Opportunities for Latin American agribusiness exporters arising from Russian sanctions potentially hedged by EU pressure

Russian sanctions

On 7 August, the Russian government imposed embargoes on agricultural and food-related imports from the United States, the European Union, Australia, Canada, and Norway. According to a list issued by Russian prime minister Dmitry Medvedev, the import ban includes beef, fish, pork, poultry, vegetables, fruit, and dairy products. An amended list published on 20 August also included bans on imports of live fish, along with a number of exceptions. The restrictions are in retaliation for sanctions imposed by the aforementioned countries on Russia over its alleged involvement in eastern Ukraine. The Russian government has said it would be willing to review the sanctions if its "Western partners" were open to dialogue on the issue.

A ban on agriculture and food products imported into Russia from Western countries has palpable negative economic implications for the states affected. Not least among these are EU countries and the United States, whose combined total food exports to Russia in 2013 were worth USD17.1 billion (European Union: USD15.8 billion; United States: USD1.3 billion). Russia is also the European Union's second largest market for food exports and accounts for approximately 10% of the bloc's total food exports. However, the import restrictions are also estimated to have created an 8% shortfall in Russian food imports, which if not filled risks generating shortages. In this regard, Russia's options are confined to increasing domestic production of the restricted produce or substituting using alternative food importers.

Filling the void

Should Russia opt for the latter strategy, Latin American agri-exporters are likely to be among the main beneficiaries. Indeed, Argentina, Brazil, Chile, Ecuador, Paraguay, and Uruguay have all expressed an interest in increasing food and agri-exports to Russia. Among the sectors likely to benefit most are the beef, pork, chicken, soy, fruit, vegetables, and dairy industries.

Argentina

The Argentine government announced yesterday (21 August) that a trade mission to Moscow, which included Minister of Industry Debroa Giorgi and Minister of Agriculture Carlos Casamiquela, had reached agreements with the Russian government on increasing food exports to Russia. Although details of the agreement have not yet been disclosed, Argentine cabinet chief Jorge Capitanich claimed that the agreement opened a window of opportunity for nearly USD18 billion in trade – although that figure exceeds total US and EU food exports to Russia. Total Argentine exports to Russia from January to June 2014 amounted to USD297 million. The main exported products included meat, fruit, dairy, and wine. According to the head of Argentina's dairy chamber, dairy exports to Russia could now increase by as much as 20%. However, there are questions over the ability and indeed willingness of Argentine producers to step up production. This relates to ongoing currency difficulties, which increase producers' propensity to hoard (see Argentina: 15 August 2014: Argentine default fosters uncertainty for soy farmers exacerbating contract frustration, taxation, and currency risks). Nonetheless, increased exports to Russia have the potential to at least partially address shortages in Argentina's ongoing foreign-exchange reserves, which currently stand at USD29 billion, down from USD52 billion in 2011.

Brazil

Brazil is among the Latin American countries that potentially stand to benefit the most from the Russian sanctions. Indeed, the Brazilian ambassador in Moscow, Antonio José Valim Guerreiro, issued a statement yesterday (21 August), underlining the potential for growth in bilateral trade. In this regard, Brazil, the world's largest meat exporter, is already reaping the benefits of increased demand in Russia. According to the Brazilian Association of Meat Exporters (Associação Brasileira das Indústrias Exportadoras de Carne: ABIEC), Brazilian meat exports to Russia increased by 70% in July 2014 compared with July 2013. Moreover, Russia was the main export destination for Brazilian meat in July, accounting for 41,000 tonnes or USD181 million in revenues. Projections in local media indicate that Brazilian beef exports to Russia could increase by USD800 million in 2014. According to the president of the Brazilian Association of Animal Protein (Associação Brasileira de Proteína Animal: ABPA), the South American country is preparing to increase chicken exports to Russia by 150,000 tonnes, to make up for the shortfall resulting from the ban on US imports. Brazil exported 60,000 tonnes of chicken to Russia in 2013. Government officials have also indicated that Brazil is seeking to increase exports of fish and dairy products including butter, cheese, and milk powder. Russia imported USD680 million-worth of butter in 2013, mainly from New Zealand and Belarus. Brazilian exports to Russia in 2013 were worth USD2.72 billion.

