Russia House

editorial

2017-10-23
RUSSIAN FEDERATION SITREP 19 OCTOBER 2017

BY PATRICK ARMSTRONG
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2017-10-18

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Russia House

2017-10-03

Russians Battle Western Sanctions
Given Russia's imbalanced economy - heavily dependent on energy income - it seemed an easy target for Western sanctions, but instead Russians have responded by creating new industries, big and small

By Gilbert Doctorow

In 2014, when the United States and the European Union slapped sanctions on Russian officials and businesses, many observers both in Russia and the West predicted serious problems for the Russian economy and near-certain failure of the Russian government's efforts to substitute for the lost access to foreign products. But those dire predictions were based on a complete misreading of the mood and general political situation in Russia.

The American legislators who initiated the sanctions believed that the punishment directed at the Kremlin leadership and Russia's corporate chieftains would alienate the so-called oligarchs from President Vladimir Putin and possibly lead to regime change or, at a minimum, a change in Russia's foreign policy to suit better the wishes of Washington.

U.S. and European politicians justified the sanctions as punishment for what they called Russia's "annexation" of Crimea and Russia's military intervention in the Donbas region of Ukraine in reaction to what Moscow and many eastern Ukrainians called a Western-orchestrated "coup" that overthrew the elected government of Ukraine in February 2014.

Russia responded to the Western sanctions with an embargo on food products from the sanctioning countries and rolled out a generalized policy of "import substitution" to sharply curtail the dependency of the Russian economy on outside commercial products and political pressures.

More than two years later - although Russia has faced some difficulties - the evidence is now clear that the sanctions against Russia have largely failed, on both an economic and political level. Reunification with Crimea and the ensuing Western sanctions aroused a swelling of national pride and patriotic feelings in the broad public.

So, instead of caving in to Western pressure, the Kremlin doubled down and has stayed the course on Crimea, on Donbas and - more recently - in Syria where its military support for the regime of Bashar al-Assad has gone directly against U.S. and Western policies of backing violent insurgents in another "regime change" project, a conflict in which Assad now appears to have largely prevailed.

So, in terms of domestic politics and international geopolitics, Putin and Russia appear to have frustrated the U.S. and the European Union as well as U.S. regional allies, Saudi Arabia and Israel ,which were strong advocates for Syrian "regime change." But what about Russia's strategy of creating domestic sources for what can no longer be imported?

Expectations of Failure

Within months of the Kremlin's announcement of this policy, commentators were publishing statistics showing that "import substitution," i.e., Russian products replacing Western ones, was negligible, that the strategy was failing. To explain why, these skeptics pointed to the unbalanced structure of the Russian economy, heavily dependent on the extraction of raw materials with massive resources invested in the highly profitable energy industry, which boosted the ruling elites. Moreover, Russia received low ratings as an "investor friendly" country, which limited outside investments.

Those doubts had validity and there were other problems, particularly the cost of money and its scarcity. In 2014, the Russian economy was experiencing high inflation and suffering from the attempts of the Bank of Russia to contain it with tight-money policies. The costs of borrowing for small businesses were particularly usurious. Indeed, lack of working capital at competitive prices was the main contributor to the flooding of the Russian market with imports and the collapse of local industry.

Yet, despite these headwinds, the Russian government began to make significant progress. Though the creation of industrial sectors can take years, the Kremlin identified priority sectors and provided various kinds of government assistance that included credit subsidies. The Kremlin also took steps to maintain the ruble at a low exchange rate to protect against imports whatever happens to the sanctions and embargo.

Agriculture is one sector where the potential payback was relatively quick, for example, by prioritizing wheat over livestock or poultry over pork. When the oxygen of subsidized credit was applied, the results were stunning. In 2017, despite negative weather conditions in the spring and early summer, Russia is expecting its largest ever grain harvest, possibly reaching 130 million metric tons, and the country is retaking its position as the world's top wheat exporter and leading exporter of other grains and of beet sugar.

What is happening in other sectors of the economy which the government prioritized for import substitution will be obvious only in the years to come, precisely because of the greater capital and knowhow required and thus the slower payback. But given the way agriculture has responded to stimuli from the Kremlin, it is reasonable to expect similar success stories in manufacturing and service industries like banking, insurance and computer programming over time.

Since arising tide raises all ships, the initial agricultural success has attracted big business interest not only to industrial-scale farming of grain crops but also to many other sides of the food supply and its processing. Such investments are being made not only by start-up small- and medium-sized businesses but also by the oligarchs, for whom this is a point of pride and a direct response to the wave of patriotism that has swept the country.

Thus, as The Financial Times recently reported oligarch Viktor Vekselberg has been pouring vast capital via his Renova holding company into the construction of greenhouses for vegetable crops that are in great demand among Russia's urban populations. Payback on these investments is measured in years, not months, and demonstrates great confidence of Russian competitiveness against ground crops from Turkey and Central Asia and from hothouse crops from Western Europe whenever the sanctions are lifted.

The result of these various undertakings is that Russian Federation Minister of Agriculture Alexander Tkachev, himself a farmer with large-scale interests in the sector, can report regularly on the dramatic progress being made in all areas of agricultural self-sufficiency. Indeed, in many product groupings quite apart from grains, Russia is becoming an exporter for the first time since before World War I.

The Fish Turnaround

This economic transformation has included progress in a surprising area, given Russian national traditions that favor meat over fish. This prejudice was long justified by the quality of fish products that were available in the market from Soviet times. The improvement in assortment and appeal of these products dates from the middle of the first decade of the new millennium.

