and the russians buying food and wine from LATAM...A consumer case study in supply chain developments between Russia and Latin America’s Mercosur bloc By Chris Devonshire-Ellis
I touched on this subject of Russia’s development of alternative supply chains earlier in the week in the article Crisis, What Crisis? How Russian Consumers Have Merely Shifted Their Purchases Away From Europe Or Developed Their Own Replacements a piece that turned out to be controversial as many comments on the subsequent Linked In thread showed that many EU nationals refuse to comprehend that Russian consumers are able to survive without them.
In fact, many of the consumer sanctions imposed on Russia date back to 2014 – eight years ago, giving Russia plenty of time to adapt, absorb, and establish new supply chains now already in situ.
In this article I focus on cheese as a consumer item, not least because it is relatively easy to examine – just requiring a trip to my local supermarket, which is situated 45km southeast of Moscow on the road to Smolensk and the border with Belorussia. That may sound bland, even irrelevant in the grander scheme of things – however bear with me – the findings are somewhat extraordinary, quite apart from possessing other supply chain and trade development implications.
The Linked In thread contained accusations from the (mainly EU based) comments that the theme of the piece was irrelevant because the supermarkets I had chosen were in too affluent a region, and the products I referred to (salmon, fruit, and vegetables) too expensive for normal Russian tastes. The implications were that the majority of Russians ‘could not afford them’ and ‘bought vegetables from horse and cart rather than supermarkets’, which is both inaccurate and way out of date to an almost laughable degree – other than then fact that these beliefs persist. It is, after all very hard to defeat a rival without fully understanding their strengths and weaknesses – a concept dating way back to Sun Zhu’s ‘Art of War’. Yet the EU naivety about Russia remains.
But back to cheese. While it is true that cheese as a product in Russia could be considered an inconsequential upper to middle class consumer item, one should consider that Russia has its own long established dairy industry and cheese has been made in the country for centuries – it’s just that not much of it, to be frank, has been especially tasty. Come the collapse of the Soviet Union in 1991, and the subsequent market reforms in Russia that eventually lead it back to reach the Bilateral Partnership and Cooperation Agreement (PCA) trade agreement with the European Union in 1997, things have changed.
Cheese has developed to become a popular imported consumer item throughout Russia. That taste was encouraged by the huge rise in Russian nationals travelling to the EU over the past 25 years, a figure that by 2019 alone saw 4.1 million Russians apply for Schengen visas.
This means tens of millions of Russians since 1997 have travelled to the EU, resulting in a huge appreciation for European culture, food, and drink. As from 2014, that began to change with the first suspensions of various EU imported food items, a situation that has become even more extreme over the course of 2022 – and continues too. But it does mean that items such as European wines and cheeses, together with processed meats and other consumables, have found a market within Russia itself. They are not ‘elitist’ – they have entered the Russian middle-class mainstream and can be found in stores throughout the country, with the exception of some of Russia’s more remote areas.
However, since 2014, Russia has had to find ways to either manufacture these products themselves – a situation encouraged by various EU producers, who barred from the Russian market, moved to Russia, set up JV’s and began showing the Russians how to manufacture the produce in Russia. The other option was to find alternative sources.
Why has this occurred? Because the Russian middle-class market represents about 30% of the population at about 50 million. To put that into context, that is larger than the middle-class population of the United Kingdom, at about 41 million. Furthermore, the Russian middle-class is fairly concentrated – meaning they are relatively easy to reach. Moscow and St. Petersburg dominate in terms of population, while another 13 cities across Russia, easily accessible via rail, have populations in excess of 1 million. Getting middle-class products to them is not an issue, and the market is there.
I have chosen cheese to illustrate the changing supply chains Russia is developing as it is a relatively inexpensive consumer item to purchase, and supermarkets are easy to find. With the EU supplies cut off, what has happened to replace it?
