They Really Think we're the Aggressors!

October 29, 2014

The founder of Cherkizovo Group Igor Babaev talks about the sanctions and the slowness of Chinese officials

The  founder of Cherkizovo  Group Igor  Babaev

The founder of Cherkizovo Group Igor Babaev

The founder of Cherkizovo Group Igor BabaevCherkizovo Group Igor Babaev told RBC why the Russian agricultural industry should thank the American president, what are the problems of major players in relationships with the Russian authorities, and how the situation in Ukraine frightened Cherkizovo's Spanish partners, forcing them to abandon construction of a pizza plant in Russia.

"MY KIDS COUNT MONEY BETTER"

- Why have you stepped down from operational management of the company?

- I've worked in operational management from 7 a. m. to midnight for nearly 30 years. The company started growing in an emerging market economy, which demanded huge efforts and took up nearly all my time. During this time, my two sons, who were educated first in Russia and then continued in Switzerland and America, had their own business abroad, but I always kept them informed of the company's affairs. From an early age, they went with me to meat processing plants worldwide as translators, and they had the opportunity to see the business from the inside. Then my eldest son, Sergei [CEO of Cherkizovo Group Sergei Mikhailov] decided to work with me and went into marketing. My younger son Evgeny later joined him in the business [member of the Board of Directors of Cherkizovo Evgeny Mikhailov]. They went through all the stages of operational management for ten years. The time came when I realized they were doing it better than me, and I turned the company over to them without hesitation. They're more conservative in business than I am and count money better. And that's good: in the past, the market allowed experiments, but mistakes are expensive now.

- What is your job now?

- Our development strategy, which we still discuss together, and our business philosophy. I have time to work on strengthening contacts with key partners. Governors of my generation, like Oleg Korolev in Lipetsk, Alexei Gordeev in Voronezh, Oleg Betin in Tambov, and Vasily Bochkaryov in Penza, manage the regions where we operate. We have a common value system and similar mentality, and we speak the same language. I've also been traveling a lot, watching what's happening in world agricultural technologies, and recommend the best practices to our company. I'm also involved in looking for business partners abroad.

An international project for turkey meat production in Tambov Region was made possible thanks to many years of friendship with the Fuertes family [the owners of the Spanish Grupo Fuertes, which has invested about €100 million in the Tambov Turkey project]. Russia was a high-risk area for them, and they hesitated for a long time. But 15 years later, they came and invested in our joint project.

"OUR PARTNERS HAVE STAYED WITH US"

- Have the sanctions affected the joint venture with your European partners?

- The owners of Grupo Fuertes recently flew in to visit the site in Tambov Region. They're continuing to invest, because they believe in us and our market. We have to get Western manufacturers to come here with their investments and know-how. The success of this and similar projects depends to a large extent on our government. Let's take the Tambov Turkey project. We were given guarantees that this project would be subsidized, and in the first year the money was allocated. But the following year, we were denied subsidies for a number of reasons. Now, when there is cooling of relations with Russia in many countries, we must act clearly and scrupulously so that foreign investors line up to come here.

- Has not their attitude changed at all?

- Our partners have stayed with us. But potential investors... I was very interested in Tarradellas, one of Spain's leading pizza manufacturers. We met with Tarradellas, and they invited me to their factory. Negotiations were difficult, but we almost reached an agreement to establish a joint venture in Russia. Then suddenly the owner of the company wrote: "Dear Mr. Babaev, we would certainly like to do business with you, but we are concerned about what is happening in Ukraine, and we cannot afford to come to Russia." They really think we're the aggressors!

But I think that sooner or later Tarradellas will see the light. I believe in fast food in the best sense of the word – in deep-processed products that consumers can prepare quickly. We will increase the production of ready-to-cook products. Our chicken products are already showing 500% growth per year.

- Will you continue to invest in processing?

- We're considering the option of modernizing a meat processing plant in Kashira District. The project involves the construction of several powerful automated monolines with a production level of 500 tonnes of sausages per day. According to preliminary estimates, the project could cost more than $200 million. We'll discuss it with the authorities in Moscow Region and with the governor. We'll move mass production of sausages from the Cherkizovsky plant to Kashira and produce only deli products at Cherkizovsky.

