Some signs of import substitution, as Russia's agribusiness struggles with bureaucracy

By bne IntelliNews October 13, 2014

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The Kremlin has touted its ban on Western food products  - introduced on August 6 in response to Western sanctions on Russia over its intervention in Ukraine - as part of a policy of import substitution.  However, so far there are only few signs of domestic food production taking the place of imports. 

Finnish dairy producer Valio's sales in Russia are at 10% of their pre-sanction level, prompting the group to announce on October 10 that it will launch production of milk and cream under contract at Russian facilities. The Galaktika dairy group in Leningrad region will start producing Valio UHT milk and cream, and will triple output of Valio-contracted yogurt and kefir.  "The company is examining other opportunities for contract production. However, certain product types can currently only be produced in Finland, notably lactose-free milk and dairy products," Valio said.

With parts of Russia having a similar environment to Scandinavia, Russia should be able to replicate Scandinavian produce. Russia's biggest single import from Scandinavia is Norwegian salmon, supplies of which have been cut off under sanctions. Now Russia’s largest seafood importer, Russian Sea Group, has marketed its first Atlantic salmon harvested at its four farms in the Barents Sea, just along from the Norwegian border. 

Russian Sea Group sold 245 tons of Atlantic salmon harvested from its farms in fjords close to the Norwegian borders, according to the company’s first-half year trading update, with 4,000 tons to be harvested in the second half of the year, according to Barents Observer, with revenues from the operation to hit €4m in 2014, helped by sanctions.  This is of course a drop in the ocean compared to the 250,000 tonnes of Norwegian salmon sold in Russia in 2013, with more than 100 trucks loaded with fish crossing the border into Russia each week. 

Ironically, co-owner of Russian Sea Group is Gennady Timchenko, friend and associate of Russian president Vladimir Putin, and himself a target of sanctions by the West.  

Not that Russia does not produce fish: 11 time zones away, refrigerators in Vladivostock in the Russian Far East are full to the brim with fresh sea-caught salmon. But the fish are all destined for tables not in Russia but in the Asian-Pacific region, since the cost of rail transport to European Russia is too high. Russian fleets catch 4m tones of fish annually, with half of that exported to Asia.

Some producers argue that the fish could be sold in Russia, if bureaucratic barriers were not so high, making it more profitable to export, a complaint that echoes through Russia's agriculture sector.  According to Vladislav Korochkin, vice-president of Russian business association Opor, writing in business daily Vedomosti: “The costs incurred by food processors, transporters and retailers through unjustified bureaucratic pressure exceeds the sum that the state plans to spend on supporting the agrifood complex."

In a further sign of import substitution taking place on the shop shelves, Russia’s discount supermarket chains, which sell more cheaply priced produce from domestic producers than their upmarket competitors, are experiencing a mini-boom in sales, as shoppers switch to cheaper food.

Russia’s biggest food retailer Magnit reported a 21% surge in revenue over the first nine  months of 2014, while third quarter revenues at second-biggest retailer X5 Retail Group grew 23% year-on-year, according to newswires. Part of this is a reflection of 8% year-on-year inflation in September and branch expansion, but part reflects consumers looking for alternatives to unavailable western imports. “We expect that consumers will switch to shops with lower prices, choosing in general discounters before more expensive supermarkets,” commented Marina Erskova, head of sales effectiveness practice at market researchers Nielsen Russia, in the Moscow Times.

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