Russian import ban to have limited effect on Western food firms

Reuters

By Maria Kiselyova and Martinne Geller

MOSCOW/LONDON (Reuters) - Western multinationals like Nestle, Unilever and McDonalds will feel only a limited effect from Russia's ban on certain food imports from Europe and the United States, since they largely produce domestically.

In retaliation for sanctions related to the crisis in Ukraine, Prime Minister Dmitry Medvedev said on Thursday Russia would ban fruit, vegetable, meat, fish, milk and dairy imports from the United States, the European Union, Australia, Canada and Norway for one year starting immediately.

While the impact on international food producers may be muted, Russian shoppers are expected to see the effect of the measures in higher prices.

Makers of packaged goods said they were still assessing the potential damage, but many companies including PepsiCo and Danone have invested heavily in Russia, building local plants, and already source most products locally.

Nestle, for example, has invested $1.6 billion in Russia since 1996 and has 11 plants in the country producing a wide range of products from ice cream to pet food.

"More than 90 percent of the company's products sold on the Russian market are produced locally, but there are specific raw materials that we import," a Nestle spokeswoman said, adding that it would take some time to estimate the potential impact if the ban forced changes in suppliers.

"The most unpleasant thing is the need to change suppliers on the go, off cycle, which would entail additional costs," said a spokeswoman for Anglo-Dutch group Unilever, a major ice cream and ketchup producer in Russia.

A market source said companies would likely pay fines for early termination of contracts with suppliers of banned foodstuffs.

Danone said Russian and Belarussian milk meets 100 percent of its needs for the Russian markets but declined to comment on possible implications of the milk and dairy import ban on the broader market and prices.

Meanwhile Finnish dairy cooperative Valio Ltd has halted production of goods it exports from Finland to Russia, according to Finnish media. Nobody at the company was immediately available to comment.

HIT TO GERMAN MEAT, BOOST FOR LOCAL SUPPLIERS

According to research firm Euromonitor International, the country most affected by the ban would be Germany, followed by the United States, Ukraine and Canada. The amount of German meat and meat products exported to Russia in 2012 were worth about $900 million at wholesale, Euromonitor said.

Of the categories banned - fruit, vegetables, meat, fish and dairy - Russian imports from the targeted countries account for less than 10 percent of production, as measured by wholesale prices, said Euromonitor food analyst Lianne van den Bos.

"The restrictions were imposed on products that Russia can produce itself or is less dependent on banned countries," van den Bos said, adding that in these categories, Russia imports a lot from Latin America and Asia.

"Having said that, these sanctions put pressure on local producers as well as other trade partners as Russia has to look elsewhere for substitution, which in turn is likely to push up prices for Russian consumers if government does not step in," she added. 

Russia's domestic food industry has grown significantly in recent years, boosted by earlier bans on U.S. meat imports over safety concerns and investment by foreign companies.

"We're committed to developing local suppliers," said a spokesman for Mondelez International. "In fact, over the last five years, we've doubled the share of procurement from local suppliers." The maker of Cadbury chocolate and Oreo cookies generated $1.2 billion in revenue from Russia last year.

At present McDonald's, the world's largest hamburger chain, sources 85 percent of its ingredients from more than 160 domestic suppliers.

"We are continually looking at ways to extend cooperation with the Russian manufacturers," a spokeswoman said. "We are monitoring the situation and will adjust our plans accordingly."

Pepsico, which is Russia's biggest buyer of potatoes and became the biggest food and beverage producer in the country when it bought juice and dairy maker Wimm-Bill-Dann in 2011, said that almost all of the products sold in Russia are made in Russia.

"We are reviewing the new policy," a spokeswoman said.

Even for meat companies like Tyson Foods and Hormel Foods, Russia has declined in importance, due to the earlier bans and efforts to boost its domestic food industry.

"We're disappointed about the loss of the Russian market, but don't expect the impact to be significant since the volume we ship there can be absorbed by other global markets," said a Tyson spokesman.

"If the ban came 10 years ago it would have been a big deal but at this point Russia is less important overall," said Liang Feng, a Chicago-based analyst for research firm Morningstar.

(Additional reporting by Anjali Athavaley in New York; editing by Janet McBride)

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