Will Russian Tariff Policy Lead to a New Smoot-Hawley Global Tariff Triggered Meltdown

[Viking Prince]

Putin's Tariffs Kick Caterpillar, Deere When They're Down as Sales Decline

Spoiler Alert, click show to read: 

Prime Minister Vladimir Putin’s trade measures are starting to keep Deere & Co. combines and Caterpillar Inc. trucks out of Russian wheat fields and coal mines, dimming the companies’ prospects for expansion abroad.

Deere and Caterpillar, reeling from the longest U.S. recession in a quarter century, were the companies most affected by loan restrictions and tariffs of as much as 25 percent that Putin imposed this year, according to a U.S. Chamber of Commerce survey of the top 50 American businesses operating in Russia.

Putin is trying to boost Russian industries with tariffs on everything from drugs to farm equipment as declining oil revenue saps the nation’s economy. The policies are hurting sales by Caterpillar, Deere and Agco Corp. in a market where revenue was forecast to rise as much as sixfold in the next decade.

“The new tariffs kicked these guys in the knees when they were down,” Larry De Maria, a New York-based analyst with Sterne, Agee & Leach Inc., said in a telephone interview. “Russia was supposed to be a $3 billion market in 2008 with potential to grow to $20 billion, possibly in as little as a decade.”

Emerging-market sales likely fell so far this year for Deere and Caterpillar, which reports first-quarter earnings tomorrow, De Maria said. Caterpillar is expected to report profit excluding certain items of 5 cents a share, the average estimate of 20 analysts surveyed by Bloomberg. The company earned $1.45 a share a year earlier.

“We are really going to struggle this year in Russia,” Ken Harding, Caterpillar’s regional execution manager for the Commonwealth of Independent States, said in a telephone interview.

‘Low’ Expectations

Caterpillar’s “expectation is low” that it will sell any of its 60-ton trucks, used for quarry and construction work, in Russia this year after selling eight last year, Harding said.

Starting in January, Peoria, Illinois-based Caterpillar and other foreign makers of off-highway trucks faced duties of 25 percent, an increase from 5 percent last year. BelAZ, a Belarusian equipment producer that dominates the region’s truck industry, isn’t subject to the tariff and will benefit, Harding said.

Caterpillar declined 59 percent on the New York Stock Exchange in the 12 months through April 17. Deere fell 56 percent, and Agco dropped 64 percent.

Deere, the world’s largest maker of agricultural equipment, and Duluth, Georgia-based Agco are being hurt by a program that gives Russian farmers a 20 percent discount on loans from Russia’s Central Bank if they buy domestic machines.

Loan Program

The deal is for loans made through OAO Sberbank, Russia’s largest lender, and Rosselkhozbank, the Russian Agricultural Bank, which both have local offices that farmers rely on for financing, Michael Considine, director of EurAsia issues for the Washington-based Chamber of Commerce, said in an interview.

“If a Russian farmer had the cash to buy a Deere combine, it would cost substantially more because of the tariff increase,” Considine said. “And if you didn’t have the money, you could just forget about it because you’d only be able to get the money to buy something made in Russia.”

Putin undertook the measures after a December visit to Rostov, Russia-based Rostselmash, the country’s leading combine maker.

Putin’s press secretary Dmitry Peskov wasn’t available for comment. Valeriy Khromthenkov, a Russian official in Washington with oversight of agricultural issues, declined to comment. A spokesman for Finance Minister Alexei Kudrin, who also is deputy prime minister, wasn’t available to comment.

‘Dramatically Reduced’

Agco’s sales are “dramatically reduced” in the region, because borrowing for a foreign tractor is now almost impossible, Greg Peterson, Agco’s head of investor relations, said in a telephone interview.

In its first-quarter earnings announcement in February, Moline, Illinois-based Deere said sales will decline in Central Europe and the Commonwealth of Independent States for the year. Ken Golden, a spokesman for Deere, declined to comment.

“Our main problems have been the lack of state subsidies on loans combined with insufficient operating cash and the general economic downturn, not the import tariffs,” Alexander Altynov, the general director of AgroSnab, an official John Deere dealer in Russia, said in a telephone interview.

Market Decline

Altynov predicted the foreign machinery market in Russia will decline as much as 75 percent this year.

