Russia to seal fate of dairy exporters

- Last updated on GMT

Related tags: Dairy, European union, Russia

Russia has become a lucrative market for dairy product exporters in
recent years, in particular those based in eastern Europe. But the
threat of punitive import duties from the Russians, concerned about
the future of their own dairy industry, could nip a burgeoning
growth opportunity in the bud, suggests Tom Armitage.

Many of the countries in central and eastern Europe are now part of the EU, but their historical ties to the country - not to mention its sheer size - mean that Russia, rather than the rest of the EU, remains their most important export market.

This is true for the dairy sector as for many others, with the fragmented and relatively unsophisticated nature of the domestic Russian market providing numerous opportunities for exporters able to offer products at competitive prices or which can meet demand for increasingly sophisticated dairy products which local producers currently do not produce.

All of which appears to have the Russian dairy sector - and officials - running scared. As we reported last week, Russian officials recently revoked Polish dairy export licences pending inspections of processing facilities there (a thinly veiled attempt to slow the flood of dairy exports) and rumours are now growing that Moscow is preparing to slap punitive import duties on dairy products in another desperate move to protect domestic producers.

But any such measures are likely to be targeted primarily at the European Union, opening the door for producers in other countries to take advantage of the likely supply vaccum.

One such country is Belarus, Russia's neighbour squashed between new EU member states in the Baltics to the north and Ukraine to the south. This prime location - close to Russia's main urban centres Moscow and St Petersburg, has made Belarus a popular location for companies looking to export to Russia.

Indeed, some companies, such as Minsk Third Dairy, are so confident about their future growth prospects that they have begun to invest in new facilities in anticipation of ever increasing demand. Danish machinery supplier Damrow recently installed a new cottage cheese processing line there in order to help Minsk Third Dairy take advantage of growing demand for Belarusian products in Russia.

A World Bank World Development report from 2001 suggests the demand for Belarusian dairy products in Russia is growing steadily, with kefir, yoghurt and cottage cheese among the most popular products, and with Belarus unlikely to be subject to the same draconian measures as Poland and other EU nations (having retained closer political and economic ties to Russia than any of the other former Soviet republics), the opportunities for real growth could be substantial.

But even if Russia attempts to close the door on Belarusian imports as well, the country could still pose a threat to western dairy processors. Kasper Madsbøll, managing director of Damrow, told DairyReporter.com​ that a long history of dairy expertise, combined with low milk prices, would give Belarusian processors a strong position on which to build a substantial business in western Europe as well.

Dairy processing is clearly big business in Belarus, with the Minsk Third Dairy alone employing around 1,000 people - a considerable number even by western European standards - and processes approximately 1 million litres of milk a day, giving some idea of the scale of the competition.

But real competition will only be possible if producers in Belarus - and other eastern European nations - can meet the same quality standards as their counterparts in the west, and that will mean taking the investment 'gamble'.

"The main problem for eastern European dairy producers is that they cannot afford to continue running on existing equipment as they will eventually lose control of the market. Furthermore, they cannot afford to buy new locally produced or other cheap processing solutions as the maintenance and running costs (breakdowns, lost production, etc.) will be much higher - and hence will not be cost effective, or meet the quality standard required for export,"​ said Damrow's Madsbøll.

Perhaps understanding that ensuring quality above all else is the key to sustained success on export markets - and in turn on their balance of payments - national authorities in eastern Europe have moved rapidly to tighten the regulatory requirements on the dairy sector.

For example, the Damrow installation in Minsk was subject to rigorous new regulations introduced by the Belarusian authorities, designed to ensure the highest hygiene standards.

Another alternative, if Russian import duties are increased for all suppliers, is to seek local partners in Russia itself. This, according to Damrow's operations manager, Sinead Walsh, could even be instigated by processing equipment manufacturers (rather than processors per se​), offering processing equipment upgrade deals to potential clients. With some 3,200 dairy processors in Russia, ranging from large multinationals to small privately owned firms, there is certainly ample scope for such partnerships, although Walsh stressed that any such deals, certainly between processors and equipment suppliers, were likely to take "a number of years"​.

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Related topics: Markets, Emerging Markets

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