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Customs and tariff regulation In 2009 all changes in the customs and tariff regulation of dairy items import were targeted at the protection of domestic milk producers. Import duties on dry milk, butter and some kinds of cheese were raised.

From March 2009 the specific component of the combined import duty on butter and other milk fats (15% but not less than 0.22 EUR per kg) was temporarily (for 9 months) raised to 0.35 EUR per kg and thus adjusted to the ad valorem component and current prices that grew in the previous two years. As a result in 7 months 2009 imports of butter reduced by 11.6%.

At the same time deliveries from Belarus (that are not subject to restrictions since the country is a member of the Customs Union) increased by 15.4%.

For the duration of 9 months import duties on dry milk and cream and on canned milk were raised from 15 to 20%. Since over 90% of dry milk is supplied from Belarus enjoying duty free import regime, this measure had no sizeable effect on prices. The overall decrease of dry and condensed milk imports in 7 months 2009 amounted to 23% while of those from Belarus to 10%.

The rate of customs duty on cheeses depended on their declared value, the lowest duty applying to the most expensive brands. For instance, cheeses whose value didnt exceed 1.EUR per kg were subject to import duty of 0.7 EUR per kg, from 1.65 to 2 EUR per kg of 0.65 EUR per kg, over 2 EUR per kg of 0.3 EUR per kg. However, due to the rise of prices for dairy products in the two recent years almost all cheeses fall into the category to which minimal rates are applied. In 2009 a single tariff was established for hard cheeses not depending on their customs value 15% but not less than 0.5 EUR per kg. The actual result of it was the raising of duty on cheeses earlier treated as expensive ones. The share of the named cheeses imports on the domestic market is rather small 20-25% (as estimated by the Russian Dairy Union) even though the higher duty doesnt apply to cheeses supplied from Ukraine and Belarus that account for over 50% of the total imports of these items. This causes concerns that Belarusian and Ukrainian competitors of domestic producers will use the opportunity opened by the raising of customs duty for expanding their shares on the market.

The restriction of cheeses import was necessary since after the reduction of dry milk production in 2009 processors used the resulting surplus of non-demanded raw milk for making cheese. As a result all companies accumulated large stocks of this product that they needed to sell. But due to the above mentioned reasons the positive effect of this measure on domestic cheese producers was too limited.

Resolution No. 821 of October 17, 2009 complemented the list of agricultural products subject to state purchase and commodity interventions by including into it butter, sterilized consumers milk and cheeses (semihard, hard and extra-hard).

RUSSIAN ECONOMY IN trends and outlooks One more important change took place in the customs and tariff regulation that had an impact on milk market the raising of import duties on tropical oils being replacers of animal fats.

2006 2007 Source: Rosstat.

Fig. 7. Imports of tropical oils to the Russian Federation 2,1,0,coconut oil palm oil butter Source: Rosstat.

Fig. 8. Actual prices for coconut and palm oils and butter in December Lately milk processors started to use bigger quantities of cheaper tropical oils (palm, coconut, palm kernel and other) in their production. According to data of the Dairy Union in the five recent years imports of tropical oils actually doubled and in 2008 reached almost thousand tons (Fig. 7). In 2008 the average contract price for 1 kg of tropical oils was almost three fold below the price for butter (Fig. 8). The price situation on the markets of tropical oils and butter within the last 10 years resulted in the substitution of dairy fat for vegetable oils in the production of food products including the ones containing milk. According to exthousand tons dollars per kg Section The Real Sector pert estimates the volume of such substitution amounted up to 500 thousand tons an equivalent of 6.5 million tons of milk1.

In response to this, import duties on tropical oils were raised up to 10%. Dairy industry consumes only a part of the imported quantities. These oils are also used for producing confectionery, mayonnaise, fast food and special fats. Besides, they are major ingredients for manufacturing toilet soap. So, the raising of import duties may result in higher prices for produce of these industries.

