By John Helmer, Moscow
The Russian government commenced its counter-sanctions programme a month ago, on August 7. This extended what had been a quarter-billion dollar loss for Australian meat exporters, beginning on March 31, to more than $7 billion in losses for the European Union plus Canada and Norway. In a briefing Prime Minister Dmitry Medvedev implied  that the sanctions were a sorry tit-for-tat for the sanctions already imposed on Russia. “This retaliation wasn’t easy for us. We were forced into it, but even under these conditions, we’re sure we’ll be able to turn things to our benefit.”
That explains why Poland is at the top, along with Australia, the US, Canada, the Netherlands, even Denmark, home of the noisiest anti-Russian outside Ukraine, Anders Fogh Rasmussen, ex-prime minister of Denmark and outgoing secretary-general of NATO. The story of what the Australians did to deserve the counterpunch can be read here . Polish Foreign Minister Radoslaw Sikorski (lead image) and his wife, Anne Applebaum, have been echoing Rasmussen’s claims from NATO headquarters, hoping to land themselves in his job, and or the European Union’s foreign ministry. The story of how they failed, leaving Poland’s apple-growers and other exporters with the bill, can be read here .
The accumulated losses imposed by the sanctions on the Russian trade have been calculated very differently; the estimates range from $3 billion to more than $7 billion. But according to the Wall Street Journal tabulation, Norway’s lost salmon, trout and other fish exports at about $1.3 billion amount to the biggest single-country blow inflicted by the Kremlin — more than double Poland’s lost fruit revenues, and larger in total than the next four country exporters combined.
Why such a Russian blow for Norway when, by comparison with other European capitals, Oslo has been so timid? The answer, according to a study of the Russian food sanctions by UK-based food trader, Volga Trader, is that cutting off the flow of Norwegian fish to Russia will be a boon for Russian seafood processors, especially one of the largest of them, Russian Sea . Its proprietor is Gennady Timchenko. Timchenko was one of the original business targets of the US sanctions announced  by the US Treasury’s Office for Foreign Assets Control in March. Several of Timchenko’s companies, including Transoil, Acquanika, Sakhatrans, Avia, Stroytransgaz, and Volga Group were listed  for US sanctions on April 28. Novatek was added  to the list on July 16. So far, Russian Sea has been spared.
The Volga Trader report, entitled “Will the Russian Government survive its own sanctions?” was written by Philip Owen, and issued on August 29. Volga Trader  provides companies in the food supply industries with the means to enter the Russian market by finding importers, or by organizing investments. It has an operations centre in Saratov, and a sales office in Bridgend, Wales.
“The categories where imports have been banned are businesses where Russian producers have strong industry associations that have been demanding protection from foreign suppliers. The large Russian producers can compete very well. The lobbying is about profit maximisation rather than survival. Unfortunately, the Russian environment does not encourage the growth of middle sized producers to match the established producers. The word ‘cartels’ comes to mind. So to enhance the profits of the potential cartels and defend the existence of the middle sized producers, the Russian government uses protective measures against foreign imports and massive subsidies to encourage domestic investment, which most small producers are too weak to use. The Russian government imposes heavy tariff and non tariff barriers to exclude foreigners and erratic sanitary and phytosanitary inspection standards to regularly disrupt importers supply chains. Despite all these measures, Russian production has not risen to meet demand. The sanctions continue this process. The sanctions are in place for a year.”
“Prime Minister Medvedev said when discussing the sanctions list on 7th August that the list was very unlikely to be expanded. Volga Trader believes that this is because all the major trade associations for food producers have already been satisfied and the large supermarkets, who are also powerful, will protest strongly against more supply chain disruptions. Further counter-sanctions are likely to be in other heavily protected industries such as pharmaceuticals and automotive components, but not food.”
Altogether, Volga Trader estimates that the value of European food imports barred by last month’s Russian sanctions will run as high as €13 billion.
The tabulation of affected food groups below has been compiled by Volga Trader; it is considerably more detailed than the public releases and press statements issued by the Russian, European or North American governments. Australia has been ignored. The sources are Presidential Decree no. 560  of August 6, “On the application of separate special economic measures for the purpose of the security of the Russian Federation”; European Union export statistics; and a briefing by Medvedev and Minister of Agriculture Nikolai Fyodorov.
Sanctioned EU exports to Russia, 2013 exports from the EU
Source: Philip Owen, Sales Director of Volga Trader, can be contacted on +44 656 7675, +44 7808 211 497, or at [email protected]
The column “Imports as a share of the Russian market” is an indication of the stress likely to be felt by Russian importers as they seek to replace the lost supplies. It uses figures from Medvedev’s speech which was based on tonnes of food. According to Volga Trader, “there are other versions of these figures in circulation which are based on value or different splits of harmonized system customs (HS) codes. The HS Code is the customs classification for the type of food and the value of imports is in millions of Euro, the quantity is in kilotonnes. Where the share of market held by EU and US imports was high, supplies are now extremely short and buyers are looking for new suppliers to avoid going out of business. The remaining data concerns the value of the now banned imports from the EU.”
