Maxim Borisov

The Russian authorities have decided to protect the cheese makers. The state plans to nearly double the duty on imported cheese, or at least the Minister of Economic Development is considering such a proposal. At the International Green Week Exhibition held recently in Berlin, Alexei Gordeyev, Vice-Premier and Minister of Agriculture, declared that Russia planed to make it harder to import dairy products. The EU has been covering as much as 50% of the costs incurred by producers of inexpensive milk and cheese for the past several years. As a result, retail prices for imported cheese sold in Russia are not much higher than those for domestic cheese. Duties will increase first and foremost on these cheap varieties of imported cheese. The import duty may increase from the present 15% to 25-30%. On more expensive imported varieties, the rate will remain minimal.
Two years ago, similar prohibitive duties were introduced in Ukraine, and the result was not slow in coming. “About five or six years ago, the production of cheeses like Gauda or Edamer in Ukraine was the same as in Russia. Today, there is virtually no imported inexpensive cheese in Ukraine, and the market is supplied by multiple primitive businesses that produce analogues of European cheeses. As consumption is low in Ukraine, as much as 60% of Ukrainian cheese is exported to Russia, mainly into the provinces because of its poor quality and moderate price,” says Evgeni Grebnev, Commercial Director of Lactalis in Russia. Experts note that prohibitive duties have not solved the main problem: the quality of Ukrainian cheese is improving only very slowly and is still a far cry from its European counterpart.

Alexei Gordeyev’s initiative provoked a wild reaction on the domestic market due to the doubtful appropriateness of the protective measures. First of all, Russian cheese makers are unable to meet market demands now. While Russians consume 440 thousand tons of cheese a year, they produce only about 250 thousand tons. According to AC Nielsen data, Russian producers’ share in the cheese market of the ten largest Russian cities doesn’t exceed 40%. 50% of the market is taken up by international and Baltic cheese makers, while producers from other CIS countries account for the remaining 10%. While the cheese market grew by 13% in 2003, production at Russian cheese makers increased by only 6.7%. Secondly, prohibitive duties will not solve the problem of quality. The majority of Russian cheese makers are small plants with obsolete equipment that manufacture cheeses such as Rossiisky or Poshekhonsky whose taste leaves much to be desired. For the most part, Russian producers are not only unable to guarantee consistent product quality, but are also unable to ensure certain production volumes, let alone create their own brands.
There are a number of reasons for this state of affairs. First, the effects of the 1998 crisis, which reduced the share of imported cheeses from 18.6% in 1997 to 11.9% in 1998, have worn off. In 1999, for the first time in a decade dairy cattle breeding began to turn a profit of 16% (in 1998, profitability was -36%). “The drastic reduction in imports stimulated domestic production, which slowly but surely began to grow. Domestic producers, however, failed to take full advantage of this opportunity. In 2001, the share of imports began to increase again,” says Elena Rybalova, the leading expert at the Institute for Agricultural Market Studies (Rus. IKAR).
The second reason is the death of raw inputs. Cheese is the most expensive and labor-intensive product made from milk. About 20 liters of fresh milk are required to make a kilo of cheese. In Russia, there is a milk shortage and dried milk is often used instead. “In the past, milk production grew due to an increase in milk yield per cow, which has now reached its peak. Furthermore, over the last few years the dairy herd has been dwindling. In 2003 alone, it shrunk by 4.3%. The declines are mainly taking place at large agricultural enterprises, the only farms able to ensure stable milk supplies. Their livestock numbers have decreased by 9%. At present, it’s more profitable to breed cows for meat,” says Rybalova. In addition, milk production in Russia has a distinctly seasonal character. Summer milk yield is over 4 times the winter one, whereas in Finland, a country with similar climatic conditions, the difference is about 1.2. As a result, in summer, the Russian milk market is glutted, and in winter there is no milk available and nothing to make dairy products from.
Under these circumstances, it is unclear who the legislation should protect, the cheese makers or the cattle breeders. “It’s a chicken-or-the-egg question: if we encourage cheese makers, they will in turn stimulate milk production and vice versa,” says Grebnev.
There are practically no serious Russian companies on the cheese market at present. “In Russia, small-scale cheese production predominates. There are good, strong individual plants with strong investors that are getting off the ground, but they are the exceptions,” says Yuri Vlasenko, leader of the cheese project being implemented by Wimm-Bill-Dann. But there are no big producers in Russia specializing in cheese with a complete production cycle, meaning marketing, large-scale production, distribution, and an established brand name. The first project of this type appeared just recently. Last autumn, the WBD Holding launched a factory specializing in hard cheese production. Investments in the project totaled $13 million. The product will be sold under the brand name of Lamber and is positioned in a higher-than-average price segment (130-160 rubles per kilo).
Planeta, Petmol, and other domestic agro-giants have not announced any plans so far to set up cheese divisions. Nor have Western manufacturers rushed into Russia. Over the last two years, German Hochland and French Lactalis (President Cheeses) have launched production in Russia, but their Russian factories only make processed cheese products, that have less rigid milk requirements.

Imposing prohibitive duties on cheap imported cheeses could have any number of effects. First of all, imported cheeses will become more expensive and will be of less interest to consumers. “A 15-percent increase in duties will result in a rise in retail prices for imported cheeses of about 25%,” says Rybalova. “Some companies will abandon the market, and the supplies will decline considerably.” Advocates of the duty increase believe that this measure will force Western companies to invest more actively in production in Russia. However, Western companies are taking wait-and-see attitude. “We do plan to make hard cheese in Russia in the future. But we need to solve the milk quality problem. We need a great deal of milk that must be fit for production. For the present, there are simply no raw inputs in Russia to make good cheese that meets Lactalis standards,” says Grebnev.
Following importers, Russian cheese makers will raise prices, too. Analysts believe that in the lowest price segment, prices will rise by 10-20%. “These measures are being introduced to allow domestic producers to raise prices. For example, our Zvenigov cheese plant will raise prices, since it has new equipment. The Rossiisky and Poshekhonsky cheese we produce, as well as our specialty Zvenigov cheeses, are in no way inferior to imported ones,” says Andrei Danilov. “All domestic cheese makers will most likely raise their prices, irrespective of the quality of the product they make.”
However, even if all potential changes to the legislation are made, will the quality and volume of Russian production change? Major market players agree that we shouldn’t expect production to grow rapidly after duties are imposed. The milk shortage will not make it possible for companies to fill the established gap. Even if Russian manufacturers want to make quality cheese, they will not be in position to do so for several years.
Although we shouldn’t expect quick results from prohibitive duties, an increase in the profitability of cheese production is likely to occur in the distant future; at least, this is what the government is counting on. If this happens, large domestic and Western companies will begin to show an interest in the market. Only then will companies be able to set up production of quality brand-name Russian cheeses that will become full-fledged alternatives to imported products.

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