Russia suspended imports of dairy products from Lithuania

On Tuesday, the 8th of October, an official statement to halt import of Lithuanian dairy products by Russia has been announced. According to Russia‘s Consumer Rights Protection Service, Lithuanian dairy production did not meet the requirements, namely the levels of yeast and mould in this production were considerable too high. Therefore, the custom control was reinforced. As a consequence, it caused delays in transportation, as the queues of the trucks delivering dairy products on the border were extended to an aberrant level.

Considering the possible reasons for such actions from Russia, it is important to notice the wider outlook. Russia‘s Consumer Rights Protection Service has previously imposed bans on wine from Georgia and Moldova, citing health concerns. In July, the import of chocolate from Ukraine was also disturbed. Unfortunately, such actions have been widely seen as a way to put political pressure on its neighbors. It may be a coincidence or not that Lithuania is leading the European Union efforts to sign association agreements and a free trade zone with Ukraine, Georgia and Moldova. It is important to mention that the president of Russia stated ”we will be forced to take defensive measures“ if Ukraine signs the agreement with European Union and “this may harm our economic relations“. Russia has accused Lithuania, the European Union rotating presidency of the Council of Ministers, to be disturbing Russia‘s efforts to build a Eurasian Union by encouraging post-Soviet states in Europe to join an association with European Union.

What is more, last week one Russian diplomat was shortly detained by local police because of allegedly drunken incident. Russia not only demanded an apology for this mistake, but recently announced that the import of dairy products and flowers from the Netherlands may be banned as well. Logically, that indicates serious problems of the quality of dairy production in Europe, or, more likely, Russia‘s manipulation with economical implements in order to show its political aspirations.

In addition to this, Lithuania is already disputing with Russia over the cost of Russian gas, witch in last six years period had soared by 600%. As far as the Europe response is concerned, the European Union Commission is investigating if Gazprom is using its domination of the natural gas market to charge exaggerated prices in Eastern European countries. The EU Commission may appoint multi-million-dollar fines. And the consideration of a visa-free travel agreement with the EU, which Russia has been seeking, may be delayed.

In terms of an economic estimation, the European Union received 60 percent of Lithuanian exports in 2012, while 58 percent of Lithuania's imports came from the EU. Lithuanian dairy manufacturers export 60 percent of their production. Russia is one of Lithuania's main trading partners, along with Germany, Latvia and some other European countries. According to Lithuanian Statistical Department, 30-40 percent of the dairy products exports go to Russian market and the turnover in Russia is more than 230 million euros.

What are the possible scenarios of the near future? One rational solution is to reorient the production to the internal market. However, increased supply will possibly intensify competition and therefore lower the prices in short-term period in the internal Lithuanian dairy market. What is more, according to one of the biggest banks in Lithuania`s president, famous economist Gitanas Nauseda, it is possible that, in short-term the government will gather higher amount of the value added tax finances. The production that remains to circulate in the internal market, instead of being exported, is charged by the value added tax, while exported production is not. Here is the potential to collect more earnings on this tax. It is important to mention that Lithuanian people response to the blockade is the social campaign to support the local manufacturers, and slogans about buying two instead of one are widely spread on the internet. Taking everything into account, this short-time period scenery of the reoriented production and the increased sales is the most favorable for both processors, the government and the sellers as well.

The other point of view is presented by the Lithuanian Institute of Agrarian Economics, announcing that manufacturers are willing to lift up the price in the internal market. However, it is not likely to happen because of one main reason: assuming that the customer owns the same amount of money and has the same consuming habits as well, he will not be willing to pay more to cover the losses for the manufacturers. Therefore, the sales may be boosted only by the marketing actions – discounts; what primarily means the lower prices.

One more scenario is likely to happen. Producers of the dairy products will be forced to slow down the output in order not to incur the loss because of the failing to export the production to Russian market. It is very likely that, because of the decreased production volumes, the losses will be only in short-term and there will be an incentive to reconsider the trade partners. The point is that manufacturers are interested in Russian market owing to the profitableness, despite the risks that may occur. Whereas, European Union market may not be so high profitable but at least it is a way more stable and predictable. Hence, it is up to the manufacturers to make the risk management decisions, while willing that politicians will manage to lead the close co-operation foreign and economical policy.

Aurelija Gylyte

Report based on recent news: http://www.bbc.co.uk/news/world-europe-24433418

[artigo de opinião produzido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]