Western conservatives: work, invest and settle in Russia – interview transcript

Write to Dmitriy Balkovskiy here: db@goldenfront.ru

Thanks to Alena Varnacheva for the help in production.

Dmitriy Balkovskiy’s interview with Aleksei Alekseevich Khohlov, Member of the lower chamber of the Russian Parliament (State Duma) from Ivanovo region and Maksim Uvarov, CEO and founder of Smart Hemp Group of Companies.

Maksim Uvarov: Yes, we now are developing the biggest and most comprehensive project for growing and processing hemp in Russia. And we are doing it in Ivanovo region.

We picked Ivanovo region for our project for a number of reasons. Firstly because Ivanovo remains the heart of the Russian textile industry. The main goal of our project is to procure hemp fiber for the textile industry. And right now we are sitting at the House of Hemp. This is our showroom, the very first exhibition point where we are showing all manner of goods made of hemp.  This is the only project of its kind in the Russian Federation.

We are sitting in the middle of Moscow, on the Nikitskiy Boulevard next to the fashionable Ponds of the Patriarch district. You can come here and see varieties of stuff that can be made out of hemp, touch it with your own hands and buy it.

Dmitriy Balkovskiy: Alexei Alekseevich, please tell us about the history of Ivanovo region as a centre of agriculture of Russian Non-black Earth region, that is North-Central European Russia.

Alexei Khohlov: Thank you, Dmitriy, for inviting to this interesting discussion and to this amazing place. I believe that with our general effort we will be able to return a deserved reputation to the old, forgotten and slandered Russian hemp. Because this plant had given literally everything to the Russian peasant for centuries. And it is very hurtful to note that Russia abandoned its traditional ways and forgot hemp, flax and many wonderful and exotic sounding plants in the 1970-s and 80-s.

So I am delighted to say that right now we are beginning a period of revival and return to things which were foundational for Russian peasants and people for many centuries.

Unfortunately, today this territory for centuries considered the centre, the heart of Russia is in a very poor state. The Non-Black Earth region we are talking about here includes such regions as Ivanovo, Kostroma, Vladimir, Tver, Pskov, Smolensk and several others. Russia as a country, as a culture was born in these regions. At the moment there are a little more 10 mln people living in this territory (excl. Moscow and Moscow region), and this vast space includes of 240 mln hectares of arable land. About 50 to 60 mln hectares out of 240 mln is not under cultivation today. For example, in my native Ivanovo region about 200,000 hectares are withdrawn from cultivation.

The government and president of the Russian Federation has paid a lot of attention to this problem in recent years. For example, it was decided to return to cultivation about 12 mln hectares. Prime minister Mishustin signed this decision last year. Additional funds will be disbursed and hopefully our Ivanovo region will use this opportunity as well.

Yet we should understand that this mechanical return of lands to crop rotation is not really needed today. Ways of life changed, people changed, but the most important thing here is that country lands have lost people. All the regions mentioned above today are living through a demographic crisis. For example, the number of residents of Ivanovo region fell below 1 mln last year.And 20-25 years ago we had 1.3 mln residents.This state of affairs is the same for all regions of the Non-Black Earth territory.

That’s why it is very important to know today not only what to return and what to cultivate, but who will be doing the cultivating. Therefore, your idea Dmitriy to invite interested, eager, entrepreneurial people with financial means and all sorts of resources is extremely important in my view.

The Russian Parliament today is looking to pass several legislative amendments which would speed up naturalization process and protect their investments in agriculture and in these regions. And I know that Ministry for Economic development is working on the golden visa law. This is how we will solve these problems, but this is, of course, in the future. This law will probably pass next year because we have parliamentary elections this fall. The issue is ripe for a solution and this solution will be found. But I would like to direct the attention of potential guests, colleagues, participants and partners that today Russia is one of the few corners of the world where healthy conservatism is still prevalent. And land and agriculture requires healthy conservatism like no other industry.

What it means that traditional, Orthodox, spiritual and moral values that have always been inherent in our people may serve as a foundation for safekeeping of moral values shared by all of mankind. Let’s take family, for example. Family, gender relations in Russia today are some of the most firm and normal if I may put it this way. And people who appreciate this must understand that they can find themselves here, they can bring up their children securely, keep their families intact, thrive and build their future.

