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By John Helmer in Moscow

If the North American Treaty Alliance (NATO) takes seriously the threat the members believe the Russian military poses for the Saakashvili regime in Georgia, or the equally jumpy rulers of the Baltic shore, it might think twice about putting more North American beef into the borsch and pelmeni that Russian tankmen and parachutists eat each day to keep up their protein levels.

US purveyors of New York sirloins and T-bone steaks may take comfort from the defence that most US beef has long been ousted from the Russian meat market; their only sales go to the elite restaurants and hotels of Moscow and St. Petersburg. In the Russian Army, USDA Prime goes only to the generals.

Canadians have always tempered their dependence on the US with economic interest, especially in the commodities in which Canadian exports compete with American ones – grain, meat, and mineral fertilizers. So the announcement this week from Moscow by Canadian Agriculture Minister Gerry Ritz that he has done a deal to sell more beef to Russia is newsworthy. What exactly it portends for the Russian meat market is being assessed now by North American marketers in Moscow.

According to Ritz, who met this week with Victor Zubkov, the first deputy prime minister in charge of the farm and food sector, Russia has agreed to allow Canada to ship bone-in beef from cattle under 30 months of age, and boneless beef from cattle over 30 months. Ritz’s announcement marks the end of the phyto-sanitary ban on some Canadian meat from Russia, following the detection of mad cow disease on a Canadian farm in 2003. Zubkov’s overture is worth about C$32 million (US$31 million) annually, Ritz estimated. Bone-in beef represents a small opportunity for elite consumption.

The bigger opportunity, according to Nathan Hunt, dean of the North American meat traders in Russia and head of the Canadian business club in Moscow, is the older cow meat. This category of beef is dispatched by Canadian producers to make mince toppings at Pizza Hut and burger patties at McDonalds, across the border. “We might be able to do relatively big volumes in the second category, which has been on the ban list until now,” Hunt told Agriprods.com. “The target for next year will be 5,000 tonnes, and 10,000 tonnes the year after. This makes a small dent in the Russian import market, but just the same, it’s hats off to the Canadian ag lobby.”

Hunt cautions that the Ritz announcement represents a “minor concession” on the Russian side because of the small share Canada holds in the Russian meat market, and the relative dominance of South American exporters. “It would be more significant if the Russians would come to the negotiating table prepared to harmonize phyto-sanitary regulations with internationally accepted standards so there can be no accusations of using science for political purposes.”

Russia imported more than C$372 million (US$364 million) worth of farm products in 2008, mostly meat, making it Canada’s 15th-largest agricultural market. Moscow also lifted a ban on Canadian pork this summer, but this will not take effect until after a visit by Russian inspectors to meat plants, Ritz said.
Before the Russian boom collapsed last September, there had been an accelerating rate of growth in imports of fresh and frozen meat. The lift in Russian consumption translated into a surge for red meat, while the appetite for pork remained flat, and dropped off sharply for mutton. Including deliveries from Belarus, but excluding poultry, Russian Customs data show the total import volume for 2006 was 925,000 tonnes. This grew 10% in 2007 to just over 1 million tonnes. In the first eight months of 2008, the volume of meat imports had already reached that total. That translated into a growth rate, year on year, of 23%. Then came the crash, and as Russian income fell off, so did the capacity to eat imported red meat. The import tonnage for January and February of 2009 was just 39,000 tonnes, down 40% on the year before.

Kolbasa evreiskaya (Hebrew sausage), the leanest beef sausage in the Moscow market, returned to super-luxury status; Russian sausage and pelmeni swelled with pork offal and even cheaper fillers.

Zubkov’s boom-time campaign to apply surplus state revenues to the farm sector, and subsidize investment in pork and beef production, to replace imports, did more than mince to a halt. Borrowers began defaulting on subsidized loans, and in one notorious case – Vadim Varshavsky, who invested in hog farming with zero-cost borrowings from the state (figure below) – the defaulting debtor has abandoned his assets altogether, leaving the federal and regional governments to keep the enterprises going with a combination of more state cash and substitute investors who remain solvent, if reluctant.

This past July, Zubkov tried to repoint the import substitution strategy long into the future.

By 2012, Russia, he said, should sharply reduce beef imports, raising its own production of beef to 282,400 tonnes against the present 62,000 tonnes. “Over the last ten years all indicators of development in this sub-branch [red meat] are falling”, Zubkov said, noting that for this period the size of the meat cattle herd was reduced 2.9 times, beef production decreased 2.5 times, and per capita consumption of red meat actually fell from 31 kg per year in 1999 to 17 kg a year now. That suggests that between Russia’s two economic crises, 1998 and 2008, the table was loaded with more red meat, but a dwindling number of Russians could afford to sit down and eat it.

Nothing gives away the new social class structure of post-Yeltsin Russia than how much (how little) beef goes into which Russian mouths. The image of a Putin-era McDonalds tossing out beef patties for pelmeni is thus a sardonic fantasy, in which the local meat product turns out to have almost as much import content, but even less protein value than before.

For Hunt, “the Russians aren’t even close to a reform of the beef industry”. The promise of import substitution in pork had been showing signs of success before the crash, he notes, and the pork import level has been declining, while domestic production was cranking up. But in the beef sector, Hunt believes the Russian herds remain “mostly dairy cows – Holstein breeds that aren’t suitable for meat raising. The feed lot programme cannot support increased beef growing, because not enough grain is produced for animal feed. For Russia to produce more beef to eat at home, farmers have to grow more grain, and develop systems to transport it efficiently around the country.”

Next year, Zubkov’s scheme for penalizing the low-cost beef importers of Brazil, Argentina, Uruguay, and Paraguay will add much tougher penalty duties on top of the landed price. But driving out beef by raising price can’t create domestic beef out of nowhere. Traders speculate that the new duty level will be fixed at 70% of import value and not less than €0.5 per kg (currently equivalent to 22 roubles).

Hunt’s prediction is that this will significantly decrease the amount of beef imported, making the quota limits already in force on imports more effective. The old out-of-quota duty level was scarcely higher than the in-quota level, meaning that hundreds of thousands of tonnes were imported without the trade feeling the pinch of Zubkov’s quota limit. Since that measure has obviously failed, Zubkov has had to feed the domestic farm lobby with something fresh. Hence, the higher out-of-quota duty to keep beef prices high throughout 2010.

Of course bone-in steaks from Canada, such as T-Bones, will be able to enter the market in the Vogue niche. This amounts to a small volume, but high margin business geared mainly at steakhouses, luxury restaurants, exclusive retailers, and hotels. While those exports are important to the Canadian beef industry, the cost of that beef is out of the reach of most Russian consumers. In other words, the Canadian trade will gain from the Zubkov concession, but it is unlikely that many Russians outside Zubkov’s social circle will get a taste.

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