Any restrictions are harmful as understate the ceiling of competition within the country, including the quality ceiling

10 november 2015 |

The Head of the Analytical Center Department for Competition Policy Tatiana Radchenko in an interview to ‘Byudjet’ commented on some findings of the report on the impact of the food embargo on the domestic market that was published by the Analytical Center in August and caused a great resonance. Analyzing consequences of introduction and extension of the food embargo on the Russian market and the structure of trade flows, experts concluded that opportunities for import substitution by domestic producers has been limited and characterized in the main trends of previous years, but the embargo was an additional factor in the growth of food prices in Russia.

Tatiana Radchenko
Tatiana Radchenko
Deputy Head

In 2014 Russian manufacturers associated serious hopes with the forthcoming introduction of the food embargo. To what extent were they justified?

—  Production volumes in the pharmaceutical and agribusiness have grown substantially. For example, since January 2015 there have been a monthly increase in the index of industrial production of pharmaceutical products. In agriculture, we also see growth of almost all categories of goods. Does it justify expectations of domestic business? Probably not, as the increase in production and in demand for Russian products was accompanied by the crisis phenomena in the economy.

First of all processers of agricultural raw materials were those who suffered the most, especially those produced canned goods for foreign raw materials - that is, for example, almost all manufacturers of canned fish. Also those who began the modernization of its production, borrowed, including in foreign currency, were seriously affected. Nevertheless, the revision of the consumption basket of Russians in favor of Russian production has helped at least provide a stable demand. This is definitely an advantage of countersanctions.

The report of the Analytical Center listed factors that did not allow to fully realize the potential of import substitution in agriculture. In particular, the long payback period of investment projects, problems with access to credit. Is it possible to overcome these obstacles in the longer term?

— The biggest negative factor, which is in the long run, it is a high uncertainty and timing of the embargo, and the ruble exchange rate. Unfortunately, many manufacturers are still dependent on the foreign seed and genetic stock, a significant portion of their costs - both in plant and in animal husbandry - depends on raw material prices. While the ruble remained highly volatile, it is prematurely to talk about some stabilization and overcoming these barriers. Our main conclusion is related to the fact that the embargo has softened the impact of the crisis in agriculture, it has created special conditions for it. However, you can forget about, for instance, a dramatical improvement in access to credit.

Is there at least some recovery of investments due to introduction of countersanctions?

— The embargo has already become an incentive for the construction of new facilities for the breeding of genetic material for agriculture. The situation here is not very good: in the post-Soviet period, we bought genetic material abroad. Now it is not grown in Russia, and is continued to be bought abroad. Invests into fish farming are performed, but again, the impact of these projects will show up not in two or three years, but much later. In addition, it is more profitable the Russian fishermen to supply fish for export, and not into the center of the country.

That is not only in the fall of the ruble exchange rate that stimulates exports, but also in the problem of administrative barriers. The delivery of fish from the Far East to central regions becomes much more expensive due to the fact that for border crossings of constituent entities of the Russian Federation it is necessary to obtain permits from the Rosselkhoznadzor. Fishermen actively complain to it and note that conditions for foreign suppliers are even softer: a single permission is all what they need.

Let's talk about negative effects of the embargo. What is its real contribution to food inflation which was felt by the Russians last year?

— Economically, it is very difficult to calculate the impact of different factors on the price. At the same time we had the drop in the ruble exchange rate, and introduction of the embargo. The fall of the ruble is yet possible to calculate - we estimate that it is responsible for 5-6 percent of food inflation, which amounted to 25-30 percent for the year and a half. According to expert estimates, by mid-2015, this component has worked itself out, as well as a price increase. This is connected to the seasonal factor: during  summer and early autumn, food prices always fall. A significant part of inflation is associated with the policy and retailers, who take advantage of the situation and raised the price of Russian products. Again, it is hardly possible to indicate exactly the contribution of the embargo on inflation.

Today, I would recommend ensuring conditions for competition in the domestic market between the domestic manufacturers, primarily due to development of transport logistics between the production and consumption centers. We know that 40 percent of all Russian consumption falls on Moscow and surrounding regions. Therefore, you need to develop logistics centers for storage and handling of agricultural products around the area. The more accessible are logistics and transport centers of consumption, the better the competition will be developed. It will have further impact on prices and quality.

Tatiana Radchenko, Head of the Analytical Center’s Department for Competition Policy

The food embargo is inherently a temporary measure. Are manufacturers ready to its lifting? What will happen to performed investments?

— According to our estimates, the current import substitution is realized at the expense of previously made investments - no ‘under embargo’ investment takes place, except, perhaps, investments into the development of the seed stock. The lifting of contersunctions will not influence manufacturers. They will implement projects which have started earlier, before sanctions’ introduction. The embargo is short-term, no one knows how long it will last, and theoretically it can be lifted next year.

Judging by what we hear, there are local projects on import substitution, but they would be carried out even without the embargo. Now due to macroeconomic conditions there is no access to credit resources even for turnover not to mention new projects.

Can adjustments to Russian countersanctions be made in order to strengthen their pros and to weaken cons?

— Countersanctions, as in general, any import restrictions lead to a weakening of competition. As we know from the economic theory inevitable result are those of higher prices and lower quality of products. By limiting access to the Russian market of high-quality foreign goods we underestimate the ceiling of competition within the country, including the quality ceiling. From this viewpoint, any restrictions are harmful.

Today, I would recommend ensuring conditions for competition in the domestic market between the domestic manufacturers, primarily due to development of transport logistics between the production and consumption centers. We know that 40 percent of all Russian consumption falls on Moscow and surrounding regions. Therefore, you need to develop logistics centers for storage and handling of agricultural products around the area. The more accessible are logistics and transport centers of consumption, the better the competition will be developed. It will have further impact on prices and quality.

