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by John Helmer in Moscow

A revival of government accusations in Moscow about Belarus milk exports was dismissed by Belarus officials on Friday. The government in Minsk has accepted a temporary cut-off of the dry-milk trade, but it continues resisting Russian pressure to sell its dairy production plants.

The Belorussians charge the Russian government with playing the cat’s paw in a scheme by Russia’s dairy giants, Wimm-Bill-Dann (WBD) and Unimilk, to buy out milk plants across the border at the lowest possible price. To get the asset price down, the Russian dairy giants have lobbied the Kremlin to arrange a cut-off of revenues for their Belarussian targets.

As Agriprods.com has reported, over the month of June, the two governments traded public barbs over the milk trade, one of Belarus’s major exports worth more than $1 billion per annum. They then agreed to cool the rhetoric, but Belarus has been obliged to accept an agreement on an export quota for this year. This requires an immediate halt to new shipments for several months. In turn, that will enable the Russian producers of fresh milk to recover market share and charge more for their products.

WBD’s latest financial report indicates its milk sale revenues fell 33.5% in the first quarter (compared to Q1 2008) to $369.2 million. The company — controlled by Gavril Yushvaev (20%), David Yakobashvili (11%), and Danone of Paris (18%) — is listed on the New York Stock Exchange, and is currently valued in the market at $2.3 billion. It depends on milk sales for 71% of its revenue line. Because Russian milk consumers cut their demand by 8% in the first quarter, forcing the average sale price of milk down to $1.06 per kilogramme, there was a sizeable new hole in the controlling shareholders’ pockets. The earnings line (Ebitda) fell 19% to $72 million; and net income lost 70% to just $12.6 million. Reporting that its baby-food and juice sales were less badly affected in the quarter, and gained market shares, WBD blamed its troubles on the competiveness of Belarussian milk imports in the Russian market.

So Yakobashvili announced he would compete by buying them out. According to an April television interview reported by Bloomberg, Yakobashvili said WBD was looking for purchases in the dairy and baby food areas in Russia and abroad. Potential targets can be based in “any type of a country in which we can have profitability,” he said. Small dairies outside Russia’s largest cities “are disappearing because they don’t have a chance to survive today, with very high credit rates and low consumption. This is good for our business.” He didn’t identify Belarus as a target. Only the Belorussians have disclosed his tactics.

On July 3, Valeriy Sadokho, economic counsellor of the Belarus Embassy in Moscow, told Agriprods.com that the Belarus agriculture ministry has agreed with its Russian counterpart, as well as with the Russian Consumer Protection Agency (Rospoterbnadzor, RPN), to adhere to newly introduced Russian packaging regulations; and to stick to the new annual quota regime. The packaging regulations had been used by RPN’s head, Gennady Onishchenko, to impose a border ban on incoming Belarus dairy imports, even though compliance with the regulations was significantly better for the Belarus manufacturers than for Russian, Latvian, or Ukrainian producers also selling in the Russian dairy market.

Sadokho explained that the Russian import quota for Belarus dry-milk was first introduced for 2008, and fixed at 100,000 tonnes. But the Russian market’s demand proved to be bigger than anticipated, and in order to avoid the upward pressure that scarcity was putting on domestic milk prices, Victor Zubkov, Russia’s first deputy prime minister in charge of agriculture, requested over-quota supplies. For this year, however, as Russian scarcity turned to surplus, and milk prices collapsed, the quota was lowered to 70,000 tonnes. According to Sadokho, Belarus did not have that much tonnage available, and only 63,000 tonnes have been shipped to the end of May. The cutoff that was agreed last month suited the Russian industry lobbying; but it also reflected the lack of supply on the other side of the border.

So what was last month’s acrimonious name-calling campaign by Russian government officials all about?

At the start, the head of RPN, Gennady Onishchenko, appears to have applied excessive zeal to a technical problem, after his superiors told him to find justification for an immediate cut-off of Belorussian shipments of dry-milk. According to claims from Onishchenko in the last week of May, Belarus had failed to update the product information required by six-month old Russian package disclosure regulations. But Onishchenkocouldn’t explain why non-compliance by other Baltic state exporters was not treated the same way, not to mention non-compliance by Russian dairies.