Deere was expected to post second-quarter profit excluding certain items of $1.08 a share, the average estimate of 17 analysts in a Bloomberg survey.

The U.S. Trade Representative has worked with the U.S. combine harvester industry and at a meeting in Moscow in March expressed concern about the tariff, Nefeterius McPherson, a spokeswoman for the trade representative, said in an e-mail.

The tariff runs counter to Russia’s G20 pledge to avoid protectionist measures and is contrary to a November 2006 bilateral agreement that Russia will maintain a 5 percent tariff on combines until it joins the World Trade Organization, McPherson said.

The ruble’s 31 percent decline against the dollar since July also has made foreign products more expensive. Russia’s Economy Ministry estimates that imports have tumbled more than 30 percent in the first quarter of this year.

Last month, Russia allocated 25 billion rubles ($746.7 million) to OAO Rosagroleasing, the nation’s largest farm- equipment leasing company, and 45 billion rubles to state-run Rosselkhozbank as part of a 3 trillion-ruble stimulus package.

Rosagroleasing spent the money on Russian-made equipment, including 5 billion rubles on OAO KamAZ trucks, Agriculture Minister Yelena Skrynnik told Putin during a meeting on April 17, according to a transcript on the government’s Web site.

Farm Equipment

Russia’s Union of Farm-Equipment Producers, known as Soyuzagromash, asked the government last week to extend the 15 percent import duty on combines to all farm equipment. The tariffs may boost domestic market share for farm machines to 60 percent, the union said.

“The government wants both to help the domestic producers and keep the state funds allocated to the agricultural sector inside Russia,” said Mikhail Pak, an analyst with IFC Metropol in Moscow.

Putin’s efforts may hurt U.S. companies’ operations in the rest of the world, said De Maria, of Sterne Agee.

“There is a worry that these measures could spread to China and other emerging-market countries,” De Maria said. That “would be a blow to the Deere brand and others, stifling their growth strategy as local companies build share.”

How long before these tariffs spread to other emerging countries? If China follows, will the developed coutries be able to resist the political pressure to protect domestic industries?

[JP226]

I don't think Russia commands enough of the world market share to force other countries to follow suit just yet. I'm saying this while not knowing exactly Russia's influence, but I don't imagine it to be quite THAT large.

[Viking Prince]

The concern is that others will follow suit: China, Vietnam, India, etc. If the tariff walls rise up throughout Asia (which is feasible if China follows Russia's lead)-- how long before the developed countries feel the political pressure in the election process to begin the same tariff wall process by people afraid of lost job? The problem with fear is that removes rational thought from the political process.

[danzig]

Doubt China would do it, for one why do they need to? They already have a bustling industrial base, unlike Russia it hasnt been a one trick pony with energy revenue funding (most) everything. Russia's move to me is an indication of failed Russian policy that (like Venezuela and others) counted on energy prices remaining relatively high...ignoring or atleast overshadowing other areas. So this is "oh crap" panic mode by Russia imo. Besides China isnt stupid they know such moves would rock the boat and they stand to lose more by hurting the very markets they need to sell their products.

[Panzerbear]

this is a very counter-productive step for Putin's administration. tariffs and other barriers only negatively affect the economy. I highly doubt that Russian farmers will be able to find the same quality trucks from domestic producers - so they will be forced to buy less Deere trucks for much higher price, and quite obviously all this extra spending will be passed on the consumer.

how this will be good for the fragile Russian economy - your guess is just as good as mine. I suppose the big nanny state govt is at it again, and this time they decided to screw with Russian farmers.

[antares24]

Putin's Tariffs Kick Caterpillar, Deere When They're Down as Sales Decline

Spoiler Alert, click show to read: 

Prime Minister Vladimir Putin’s trade measures are starting to keep Deere & Co. combines and Caterpillar Inc. trucks out of Russian wheat fields and coal mines, dimming the companies’ prospects for expansion abroad.

Deere and Caterpillar, reeling from the longest U.S. recession in a quarter century, were the companies most affected by loan restrictions and tariffs of as much as 25 percent that Putin imposed this year, according to a U.S. Chamber of Commerce survey of the top 50 American businesses operating in Russia.

