzhskaya Oblast governors that they should
set up tractor and harvester production in Russia.

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DEERE'S LONG-TERM PLANS IN RUSSIA
--------------


13. (C) Bardwell said that despite the ongoing safeguards
investigation, Deere remains bullish on Russia as one of the
company's major growth markets over the next several years.
Among the BRIC countries, Deere's overall agricultural
equipment sales in Russia in 2008 are expected to surpass
sales to Brazil (the BRIC sales leader in 2007),making
Russia the company's second biggest market after the United

States. Sales in India and China are far lower than in
Brazil and Russia, even though Deere has a major production
facility in Kunming, China.


14. (C) Bardwell said Deere's facility in Orenburg assembles
seeding equipment that contains 35 percent local content.
The company hopes to increase the amount of local content in
that equipment over the next few years, as Russian suppliers
become more skilled at supplying finished agricultural
components and finished steel shapes. The company also plans
to expand the Orenburg operation to include assembly of
tilling equipment. The proposed $70 million facility in
Kaluzhskaya Oblast would make agricultural components, weld
and paint tractor frames, and also serve as a company
logistics and training center.


15. (C) COMMENT: The investigation will likely conclude by
mid-November, though it is possible MIT could choose to
extend the investigation for another three months until
February 2009. If MIT finds that the domestic industry has
been injured by imports, the GOR would then have up to 14
days to decide on a remedy, such as increased tariffs or an
import quota. We share Bardwell's hope that cooler heads
within the GOR will prevail, and in the worst case scenario,
persuade the GOR to impose a modest tariff rather than a
steep duty or import quota. We will continue to closely
monitor the case in consultation with Deere, cognizant of the
USG's rights under our 1992 bilateral trade agreement to
request consultations with the GOR over this case.
RUBIN