The cancellation of the embargo: will the life continue?

POWER: CHANGE OF COURSE

The food embargo was introduced on 6 August 2014 in response to the sanctions of the USA, member countries of the European Union and some others. On August 6, 2016 the Russian government extended the counter sanctions till the end of 2017. Dairy products are still under the ban, except lactose-free milk, imported to Russia y several companies including Finnish Corporation Valio.

Russian authorities have recited the enthusiastic odes to the sanctions for a long time. "If there were no the sanctions, it would be necessary to invent them. Every cloud has a silver lining" , said the Minister of agriculture of the Russian Federation Alexander Tkachev, in his speech at "Golden autumn-2016". "We wait as long as possible", said Vladimir Putin, answering the question about the extension of the embargo at the forum of All-Russia people's front last November.

In winter, the rhetoric of the authorities has changed dramatically. At the end of December at the traditional press conference, the Russian President said: "We will cancel the counter sanctions, if our partners will cancel anti-Russian sanctions, despite the fact that our farmers are asking not to cancel counter sanctions". Last week Igor Shuvalov in the framework of the Gaidar forum, announced a possible cancellation of the embargo and called on the authorities to prepare for this. Alexander Tkachev, in turn, plans to attend the summit of Ministers of agriculture of G20, which will take place on 22 January in Berlin, in the bypass of personal sanctions.

THE EFFECT OF THE EMBARGO

The greatest benefit of the embargo was received by the cheesemakers. For two and a half years the shelves have been filled with different kinds of cheeses from known manufacturers, and the number of small farm cheese dairies significantly increased. According to the owner of the cheese factory "Russian Parmesan" Oleg Sirota, about 150 dairies have appeared during this time. Consumers appreciated farmers’ cheese, as a result, two cheese fairs in Moscow, as well as the cheese festival in Kaluga were a success last year. The courses of cheese making appeared, in particular the school of Olesya Shevchuk.

Peter Kondaurov and Alexey Demyanov created their "Cheese Start-up" last year. According to Kondaurov, the project has almost reached the operating payback.

According to Rosstat, consumer prices at the end of 2016 increased by 4.6%. Dairy products rose in price on average by 9.5% last year, while butter - by 20%. As a result, consumers start to reduce consumption of dairy products, especially milk consuming products: cheese and butter. "By the end of 2016, the consumption of dairy products can reduce by 2-3%", - is said in the report of "Soyuzmoloko". According to GIRA, the prices of cheese in Russia in 2015 have increased by 23% and consumption per capita per year amounted to 5.7 kg.

The decline in real incomes and increasing of prices led to the growth of counterfeit goods on the Russian market. According to Deputy Head of the Rosselkhoznadzor Alexey Alekseenko at the recent Gaidar forum, a quarter of food products are counterfeit. The Head of the Rosselkhoznadzor Sergey Dankvert immediately denied the information to his subordinate and dismissed him from communicating with the press, reports Milknews. Due to the growth of counterfeit goods on the Russian market the IDF has not included Russia in the list of top producers of cheese. "After reviewing data, Russia is no longer included in the list of leading producers of cheese in 2015. The indicators of the country show an increase in the production of cheese by 23% in 2014, however, it is due to an increase of non-dairy and counterfeit products, with which Russian processors are trying to meet domestic demand after the embargo was imposed in 2014", - stated in the Bulletin of IDF.

EUROPE IS STANDING

According to the results of 2013, Russia was the largest importer of cheese in the world, importing approximately 455 thousand tons, of which 57% came from EU countries. As a result, during the sanctions the European authorities have invested billions of euros in their own agricultural production. According to GIRA, 500 million euros was allocated to dairy producers by the European Commission in 2016, of which 150 million euros will be allocated for the reduction of milk production: European farmers will get 0,14 EUR per liter.

However, according to leading analyst of GIRA Veronique of Aguera, Europe was able to find where to send "forbidden products": alternative markets for European milk processors became the United States, China, Japan and South Korea.

"After the embargo, the EU has directed its dairy products to other countries, but the prices were disastrously low. Surprisingly, now more products are produced than before the embargo," stated Director of GIRA Christoph Lafougere during the plenary session of the World Dairy summit of IDF in Rotterdam in October last year.