"WE ARE LACKING DIALOGUE WITH THE AUTHORITIES"

- How have the sanctions impacted your family's business?

- The border was closed to imports even before the sanctions. There is one huge advantage in this whole situation: the government returned to the subject of allocating additional funds to develop the agricultural industry. Remember that subsidized loans for pork and poultry production nearly came to a halt early this year. So we can thank Obama for the fact that the government turned its attention back to the national agro-industrial sector.

I remember how it all began: ten years ago, at a meeting with Vladimir Putin at the State Council in Kalmykia, we, meaning agribusiness leaders, raised the issue of the need for long-term subsidies. It was resolved within a few weeks. The fact that we now have domestic poultry and pork industries is the result of these same negotiations. Six years later, I reported the results to Mr. Putin. By that time, we were raising 1 million head of pigs per year due to the decisions made in 2004. This system works.

But there have been discussions on possible improvements to the subsidy mechanism for several months now. But the time goes on! The key players need support. There are less than ten of them, they're recognized by both the banks and the Ministry of Agriculture, and they can quickly provide import substitution. There is minimal risk for banks and the government from the major players in our business.

We are lacking dialogue with the authorities and frank discussion of strategy. Maybe it's time to create a Food Security Council and involve us, Miratorg, Rusagro, and other leaders in the conversation. According to conservative estimates, we will invest hundreds of billions of roubles in the economy in the next few years; and unlike Western companies, we won't leave or shut down the business. These meetings could help work out a long-term growth strategy.

- Are you prepared to expand your investment program only with government support?

- It's a known fact that the global agricultural industry is not viable without government support. If you compare the subsidy per hectare that farmers in the EU receive and what we have, the difference is huge! We'll develop new projects and talk with banks and governors. We already have a project for 12 billion roubles to double pork production, and the Tambov Turkey construction project for 7 billion roubles, which will be completed next year. We've also invested about 3 billion roubles in a project in Elets, and we'll be starting up the first bird houses and grain storage facilities there in November. At the same time, we're trying find room to grow within the company: we employ Western experts, and they're taking us from 180,000 tonnes of pork to 200,000 tonnes with the same capacity by implementing new technologies.

- Cherkizovo recently announced that it plans to pay dividends for the first time. Why is this, and why now?

- We went on the London Stock Exchange in 2006, when the company was appraised at $800 million. For eight years, we expanded aggressively and organically, hoping that the company's performance would increase its value. Today, according to the most conservative estimates, Cherkizovo should be worth at least $2.5 billion. Unfortunately, this didn't happen. We've become hostages of negative global economic and political processes. We've been talking to minority shareholders and understand that they expect dividends, so we made this decision.

"I STARTED IN MOSCOW AND ALMOST REACHED ORENBURG"

- Which areas of agribusiness you consider the most promising?

- All areas are important in their own way.

Grain farming is the heart of agribusiness and the basis of everything. The country harvested about 100 million tonnes of grain this year, but with the amount of land we have, we could grow 200 million or even 250 million tonnes. Russia has vast resources, but unfortunately, we're still far from what is being done in Europe, the US or Canada. Over the last decade, we've only laid the foundation for meat production. We have to move from grain reproduction to meat reproduction. China, which has now has received the "green light" to supply pork to our market, is an example for us. The Chinese grow hundreds of millions of tonnes of grain, but they don't export it, they use it for their own livestock. They produce 55 million tonnes of pork per year and can export the meat – this is an example to follow. We've barely reached 3 million tonnes of pork, and it will take decades of enormous effort to reach at least a reasonable balance.

- Two years ago, you spoke about projects in the Far East. What was the idea behind this?

- This is a very promising area, but unfortunately, two years ago the region still wasn't ready to accept a large agroinvestor from Moscow. Now we see that our colleagues from Rusagro are ready to go to Primorye and invest serious money there. I recently spoke with the leadership of Khabarovsk Territory, and the negotiation process is continuing. The region has good prospects for pig farming and meat processing.

- How about projects not included in Cherkizovo Group? Like NAPKO, for example?

