Russia has generated considerable political ill will throughout the former Soviet Union and even in Europe by renationalizing its energy sector – ultimately using such state-run ventures as OAO Gazprom and its resource-rich position as weapons of economic diplomacy.

And now that Russia has formed a state-run grain trader, analysts fear that Moscow is expanding these bare-fisted tactics to its agricultural sector. The enterprise, the Agency for the Regulation of Food Prices, will take control of 28 government-controlled assets, including storage depots, grain elevators, flour mills and export terminals. The agency will control between 40% and 50% of the nation’s cereal exports by 2011.

“The aim of creating the company is quite clear. As grain trade becomes attractive, bureaucrats are looking for ways of making some extra money using government resources,” a market source, speaking on the condition of anonymity, told Reuters.

With food-and-energy commodities trading at near-record levels – even prompting the leader of the United Nation’s World Food Programme to warn that soaring food prices have caused a “silent tsunami” of hunger to sweep the globe – Moscow’s move is viewed with equal measures of concern and moral ire.

However, it is not yet clear whether the Agency for the Regulation of Food Prices will enter the market as a regular commercial player or whether it will simply serve as another state-run resource monopoly akin to Gazprom – Moscow’s energy arm.

“The idea is to manage the assets more efficiently and to generate profit,” a second source told Reuters.  While the source didn’t offer a timeframe, some reports suggest the new state-run firm could be up and running as soon as this fall.

As with energy, Russia has the natural resources to give it the muscle – and the leverage – to carry this off.

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Russia’s farming industry collapsed alongside the Soviet Union in the 1990s, but soaring commodity prices and increased foreign investment have triggered a revival in the nation’s agricultural sector, particularly in the Chernozem, or “black earth,” belt – a tract of particularly fertile soil in southern Russia.

The region used to be known as the “Bread basket of the Soviet Union,” as its nutrient-rich, black soil produced enough grain to not only satisfy the nation’s domestic needs, but generate lavish export revenue as well.

Russia, the world’s fifth-largest exporter of cereals, exported nearly 13 million metric tons of grain in the 2007-2008-crop year, generating $3.5 billion in revenue. Moscow expects to export at least 15 million metric tons in the current 2008-2009 season, and have export levels reach 25 million metric tons in the next five years.

“Russia has this black soil – it’s another resource just like oil and gas,” Victor Nageyev chief agronomist at Heartland Farms, a company that has 75,000 acres of the fertile land in its portfolio, told Sky News. “The land, plus new technologies, should make Russia a world leader again in grain production and exports. Just like it was at the beginning of last century.”

The introduction of modern farming methods has already resulted in a 300% increase in production at Penza – the region currently being worked by Heartland Farms. If such methods were implemented across the entire Chernozem region, Russia could be producing 300 million metric tons of cereals annually, BBC News reported. That would make it the world’s third largest cereal producer behind the United States and China.

However, analysts fear that if Russia does return to its prominent role as a global food supplier, a state-run monopoly like the Agency for the Regulation of Food Prices could use its exports as political leverage – the same way Gazprom has used its energy exports, to meddle in European politics.

Russia’s Export Leverage

Gazprom, which controls 25% of Europe’s gas supply, has routinely jacked up prices and cut off supplies to the region as a means of exerting political leverage over its customers.

Last year, Gazprom threatened to cut off gas shipments to Belarus, and the energy giant followed through with similar threats against the Ukraine as recently as March of this year.

Gazprom reduced natural gas deliveries to Ukraine by a full one quarter in March after accusing the country of failing to pay $600 million in gas bills for the year. After Ukrainian officials failed to turn up for planned talks aimed at ending the pair’s supply dispute, Gazprom threatened to cut supplies by another 25%, reducing the total amount of natural gas to the Ukraine by half.

It was the second time in as many years Gazprom cut gas shipments to the Ukraine, which in 2006 installed a pro-Western government in Kiev.

About 80% of Russian gas supplies to Europe pass through the Ukraine, which puts Naftogaz of Ukraine in a position to siphon off supplies intended for other customers throughout Europe. In January 2006, Russia cut supplies to Ukraine completely for a period of three days, causing gas volumes across Europe to fall, as Ukraine scrambled to satisfy its demand.

Most recently, Gazprom offered to buy all of Libya’s oil and gas exports just as the former terrorist state was beginning to look like a viable alternative for Europe to diversify away from Gazprom’s dominance.

