In the latest round of tit for tat sanctions, Putin has decided to ban imports of European and American food products into Russia. Russia imports €12.2bn of food from Europe, much of it dairy and meat. UK food represents only about 1% of that total. Many European companies are likely to suffer from this trade sanction – not so much UK food manufacturing.
I spent the best part of a year commuting in and out of Russia and Ukraine a few years ago and was surprised at just how much mid and top end Russian consumers depended upon imported foods.
One of my clients was a wealthy Russian investing in the Russian and Ukrainian food sectors. As I researched some of the Moscow, Kiev and Rural grocery markets I was struck by the poor quality of locally produced goods. Despite fantastic agricultural land resources, the quality of locally produced carrots, cabbages, beets and basic vegetables was highly variable. This was due to a number of factors – poor farming practice, limited investment in modern farming equipment, poor selection of seed, fertilizer, pesticides and so on.
We may bemoan UK supermarkets’ obsession with uniformity of carrot shape, but in many Russian and Ukrainian supermarkets, it wasn’t simply a lack of uniformity that was problematic. Even during harvest season, carrots, radishes, potatoes were mostly spongy or rotten. Higher quality produce was available in super-premium supermarkets that target ex-pats and the local super wealthy and also the street markets, but much of it was imported from Poland and Turkey. And the markets are not much fun to visit in the middle of a Russian winter when temperatures can fall to -50C.
In packaged goods there was a similar story. The top quality frozen food, in particular frozen vegetables was sourced from Poland. Locally produced was much lower quality. And Hortex, the Polish producer was market leader across most segments.
Applying a blanket import ban on European food will block access for Russian consumers to some basic foods of decent quality. Even in frozen food there was insufficient local capacity right through the supply chain – farmers were not equipped to produce high quality veg, and there was insufficient processing, freezing and storage capacity in the market.
And the average Muscovite will have to learn to do without their McDonalds fries – a treat for many across the social spectrum – almost all McDonalds chips are sourced from the EU.
Economists were forecasting a deep recession for Russia before the latest round of sanctions. Now consumers will also have to contend with rising prices, and I would be surprised if those price rises were limited to top end products. The knock on effect of food import bans will be that prices will rise all the way down the food chain.
Politically, Putin’s gamble is that Russian consumers are willing to tighten their belts for Mother Russia. Apparently in an internet poll over the past 24 hours, Russians were asked which they valued more Crimea or cheese! 64% preferred Cheese!
Tags: Developing Markets, Emerging Markets, Hortex, Russia, Trade War, Ukraine