While 100g of the product may not be expensive, it’s not an inexpensive question. In 2013, the year before such products were barred from export to Russia, according to the European Commision, the European Union exported US$3 billion worth of dairy products to Russia. Cheese amounted to 50% – an export market worth US$1.5 billion. Again, to compare, that is larger than the value of cheese exported to the UK in 2020 at about US$1.2 billion – and the Brits do like their cheese.
Examining the contents of my local Russian cheese counter, products are broadly, and equally divided into three: Russian, Swiss, and interestingly, Latin American. The loss of the EU’s cheese export market to Russia has been absorbed by their Swiss neighbors, who are not bound by EU trade terms or sanctions, and whose dairy farmers are now an estimated US$500 million better off than they were in 2014 in taking on exports to Russia of Swiss made varieties.
I already discussed the Russia situation, while the surprise has been the strength of Latin American cheeses now appearing on Russian shelves. The photo shows products from Argentina, Chile, and Uruguay. That in itself is interesting – a reflection of old Europe, in Russia.
The reason for this is the historic migration of Europeans to Latin America. For example, ethnic Italians make up 65% of the total Argentinian population, while Chile has significant and established German, Austrian, and Spanish (Basque) populations. Uruguay is well known for its European ancestry – an estimated 88% of Uruguayans are of European stock, largely from Germany, Italy, and France. Migrations to these countries occurred in the mid-1800’s during colonialism and at the end of WWII as many fled their political past and the destruction of Europe at that time. Naturally, they bought with them their cultures and skills.
Cheese exports to Russia appears to be a growing export market worth about US$500 million to the Latin American economies. This is not small money – which is why these products are now turning up in Russian markets thousands of kilometers distant. Close facsimiles of Italian Parmigiana are now being sourced from Mendoza, Germany’s Cambozola blue cheese from Montevideo, and Spain’s famous Manchego cheese from Santiago.
Naturally, as Russia’s stocks of European wines begin to disappear, these countries will also see their wine exports to Russia increase – along with the various European style traditional processed meats – a boom time for Latin American producers looking for new export markets. Russia imported US$1.09 billion of wine in 2020, primarily from Italy, France, and Spain with transshipments of other EU wines (such as German) being exported to Russia from Latvia and Lithuania. Georgia is also a major wine exporter to Russia, but the bulk – until now – has been from the EU. Russia is the world’s ninth largest importer – a nice market to have, and the market has been growing too. Those EU exports are also likely to gravitate to Latin America. Wine bars with cheese dishes on the menu in Moscow and St. Petersburg’s trend setting scene are going to be taking on a decidedly Latin flavour.
There are other trends within this basic explosion of new cheeseboard varietals. One is the developing ties between Russia and Latin America, an issue I framed in late 2019 when discussing how companies from Latin America’s Mercosur trade bloc could access the Eurasian Economic Union.
Brazil has been instrumental in this, being part of the BRICS grouping along with Russia, and several Latin American countries have been keen to get on board – Argentina has expressed interest in joining the BRICS group, while Ecuador. is negotiating an FTA with the EAEU. One can almost guarantee that other Latin American countries will be taking the developing trade potential with Russia very seriously – one reason Mercosur turned down Ukrainian President Zelinsky’s recent attempts to talk about the Ukraine conflict with them. They just don’t want to know and have already assessed Ukraine has nothing to offer but complaints and harassment when matched against Russia’s trade capabilities – which extend way beyond cheese and into areas such as nuclear energy and the building of nuclear power plants.
Of course, cheese is an insignificant product in the larger scheme of Russia’s import requirements, which extend far beyond consumables and into technical mechanical and engineering needs such as semi-conductors and aircraft parts.
But what it does show is that Russia can be most inventive when it comes to finding alternative sources to what it wants. The semi-conductor manufacturing market for example is often cited as being under US control, but in fact, China’s manufacturing of semi-conductors is at roughly the same level as America’s.
In terms of aircraft parts, Brazil, China, and a fast-growing India are all developing while Russia has its own internal industry. Product and component shortages will be alleviated over time by increasing cooperation among these countries – just as we are seeing between Russia and Mercosur and the cheese scenario. Collaborative surprises may well be in store.
russia-briefing.com |
