Besides oil, a rich literary tradition and lots of snow, what’s one thing Russia has a ridiculous amount of? That’s easy — just look at a map. As the world’s largest country, Russia has millions of acres that are completely untapped for agricultural development, not to mention inexpensive. Combined with rising global food prices and the country’s need to tie its economy to something other than oil, which has proved to be an unstable resource recently, this mass of cheap, undeveloped land could be a boon for would-be buyers. But there are some serious caveats.

“What you should remember about land in Russia... is that a lot of the land available is land that has been laying fallow for many years and needs to be redeveloped,” said Gustav Wetterling, head of investor relations at Black Earth Farming Ltd., a Swedish agrodevelopment company operating in Russia. “We are paying $350 to $400 per hectare, and there’s a development cost of, say, $1,300 to redevelop the land,” he said. This goes on chemicals to remove weeds and machinery to cultivate and level the soil. “While you can buy it cheap, it’s usually not in a state to be able to immediately develop it.”

Black Earth has made its mark on Russia’s fallow land since its inception in 2005, buying close to 317,000 hectares in the Tambov, Kursk, Voronezh, Lipetsk, Samara and Ryazan regions. With such a land bank in its grip, the company has recently switched its focus from land acquisition to growing wheat, barley, corn, rapeseed and sunflowers. Last year, the company harvested more than 141,000 hectares of the land that it owns, and this year Wetterling predicts that it will turn over close to 180,000 hectares. In a period of economic stagnation, such a business model doesn’t fit the trend of most companies operating in Russia. In fact, caution is key for many players in this market.

“There’s a lot of opportunities in the market, but there’s no money, no financing,” explained Jana Kuzina, head of strategic consulting and valuation at CB Richard Ellis. “Currently in the market there’s a lot at low prices; however, these assets have problems with the registration of land plots and permission for the use of the land,” she said. “Therefore it’s necessary to analyze very carefully deals or offers in the market and to carefully look at whether or not there are serious problems with these assets.”

Of course, with such caution comes patience. Even with the sizable nest egg that they have been sitting on for the past several years, Black Earth has had its share of difficulties. In April, Bloomberg reported that the company lost $25 million in 2008, would possibly earn a profit before interest, depreciation and amortization in 2009 and would only post their first net profit next year. According to Wetterling, Black Earth is in a comfortable position now, but it was this combination of careful spending and acceptance of market conditions that allowed them to reach this point.

“We are not in a position where we need capital; we had a successful IPO at the end of 2007. When we saw turmoil in the market, we were very careful how we spent our cash,” Wetterling said. “We are one of the few who are increasing production in 2009... in comparison to the contraction of production for other companies, we are actually growing instead.”

This ‘contraction of production’ is a result of the credit crunch, which comes on the heels of Russia’s largest grain harvest since 1991. Last year, the country reaped 108.1 million tonnes of grain, about one-fifth of which was exported around the world. Concurrently, the government last year upped its support for the sector, pledging $3.3 billion in state money and almost the same amount from regional funds. But according to this year’s adjusted federal budget, these funds have been cut by 15.3 percent, and with rumblings of a second wave of the crisis sounding through the halls of banks and financial firms, investment in the sector is risky.

“Within the context of the crisis, I don’t think it is wise to invest money in agricultural land with future development in mind,” said Olga Kuzyakina, head of the land department at Cushman & Wakefield Stiles & Riabokobylko. “Any development endeavor is capital-intensive; in order to develop a site, one requires monetary funds,” she said. “As a rule, monetary funds are procured through credit for the duration of development, and then these funds are restructured through the functioning period of the developed enterprise. During the crisis, the restructuring process and, more importantly, the procurement of credit have become extremely difficult.”