- NAPKO [National Agroindustrial Company, an agro holding founded by Igor Babaev in 2006; its core business is grain farming] was founded when Cherkizovo was still not involved in grain farming. I started in Moscow and almost reached Orenburg. I had a team of lawyers with me; we invested nearly $50 million and bought 400,000 ha. Then we invested almost another $200 million in infrastructure and farm machinery. We took out loans for these projects, and now if I'm not mistaken, we have about $30-40 million left to pay on them. My original idea was to build a vertically integrated holding company that would bring together all the links of the agriculture chain. Today, NAPKO has about 200,000 ha, works 120,000-130,000 ha, a part is fallow. Cherkizovo has also become a strong grain farming player. This year, we harvested almost a quarter of a million tonnes of grain from 60,000 ha, and the group's grain storage facilities can hold 1 million tonnes.

There's the "Dairy Business", which I'm proud of. We ended up with nearly 10,000 head of dairy cattle from other assets, and we either had to slaughter them or get into milk production. We launched the country's first family mini-farm project. Why is it impossible to produce good hard cheese in our country?

Milk quality isn't good enough. In Europe, 70% of the milk is produced on family farms where the owners know each cow by sight. I supplied these eight mini-farms. The farmers live on them in comfortable private homes 50 m from the barns, and they feel like real owners. The milk is better, we sell it at a very high price, but it still flies off the shelves.

- You also had other developments for land near Moscow. What do you plan to do with it?

- We're not involved in operations; we just own the assets and land. A Canadian company is constructing Raevo Golf & Country Club on one of the sites near Zvenigorod. I think it will be one of the best in Russia when we open it in 2015. A large Ledentsovo hypermarket is being built in Odintsovo District at a cost of $170 million, and American and French investors are putting money into it. There are also several residential projects where we are co-investors.

- You recently turned 65. Do you have time for other things besides business?

- I'm replenishing my spirit, which I need after years of exhaustion and overwork. I'm writing books about my life, about how our generation was lucky to live in a country that changed the direction of its development philosophy. I'm learning about architecture, and I'm singing because I love it, as something I've dreamed of since childhood.

As soon as I get the chance, I'm always flying to Altai – a wonder of the world, where I get a charge of energy to create, and thus live. Not far from the border, where the lands of three countries meet – China, Kazakhstan and Mongolia – I've built a mansion with our country's flag flying over it.

Igor Erzolovich Babaev

Chairman of the Board of Directors of AIC Cherkizovsky and the NAPKO holding.

Born in Makhachkala in August 1949.

He graduated from Krasnodar Polytechnic Institute with a degree in process engineering, and received a PhD from Moscow Technological Institute of Meat and Milk Processing Industry. PhD in Technical Sciences.

After completing his studies, he worked as a shift engineer and senior engineer at Essentuki Canning Plant.

He became head of Anapa Meat Processing Plant in 1976, and then director of Armavir Cannery in 1978.

Between 1985 and 1988, he was head of the Production Division of Nalchik Meat Processing Plant, chief engineer of Stavropol Meat Canning Plant, chief process engineer of Simferopol Poultry Processing Plant and chief engineer of NGO Complex of the poultry processing and glue and gelatine industry under Gosagroprom of the USSR.

He joined Cherkizovsky Meat Processing Plant (CMPP) in Moscow in 1988 as chief engineer.

He became director of CMPP in 1989, a position he held until 2010.

His family bought a controlling interest in the company when it was privatized.

He became president of AIC Cherkizovsky in 1998.

Cherkizovo Group OJSC

Cherkizovo is one of Russia's largest agroindustrial holdings. It is one of the top 3 companies serving Russia’s poultry, pork, and meat processing markets. The Group includes 8 poultry production facilities, 15 pork production facilities, 6 meat processing plants, 7 feed mills, and grain storage facilities.

The company is 65% owned by the Cyprus offshore company MB Capital Partners, which according to its information, is controlled by Igor Babaev and members of his family. The company's capitalization on the LSE was $748.49 million as of October 28, 2014; and reached $904 million in May 2006 after the IPO. The company's revenue in 2013 was $1.655 billion, and net income was $64.3 million.