In response to sanctions against certain Russian individuals and companies, the Russian Federation has adopted a ban on the imports of certain agricultural products from the EU, the US, Canada, Australia and Norway.
The ban was documented by the President’s Edict No. 560 dated August 6, 2014 and the Government’s Decree No. 778 dated August 7, 2014. The Decree specifies types of banned products, which include: meat and poultry, fish and seafood, milk and milk products (including cheese), vegetables, fruits, nuts as well as some other foods and ready-made meals. The restrictive measures do not include wine and spirits, cereals, pasta, olive oil, baby food and beverages. The ban is imposed for the duration of one year, but can be revisited earlier, if appropriate.
Russian Customs commenced implementation immediately on August 7 with no grace period or carveouts for existing contracts. It has been reported that some suppliers had to recall deliveries which were already on their way to the Russian border. Some EU agricultural businesses sought to import their goods through Switzerland, but Swiss authorities have not allowed this. There were also a number of attempts to circumvent the ban by re-labelling foods originating from EU sources as coming from Belarus for the purpose of their further import into Russia. According to the customs authorities, numerous shipments were stopped at the Russian border because of such violations.
In addition to public law implications, the ban affects many private relationships, including contractual relationships underpinning the sale of banned products – both with foreign suppliers and the resale contracts within Russia – as well as auxiliary contracts (such as contracts for transportation, storage, insurance and credit facilities). Nonetheless, there does not seem to be a flow of Russian litigation cases arising out of the agricultural products ban in the Russian courts at the moment.
In September and October, the Russian Federal Service for Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) imposed various temporary restrictions on the import of foods not affected by the governmental ban. This includes a prohibition on the import of various meat by-products from the EU, meat from Moldova (in addition to the already restricted importation of fruits from Moldova) as well as nearly all foods from the Ukraine. These temporary restrictions were imposed due to alleged violations of Russian consumer-protection legislation and product safety law.
While legally the Rospotrebnadzor’s restrictions are unrelated to the governmental anti-sanctions agricultural ban, the timing of these new restrictive measures puts additional pressure on agricultural businesses in the EU, Moldova and the Ukraine.
Following Russia’s import ban of EU agricultural products, the EU established a task force of Commission experts to assess the situation from both the European perspective and international markets for each product covered by the Russian sanctions. Dacian Cioloș, the EU Commissioner for Agriculture and Rural Development made a number of statements regarding the import ban and has confirmed that the EU is working closely with Member States to monitor market prices for every product in every Member State each week.
Potential trade advantage to unaffected countries
The EU is concerned that Latin American countries and other countries not affected by the ban such as Turkey and Belarus will profit from the gap left by the EU, US, Norway and Australia. It has been reported that the EU may be planning to meet with the relevant authorities from countries that could potentially supplement EU exports and indicate to those countries that it would not expect them to profit unfairly from the current situation. It is thought that the EU will also emphasise the importance of a united front in relation to the situation in the Ukraine.
The EU has not made a formal statement in relation to this and several Latin American countries and trade groups have already declared that the sanctions imposed by Russia will offer them a trade advantage. For example, Brazil has permitted 90 new meat plants to begin exporting chicken, beef and pork to Russia. Brazil’s Secretary for Agricultural Policy stated recently that ‘Russia has the potential to be a large consumer of agricultural commodities, not just meat’. Chile is also set to benefit from Russia’s ban on the import of European fish.
As a result of the Russian import ban being implemented with immediate effect, EU companies that have contracted with Russian companies to supply foods affected by the sanctions face a difficult choice if the contract does not contain suitable contractual protection. Companies can choose to either:
- comply with Russian sanctions and breach their contractual obligations to supply goods or
- try to satisfy their contractual obligations and risk breaching Russian sanctions.
In particular, longer term contracts with force majeure or frustration clauses that do not make specific reference to sanctions may allow Russian counterparties to argue that the company is in breach of contract if it fails to supply goods. It is currently unclear how Russia intends to police the import ban.
Impact of the export restrictions
In general, it is expected that the EU will be the region which is most affected by the targeted restrictions as 73 per cent of the banned imports come from the EU. This is unsurprising given that the EU represents the vast majority of Russia’s total imports from the countries impacted by the sanctions. Within the EU, it is expected that Germany, Spain and Poland will be the countries most affected by the ban.
In 2013, total EU agricultural exports to Russia were worth €11.3 billion. The estimated value of exports affected by the ban in the EU is €5.1 billion or 45% of the total. Some food sectors will be affected more by the measures than others, most notably the dairy and fisheries sectors. Last year, these exports to Russia were worth €2.3 billion and €199 million respectively.
Impact around Europe
A few of the economies to be affected by the sanctions are:
According to Statistics Netherlands (CBS), the total Dutch export value of products to Russia was nearly €7 billion in 2013, representing almost two per cent of the total Dutch export value in that year. This makes Russia eleventh on the list of major Dutch export destinations. Of this €7 billion total, €1.5 billion were agricultural products and can be divided into the following main subcategories: floriculture (approximately €365 million), dairy products (approximately €300 million), fruit and vegetables (approximately €180 million) and prepared food products (approximately €130 million).
