JOHN DEERE CONCERNED ABOUT HIGHER DUTIES AND

C O N F I D E N T I A L MOSCOW 003678

SENSITIVE
SIPDIS

STATE FOR EUR/RUS
COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON, JACK BROUGHER)
STATE PLS PASS USTR (KLEIN, HAFNER)
STATE PLS PASS USDA/FAS FOR OCRA (KUYPERS)
STATE PLS PASS EXIM BANK

E.O. 12958: DECL: 12/18/2018
TAGS: ETRD EAGR EINV ECON RS
SUBJECT: JOHN DEERE CONCERNED ABOUT HIGHER DUTIES AND
CREDIT CRISIS IN AGRICULTURE

REF: A. MOSCOW 3151

B. MOSCOW 2315

C. VLADIVOSTOK 135

D. VLADIVOSTOK 130

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

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SUMMARY
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1. (C) On December 11, PM Putin proposed raising the duties
on imported combine harvesters and ending GOR-financing for
purchases of foreign agricultural equipment. Deere and
Company Russia Country Director Sidney Bardwell told us
December 16 that PM Putin's recent proposals would have a
catastrophic impact not only on Deere's sales in Russia but
also on the Russian farm sector's ability to harvest wheat
and maintain the current levels of cultivated land. However,
Bardwell said the more modest duty increase proposed by the
GOR Tariff Policy Commission headed by First Deputy PM Zubkov
was "reasonable" and was a cost that Deere could pass on to
its customers.


2. (C) Bardwell said Deere's contacts in the Agriculture and
Trade and Industry Ministries have indicated that the higher
duty and tough financing proposals suggested by Putin may
only be applied in limited circumstances. Beyond the
unsettled issues of duties and financing, Deere is expecting
that its 2009 sales in Russia will drop sharply, and it is
scaling back the scope of construction at a new facility in
the Kaluzhskaya region.

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POTENTIAL DUTY INCREASE FOR HARVESTERS
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3. (C) On December 16, Deere and Company Russia Country
Director Sidney Bardwell provided ECON officer with his
assessment of the recent GOR proposals for duty increases on
imported harvesters, current financing conditions in Russia
for agricultural equipment, and the company's near term
expectations for sales in Russia. On December 11, PM Putin
proposed raising the duties on harvesters and ending
GOR-financing for purchases of foreign agricultural
equipment. Putin's comments came while visiting the
agriculture region of Rostov, and the production facility of
Rostselmash, Russia's major agricultural equipment producer.
Rostselmash has laid off 1,300 workers in the past three
months and drastically cut its production for 2009.


4. (C) Bardwell said that PM Putin's December 11 proposal to
increase the duty on imported harvesters to 120 Euros per
kilowatt of engine capacity was roughly equivalent to
imposing a 25% ad valorum duty on imported harvesters, a
massive increase over the current 5% duty rate. Such a large
increase in the duty would have a major negative impact on
Deere's and other major foreign producers sales in Russia.


5. (C) Bardwell said that the more modest increase in the
duty rate proposed in November by First DPM Zubkov's Tariff
Policy Commission would be "reasonable," and in line with the
duty rates on imported tractors, which are currently assessed
at a 15% ad valorum duty rate. Zubkov's Commission
recommended increasing the duty on harvesters to 75 Euros per
kilowatt for "Walker" harvesters (roughly equivalent to a 15%
ad valorum rate) and 50 Euros per kilowatt for "Rotary"
harvesters (about a 10% ad valorum rate). Bardwell said that
was a cost that Deere could live with and pass on to its
customers.

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POSSIBLE HALT IN FINANCING OF FOREIGN EQUIPMENT
-------------- --


6. (C) Bardwell was equally troubled by Putin's statements
that the GOR should cease financing the purchase of foreign
agricultural equipment through the three major state-owned

entities that provided agricultural equipment financing in
Russia. Farm equipment dealers, distributors and farmers had
few other sources of financing beyond the GOR-backed support
provided by Sberbank, Rosselkhozbank, and Rosagrolising. If
the GOR really limited financing only to purchases of
domestically-produced equipment, it would be a "game changer"
for the major foreign agricultural equipment producers doing
business in Russia (Deere, Case New Holland, Claas and AgCo),
and they would sell very few harvesters and tractors in
Russia.


7. (C) Bardwell said Deere was pursuing a deal with EXIM Bank
that would provide financing to Rosselkhozbank for the
purchase of U.S. agricultural equipment, and next year Deere
would start a pilot financing program for its network of
dealers and their customers. These measures, however, would
be modest compared to the scale of GOR-financing.

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GRAIN PRODUCTION MAY FALL
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8. (C) Bardwell also stated that Putin's duty and financing
proposals, if fully implemented, would precipitate a
significant decline in wheat and other grain production for
at least one to two seasons. The winter wheat crop was now
in the ground, and there would soon be a "tremendous need"
for the large harvesters that Rostselmash did not produce.
While Russia was currently cultivating 70% of its arable
land, that number could drop to 50% in the next one to two
years, if Russian farmers were not able to purchase foreign
agricultural equipment.