Putin is trying to boost Russian industries with tariffs on everything from drugs to farm equipment as declining oil revenue saps the nation’s economy. The policies are hurting sales by Caterpillar, Deere and Agco Corp. in a market where revenue was forecast to rise as much as sixfold in the next decade.

“The new tariffs kicked these guys in the knees when they were down,” Larry De Maria, a New York-based analyst with Sterne, Agee & Leach Inc., said in a telephone interview. “Russia was supposed to be a $3 billion market in 2008 with potential to grow to $20 billion, possibly in as little as a decade.”

Emerging-market sales likely fell so far this year for Deere and Caterpillar, which reports first-quarter earnings tomorrow, De Maria said. Caterpillar is expected to report profit excluding certain items of 5 cents a share, the average estimate of 20 analysts surveyed by Bloomberg. The company earned $1.45 a share a year earlier.

“We are really going to struggle this year in Russia,” Ken Harding, Caterpillar’s regional execution manager for the Commonwealth of Independent States, said in a telephone interview.

‘Low’ Expectations

Caterpillar’s “expectation is low” that it will sell any of its 60-ton trucks, used for quarry and construction work, in Russia this year after selling eight last year, Harding said.

Starting in January, Peoria, Illinois-based Caterpillar and other foreign makers of off-highway trucks faced duties of 25 percent, an increase from 5 percent last year. BelAZ, a Belarusian equipment producer that dominates the region’s truck industry, isn’t subject to the tariff and will benefit, Harding said.

Caterpillar declined 59 percent on the New York Stock Exchange in the 12 months through April 17. Deere fell 56 percent, and Agco dropped 64 percent.

Deere, the world’s largest maker of agricultural equipment, and Duluth, Georgia-based Agco are being hurt by a program that gives Russian farmers a 20 percent discount on loans from Russia’s Central Bank if they buy domestic machines.

Loan Program

The deal is for loans made through OAO Sberbank, Russia’s largest lender, and Rosselkhozbank, the Russian Agricultural Bank, which both have local offices that farmers rely on for financing, Michael Considine, director of EurAsia issues for the Washington-based Chamber of Commerce, said in an interview.

“If a Russian farmer had the cash to buy a Deere combine, it would cost substantially more because of the tariff increase,” Considine said. “And if you didn’t have the money, you could just forget about it because you’d only be able to get the money to buy something made in Russia.”

Putin undertook the measures after a December visit to Rostov, Russia-based Rostselmash, the country’s leading combine maker.

Putin’s press secretary Dmitry Peskov wasn’t available for comment. Valeriy Khromthenkov, a Russian official in Washington with oversight of agricultural issues, declined to comment. A spokesman for Finance Minister Alexei Kudrin, who also is deputy prime minister, wasn’t available to comment.

‘Dramatically Reduced’

Agco’s sales are “dramatically reduced” in the region, because borrowing for a foreign tractor is now almost impossible, Greg Peterson, Agco’s head of investor relations, said in a telephone interview.

In its first-quarter earnings announcement in February, Moline, Illinois-based Deere said sales will decline in Central Europe and the Commonwealth of Independent States for the year. Ken Golden, a spokesman for Deere, declined to comment.

“Our main problems have been the lack of state subsidies on loans combined with insufficient operating cash and the general economic downturn, not the import tariffs,” Alexander Altynov, the general director of AgroSnab, an official John Deere dealer in Russia, said in a telephone interview.

Market Decline

Altynov predicted the foreign machinery market in Russia will decline as much as 75 percent this year.

Deere was expected to post second-quarter profit excluding certain items of $1.08 a share, the average estimate of 17 analysts in a Bloomberg survey.

The U.S. Trade Representative has worked with the U.S. combine harvester industry and at a meeting in Moscow in March expressed concern about the tariff, Nefeterius McPherson, a spokeswoman for the trade representative, said in an e-mail.

The tariff runs counter to Russia’s G20 pledge to avoid protectionist measures and is contrary to a November 2006 bilateral agreement that Russia will maintain a 5 percent tariff on combines until it joins the World Trade Organization, McPherson said.

The ruble’s 31 percent decline against the dollar since July also has made foreign products more expensive. Russia’s Economy Ministry estimates that imports have tumbled more than 30 percent in the first quarter of this year.