According to Euromonitor International, which is cited in the recently released report "the Dairy industry in Eastern Europe," the consumption of dairy products of chains ' brands is growing, as they offer better prices.

According to FAO price index for dairy products in December of last year decreased by 3.3% compared to November. According to FAO experts, it has occurred because of limited milk production in the EU and Oceania and the active demand on domestic and international markets. The average value of the index at the end of 2016 was 4% lower than in 2015.

The index of the GDT dairy prices rose by 0.6% at the end of trading on January 17. The price increase was marked in the categories of: cheddar, butter and anhydrous milk fat, and the increase was shown by skimmed milk powder, whole milk powder and lactose.

WILL THERE BE BANKRUPTCY?

Almost all experts and market participants polled by The DairyNews, believe that small dairies will suffer the most from the abolition of the counter sanctions. "If the current leadership of the United States cancel sanctions, we will be under very difficult conditions," - said Oleg Sirota in his column on Speakercom. According to Sirota, state programs of support “which would be comparable with similar programs of American or European farmers” are important for the development of domestic cheese making.

Artyom Belov, Executive Director of Soyuzmoloko is in solidarity with him. "It is clear that there will be the situation on the market (in case of cancellation of counter sanctions– noted by the editor), when imported cheese and butter will once again take a serious place on the market and sanctions are gone. Therefore, in case of cancellation of the embargo one should seriously consider and keep either restrictions on import not to deprive the Russian cheese makers of these conditions for further development or to provide compensating support for the sector," said Artyom Belov, quoted by Milknews.

"The cancellation of the counter sanctions on some sectors will worsen the situation for the agricultural sector, but this will not happen immediately, but at least within six months after the cancellation of the counter sanctions <...> In the dairy industry cheese making and other certain sectors of dairy products will be affected most of all," said Vasily Boiko-Veliky, President of the Board of Directors of Agroholding "Russian milk" in the comments to The DairyNews.

Vladimir Pasternak, Director of LLC "Tyumenmoloko" in the comments to The DairyNews noted that the cancellation of the counter sanctions might entail the bankruptcy of those processors, which appeared specifically in this period.

"Small dairies are mostly unsustainable even without the cancellation of sanctions. After the cancellation of sanctions - a fortiori. Only those will survive who will manage to maintain their level of sales," said Alexander Nikitin, a member of the Board of Directors of "Alantal" in the comments to The DairyNews.

Along with the return of European imports the price of raw milk, which, though higher than in Europe, does not cover all the costs of Russian producers, may decline. Combined with declining of state support, the situation for small and medium producers of milk may be critical.

INCENTIVE OF EFFICIENCY?

Many experts and market participants (with the exception of the cheese-makers, most of whom expressed a pessimistic attitude) interviewed by The DairyNews, note that the cancellation of sanctions will be beneficial for the end consumers, as the range of dairy products on the shelf will increase.

Along with that, the cancellation of the sanctions can serve as an incentive to improve business performance. "One can analyze the performance "before and after" to identify strengths and weaknesses, to formulate right conclusions and, most importantly, each manufacturer and processor can build a system of business development, taking into account the lessons that we were taught. Experience is invaluable, and we got it," said Vladimir Pasternak.

In addition, an important consequence of the cancellation of sanctions and counter sanctions could be Russia's return to international financial markets. "As a result, the availability of credits will increase and the credit cost will reduce, which will have a positive impact on the cost of imported machinery, equipment, veterinary drugs and other essential resources of production", said Vladimir Surovtsev, Ph. D., head of Department of economic and organizational problems of development of branches of agriculture, associate Professor of Federal state budgetary scientific institution « North-West Research Institute of Economics and organization of agriculture» in the comments to The DairyNews.

THE TEMPORARY SANCTIONS

Speaking about the consequences of the cancellation of sanctions and counter sanctions, it is important to consider other factors in the development of the dairy industry, the most important of which is the state support. In addition to the prohibitive measures there are other ways of regulating the market in the arsenal of the authorities. Many experts, interviewed by The DairyNews say that with adequate state aid, the domestic dairy industry can successfully compete with the European. It is also important for the mood of dairy producers, who have the choice to accept this challenge or withdraw from the market. The leading analyst of "Russian Dairy Research Center" Ekaterina Zakharova fairly noted: "many people consider the embargo as ideal conditions for work, but the market has its own laws."

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