Thus, market players who do not need to rely on credit, namely foreigners, have a huge advantage in the agrodevelopment sector. According to a recent report from Cushman & Wakefield, it is companies like Black Earth which are most attracted to the glut of undeveloped land. The weakening of the ruble makes the sector even more attractive for companies with operating capital in dollars or euros. For example, a foreign developer looking to purchase any of the 8 million hectares available in the Bryansk region can expect to pay 9,000 to 12,000 rubles ($280 to $375) per hectare, while land in the Voronezh region runs between 20,000 rubles to 25,000 per hectare. But these prices, Wetterling reiterates, are based on the condition of the land and the assumption of a certain amount of further investment to turn those plots into cash-generating assets.

It depends on what the company is buying. “For sure, you can buy land that is already in a cultivated state, but you are paying much more for the land because that is part of the prices,” Wetterling said. “You might pay $700 per hectare, not with the best quality, but it’s not with trees and weed. The other question is whether or not you can acquire a title.”

And there lies an extremely large rub. In order to be able to turn an adequate profit in the agrodevelopment sector is not simply a matter of buying land, watering crops and waiting. Like in all industries in Russia, there is no getting around the long processes of registering titles and ownership rights with the government. For an asset like land, which needs time and patience to be fully developed for agricultural use, such processes can present a difficult obstacle to overcome without a substantial amount of capital. For example, according to the Russian Tax Code, if land that a company owns can provide future income, is intended for use as a production facility for more than one year and is not expected to be resold soon after purchase, it must be registered with the state before any production can actually begin. If a company starts developing land that they have purchased before beginning the registration process, the state can consider this tax evasion. Thus, the time between the purchase of land and its actual development can be a make-or-break situation for a company without significant capital — especially during a crisis. On its own, the registration process can take between eight months and several years, but there are still ways to operate on the land without these titles, said Frank Shikhaliev, an analyst at Cushman & Wakefield.

“Yes, it is true that the process of agricultural land registration is quite complex and time-consuming. Yet it only has an indirect effect on the success of the company,” said Shikhaliev. “For example, lots of companies work on the basis of long-term leases without investing their funds in the purchase of land for private ownership. Of course, from the point of view of security and the capitalization of the company, private property is very important, but it does not have a b influence on operational activity.”

Registration is not the only difficulty. While Russian agricultural land has dropped in price, by 30 to 40 percent in the past year, so have grain prices — by 40 to 50 percent. As a result, even if a company like Black Earth has a substantial amount of capital and the legal means with which to operate, they cannot escape exposure to fluctuations in market prices.

“Why buy the land? Presumably to turn it into cash,” said Natasha Zagvozdina, a commodities analyst at Renaissance Capital. “They have $156 million in cash on their balance sheet, which is an advantage,” she explained, but if you are a company jumping into a market whose cost and return prices are measured in a fluctuating currency, “you will be greatly exposed to the grain market.”

“Land is a cheap asset, so return on that asset is long,” said Zagvozdina. “But the land price dropped not only because the funding wasn’t available — the land isn’t producing the profits that the grain used to.”

But it is not as simple as reaping lower profits, according to Wetterling. The interplay between grain prices and the cost of production is always a factor, he explained. While grain prices are lower, “by historical comparison, the prices are still fairly good,” he explained. “Fertilizer prices and feed prices have dropped as well. Even as prices are lower, we have a much lower cost of production,” he added.

And to succeed in the market, a company needs not only a large amount of working capital and patience but also a substantial staff of experts who can farm diverse regions and learn from their mistakes. Black Earth currently utilizes a mixture of local Russian farmers and experts from around the world, including from Texas, South Africa, Sweden and Switzerland, to work with the disparate climates in Russia.

“We have learned a lot along the way, and it’s just a fact that there are few farm managers with the experience of running farm clusters the size of 20, 30, 40,000 hectares. In terms of people, it’s hard if you want to start from scratch to find people with this experience,” he said. “That’s the good thing about being a large industrial company — we can get the best, but we are depending on local farmers as well, so it’s a mix of both.”

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