The topic that we will discuss here today – hemp is, in my opinion, very interesting because hemp is a traditional Russian product. I believe Maxim will talk about it in more detail so I will not take away his bread made of hemp, so to speak. But let us not think that everything here in Russia is “poskonnoye” that is down-to-earth and rustic.

Today’s tendencies that we are observing all over the world – globalization, deep automatization – may find very interesting application here. There is carbon footprint, for example. They say that if we plant a trillion trees then the problem will be solved. So these millions upon millions of hectares of ours that today are covered with brush and waste tree species may be returned to cultivation. And why not plant forests which in 2-3 generations will begin destroying this carbon footprint which is stored in atmosphere today.

And this is an additional family tie, a family brace, so to speak, because today you are founding what your grandsons and great grandsons will enjoy and use. And we can use many examples of this sort which let us unite the past and present and build a chain to the future.

Dmitriy Balkovskiy: Thank you, Alexei Alekseevich, and Maxim as a representative of agricultural business, a productive sector of the economy will tell of what goes on in this noble field of endeavor.

Maksim Uvarov: Hemp was in Russia since time immemorial. Peter the Great was the first to revive the industry on all Russian level, he issued a decree on development of flax and hemp manufacture which boosted this industry tremendously. The Navy was all made of hemp. There are many words in Russian language that originate from hemp. For example, the phrase that you use “poskonnaya Rus” which means “simple, downhome, traditional Russia”, and the word “poskonnaya” means the following. There are male and female plants in hemp. Male plants mature first and they are called “poskon” while female plants mature a month later and they are called “materka”. Poskon was harvested by hand and it was used for textile, for shirts. Therefore, the phrase “poskonnaya” Rus comes from hemp.

And now as far as carbon footprint is concerned it is very interesting because trees absorb a ton or a ton and a half of carbon per hectare a year and the champion here is poplar – 5-7 tons per hectare. Whereas hemp absorbs 20-30 tons of carbon.

Dmitriy Balkovskiy: It is very impressive.

Maksim Uvarov: So in essence, hemp is something capable of saving the planet.

You can make a lot of stuff out of hemp, approximately 10,000 products for dozens of industries. Therefore, there are huge opportunities for development of hemp products. Up until 1961 hemp in the USSR was king, a proof of it may be found in one of the most notable monuments of the Soviet era – the golden fountain at the Exhibition of achievements of people’s economy. There are three main types of Soviet agricultural commodities pictured on this fountain – wheat, sunflower and hemp.

Hemp was one of the most important agricultural products in the Soviet Union and it was actively exported.

Hemp was used in a variety of applications and industries: food, construction, non-woven materials. So what happened and why everything suddenly disappeared?

The United States banned hemp by 1961. Two people played a role in introducing this ban: media-magnate William Hearst who wanted to print all newspapers using tree pulp based paper instead of hemp paper. The pulp came from his Amazonian tree plantations.

And the DuPont family who recently patented fiberglass and wanted everyone to use this new material and receive royalties. Then the United States equated hemp with marijuana, first they taxed and then outright declared it a narcotic drug. Khrushchev ratified the UN’s1961 Single Convention on Narcotic Drugs in 1963 and the bulk of hemp harvesting and processing machinery was transferred to corn cultivation and processing. And the lands under hemp were transferred to flax.

Hemp is also very useful in regional development since it enriches the soil and raises yields for other agricultural commodities. Hemp cures soil, it absorbs heavy metals and they used it in Chernobyl and Fukusima for soil resuscitation – all because of its excellent absorptive qualities. It enriches the soil, so grain yields on fields where hemp grew before rise enormously. For example, in the French region of Ile-de-France, and France was the only country without a hemp ban, they experimented with hemp’s impact on crop rotation. So after hemp wheat yields rose from 9 tons per hectare traditional for this region to 11 tons per hectare.