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Of the total agricultural export of €1.5 billion to Russia, €527 million of this is attributable to now-sanctioned products. According to CBS, the net earnings for the Netherlands resulting from the above mentioned export value of €527 million amounted to approximately €300 million.
While some of these losses may be recouped as the sanctioned products will most likely be sold to other countries, the market surplus of these products will impact on their value.
As a result of decreased prices and/or an inability to sell the sanctioned products, losses are likely to be incurred until new markets can be found, production is modified, a new market equilibrium is formed or Russian sanctions are abolished or reduced.
Of the approximately four thousand Dutch companies that exported products to Russia in 2013, roughly 10 per cent are directly affected by the Russian sanctions (mainly in the wholesale and food industry).
Many more Dutch businesses are indirectly affected by the Russian import ban. Such businesses operate mainly in the production chain of the restricted products, such as producers and transporters.
In 2013 it was estimated that around five thousand people are employed in the Dutch food and agribusiness industry, whose jobs may now be under threat. In addition, the Netherlands is also a major supplier of currently sanctioned products to Russia’s neighbours such as Poland, Estonia, Latvia and Lithuania. These products are partly sold in the local markets of these countries and partly sold to Russia, meaning that the Netherlands is exporting less sanctioned products to these countries. The Russian sanctions have had a particular impact on the horticulture and the fruit cultivation sector. (However, on a positive note, some glasshouse builders may report increased orders from Russian companies to build glasshouses in Russia.)
The impact across the Netherlands varies and the direct impact of the Russian import ban on the Dutch food and agriculture industry may seem relatively limited. However, the indirect impact proves more difficult to quantify and so the final outcomes for the Dutch food and agribusiness industry are yet to be determined.
Saskia Blokland is a partner and Joke Everts is an associate in the Amsterdam office of Norton Rose Fulbright.
The Russian import ban prevents certain Belgian food products from being imported into Russia and accounts for about seven per cent of total Belgian exports to Russia. In 2013, Belgium exported food and agribusiness products to Russia with a total value of €558 million, with €281 million of this amount consisting of now-restricted products. As such, over 50 per cent of Belgium’s food and agribusiness exports to Russia are now affected by the Russian ban.
Within the Belgian food sector, fruit exports to Russia have felt a significant impact with €155 million of the fruit export market being affected by the ban. The impact on the fruit sector accounts for 27.8 per cent of total food and agribusiness product. Restricted products include apples, pears, quinces, apricots, peaches, nectarines, cherries and plums.
In an official publication shortly after Russia had imposed the import ban, the Belgian Minister of Foreign Affairs, Didier Reynders, encouraged agricultural organisations in Belgium and Europe to cooperate in order to find alternative markets and to consider a possible EU claim settlement.
Michael Jürgen Werner is a partner in the Brussels office of Norton Rose Fulbright.
Russia is one of the most important trading partners for Germany. Milk products, meat, cheese, bakery products, cocoa products, apples and cabbage are the most affected commodities for Germany, according to the German farming minister Christian Schmidt and the German Farmers Association (Deutscher Bauern Verband or DBV). In 2013, Germany exported food and agribusiness products to Russia with a total value of €1.6 billion. Of that total, €589 million worth of products are now sanctioned.
However, this needs to be put in the context of the total exports to Russia, beyond food and agribusiness, and the fact that exports to Russia account for only 3.3 per cent of the total German export value, which is more than one trillion euros. Nevertheless, the impact will be significant in some areas – most notably in pork-related products and cheese.
The biggest impact for Germany will not be the loss of Russia as an export market for sanctioned food products, but rather the increasing import from other EU countries, which have lost Russia as their key market. If the EU is not able to absorb this excessive supply, it is very likely that the prices for all sanctioned products will decrease, with a corresponding impact upon the livelihood of suppliers and producers across Europe.
Another important element is the Russian tariff union with Kazakhstan and Belarus. Russia tried unsuccessfully to have both countries join the embargo. It is therefore still possible to import banned products to Russia via Kazakhstan and Belarus, leading to a likely increase in the traffic of banned products through Kazakhstan and Belarus.
If the current sanctions continue, a significant impact on Germany is likely. Depending on the duration of the sanctions, trading partners of both Russia and the EU are likely to change in a significant and permanent way. Although other trading partners may have higher transporting costs, it may prove difficult for European companies to re-enter the market once the ban has been lifted.
Patricia Nacimiento is a partner in the Frankfurt office of Norton Rose Fulbright.
The UK Department for Environment, Food & Rural Affairs published a statement on August 8, 2014 explaining that although it did not expect the Russian ban to have a significant overall effect on the UK’s agricultural industry, it did recognise that it would impact on certain businesses, for example the Scottish fishing industry. Last year, mackerel exports to Russia generated £16 million for the UK.
As a result of lobbying by the UK government, the EU has altered legislation to allow mackerel and herring fisherman to ‘bank’ a higher proportion of their quota this year and use it next year instead. The intention is that it will provide more time for industry establish trade routes into new international markets, making up for the loss of Russian trade.