The Financial Times article gave statistics for the Murmansk-based LLC Russkoye More, an ambitious firm that is rapidly expanding to occupy the leading position as supplier of farmed salmon in what is a major import substitution project. The Russian market for fresh salmon, like the E.U. market, was until two years ago entirely dominated by the Scandinavians, now on the embargo list.

Whereas The Financial Times addresses the changes in the fish sector at the corporate and macroeconomic level, there is also the microeconomic level where people live and where demand meets supply. From my own visits to supermarkets, to independent fish vendors, to covered street markets in cities and in the countryside up to 80 km from St Petersburg, I can speak from first-hand experience about how these fish supplies are reaching consumers. The distribution and logistical chain is all the more important in products as perishable as fresh fish.

Some specific fish varieties are locally grown in the Russian Northwest region, including the sig, a fresh water member of the salmon family native to Lake Ladoga, Europe's largest body of fresh water that is 50 km east of Petersburg, and also the minnow-sized koryushka, another native of Ladoga that each spring travels down the Neva River to the lightly saline Gulf of Finland to lay its eggs and is caught on the way in vast quantities to the great pleasure of Petersburgers.

But the bigger picture is that - as the largest country on earth representing more than 10 percent of the world's land surface - Russia has tremendous fresh water resources in terms of lakes and rivers that still abound in fish enjoying local reputation and retail distribution. This is particularly true of the Siberian rivers; smoked delicacy fish from there are sold at high prices across the Russian Federation. In addition, Russian fishing fleets based in Murmansk, to the north and in Vladivostok to the east have been and remain large suppliers of ocean fish.

What has changed is the scale of production and distribution of fish whether from fresh salt water or from lakes and rivers or farmed fish. In the past, the fish section in Russian supermarkets meant shelves of tinned sardines or catfish in tomato sauce, today every respectable market offers fresh fish, in filets or whole, presented on beds of ice.

Specialized fish stores have sprung up even in the hinterland in the Northwest, receiving daily shipments of farmed salmon, wild gorbusha and hefty flounders, among other varieties. By local standards, these fish are all substantially more expensive sources of protein than domestic chickens or pork chops. But they obviously do find their consumers and they are priced 30 percent or more below West European store prices for similar fish.

Until recently, ocean fish were brought to market frozen. The Soviet Union developed a large fleet of trawlers and fish processing ships that brought frozen product to port, much of it going into export. The fish were usually low grade, bony, good only for stews and soups. Higher-grade fish like cod appeared for sale in shops in bulk in contorted stages of rigor mortis, not very appealing to the faint of heart.

Meeting Demand

Now, in the past couple of years, the frozen foods bins of super markets are stocked with fish steaks packaged in clear plastic that are as attractive and as high quality as anything sold in Western Europe. These cod steaks, wild salmon (gorbusha) steaks have been flash frozen and are offered in half-kilogram portions. The labeling stresses that no preservatives have been used, that the products are natural and healthful, with detailed nutritional information provided.

In the days of the Soviet Union, the Russian fishing industry produced some world-beating tinned products including red and black caviar and Chatka brand king crab meat. These exclusive and very pricey products are exported, where they enjoy demand and are available domestically in specialty shops. But most tinned fish traditionally fell into the category of low-grade fish in tomato sauce or very poor grade vegetable oil.

Over the past several years, that has changed beyond recognition. Tinned fish of world-class quality is making its appearance on store shelves. For example, a week ago I discovered a new arrival: "premium" class chunk tuna in olive oil packaged in 200 gram glass jars. The producer is the Far East fishing fleet, and the fish name is given in Japanese as well as Russian. The product is similar in design and presentation to premium tuna on sale in Belgium at twice the price.

And finally another fish product category is worth mentioning: the salted, smoked or otherwise processed and unit-packed fish sold in the chilled products sections of supermarkets. This has expanded in product range and quality so as to be beyond recognition when compared with similar offerings just a few years ago.

Many different suppliers vie in the category of cold or hot smoked, salted salmon shrink-wrapped in units of 200 grams plus or minus. Herrings filets in oil or in sauces are now very attractive and of generally high quality. Anchovies and other small fish filets have proliferated. And hitherto unknown product categories such as "seafood cocktails" consisting of baby octopus and squid, pink shrimp and mussels in brine are offered in small plastic pots; quality is in no way inferior to what you would find in an upscale supermarket in Western Europe.

All such alien - "indescribably awful" (???????) foods in the judgment of your average Soviet consumer - are today welcomed as the basis for salads, as stuffing for avocados, themselves a relatively new food item to the Russian shopper.

Travel abroad, and 10 million Russians do travel abroad each year, has turned them into quite sophisticated shoppers and diners. And what they have come to love they now can largely find in their supermarkets supplied by domestic producers, including all varieties of fish specialties.

The point is, that from nowhere, the Russian fishing industry has made enormous strides and, unlike the cheese industry, is fully replacing imports with equal or better quality contents and lower prices.

This is the consequence of change in demand as well as change in supply. Demand has changed because before 2014 Russians still distrusted their compatriots and believed that everything made in their country was rubbish. The Ukraine crisis, the reunification with Crimea, the war in Donbas, and the upsurge of patriotism prodded folks to try their own. What Russia has now is a virtuous cycle: the Russian people expect better and what they are getting is better.

"Consortiumnews.com"