If we look at sugar beets, we see that economic efficiencies of this product grow by 40% after hemp because of fewer labor hours in the field, less fertilizer and yield growth. This is why hemp is a very useful product for agricultural development in other regions. For example, Ivanovo region has a short and poor vegetative period – too little sun. In addition, it means that not all cultures have enough time for maturation. Therefore, if hemp helps grow yields of other grains then we finally can make them profitable.

That is what makes hemp so interesting. Because now when you choose between Northern and Southern regions, it turns out that things grow better in the South. However, land in the North costs almost nothing. Therefore, it is an excellent time to go Ivanovo and other regions of Central European Russia and engage in agriculture. Because the land is extremely cheap, so hemp cultivation helps other farmers to develop their crops.

As I said before France was the only country not to introduce hemp ban whereas in Russia since 1963 this ban is in place and there are no hemp cultivation experts left. That is why we went to France in search of expertise and our chief agronomist is French, François de Senlac. He is 65, he came here, he enjoys Russia, and he likes everything here. And we continue with our search for expertise in France. We are planning to hire there a chief technician, chief engineer because of a great deal of practical experience. Besides the equipment used for hemp cultivation, its primary and secondary processing is made in France. The company is called Laroche.

There were two hemp processing equipment makers during the Soviet times – one from Ivanovo and the other one from France. This is one of the reasons why we bought French equipment and thanks to that we get in touch with foreign experts and companies which require this product – hemp. There is a shortage of foreign expertise, because production experience is concentrated abroad at the moment. Therefore, our goal is to transfer them here.

There are tax and accounting advantages present in Ivanovo. A legal/taxation regime within which we are developing our project is called TOSER (Territory of advanced social-economic development) and the only tax that we are paying right now is that on wages. We pay about 15% tax on wages instead of 35%. We pay nothing else. Besides all of the foreign experts that we invite are highly qualified. And all this is happening in Ivanovo region. There are many shortages in our industry and we will not be able to advance alone. We created an industrial association uniting all flax and hemp growers.

Besides the factory we are building which will process hemp into fiber used in food, auto parts, cardboard and non-woven materials creates an environment for many other businesses to thrive. They would be involved in processing and deep processing of hemp but the expertize is all abroad. The paradox here is that from a market point of view the environment abroad is more welcoming but legislatively Russia is much more prepared.

Russian state is doing much financing and subsidizing now, no other country in the world is providing as much help of all kinds as Russia does today. I am being completely serious, they are subsidizing growing, processing and manufacturing finished products from hemp – Ministry of economics will introduce the program for the latter this year.

Equipment imports are not subject to excise and VAT, so the number of support programs is colossal. So it would be interesting to further develop in this direction. I believe that the factory we are building in Ivanovo will serve as the beginning for these developments. We are not talking about hemp growing only but all manner of related industries as well. Including construction, non-wovens, food and many others.

Dmitriy Balkovskiy: We are talking cluster here.

Maksim Uvarov: Yes, it is a hemp cluster in Ivanovo region. And the town of Uja (in the south of Ivanovo region) will serve as the center for hemp cultivation in the Russian Federation.

Alexei Khohlov: Yes, Maksim, thank you, I would like to say that our future foreign investors have opportunities not only in hemp growing. A traditional peasant way of life in our Non-Black Earth region of Central Russia included cattle rearing for milk and meat with rich wet pastures and abundant herbage. We have all of it here and this is another point of application for representatives of other countries and cultures. And Maksim was absolutely correct when he said that local and regional legislative arrangements offer a wide variety of tools helping investors to adapt in these new conditions. So we are expecting people with a variety of interests, directions and business experience. We should say that the more businesses of all varieties we have here, the better and more stable the local economy will be.

Dmitriy Balkovskiy: It is very important that you are pointing out that there will be other opportunities in the agricultural sector besides hemp such as meat and milk that are traditional industries for Ivanovo as far as I know. It is very well that we have heard all of this from representatives of local government and the business community. Let’s emphasize this once more: foreign guests, investors, settlers and technical experts may expect traditional Russian welcome and acceptance. Do I understand this correctly?