Technical regulation RF Federal Law No. 88-FL Technical regulation for milk and milk products of June 12, 2008 was enforced in December 2008. It sets special requirements to raw milk and products of its processing that are aimed to safeguard life and health of citizens, to protect environment and to prevent actions misguiding consumers. In fact the goal of the Technical Regulation is to encourage production and purchase of domestic raw milk and to lower demand for imported dry milk.

According to the Technical Regulation a product reconstituted from dry milk is now called milk drink. Milk is defined as a product made out of whole milk without adding to or extracting any substances from it. It was supposed that the introduction of this standard would lead to the division of consumers milk market into two segments: the segment of natural milk and the segment of reconstituted milk made out of dry milk. As a result prices for qualitative raw milk should have risen. But nothing of the kind has taken place.

There is no habit of consuming milk drinks in Russia domestic consumers are used to regard dairy products as natural ones. The introduction of new definition milk drink should have been accompanied by providing consumers with explicit information about this product.

But since milk drink was discredited in mass media as a non-worthy product, it was not accepted by consumers. Due to the incorrect PR-campaign for the adoption of Technical Regulation consumers got a strong feeling that milk offered by retailers was not natural. This was an additional factor entailing lower demand for dairy products. The Russian Dairy Union offers to replace the term milk drink in the Technical Regulation by the term reconstituted milk in order to restore consumers confidence in this product.

Having limited opportunities for the use of dry milk in production of dairy products, the Technical Regulation aggravated the problem of milk production seasonality. Earlier it was tackled by drying surplus summer milk for utilizing it later during the autumn-winter deficit period. After the enforcement of Technical Regulation milk processing plants reduced purchases of raw milk for manufacturing dry milk. In January-August 2009 the output of dry whole milk reduced by 47%, of skimmed milk powder by 30% as compared with the corresponding period previous year2. As a result there was a surplus of raw milk on the market and instead of the expected rise purchase prices for it continued falling in spite of the growth of prices for processed dairy products. In June 2009 the average purchase price for raw milk dropped to its minimal level beginning from October 2007 8389 rubles per ton3.

Given smaller production of dry milk some processors used the resulting surplus of raw milk for making cheese. In 8 months 2009 its output grew by 7.9%4 as compared with the pre According to data of the Dairy Union.

According to data of the Russian Dairy Union.

According to data of the Russian Dairy Union.

According to data of Rosstat.

RUSSIAN ECONOMY IN trends and outlooks vious year. But the development of domestic cheese industry was hindered by imports of cheap cheese from Belarus and Ukraine (enjoying duty-free regime of trade with Russia) and by subsidized export of cheese from the European countries. As mentioned above, the introduction of restrictions on import of cheese did not help to fully solve this problem and thus to encourage its domestic production and support demand and purchase prices for milk.

The enforcement of Technical Regulation had not only to reduce processors demand for dry milk but also to restrict imports of cheap dry dairy products from Belarus. In recent years dry milk produced in Russia loses price competition to the similar Belarusian item whose production is subsidized. Thats why many Russian processing enterprises prefer to use raw inputs imported from Belarus.

For the period from March to December 2009 Russian government raised import duties on dry milk from 15 to 20%. But this restriction didnt apply to countries of the Customs Union including Belarus. As a result overall supplies of dry dairy products to the Russian market in the first half of 2009 fell by 12.8% down to 45 thousand tons. However, the expected reduction of dry milk imports from Belarus didnt take place. On the contrary, supplies of Belarusian commodities within this period grew by 18.5% up to 44.2 thousand tons1.

After the introduction of Technical Regulation Belarus had to bring its permissive documentation on dairy products in accordance with the new requirements. But for almost half a year after the laws enforcement the country continued to supply dairy produce to Russia under documents not complying with the new Russian regulations. As a result in June 2009 the Russian Federal Service for Oversight of Consumer Protection and Welfare banned import of dairy products from Belarus for over a month. It regained after the harmonization of documentation.

