Back to the future in Russia

With the latest developments in Russia and the ban on food imports from the EU, the USA, Canada, Australia and Norway, we have an example of how the Russian economy can be thrown off course by political events. The economy will not develop properly until politicians stop meddling with markets. As far as pork is concerned Russia imports about a quarter of its pigmeat needs and this ban will hit some of the world’s big pork exporters – but it could hurt Russians much more than the exporting countries in the short run and it’s safe to predict the return of price controls, the black market and queues outside butchers’ shops in Moscow before too long. (It’s worth noting here that the trade ban does not yet include pet food – so what chance a hike in the sales of 5 star pet food to Russia in the next few weeks?)

The EU exports about 25% of its pork exports to Russia and, over a full year, this amounts to around 750,000 tonnes in a normal year but an ASF-linked ban on EU pork exports to Russia has been in place since February this year so at first sight the latest news  doesn’t make the situation any worse for EU sales of pork.  Similarly, the US has had a de facto ban on its pork exports to Russia since last year as it has tried to build a ractopamine-free supply chain to meet Rosselkhoznadzor’s rules on this additive: again, no real change for US exports with the latest news. The annual sales of US pork products to Russia in 2012 were c. 100,000 tonnes – or about 4% of its annual exports. In all, the USA and the EU together would expect to sell around 850,000 tonnes of pigmeat to Russia in a normal year—that’s about 12% of the global pork trade. This number puts the quote by the Russian Prime Minister Dimitry Medvedev in context, “Of course, Russian farmers will have to accomplish a lot and work hard, but this opportunity to launch and expand import-substituting production facilities should not be missed”.

This import gap simply cannot be filled by Russia’s domestic production quickly – in terms of quantity or quality. And, as I pointed out in the May 2014 issue of Whole Hog, Brazil would have to more than double its current exports of pork to Russia to make up this deficiency. It can’t be done.

The Russian meat industry chart reproduced here is sourced from a presentation by Sergey Yushin, the President of Russia’s National Meat Association in February this year – his figures appear to be rather different than the export data provided by Western sources but we can use his chart as an illustration.

In the short term Canada’s pork exports to Russia will be hit hard by the latest ban (c. 15% of Canada’s exports and around 150,000 tonnes in a full year) but this just adds to the Russian import deficit and the impact on Russian consumers – and scale of the challenge to domestic producers (or Brazilian ones) to fill this gap. It’s just not possible. Similar points can be made about poultrymeat and beef. I am more inclined to accept the views of the USA’s National Chicken Council, “The biggest impact, we believe, will be on Russian citizens who will be burdened by higher prices for all food products, especially meat and poultry. The price of poultry in Russia is already rising and has recently been increasing at a rate of 2-3% per week.” Stand by for the return of the queue outside butchers’ shops in Moscow. Last Friday the Russian Ministry of Agriculture was reported to be discussing the introduction of price controls for domestic food producers – shades of the 1970s and 1980s when Communist ideology almost starved the Russian people – back to the future!

To add to this, Russia is already subject to a WTO complaint for its previous ASF-related ban on pork exports from the EU – and that will probably lead to a very large WTO-sanctioned bill for Russia. More WTO complaints are likely to follow after this week’s news. President Putin certainly has stirred a hornets’ nest – but that may not worry him. His strategic objective may be to kick-start the Russian agri-food industry into greater self-sufficiency.

Clearly, some companies and supply chains – not just the pig and pork industry  – will be hit hard in the short term by the Russian trade bans and I do not dismiss this. Restaurants and supermarkets in Moscow, St Petersburg and other big cities in Russia will close, pig farmers and packers in Canada will be hit, and everyone, everywhere will take a long hard look a whether the Russian market is worth selling to, or investing in.  Those of us who endured the Cold War with Russia from 1945-89 know that the Soviet Union had problems because of economic mismanagement – it wasn’t military might that the Soviets lacked. This latest trade spat is, perhaps, an example of politics trying to push markets in a direction that they do not want to go.