Alexei Khohlov: There are plenty of foreign investors in Russia today, there is a lot of them, they work in a variety of industries.Of course, traditional spheres are oil, gas and energy, but today we are talking about agriculture. And there are no hurdles, there are institutional arrangements and tools allowing to attract capital, secure and guarantee it. One of the options Maksim mentioned are Territories of advanced development. These are Special Economic Zones where qualified personnel work with investors, they analyze and help adapt business projects – not only foreign business projects, but literally any business projects. But foreign investors certainly deserve and get special attention.

We will further develop these projects. I have no doubts that legislative proposals I am talking about – golden visa - will pass and become law. But I would like to emphasize again that this golden visa by itself does not give any privileges or advantages. Everything is built here on the ground, for example, in that tiny of town of Uja. First, you need to build connection with the local population, local government, you need to know laws and regulations, customs and mores. It is very important.

I wish to convey one thing to the people who want to come to Russia and do business here. They are not coming to some backward country. Please excuse me but this is one of the very few countries that created an empire. Russia is an empire. We will not list everything here. Therefore, now we are saying that there are opportunities for a concerted effort in building something new, giving a new life to something that is well known.

Dmitriy Balkovskiy: Let me insert a small remark. Usually when an average person hear the word “investor” he thinks of huge steel and glass office towers and companies from Fortune magazine. But in our situation if we are thinking of sparking organic revival of Russian rural life then we would be more interested in small to medium enterprises. People who do not have a planeload of lawyers… You know what I am saying, right?

Alexei Khohlov: Yes, you are absolutely rightand I have said earlier that Russia is a country of healthy conservatism and this conservatism is in the Russian countryside, in the village. And we are expecting people who support these national, cultural traditions and values embracing mankind as a whole. We in Russia are keeping them alive and we together need to foster and grow them.

Dmitriy Balkovskiy: Yes, and thank you for clarifying this for us, because many our viewers, especially foreign ones will ask this question.

Maksim Uvarov: I have a somewhat different opinion on the issue, I would divide foreigners on those who want to come and work here and investors. And these are two completely different categories of people. If we take those who want to live and work here, they have a completely different motivation for coming here from those who want to invest here.

So we have excellent conditions for those who want to come and settle here. I have already mentioned tax situation, if we compare Russia with other countries we see that we have the lowest salary taxes anywhere. This is our strongest competitive advantage.

Coming here to Russia, you first arrive to Moscow and it is very easy to get to Ivanovo from Moscow by train, which is fast and modern. You can easily fly from Ivanovo to St. Petersburg, Sochi and other cities.

Another important thing to know about Ivanovo’s regional government is that they all speak English, present their region in English. In addition to that, local places of higher learning wish to see you not as a student but as a professor or tutor. Every college or university in Ivanovo is interested in that. Foreigners are really taken care of even though there might be issues with places to live. Infrastructure like cafes and restaurants is not very developed, but I will say it again Ivanovo is really close to Moscow and it takes about 3 hours on a very comfortable train to get to and fro.

Land quality and ecology in Ivanovo is excellent especially in comparison with bigger cities. But if we are talking investments there would be some difficulties, because a share of foreign capital should be limited. If a share of foreign capital crosses a given threshold in an enterprise then it loses the opportunity to apply for state subsidies.

So if foreigners are so very much afraid of coming to Russia then they need to find good partners here. Who would serve as conductors and protectors for their capital. So in essence there should be a reliable local partner here and develop alongside him. And there all possible conditions you can think of for this type of partnership created here, in the Russian Federation.

If we take our company Smart Hemp as an example we set up a closed mutual fund allowing for participation of foreign and local capital. This is most reliable and protected way for investors to protect and grow their capital.

If foreigners know nothing about Russia then they should choose leaders, us for examples, or other companies we work with. Thus foreigners would be able to bring in their experience because it is difficult to develop hemp industry in Russia without foreign experience.

Dmitriy Balkovskiy: Thank you for the clarification because there are fears, so a partnership is the way to go. Thank you, dear friends for the interesting conversation, and I am sure that our viewers still have a lot of questions, so you can contact me through my email: db@goldenfront.ru. Let us begin a dialogue, thank you gentlemen.