9. (C) Putin's Rostov comments, if carried out, ran counter
to his oft-stated vision of transforming Russia into a
grain-exporting superpower, according to Bardwell. Russia
already faces major hurdles in turning that vision into a
reality, including poor transportation and ports
infrastructure, the lack of silo storage space, and the small
scale of most Russian farms. Bardwell noted that Russia had
accumulated a 20-million ton wheat surplus in 2008, but it
was unable to sell the surplus effectively on world markets,
and was currently only getting two-thirds of the world wheat
price for this grain. The principle bottleneck was that
Novorossiisk, the major agricultural port in Southern Russia,
could only handle three million tons of wheat per month, when
operating at maximum capacity.

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GOR MAY LIMIT IMPACT OF PUTIN'S PROPOSALS
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10. (C) In Bardwell's view, Putin appeared "rattled" by the
global financial crisis, and in the face of the real impact
it was having on Rostselmash and other Russian manufacturers,
he had opted for a broad "Brezhnev-style" proclamation while
in Rostov-on-Don. Bardwell said his sources within the
Ministries of Agriculture and of Industry and Trade had been
caught off guard by Putin's "unscripted" statements. (NOTE:
A trade disputes specialist at the Industry and Trade
Ministry also confirmed to us that the ministry was caught
off guard by Putin's proposed duty increase, which went well
beyond the Zubkov Commission proposal, and beyond what the
ministry was considering as a potential remedy in the
safeguards investigation of imported harvesters, discussed in
Ref B. END NOTE)


11. (C) Bardwell said Deere's GOR contacts had reported that
senior officials from both ministries consulted with First
DPM Zubkov on December 16 about ways to limit the impact of
Putin's broad proposals. For instance, the high duty rate
proposed by Putin might not be assessed on large harvesters
over 300 horsepower or tractors, since there was no domestic
production of either. There was a "desperate need" for both,
but especially the larger size harvesters, in order to
achieve harvesting and labor efficiencies in the field.
Similarly, the proposed financing moratorium also might not
be applied to purchases of large foreign harvesters and
foreign tractors.



12. (C) Bardwell also noted that Deere was considering
sending a letter from Deere CEO Robert Lane to the GOR
raising concerns about any increase in duties or a moratorium
on financing. Bardwell explained that Lane had worked
carefully to cultivate a relationship with Agriculture
Minister Gordeyev during annual visits to Russia. Likewise,
a letter might also come from the foreign manufacturing
associations to which the major foreign producers belong.
The major foreign producers would also attempt to have their
customer base lobby the GOR. However, Bardwell said he was
skeptical that customers would want to be out front on the
issue. They would not want, in his view, to irritate
domestic producer Rostselmash, which would become the only
source of supply if foreign firms were effectively shut out
of the market by a spike in duties and a suspension of
financing.

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2009 WILL BE A LEAN YEAR FOR DEERE
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13. (C) Beyond the uncertainties of increased duties and
continued financing, Bardwell noted that Deere was already
expecting a sharp drop in sales in 2009, because of a general
lack of liquidity and credit in the Russian agricultural
sector (Ref B). Globally, he said that Deere's costs for
access to short-term financing through the commercial paper
markets had increased significantly in the past few months,
and the company was in the midst of a major capital
expenditure to comply with new emissions standards that would
come into effect for agricultural equipment in North America,
EU and Japan starting in 2011.


14. (C) Within Russia, Bardwell said Deere's "optimistic"
forecast was that tight credit conditions would mean that ten
percent of the company's dealer network would go out of
business before the end of 2009. He said the company had
lined up $100 million in sales for February and March 2009
deliveries that were pre-approved for financing, but that
this was down from the $150 million in pre-approved sales
that the company had booked in the same period of 2008.


15. (C) Bardwell said Deere's projected sales declines in
Russia were on a par with most other emerging markets,
including Brazil, and far better than the expected drop-off
in sales in Ukraine, where the company's 2009 sales might
only be 10% of the sales level achieved in 2008. Still,
Deere had a lot of inventory already in Russia on which
duties and taxes had been paid. With the expected decline in
sales and tight credit conditions lasting into next year, the
company could end up with a big overhang of inventory to work
through during 2009.


16. (C) Bardwell also observed that Deere's plans for the
construction of a $70 million facility in Kaluzhskaya Oblast
(Ref B) had been scaled back. The company had broken ground
and would continue with the construction of the logistics,
operations and training center, but plans for the second
phase of construction on a components manufacturing and
assembly plant had been put on hold until business and
financial conditions in Russia and the rest of the world
improved.

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COMMENT
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17. (C) The senior GOR leadership is struggling to find the
right approach to the increasingly dire impact in Russia of
the global financial crisis. To date, the GOR has been prone
to make broad-brush protectionist statements to appease
domestic constituents. However, as they have discovered with
the proposed increase in automobile tariffs (Refs C, D and
septel),these actions create domestic losers as well as
winners. A drastic increase in duties and a wholesale
suspension in financing for foreign agricultural equipment
would severely hamstring the development of Russia's
agriculture sector. In that regard, it is worth noting the

irony of Gordeyev and the agricultural sector, enthusiastic
proponents of protection for their interests, leading the
opposition to protectionist measures for Rostselmash.
BEYRLE