“The biggest single product affected is the import of fresh salmon and other fish from Norway which is losing over a billion Euro of sales. Pork in its various forms is also a huge part of the sanctions. The opportunity to import other forms of meat as a substitute for pork is large. Meat and offal from sheep, goats, horses and if the price is competitive, venison, are all options. Apart from fresh milk, the sanctioned dairy products represent a large share of the Russian market and retailers will soon be under pressure to find replacement suppliers.
For fruit and vegetables, it is currently harvest time. Russian farmers will be selling on to the market rather than into storage. The large price rises Volga Trader is forecasting will not occur for two or three months.”
“Many smaller Russian importers with their contacts confined to the EU face ruin as their resources are unlikely to cover the requirements of finding and financing new sources of supply. These are not just elite cheese importers serving the tastes of the Moscow elite. Volga Trader works with sausage factories in the depths of the Volga Region which buy their offal from the US and their meat from Germany, based on personal contacts not readily available in Brazil. So far as the domestic producer associations which have lobbied for these sanctions are concerned, this is good news. It reduces competition.
“Surely these food imports can be replaced? As a percentage of world production, the amount is trivial. But the devil is in the details. Farmers and processing companies want to sell at the farm gate or factory loading dock. Retail buyers and processors for the consuming country want to buy on delivery to their warehouse. In between are the traders. The trading of food and other commodities is dominated by about a dozen companies. Typically 60% to 70% of, say, the coffee market is dominated by a handful of companies. So, in principle, a large proportion of the Edam cheese being sent to Russia by lorry from the Netherlands can be sent to China by ship while the cheddar cheese heading for China from New Zealand can be sent to Russia. And all this can be done by a few computers in Paris, London or Geneva. The little guys lose out. Costs might rise a little because present trade patterns are the most cost-effective, according to those computers, but supply and demand will be met. Or won’t it?”
“The food arriving from the EU to Russia arrives by refrigerated container (reefer), straight to the retailers’ distribution warehouses. Food arriving from Brazil or Vietnam or anywhere except perhaps for Turkey and Iran is going to be coming to Russia by ship. For food, containers are expensive for long-distance transit. Refrigerated ships (also known as reefers) are preferred. Ships require wharf space; loading; unloading; temperature-controlled storage facilities while they wait for transport to arrive. This costs money. The journey to port might cost as much as the trip across Europe for EU- supplied food. But, at any cost, these facilities are not available in Russia. Russia’s port infrastructure is a mixture of the extremely modern and the hopelessly outdated, mostly the latter. It is already full to capacity. Novorossiysk, the port nearest Magnit, Russia’s biggest grocer, currently has no more than 10,000 square meters of world class, temperature-controlled storage.”
“Two of the three biggest ports supplying European Russia are Helsinki in Finland and Riga in Estonia. However, the EU might not sit idly by and let Latin America companies use EU ports to destroy an EU market. At the moment, on behalf of our own clients, Volga Trader is looking at routes overland from Turkey, and from Iran. But where are the lorries and reefer containers to come from? The EU will have tens of thousands to spare, but Russian cabotage laws and a very strong trucking industry association mean that EU lorries cannot deliver point-to-point loads in Russia. The road transportation infrastructure connecting China to European Russia is really bad. To deal with that problem, and avoid Siberia, Chinese firms have been planning to build new ports in Crimea.”
“Realistically then, the options for increasing imports are not so very large because of the infrastructure limits. So something else must give way – and that’s price. Shipping €60,000 of port cuts from Berlin to Saratov on a regular run might cost €3,000. The same load from Brazil might cost €6,500 at the present port fees. But with the predictable congestion, these are likely to rise. So a 10% increase in recurring costs These will rise due to congestion. So there is likely to be at least a 10% increase in recurring costs, and that’s not counting the initial set-p costs and extraction of rent by the transport system.”
“There is some hope for Russian consumers. Belarussia, which has big, new, underused distribution centres, may become a reprocessing centre for EU pork and cheese. The Belarussian slaughtering and processing industry is modern, but at present it is working only one shift. There is thus surplus capacity. Also the import of live pigs to Russia is allowed. EU animal care regulations make this awkward, but not impossible. Russian independent processors, who are on the whole more antiquated than the Belarussians, can also add extra shifts. All concerned can lift supply, but that will be at the expense of higher prices to the Russian consumer. All the substitutions take time and money to arrange, so the months of October and November are likely to see immediate and big shortages in the protein sanctions.”