Then - as we said - we need a change in the licensing system, facilitating of market access for domestic producers to replace foreign companies that fell under countersanctions. The third direction, I think, would be the development of non-discriminatory access to agricultural financial support. Today, agriculture receives substantial state assistance, however, each region independently decides how subsidies are allocated, and it writes appropriate methods itself. Creating a unified allocation criterion for such subsidies for the whole country would allow to a greater number of farms to request them.

What can the Government do for the development of logistics? Eventually, the market presents demand for new logistics centers. Is the budget the only hope, again?

— Apparently, retailers currently have funds for this purpose and many of them develop logistics centers. This is an advantage. What the authorities could make is help with the release of land and areas, pulling potential sites out for auction for sorting stations and warehouses. All these are, first and foremost, issues of regional and local levels.

A few words about the actual aim of countersanctions. Did they hit foreign exporters?

— There was quite a lot of information in media about facts that our suppliers, former European partners, have been hit hard. We decided to estimate what proportion of the total European export goes to Russia. If we talk about individual countries of the European Union, by certain categories of goods exports to the Russian market reached 30-40 per cent of their exports. However, the analysis of share of the Russian market in the volume of European production, it showed that almost all of its production can easily be absorbed within the EU. Russia accounts for only 2-5 per cent of the different categories of EU production. This is not an issue for European countries; the entire amount can be consumed within the EU.

Nevertheless, the detailed country analysis showed that several countries do really suffer. It is Poland with its apples (more than 20 percent of them was supplied to Russia), as well as Sweden, where we bought cheese (10 percent of production). Norway may be noted with its fish products, but here we talk about less than 10 percent of production. All these countries in particular Poland and Norway have found new channels for export of these products, including the re-export to Russia.

The expansion of the embargo on Iceland could become a particular concern to us: lately this country occupied a large share of Russian imports - primarily fish. Here we suffer more than they do, since for Iceland Russia was a relatively small market. Some products have found sales channel via Belarus - including Polish apples, fish.

In general, what is the extent of Belarussian benefits from Russian countersanctions?

— Belarus realized its transit potential, adjusting the processing of products - production of salted, smoked fish. That is not a direct re-exports, which we were so afraid of. On the part of Belarus there were attempt to increase re-export immediately after the introduction of the embargo in October-November 2014, but the Rosselkhoznadzor has taken certain preventive measures. Then Belarus increased the processing capacity of fish, so that in both absolute and relative terms the delivery of fish products to Russia increased. In addition, there was an increase in the supply of dairy products. For all other categories the supply remained unchanged.

As a disadvantage I can name an increase of the share of the Belarus' import of milk powder. The main objective of the competition, including the diversification of supply channels is avoiding the dependence on a single supplier. Our dependence on Belarus in this category has increased with the introduction of the embargo.

Concerning the change in country’s import structure, to what extent the vacuum was filled with the countries of Asia and Latin America, some new suppliers?

— We conducted the analysis and as it turned out great changes have not occurred, the import was not substituted by new countries. There have been some changes just in supply of chicken meat: Canada was replaced by Brazil and partially by Belarus.

If the import is not substituted what happens to the demand for sanctions goods - does it fall?

— People either abandon the consumption or revise their basket and switch to other product categories: in this case, Russian. A man cannot eat less: such socially important foods like bread, milk, meat, fish are consumed in about the same amount and this consumption cannot be greatly reduced. Therefore, there was a shift to Russian products that ensured the demand and, consequently, an increase in its production.

However, for example, in the case of dairy products (cheese, cottage cheese), Russian manufacturers were not able to compensate for the fallen volume of imports. Unfortunately, at the same time the volume of counterfeit increased. Therefore, in the beginning of summer Russia has expanded the list of goods under embargo including the category that covers so-called cheese products. It turned out that with the introduction of embargo shipments of so-called category of "other" have increased. It included cheese substitutes - for example, cheese production based on vegetable fats. It also might potentially include counterfeits. This could negatively affect the overall quality of products on the Russian grocery shelves.

The product quality is still deteriorating: You said yourself that it inevitably follows the economic theory.

— Yes, but we do not check the quality of products, we can only judge according to specific statistical indicators that, most likely, it happens. However, we cannot clearly establish it as a fact.

Summing up - which sectors livened up most notably after the embargo?

— First of all, the production of meat and edible by-products. The volume of imports of these categories was not so big: we have built up the same amount and in some places even more than fallen imports. The main import substitution has occurred in dairy products - butter, cheese, cottage cheese. Here, perhaps, we can see the greatest breakthrough. It is difficult to say about the production of fish, products of the industry are mainly exported. Yes, products that we had never consumed before appeared in our market - shops of central Russia received many varieties of fish that we almost had not seen before. However, it is impossible to ascertain the fact that the increase in production aimed at the Russian market. There is no such evidence for now.

In the beginning of our conversation you noted positive trends in the pharmaceutical industry. Here, as we know, the Government also takes measures for the import substitution.

— There is an increase in production of almost all products, but problems persist. As you know, prices of essential drugs are subject to state regulation in a way that they cannot grow faster than inflation. Today it is a major problem for Russian producers: a new method of price indexation is not accepted, and the only way to increase the price of medicines is re-registration of drugs. Unfortunately, there remains another problem - we almost do not produce medical products, i.e., syringes, bandages, and so on. That is, restrictions may affect the procurement of products that are not manufactured in Russia. Thus, restrictions on the purchase of foreign products force clinics, hospitals to form terms of reference for the procurement of the most necessary items more attentively.

Interview by Маrk Tsutsiev