A publication by RPN onMay 29, reporting on package checks for domestic dairy products as well as imports, found that five Russian regions had no packaging that met the new rules, while 13 regions were reporting less than 50% compliance. Even in Moscow, the RPN report suggests, one product package in five being sold lacks the right information labels. The RPN report also foundthat non-compliance for Belarus imports was found in 49.8% of samples checked; that compared with 53.6% for Lithuanian products in the check; 71.4% for Latvian imports; and 90.6% for Ukrainian imports.

Onishchenko’s order to stop Belarus imports of dry-milk, issued on June 6, might have been quietly negotiated, had senior Russian ministers, starting with Finance Minister Alexei Kudrin, not escalated the issue personally and politically, aiming directly at Belarus President, Alexander Lukashenko. He retaliated by declaring publicly that Belarus would not “bow down, whine and cry” before Moscow, and absented himself from a conference with President Dmitry Medvedev. The latter then complained, also publicly, that Lukashenko should have applied to absent himself with an apology note in advance. Russia’s Foreign Minister Sergei Lavrov issued a statement that was patently false: “Russia has not started any sanctions against Belarus…These measures are dictated by a concern for the health of our consumers.”

Had Lavrov conceded that the dry-milk trade had already reached itsnatural end for the season, and referred to the health of WBD and Unimilk, the Belorussians would have agreed. Their recriminations then delayed by several weeks the terms on which the two agriculture ministries could agree to implement the temporary halt to dry-milk shipments, and a compensating increase in quota for other Belarus dairy products — from 110,000 tonnes to 132,000 tonnes. Onishchenko, Russia’s chief food safety expert, was slow to quiet the bee in his bonnet. “The Russian side,” he told a state news agency on July 2, “which is strictly carrying out its obligations has admitted to the Russian market over 400 brand-names on three lists, on condition that until the end of July, all requirements of the Russian [packaging] legislation would be met. At the same time, from the moment of the agreements [between Moscow and Minsk of mid-June], a ridiculously small number of samples for examination have arrived from Belarus — about 30.”

The Belarus agriculture ministry countered by saying it had documentation to show that its plants had sent 540 samples of various brand-name products to RPN’s laboratory for testing and certification. Sadokho told Agriprods.com that Onishchenko had spoken too soon; that the samples were either on their way to the lab, or that the lab hadn’t brought Onishchenko up to date.

Sadokho’s assessment of Onishchenko’s tactics is that “the Russian Dairy Union wants a deficit of milk in Russia in order to raise prices, so by introducing the ban, they achieve yet another goal.” A Moscow industry expert told Agriprods.com that the union is dominated by WBD and Unimilk, and that apart from them, “the rest of the market is non-consolidated small producers, without political influence.” He said “the game of big political figures in the government” had been prompted to benefit Russian attempts to acquire Belarus companies at low price. He suspects, he said, that lower-level Russian officials had fabricated the reasons initially used to halt the milk imports.

According to the Belorussians, WBD and UniMilk “are interested in purchasing Belorussian milk factories, but the Belorussians have been reluctant to sell their factories to Russians. So the Russian companies found a way to press – the ban on dry-milk imports, that is. This is the way the Russian companies are trying to force Belorussians to sell their factories.”

The Belorussian Agriculture Minister Semyon Shapiro hastried to be polite. “I’m convinced that the milk problem came up because we don’t know each other very well.”

You would expect the Moscow brokerages to keep urging share-buyers to ignore all of this, as well as the worst in WBD’s financial performance, and keep buying WBD shares. Uralsib Bank analyst Natalia Smirnova reported on June 19 that “the significant sales decline that began in 4Q08 and continued into 1Q09 confirms our expectations that 2009 will be a very challenging year for WBD. Management does not expect any significant sales growth in 2Q09, though it did not provide any 2009 sales or EBITDA guidance due to macroeconomic uncertainty. However, overall, WBD’s market dominance, acceptable debt level, and strong operating cash flow should allow it to weather the economic downturn.” But volume of trades in WBD was negligible until the second half of the month. Then the majority of shareholders wanted to sell. WBD’s share price in the US was $59 before the trouble started; it rose to $63 on June 11, and then dropped to $52 this week.

When asked directly, Unimilk acknowledges they are in negotiations with several Belarus milk plants. WBD spokesman Eleonora Chernetskaya said they “don’t consider purchasing milk factories in Belarus yet.”

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