Experts have analyzed the consequences of the introduction and extension of the food imports embargo for the domestic market and the structure of trade flows and concluded that the abilities of domestic suppliers for import substitution have proved to be rather limited and mostly characterized by continued trends of past years.
Looking at the causes of what happened experts of the Analytical Center have identified several objective economic factors that have played their role. First of all, the production of a large number of food stuffs, for example cattle meat and fish, is characterized by long payback periods of investment projects. Secondly, the production cycle can far exceed the one-year period the embargo was originally imposed for, which discourages potential investors from investing in production capacity. The announcement earlier this summer that the embargo will be extended for another year does create an additional incentive to invest in production but it has once again limited the planning time-frame to just one year. Equally important was the fact that the increase in interest rates imposed significant limitations on the amount of money producers can borrow not just for investment projects but even for replenishment of the working capital. And finally, the costs of purchasing foreign raw materials for production (such as hatching eggs for poultry farming, cattle breeding stock and feed supplements for dairy farming, fertilized salmon eggs and fry, seed potatoes, sugar beets, and corn) have increased significantly and feed prices are expected to go up too.
Food stuffs production increased only for a limited number of categories in which banned imports have been partially replaced, experts note. Positive changes have been seen in meat production where growth in output has been happening primarily in pork and poultry farming. As far as the fishing industry is concerned, it has seen a significant decline in the output of fresh and chilled fish while the output of frozen fish has gone up, for the most part closing the gap left by the drop in imports. For the time being, domestic dairy manufacturers are also finding it rather hard to produce enough output to compensate for the suddenly cut-off dairy imports in the short term. The best results are seen in cheese production. However, domestic dairy producers have been stepping up their cheese production since 2013 so the current trend has most likely been brought about by investments made much earlier rather than by more recent import substitution efforts.
Analysis of changes in domestic production demonstrates that investments made in earlier years have brought about an increase in output in some sectors today, but this increase is insufficient to substitute for discontinued imports. At the same time, lack of imports in the domestic markets has ensured an increase in demand for domestically produced food stuffs, which could have failed to materialize if domestic producers would have had to compete with imports on a more or less level playing ground and this, the experts believe, is a good foundation for stepping up domestic production.
The specialists note that after the embargo was imposed it brought about not just a significant fall in the amount of imported food stuffs available in Russia but also some changes in the structure of the imports. Analysis of statistics for January through April 2015 found a significant drop in imports in all the categories of food stuffs the embargo applies to. For a number of food stuffs, the groceries that are no longer being imported are being substituted for with something else but the majority of banned groceries are not being substituted for by either increased supplies from traditional foreign sources nor by new suppliers.
From the point of view of competition, the imposition of the import bans is having an extremely negative impact on competition, both on price and non-price competition, the experts contend. Limited competition with imported food stuffs has resulted not just in higher prices but also in reduced product quality and unless more domestic competition is encouraged both these effects are only going to get worse in the long term, the specialists believe.
It is no easy task identifying the impacts of the embargo and assessing its effects, especially in the short term because there are several factors affecting the situation: the depreciation of the Russian ruble, bans of the Federal Agricultural Supervision Service on the imports of specific food stuffs imposed in early 2014 as well as consistent subsidizing of agricultural producers in the past several years. Nevertheless, Analytical Center experts have come to the following conclusions about how the embargo has been affecting the domestic market.
The embargo was a contributing factor to the increase in grocery prices in the domestic market, alongside the depreciation of the ruble. Despite expert claims that the impact of the weakening ruble on the prices had fizzled out by June, there is still a very real risk that if the ruble loses value again towards the end of the year, that is going to result in another round of consumer prices inflation.
The threat of re-export and dumping from Belarus has for the most part not materialized. In this situation Belarus capitalized on its transit location and increased its sales of several categories of groceries to Russia (salted fish, apples). The embargo has resulted in a dramatic collapse in diversification in dry milk available in Russia, with the Republic of Belarus’s share in total Russian dry milk imports reaching almost 95%.
An increase in imports of cheese and cheese products through alternative channels (using other codes) has resulted in the embargo being expanded in 2015, with more categories of groceries being made subject to it.
The embargo created opportunities for stepping up domestic production. However, output data suggest that despite huge import substitution potential (substitutes are needed for all the sundry imported groceries that are now banned) today it is being taken advantage of only in a handful of sectors, primarily in meat and dairy production, which is also stimulating development of meat and dairy processing companies. The successes in expanding domestic production mostly come as a result of investments made much earlier. The extension of the embargo for another year gives domestic manufactures an opportunity to adapt to the challenging economic conditions in the country and invest in import substitution.
Analysis of changes in trade flows in the EU demonstrates that thanks to the huge volume of the European market and the rather modest EU grocery exports to Russia the Russian embargo on food imports from the EU has had a very limited impact on the EU, affecting only isolated producers of cheeses, vegetables, fruits, and fish in Europe (specifically in Poland, Sweden and Norway).
For more information see the review Food Imports Embargo: Import Substitution and Changes in Foreign Trade Structure.
For other reviews on development of competition see Publications.