Experts have analyzed the trends in imports into Russia of key embargoed food products, changes in the composition of the exporting countries, substitution for food imports, changes in the position of various companies in the Russian food markets as well as the impact of the embargo on the countries targeted by it. The key conclusions are found in the report "Food Embargo in 2015."
Experts conclude that practically all grocery markets in Russia have been negatively impacted by the falling household income and rising prices. Nevertheless, the self-imposed food sanctions have not had a substantial negative impact: the markets have already adapted to them in various ways: in the meat market there was an increase in domestic production; in the fish market people were switching to the cheaper meat; in addition, domestic fish production increased and fish suppliers switched to other exporters; in the dairy market domestic production increased plus Belorussian suppliers strengthened their positions in the Russian market; in the fruits and vegetables market there was an increase in private non-industrial production and partial switching to alternative foreign suppliers.
The imposition of the food embargo has also changed the positions of existing market players. Some foreign brands and Russian companies that specialized in importing groceries have either left the market entirely or seen their share shrink significantly. This resulted in existing big companies operating in the fish and sea food markets seeing their market shares grow a little even as new small domestic manufacturers entered the market (cheese) while domestic retailer chains saw their in-house brands get more market share in practically all food markets. The significant devaluation of the ruble made imported food less attractive to Russian consumers which is having an effect on the market volume available to foreign exporters, and is contributing to the decline in imports.
The experts note that the quality of consumption has declined. Partly, it has to do with the decline in real household income. Two trends are noted: consumers choosing less expensive items (pastas, cereals) and counterfeit items (cheeses mostly) appearing in the market. The share of groceries in household spending has gone up while the share of non-grocery items in total purchases has gone down.
The global trend towards lower grocery prices is going to keep Russian exports from expanding into new markets as well as creating significant risks that as soon as the counter-sanctions are lifted, cheap imports will flood in and eat into the market share of domestic producers.
The Analytical Center experts believe that the state support to food exports must be a priority of the Federal Program for agriculture development and regulation of the markets of agricultural products, raw materials and groceries in 2013-2020 across the entire product range.
There is growing imbalance in meat and poultry production between rising output and declining demand resulting from the shrinkage of real household income. Under these conditions, a key objective for meat and poultry producers is to get access to foreign markets. Unless there is a new export revolution, investments in new meat production capacity must be limited.
The state policy in the fish market must target the aquaculture sector, while ensuring enough effort is going into expanding the export capabilities of the sector. The relatively short investment cycle makes it possible to develop this sector on the same principles as pork and poultry production. At the moment the fish and sea foods market is seeing an expansion in the share of the largest brands that have had production facilities in Russia since 2013.
The state policy in the dairy market must aim to reduce milk production costs to a level competitive with the global market while ensuring the products are safe and meet all technical requirements. Thanks to the disparity in milk prices between the domestic and global markets, there are still ample opportunities to modernize dairy production. In 2015, Russia’s dependence on imports of cheeses, butter and other fats and oils from Belarus increased, which is an evidence of limited diversification of sources of imported groceries. At the same time, retail chains started working with a large number of small cheese suppliers and the share of store brands in total sales increased.
It would make sense to focus the state policy in the fruits and vegetables market on ensuring small business production growth by introducing standards and promoting production and trade cooperation as well as on supporting investments. The right way to do things is to set the goal of ensuring exports of both fruits and deep processed fruits. The state should also support selection of fodders (corn, soybeans).
For more see the report Food Embargo in 2015.