Last month, Russia allocated 25 billion rubles ($746.7 million) to OAO Rosagroleasing, the nation’s largest farm- equipment leasing company, and 45 billion rubles to state-run Rosselkhozbank as part of a 3 trillion-ruble stimulus package.

Rosagroleasing spent the money on Russian-made equipment, including 5 billion rubles on OAO KamAZ trucks, Agriculture Minister Yelena Skrynnik told Putin during a meeting on April 17, according to a transcript on the government’s Web site.

Farm Equipment

Russia’s Union of Farm-Equipment Producers, known as Soyuzagromash, asked the government last week to extend the 15 percent import duty on combines to all farm equipment. The tariffs may boost domestic market share for farm machines to 60 percent, the union said.

“The government wants both to help the domestic producers and keep the state funds allocated to the agricultural sector inside Russia,” said Mikhail Pak, an analyst with IFC Metropol in Moscow.

Putin’s efforts may hurt U.S. companies’ operations in the rest of the world, said De Maria, of Sterne Agee.

“There is a worry that these measures could spread to China and other emerging-market countries,” De Maria said. That “would be a blow to the Deere brand and others, stifling their growth strategy as local companies build share.”

How long before these tariffs spread to other emerging countries? If China follows, will the developed coutries be able to resist the political pressure to protect domestic industries?

China has spended the last months shouting against the USA proposed protectionist measures, it would not plan any kind of new protectionist system for its industries, becouse, guess what, its economy is hugely dependant on export. Putting tariff on foreign goods (and having other countries immediatly raising countertariff on chinese goods) will be like shooting in their own foot.
As for Russia, while these tariffs are not a good thing it hardly would be noticed by the international markets.

[seal]

I would like to think the average "developed" consumer is much more self-indulging to allow a government to enact economic isolationist policies. Do you recall the "Made in the USA" advertising campaign? It didn't really go anywhere. Consumers want the best possible product at the smallest price. Isolationism only offers a product at a price.

Edit: Mad props for using Smoot-Hawley in a thread subject title.

[Thorn777]

@Viking Prince

Are these new tarrifs only in place for US goods?

I ask this because the Kremlin already gave hard times for US business before, they even kicked several US companys out during "the missile and Georgia crisis"(and the article only mentioned US companys).

So if thats the case It must be political motives not economic, and would hardly cause a chain-reaction towards other nations.

[Viking Prince]

@Viking Prince

Are these new tarrifs only in place for US goods?

I ask this because the Kremlin already gave hard times for US business before, they even kicked several US companys out during "the missile and Georgia crisis"(and the article only mentioned US companys).

So if thats the case It must be political motives not economic, and would hardly cause a chain-reaction towards other nations.

No they are for all imports of protected classes. Putin is not targeting the USA, but trying to retain manufacturing jobs as the jobs are softening in the energy sector. The thing that makes countries revert to tariffs is a concern of lost employment domesticly (need not be lost due to imports, just lost jobs in general). China is indeed a potential tariff raiser to "help" local industry when imports threaten a company's viability. The company may indeed be export oriented, but lost export sales will often be thought to be made up by capturing more of the domestic market by using government tariffs.

The USA and Europe all also piling up protectionist layers, but not with tariffs. They will use regulatory procedures and contraints on government spending to steer purchasers toward domestic choices. The military is always a classic example, but even the local teacher's union can demand that products from another "sister" union contracted supplier be given preference over lower cost and better value imports. When unemployment rises, all government levels are motivated to stop the loses in employment. They just do not understand that this raises costs for other sectors that then lose jobs due to decreased demand or los profitability due to the forced domestic content that prices the product or service out of the market.

[YuriVII]

Bad move IMHO, better relations follows better business. Plus those machines are still high quality and reasonably priced. Or atleast they were

[Nouvelle Vague]

Thought France introduced something relating to an increase in tariffs awhile ago, at that time everyone was fearing that precedent was to follow. Russia is hardly the first to do such a thing.

They've been one of the worst financially hit, possibly even more than the US from which the crisis arose from. Can't say I'm surprised Putin has done something like this. After his and the Chinese comments in earlier economic talks, suggesting its solely the blame of the US.