I remember watching the start of the 1970s BBC series The World at War. The screen showed the wreckage of a French village. Over it, Lawrence Olivier entoned, “Down this road in 1944, the soldiers came. When they left, a community which had lived for a thousand years was dead.”
If such a documentary was to be made about 2022, “this road” would be the highway from Belarus to Kyiv. The video would show destruction in Ukraine. It would show the terrible toll on human life, this time created by Russian soldiers.
And the narrator would add that a concept that has guided the world for several decades — globalization — has been severely injured too.
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The war’s long-term impact on international businesses including ag equipment manufacturers is still uncertain, but it will likely be significant.
A growing number of analysts are predicting that entire global supply chains and many business ventures will somehow have to be completely rebuilt in its wake.
Big logistical issues, like where the components that go into ag machinery are made and assembled, as well as crucial market drivers like where the finished machines will be sold will almost certainly look different in the coming decade.
Already, we’re seeing that for most western corporations, any further investment in Russia, or even just maintaining existing ventures, will not likely be practical or even possible again for many, many years.
Sergy Aleksashenko, a former deputy finance minister in Russia in the 1990s, recently told media outlet Al Jazeera the war will result in in a decoupling of Russia from the global economy. He predicts even if there is some sort of peace agreement, Russia’s economy will look like a mix of the former Soviet Union and today’s North Korean economies.
Little more than a decade ago, ag equipment manufacturers began making significant investments in Russia to tap into what was then seen as a promising market. Of the 1.96 billion hectares of arable land in the Commonwealth of Independent (CIS) States that formerly made up the Soviet Union, only 560 million were being utilized in 2014, according to statistics available at the time. And “western-style” farm equipment was in use on only about one-quarter of farms back then.
When you add to that the fact that Russia was one of the “BRIC” countries, which included Brazil, Russia, India and China, where well above average GDP growth was forecast, it’s easy to see why Russia was attracting so much attention.
Farm equipment brands came looking to stake a claim in what promised to be a strong future market. By 2013 major brands began seeing their investments pay off. U.S. firms sent over 215 million euros worth of equipment, and in 2012 Canadian companies had shipped farm machinery to Russia worth 116 million euros (C$176 million).
Manufacturers in other countries, most notably Germany, had begun making major inroads into the Russian ag equipment market too. But then came the Russian invasion of Crimea in 2014 and farm equipment brands playing in the Russian market started to get nervous. Compared to the current war in the rest of Ukraine, however, the Crimean invasion looks like just a minor skirmish. And it didn’t prove to hinder trade too badly.
The international response to the latest Russian action is orders of magnitude higher.
What kind of a hit will brands take losing the Russian and CIS markets? Up until the end of April, companies hadn’t publicly said too much, apparently taking a wait-and-see approach. But annual reports soon provided a clue. For John Deere, revenue for fiscal year 2021 from Eastern Europe was US$2.6 billion, up US$600 million from the previous year.
At CNH Industrial, the company doesn’t break down sales numbers for just Eastern Europe. Their reporting shows sales of Case IH and New Holland ag equipment into all of Russia, the Middle East and Africa accounted for about US$1 billion in total annual sales for 2021.
AGCO lumps all of Europe together in its accounting, and that is where the lion’s share of its revenue comes from — 57 per cent of its annual income for 2020, to be exact.
Then there are all the other smaller manufacturers who will take significant hits to their bottom lines from the loss of the Russian market. For example, German-based Claas had only recently announced a 12.6 million euro investment in an expansion to its manufacturing facility in Krasnodar, Russia, which began in 2020. “We are also adjusting production capacity to the increased demand and our medium-term sales expectations,” said the company’s Dr. Ralf Bendisch, in the press release at the time.
Almost all major western nations have now placed sanctions on Russia as well as on its military accomplice, Belarus. As early as March, Deere, CNH and AGCO had all announced they intended to fully comply with international sanctions and had suspended all shipments to those countries.
The Kremlin has added to the difficulty and risk for foreign firms attempting to do business in Russia too, making it difficult for any foreign company to dispose of assets they hold within the country, even threatening to nationalize all foreign assets.
“It will compound the clear message to the global business community that Russia is not a safe place to invest and do business,” said Whitehouse spokesperson Jen Psaki.
Russia seems to be fine with that message. A post in the Russian state-owned news agency RIA Novosti set out the Kremlin’s anti-western position this way:
“Russia itself will have to finally part with pro-European and pro-Western illusions, realize itself as the last instance of protecting and preserving those values of historical Europe (the Old World) that deserve it and which the West ultimately abandoned, losing the fight for himself (sic) … Russia will go its own way, not worrying about the fate of the West, relying on another part of its heritage — leadership in the global process of decolonization.”
So far over 200 international corporations have ceased operations in Russia.
As significant as this war has been in relation to international trade, some analysts think this could only be a small part of the disruption to globalization in the near future. Russia does have allies, particularly in the Middle East, that have chosen to retain ties with that country. But the other real concern is China. It is a major component supplier to equipment manufacturers as well as a growing market, and it has not joined in the international condemnation of Russia. Instead, it has stuck with the announcement made just before the Ukraine invasion began, saying it signed a partnership agreement with Russia that is “without limits.”
Given that China depends far more on trade with western nations than with Russia, expert opinion is mixed on how far China will go in its co-operation with Russia. But China, itself, has strongly hinted at its desire for military adventures. In the South China Sea it’s building man-made islands that house military establishments in disputed waters claimed by other Asian nations.
It has also been engaged in some very unfriendly behaviour toward Australia and New Zealand. Australia’s defence minister was recently quoted expressing concern over China’s military activities in the south Pacific. “We’ve watched very closely as the Chinese government has engaged in increasingly alarming activities,” he said.
China’s navy has also been harassing Japanese boats fishing off islands that it has also claimed, and it is proposing to build a new naval base in the Solomon Islands.
Perhaps most importantly, China’s eyes have been firmly fixed on Taiwan. China has increasingly flown military aircraft into its airspace and held naval manoeuvres close to its shores, prompting many to suggest it is waiting to evaluate the fallout from Russia’s invasion of Ukraine to gauge what the costs will be if it goes ahead with its own invasion, in this case Taiwan.
Because of the size of its economy, that would undoubtedly cause much greater harm to the current level of globalization in trade and commerce than severing ties with Russia.
The result of all of this uncertainty and problems created by the COVID-19 pandemic is that global trade with China has already begun to fall off. North American manufacturers are now engaged in creating multiple supply sources for components from nearer countries, including Mexico.
A report in the Wall Street Journal reveals that last year large American manufacturers solicited chemicals, produce, construction materials and other goods from six times as many suppliers based in Mexico as they did in 2020, while procurement from China dropped by nine per cent, according to data from 30 U.S. manufacturing customers with an average of over $30 billion in annual revenues.
Latin American firms also saw a 155 per cent increase in purchase bid from these manufacturers while the number of suppliers in the Asia-Pacific region fell 26 per cent.
Concern continues to grow. Ag equipment brands with investments in China fear they may see them fall into the same jeopardy as those in Russia if China becomes more militarily aggressive.
“For those of us born after World War II, this (Russian invasion of Ukraine) is the most consequential war of our lifetime,” wrote Eliot Cohen, a professor at the Johns Hopkins University School of Advanced International Studies, in The Atlantic magazine in April.
His final assessment is chilling. “Upon its outcome rests the future of European stability and prosperity.”