A member of the Organization of Petroleum Exporting Countries, Libya produces 1.7 million barrels of oil each day. The country had total proven oil reserves of 41.5 billion barrels in 2007, and about 53 trillion cubic feet of proven natural gas reserves. Its oil and gas industries earned Libya more than $40 billion in revenue in 2007.

Prior to its offer to buy Libya’s gas exports, Russia agreed to write off $4.5 billion in Libyan Cold War-era debt in exchange for military and civilian contracts for Russian companies. A memorandum of cooperation between Gazprom and Libya’s state energy conglomerate National Oil Corporation (NOC) was one of ten trade, investment and political agreements reached during then-president Vladimir Putin’s two-day visit to Tripoli.

Stroytransgaz OAO, another Russian company, is in talks to build a network of natural gas pipelines on the Mediterranean coast of Libya.

Related Articles and Links:

• Reuters:
  Russia gov’t considers creation of state grain trader

• Sky News:
  Could Russia Feed the World

• BBC News:
  Turning Russia’s rich soil into riches

• Money Morning:
  The New Cold War: How Russia Has Turned Its Energy Exports Into Weapons of Diplomacy

• Money Morning:
  Gazprom Keeps the Heat on Europe by Pressing Libya

• Money Morning:
  Six Ways to Protect Yourself – and Profit – From a Global Food Crisis That’s Here to Stay.
• Money Morning:
  New Pipeline Subverts U.S. Efforts to Diversify Gas Supply.
• Russian Co. of Heartland Farms Ltd:
  Corporate Web Site. 

A Wall Street investment bank yesterday (Thursday) upgraded its ratings on Merrill Lynch & Co., Inc. (MER) after the company announced it filled its empty chief executive officer slot with John Thain, CEO of the NYSE Euronext (NYX). 

Credit Suisse Group (CS) raised its rating of Merrill Lynch shares from "Neutral" to "Outperform," predicting that Thain’s steady hand is exactly what the embattled lender needs to rebound from the subprime market fallout.

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Other analysts praised also the move. Citigroup Inc. (C), which also ousted its CEO recently, was reportedly considering Thain as a candidate, too.

"Thain is the absolute best possible candidate, as he brings experience that is both deep in years and functionally broad," Fox-Pitt Kelton said in an analyst’s report, cited by MarketWatch.

Before Thain’s time at NYSE, he was president and chief operating officer at Goldman Sachs Group Inc. (GS). 

Thain’s first day at Merrill Lynch will be Dec. 1. He takes over for ousted CEO E. Stanley "Stan" O’Neal.

In an interview on CNBC TV, Thain declined comment on future Merrill write-downs, but he did say that the banking industry likely faced three to six months’ worth of additional losses from subprime mortgages and collateralized debt obligations (CDOs).

"I don’t think we’ve seen the bottom," Thain told CNBC. [For a related story on the continued write-downs by the banking sector in today's coverage, please click here].

Merrill is unlikely to get out of fixed-income businesses, such as mortgages and underwriting CDOs. The reason: They are attractive and profitable businesses if the risks are managed closely, Thain said.

"You have to take measured risk," he said during the interview with the widely watched cable TV network. "That’s fine. It’s a question of how you size that risk."

Punk Ziegel & Co. banking analyst Richard Bove, one of the few analysts who has repeatedly made the correct calls about the problems facing the U.S. financial-services sector, called Thain’s hire "a big plus" for Merrill because the executive has the ability to solve the company’s key problem: risk management. Thain also has a reputation for never having dodged making tough personal decision.

Even so, Bove noted in a research note he penned yesterday (Thursday), "Mr. Thain is not a miracle worker and the markets Merrill serves must improve before the stock becomes a ‘Buy’."

Bove is well respected because he always tells both sides of a story, and doesn’t gloss over the negatives at the companies he covers. Indeed, he highlights them for clients and investors.

So despite Thain’s reputation and generally solid record, Bove said, it’s important to note that earnings actually declined during the executive’s last two years at Goldman Sachs. Nor was Thain able to reverse, or even stem, market-share losses at the NYSE.

"In sum, [as] considerable as his abilities might be, he has been powerless to reverse major trends in the business in which he operates [no one can]," the analyst wrote.
"In sum," Bove concluded, "we like the company and the new manager. I do not like the markets."

News and Related Story Links:

• Money Morning:
  The Merrill Lynch "Surprise" Fuels More Subprime Uncertainty.

• MarketWatch:
  Wall Street analysts applaud new Merrill CEO.

• Money Morning:
  O’Neal Finally Out at Merrill Lynch.

• MarketWatch.com:
  
  Merrill Lynch Taps NYSE’s Thain as New CEO.