The bear roars and Europe feels the chill

European dairy producers are feeling the effect of Russian bans, according to Lena Smirnova, in Moscow and Andrew Kureth, in Warsaw.

In the latest in a string of bans on cheese products entering Russia, the Russian Federal Service for Surveillance on Consumer Rights and Protection and Human Wellbeing (Rospotrebnadzor) has banned cheese products made by Poland’s Ostrowia.

But this latest dairy ban is not all it seems, and Milkiland, the Netherlands-based dairy products producer owning Ostrowia, has called for “dialogue” with Russian authorities because its banned Wesola Krowka (Jolly Cow) is made from vegetable fats. So Milkiland says the latest Russian action was unjustified as its product is not a dairy product: “Thus, technical requirements of [Russian regulations on dairy products] are not applicable to imitation cheese,” the company said in a statement. “We believe this Rospotrebnadzor decision has been caused by mal-communication,” says Milkiland CEO Anatoly Yurkevych. “The company has applied to the Russian authorities to establish a dialogue, define the violations and develop an action plan to address them.”

Blanket bans

Meanwhile, based on this one alleged violation, a blanket ban was issued on Polish non-dairy and processed cheese exports. Hard cheese exports from Poland to Russia have already been blocked since August, when Russia issued a European Union (EU)-wide embargo on a wide range of food products, but the position of non-dairy and processed cheeses is not clear and some exports have continued.

This complex situation is typical of Russia’s widespread bans on European dairy exports. Its August sanctions, for instance, officially exclude lactose-free cheeses, though there are no set markers for how much lactose a product must have to qualify. This has allowed some European exporters to continue exporting their cheeses to Russia as lactose-free products.

Rospotrebnadzor has introduced multiple bans on cheese imports in recent years. Cheese imports from Ukraine were suspended in February 2012, February 2013, April and July 2014, citing improper quality control. The latest ban on Ukrainian cheeses was announced in October 2014. As with previous cases, Rospotrebnadzor’s decisions coincided with moments of heightened political tension between the countries. At the end of 2013 Rospotrebnadzor banned the cheeses of the 13 largest Dutch importers, which accounted for about 50% of total cheese imports from the Netherlands to Russia. The Russian watchdog claimed that the documents for these products were not properly filled out, though the ban also came shortly after a Russian diplomat was beaten in the Netherlands. Before the latest ban, Poland was tied with Latvia as the fourth largest supplier of hard cheeses to Russia in 2013, surpassed only by the Netherlands, Ukraine and Germany. It became the third largest supplier of hard cheeses in 2014, though its imports dropped from 24,000 tonnes to 14,000 tonnes this year, according to preliminary statistics from Russia’s Federal Customs Service. Poland also supplied 2,800 tonnes of soft cheeses to Russia in 2014, down from 3,300 tonnes in 2013. Imports of cheese and cottage cheese to Russia from all countries excluding members of the Russia-dominated Eurasian Customs Union (also including Belarus, Kazakhstan and Armenia) fell from 329,000 tonnes in 2013 to 185,000 tonnes in 2014, according to the Federal Customs Service. This drop was most felt in the second half year of the year. There were 158,000 tonnes of cheeses imported between January and July, but in the August to December period when the sanctions were in place, only 27,000 tonnes. Russian cheese manufacturers increased their production volumes to fill the market void left by the sanctions. Local production of cheese and cheese products increased by 14.1% in 2014, according to Russia’s National Union of Milk Producers, and totalled more than 494,000 tonnes.

“After the sanctions were put in place, the volume of cheese imports decreased drastically and a niche was formed on the market,” says the union’s head of public relations Maria Zhebit. “This niche allowed Russian enterprises to load up existing capacities, which were previously idle.” Cheese producers from nations that did not come under the embargo also capitalised on the opportunity to increase sales to Russia.

Belarus emerged as the biggest winner. The country’s cheese producers supplied 89,000 tonnes of cheese to Russia between January and November 2013 and this number climbed to 106,000 tonnes in the same period for 2014, according to the state statistics agency Belstat. Belarus’ Turov Dairy Industrial Complex, which owns the Bonfesto brand, supplied 50% of its products to Russia before the sanctions went into effect, but has since increased this share to 85-90%, according to Dmitry Melnikov, deputy director for commercial affairs. In the process, the complex’s focus shifted to producing more mascarpone and ricotta and now its shares of these types of cheeses on the Russian market are 40% and 32%, respectively. “We increased production and were able to enter large retail chains in Russia, such as Magnit, Auchan and X5 Retail Group,” Melnikov says of his company’s business strategy after Russia shut out EU cheeses from its market. “In the long term, we plan to increase the amount of our products at the these three retail chains and are also actively looking for new partners.”
In addition to Belarus, the Russian sanctions gave momentum to countries that usually do not figure among its top cheese suppliers, most notably Switzerland, Serbia and South American nations. Argentina and Serbia became the leading exporters to Russia of soft cheeses in 2014 as the previous leaders Latvia, Denmark and Italy were blocked by the sanctions, according to the Federal Customs Service. Retailers relied on these foreign and local producers to fill their shelves after the ban on EU cheeses.

“Prior to the sanctions, we offered a wide range of hard cheeses and soft cheeses with white or green mould,” Artem Potapov spokesperson for Utkonos, Russia’s largest online-only grocery store, says. “We were able to replace the majority of products that we lost with their Russian counterparts or with products from countries that did not come under the embargo. Our assortment of dairy products has expanded thanks to manufacturers from Belarus, Switzerland and Serbia.” Hard cheeses and soft cheeses with mould were the hardest to find replacements for among local producers, Potapov adds.

One of the ways to get around this is to import lactose-free cheeses, which have special privileges under the embargo, though the National Union of Milk Producers has described the volume of lactose-free cheese imports to Russia since August as “negligible.” While new opportunities have opened up in Russia in the absence of key EU exporters, cheese makers that do have access to the market are cautious about expanding their production lines to meet this growing demand due to the uncertainty of how long the embargo will last. Switzerland’s Emmi Group has not made big changes in its production since August, instead focusing on established relationships with Russian clients, says the company’s spokesperson Sibylle Umiker. Although itself exempt from the sanctions, the Swiss manufacturer has suffered from the surplus supply they created on the European market. “The modest increase in exports to Russia cannot compensate for the losses in other markets, caused by these sanctions,” Umiker says. “Large European dairies have aligned their production capacity with exports to Russia. This excess merchandise is now putting pressure on the prices.” Russian cheese manufacturers are also hesitant to increase their production volumes. “Everything will depend on how long the embargo lasts,” the milk union’s Zhebit says. “There is opportunity for growth in the cheese production at existing facilities. The construction of new plants and purchase of new lines requires finding a solution to the credit problem, as well as the shortage of raw materials. If the embargo lasts one or two years while interest rates on loans stay extremely high – up to 30% – cheese manufacturers are unlikely to invest in the construction of new plants.”

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