Nonetheless, Brazil faces a number of obstacles that have the potential to hinder its ability to increase exports. One major hurdle relates to restrictions imposed on a series of Brazilian beef and pork processing plants by Russian consumer watchdog Rosselkhoznadzor for alleged unsanitary conditions. While the most recent set of restrictions has been in place since September 2013, local media report that Rosselkhoznadzor has announced that the bans on imports from three facilities, including Brazilian meat producer BRF, are to be lifted. Brazilian media sources also report that the Brazilian authorities have approved 90 meat (beef, pork, and chicken) processing plants for exports.

Chile, Ecuador, Paraguay, and Uruguay

Among the other countries in the region that have the potential to benefit, Chile has expressed an interest in filling the shortfall in Russia's fruit imports. Russia imported USD567 million in agricultural produce from Chile in 2013, including fish, fruit, and wine. The Ecuadorian government has also revealed that it is evaluating its ability to increase exports of fruit, vegetables, and seafood to Russia. According to Rosselkhoznadzor, 23 Ecuadorian companies that have not previously exported to Russia are seeking to do so, while more than 30 other companies are seeking to step up fish exports. Ecuador has 29 partial trade agreements with Russia, while Russian imports from Ecuador increased by 69% between 2008 and 2012, according to the Ecuadorian Ministry of External Relations. Meanwhile, Paraguay is well placed to increase supplies of meat. Russia is already the main market for Paraguayan meat exports, consuming approximately 70% of all Paraguayan beef exports. It is also the largest export destination for Paraguayan pork, importing 1,000 tonnes or USD3 million in 2012. However, Paraguay faces similar restrictions to Brazil and a series of foot-and-mouth outbreaks since 2011 resulted in Rosselkhoznadzor imposing suspensions on buying meat from at least eight Paraguayan meat processing plants. This has resulted in an approximately 18% decline in meat exports, but Paraguay has significant potential to increase exports should those restrictions be lifted. Uruguay also has the potential to capitialise on shortfalls in Russian meat imports. Russia is Uruguay's second largest market for frozen beef exports, having imported 14% of total Uruguayan frozen beef exports in the period January-September 2013.

Outlook and implications

The ability of Latin American countries to take advantage of Russian sanctions will not be straightforward. Politically, the United States and the European Union are likely to put significant diplomatic pressure on countries in the region not to increase supplies to Russia. Indeed, the Financial Times has cited a senior EU official as saying that the intergovernmental organisation expects countries not to profit unfairly from the Russian situation. Among the bargaining chips the EU may use in applying pressure on Latin American countries are the ongoing negotiations with Brazil and Mercosur countries (Argentina, Brazil, Paraguay, Uruguay, and Venezuela) regarding free-trade agreements. Mercosur-EU free-trade negotiations have been ongoing for more than 15 years, but remain a major goal of the Latin American trade bloc, not least because it has been estimated that such an agreement would increase Mercosur exports to the European Union by 40%. Nonetheless, that deal continues to face various obstacles, including Argentina's reluctance to open its domestic market to foreign imports and Brazil's appetite to negotiate its own separate deal. Efforts to weigh up the costs and benefits of increasing supplies to Russia in the short term, potentially at the cost of slowing down or even ruling out a free-trade deal with the European Union in the longer term, will therefore feature in each country's strategic thinking on the issue. Russia's intentions regarding its food suppliers in the longer term, once sanctions are potentially lifted, are also unclear.

There is also the question of the Latin American countries' ability to increase production. Brazil and Paraguay have considerable potential for expansion, not least if Russia lifts its restrictions. Problems may also arise regarding the ability of Latin American producers to meet increases in demand for seasonal fruit and vegetables at the current time of year, with the next harvest for some produce most likely not due until early 2015. Finally, a significant increase in exports may also affect domestic supply and prices, which in turn could prove unpopular and politically difficult to sell, especially in Brazil, which is due to hold a presidential election in October, and Argentina, which has an election scheduled for October 2015. In this regard, the Argentine government yesterday imposed a 15-day suspension on beef exports to stabilise domestic supply and ensure favourable prices.