“But do firms outside the big international trading companies want to sell to Russia? Volga Trader is talking to firms in Brazil, South Africa, Turkey, Malaysia, Singapore, Indonesia, Egypt, Zambia and especially New Zealand, which has answers to most of Russia’s shortages. New Zealand was the first country to apply for a trade agreement with the Eurasian Economic Union although traditional allies such as Vietnam and Nicaragua were given such agreements even earlier. Food from these countries will be let in with lower duties. Still, there is a great reluctance to deal with Russia. In Turkey, Russians have a bad reputation for paying their debts. Generally, the non-English speaking countries have a more negative perspective towards Russia than do businessmen in the EU, even in the UK.”
“Can Russia replace the lost imports with local production? By this time next year, vegetable production can easily be increased to close the supply gap. Until New Year, there will be little impact from the sanctions and Turkey and Iran can supply extra vegetables and quite a lot of fruit on relatively short overland routes direct to the distribution warehouses. No doubt, after a few months to organize it, a lot of EU fruit and vegetables will arrive in Turkey for “processing”. Turkey may also suddenly become a world leader in the production of Edam cheese.”
“The big shortfalls will be in meat or protein products. A chicken matures in six months but it takes longer than a year to plan, finance and fit out a new chicken farm and processing plant. A pig takes eighteen months to mature. The investment is colossal. Five thousand sows will produce between eighty and one hundred thousand pigs in that 18 months. They all have to be fed before a kopek is earned. Of the €45 million required to start a modern pig farm from scratch, €30 million will be spent on feeding the pigs. After that the return on investment accelerates very fast. Again, it takes at least a year to build the farm, and all the good breeding stock is in the EU. Small-scale producers who produce 60% of Russia’s pigs need just eighteen months, but for the consumer market that is still too long. The Russian firms which have already invested on this scale are very concerned to keep capacity well below demand, and take high percentage return not maximise revenue and market share.”
For the story of Russia’s pork oligarchs until this big break, click here . The share price trajectory of London-listed pork producer Cherkizovo signalled the market’s understanding of the benefit of the Russian sanctions move a month ago, but since then the price drift has been downwards.
THE 6-MONTH SHARE PRICE TRAJECTORY FOR CHERKIZOVO
Source: http://www.bloomberg.com/ 
According to Owen of Volga Trader, “it takes three years to raise a calf. So at least a quarter of the beef herd are breeding cows who are eating food that doesn’t directly turn into meat. Setting up a large beef herd is a colossally expensive, long-term investment. Similarly, a milk herd. No new supplies can appear in a year.
“So what will be the effect on prices? Every undergraduate economist knows that prices are set by changes at the margin, not by the overall balance of supply and demand. So food prices are going to rise, or else the shelves will empty. For some products this process will take six weeks. For others, two to three months. A few years ago, when there was a 5% shortfall in the Russian potato harvest, the price rose from the usual 6 roubles a kilo (in the open air markets for uncleaned potatoes) to 60 roubles a kilo for clean select French potatoes on the shelves of Perekrostik supermarket. Freight rates for all reefers from Europe increased sharply. On the whole, the potato price rose by a factor of three. The present sanctions are on a far greater scale than the potato shortage.”
“The Russian shopping basket cannot increase in price by a factor of three, especially when other imports are also rising in price. Discretionary spending of all kinds will take a hit. The Russian shopper could ignore a huge rise in potato prices as it was a small part of the shopping basket. A three-times increase in prices for protein products is harder to ignore at a time of other price rises. Obviously the mix of foods will change. Bread, buckwheat, potatoes, cakes and pastries will become a larger part of the diet, although a lot of the sugar came from the Ukraine. Tinned meat needs less care and attention during import than fresh and frozen so this can be imported easily and quickly. Vietnamese spam will feature on the menu for 2015.”
“Without large-scale redirection of EU food supplies through Belarus, and with imports from elsewhere rising effectively, Volga Trader predicts a rise in the protein foods on the sanctions list of between 10% and 50%; the worst of this will happen in November and December of this year.”
“If price controls are imposed, there will be shortages instead. Fruit and vegetables may rise 10% to 15% probably after New Year. Small importers and fruit and vegetable storage specialists may go out of business. Food is about 30% of Russian household spend, so the minimum 10% will generate an extra 3% inflation above the basic rate, and impact from the falling value of the rouble, 4% to 5%. Inflation is currently about 7.5%. Without situational changes such as a large rise in interest rates to boost the rouble (which brings other problems), inflation of around 15% within 6 months is likely and it could be much higher if interested parties take the opportunities to charge speculative prices, and the potential Belarussian and Turkish safety valves are blocked.”
US Senator Dianne Feinstein, Chairman of Senate
Intelligence Committee – August 31, 2014
“I think there ought to be direct discussions with Vladimir Putin. I think he is the singular figure in Russia. The Crimea is gone. I think there ought to be steps taken to send people, to talk with him, to have our Secretary of State talk with him personally. I think this is deeply personal with him. I really do. And he’s enjoying intensely high favourability in his country. People say, ‘Well, just wait till the sanctions bite and the economy slips.’ I don’t think so. I think if Russians follow him, and up to date, they are following him, the Russians are very brave and very long-suffering. And they will tough out any economic difficulty.”