The transfer of Russian producers to new standards is also halted. The needed changes in technical documentation, the purchase of new equipment for complying with Technical Regulations requirements and the printing of new labels demands additional financial resources that are not easily available in the crisis situation.

The normative basis for the enforcement of Technical Regulation is not sufficient as well.

Many standards and techniques are not yet defined including the ones needed for control over the laws execution. For instance, there are no certified techniques allowing to determine whether dry milk was used in production of consumers milk.

In 2008 four new standards were worked out in the framework of the Technical Regulations implementation, the development of 30 more was planned for 2009.

So, the practice of Technical Regulations application showed that neither market nor normative basis was ready for the full-scale implementation of the law. The lack of necessary normative basis does not allow to exercise milk production and marketing control. There is no opportunity to prevent counterfeiting and to secure compliance with the Technical Regulation. Besides, the regulation itself requires adjustment.

The introduction of this law is certainly needed for the harmonization of domestic practice with international rules and regulations pertaining to terminology and labeling. The Regulation helps to guide dairy industry towards production of natural products. And most importantly, the enforcement of this law should provide consumers with explicit information about the dairy products they are offered.

According to data of the Russian Dairy Union.

Section The Real Sector 3.6. Foreign Trade 3.6.1. International Trade in the Wake of the Global Crisis The World Bank Report1 on the global economic outlook published in January 2010 states that the global production and trade levels have gained during the 2H 2009 after the preceding decline.

Confidence strengthened significantly both in finance and in real economy, as governments emergency measures allowed for preventing the repetition of the Great Depression. The extraordinary amounts of governments incentives were the main driver underpinning this global recovery.

Foreign trade landslide commenced in October 2008 and lasted until the 2nd quarter of 2009; moreover, it happened in all the countries simultaneously. If we look at the EU and other leading global exporters / importers (altogether accounting for the 3/4 of international trade), their export and import numbers both declined by 2030%. Foreign trade turnover was growing in the 2nd quarter of 2008 across all the commodity lines, and in the 4th quarter the recession was obvious practically everywhere, then in the 1st quarter of 2009 the decline became really universal. After that the turnover started growing slowly, but there is still a long way to go to achieve the complete recovery.

As per the WTO data, the global export decline started way back in the 3rd quarter of (vs. the preceding quarter), however, at that stage it affected only European and North American countries. In the 4th quarter export decline became universal. The overall global export in the 4th quarter of 2008 fell by 20.7% versus the pre-crisis peaks of the 2nd quarter.

North America South and Central America Europe CIS Asia others Source: http://www.wto.org/english/res_e/statis_e/quarterly_trade_e.xls Fig. 1. Global Export Dynamics by Quarters (USD bn.) In the 1st quarter of 2009 the global export decline constituted 37.9% versus the pre-crisis peaks. However, it then started to recover: 7.6% growth in the 2nd quarter versus the crisis minimum of the 1st quarter; 10.4% growth in the 3rd quarter versus the preceding one. Export http://siteresources.worldbank.org/INTGEP2010/Resources/GEP2010-Full-Report.pdf 2005Q2005Q2005Q2005Q2006Q2006Q2006Q2006Q2007Q2007Q2007Q2007Q2008Q2008Q2008Q2008Q2009Q2009Q2009QRUSSIAN ECONOMY IN trends and outlooks recovery wasnt evenly distributed between the regions: thus, the maximum decline of export (the crisis minimum of the 1st quarter of 2009 versus the pre-crisis maximums) from North American countries made 32%, in Europe 37%, in Asia 35.2%, in South America 45.8%, and in CIS countries 51.5%.

The World Bank forecasts that after 12.3% slide in 2009 (versus the preceding year) the global trade will start its slow recovery: 5.8% growth is forecasted for 2010 and 6.3% growth for 2011.

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