Upon creation of a free trade zone with the EU Ukraine may lose markets in member countries of the Customs Union

Russia decided again to test sanctions on dairy industry

Photo: Ivan Chernichkin

After signing the economic part of the Association Agreement with the EU Ukrainian business may lose preferences within the free trade zone (FTZ) in the CIS. Russia has already introduced trade sanctions. It started with dairy products, affecting seven Ukrainian enterprises. Also Moscow has new claims to the quality of other kinds of Ukrainian food.

Take your marks

On July 4 the Russian sanitary service imposed a ban on supplies of milk and dairy products manufactured by seven enterprises in the structure of Milkiland-Ukraine. The press service of the Rospotrebnadzor reported that during inspection of the samples of products manufactured at those enterprises it “discovered violation of the Law On the Consumer Rights Protection”. In particular, during the inspection of Smetankoviy Dobryana cheese manufactured by the Myrhorod Cheese Factory and Korol Artur cheese produced by Milkiland-Ukraine the agency “revealed their non-conformity in fatty acid composition”.

The Rospotrebnadzor also refers to the evidence of microbial contamination in products from Milkiland-Ukraine, but the company denies the accusations. “The use of such sanctions not in relation to specific products, but to the group of seven factories, four of which have not supplied their products to the territory of Russia for the last five years, suggests that the decision of Rospotrebnadzor has no relation to the quality of our products,” Milkiland Executive Director Anatoliy Yurkevych commented on the embargo.

Milk and dairy products, which accounted for 2.3% of Ukrainian exports to Russia (US $374 mn in 2013), have traditionally been one of the spheres in which Moscow launched trade wars with Kyiv in the period of deterioration of political relations between the two countries. As a rule, cheese exports become the main launching ground. Ukrainian cheese exports to Russia overcome exports of other types of dairy products on the whole: in 2013 cheese products accounted for US $314 mn in exports. The weakness of our country is that the Russian market is a key market for the export of Ukrainian cheese. In 2013 Russia accounted for 87% of all Ukrainian cheese exports and Russia takes advantage of such a state of affairs.

So, in February 2012, Moscow banned imports of certain cheeses from Ukrainian producers due to the discovery of palm oil in their composition. At that time, the embargo applied not only to enterprises of Milkiland-Ukraine, but also enterprises from the Milk Alliance group of companies, Almira (Hadyachsyr) and Belle Shostka Ukraine. Due to the inability to deliver products to Russia those companies were forced to shut down a number of production facilities.

After negotiations with Kyiv, in April of the same year Moscow started lifting the ban gradually. By August, exports of cheese returned to the level of the beginning of the year, although the control over each batch of Ukrainian cheese lasted till April 2013.
However, the truce was quite brief. Already in June 2013 the Rospotrebnadzor repeatedly had claims to cheeses produced by Milkiland-Ukraine and Hadyachsyr due to the discovery of antibiotics and in August a three-month regime of enhanced laboratory control was introduced in respect to their products.

Another deja vu occurred in April 2014, when the Russian sanitary service banned imports of food products manufactured by six Ukrainian cheese companies from the Milkiland-Ukraine group, Milk Alliance and Almira. Thus, the new cheese sanctions imposed last week became an extension for the existing embargo.

Risk zones

On July 1 the head of Rospotrebnadzor and Russia’s Chief Sanitary Doctor Anna Popova said the Russian sanitary service also received new complaints regarding the quality of other types of Ukrainian products entering the Russian market. “We have observed a deterioration in the quality of different types of products and have to admit: we have increased the number of negative findings in cheeses, dairy products and canned vegetables,” she said. However, the list is not limited to those three types of products. In June, the Rospotrebnadzor reported that during inspection of food products of Ukrainian origin in the Rostov region the Federal Service found that close to 30% did not meet the mandatory requirements to quality and safety of food products. “Those are fat and oil products, confectionery, juices and alcoholic beverages, fish products and sausages,” said the agency.

Judging by the history of trade wars between Russia and Ukraine, the next who may face a blockade will be producers of meat and meat products and confectionery. Moscow introduced restrictions on supplies of Ukrainian beef, pork and chicken from certain individual producers in October 2010, July 2011, September 2012 and October 2013. Russia closed its market for Ukrainian confectionery in 2011 by introducing anti-dumping duty on import of caramel, and in the second half of 2013 by banning the import of Roshen products.

Full-scale attack

Not only Ukrainian food industry may suffer from the trade war between Russia and Ukraine. In late June at the meeting of the Eurasian Economic Commission (EEC) Deputy Prime Ministers of Russia, Belarus and Kazakhstan discussed the possibility of application of the annex to the agreement on the FTZ in the CIS to Ukraine, which allows introduction of zero duties within the borders of the FTZ for those countries which signed FTZ agreements with other states. The mechanism can be used if the FTZ of a member country (Ukraine) with a third country (the EU) resulted in a significant increase of imports through the “intersection” of the free trade zones in the CIS. At the same time the rates of imposed import duties cannot exceed liabilities of the World Trade Organization (WTO). For now they decided not to resort to such measures. But this is not the final verdict. “It cannot be ruled out that such a decision may subsequently arise regarding specific industries, competitive products under appropriate circumstances and evidence,” said EEC Trade Minister Andrey Slepnev.

It will be difficult for Kyiv to solve the problem of sanctions, as well as the problem of increasing fees within the FTZ in the CIS. In theory, it is possible to dispute the sanctions through the WTO, as both Russia and Ukraine are its members, yet such an approach does not promise a quick solution. Moreover, Kyiv has no precedents of resolving disputes with Russia through the WTO – it always preferred to resolve all trade disputes with Moscow bilaterally.

As to the hike in duties within the FTZ in the CIS, the WTO is powerless there, and, according to Ustenko, our country will have to look for a compromise directly through negotiations with Russia and other member countries of the Customs Union. Two months are given for consultation according to the agreement on the FTZ in the CIS, after which, if there is no compromise, the appeal shall be submitted for examination to the committee of experts. It make take a year a more from until the commission’s ruling, including possible appeals, is reinforced, which means that Ukraine will not be able to resolve this issue that quickly.