Russian consumers overpay billions due to food embargo

According to the Russian Central Bank, consumers are constantly overpaying, due to the trade barriers that prevent access to imported products on the domestic market, enabling local manufacturers to raise prices.

It said that, in 2014, consumers overpaid RUB278.2bn ($4.45bn) in total, while in 2016 this figure jumped to RUB603.7bn ($9.67bn) primarily due to the introduction of the food embargo.

These figures did not include the money paid to the agricultural producers in the form of state aid from the federal and regional budgets, which are filled primarily by Russian taxpayers. 

The competitiveness of the Russian agricultural and food products on the global market is “low and unsustainable”​, Russian Central Bank stated. “This problem not only incurs losses to the average customers, who have overpaid for products of Russian origin due to the food embargo, but also questions the export potential of the Russian meat industry.”​

Unclear export potential​

Several agricultural product categories with the made-in-Russia label, such as beef, are not competitive on the global market pricewise, the Central Bank outlined. Other types of meat, such as poultry and pork, have “rather unclear export potential”​. Given current production costs, the Central Bank believed their export growth in the next few years was not guaranteed.

High prices on the domestic market coupled with large-scale state support have raised average profitability in the Russian meat industry to record levels, it added. In 2015, the first year when the food embargo was in place, the profitability in the Russian agriculture was equivalent to 20.3%. However, for many products such as poultry and pork, the domestic market is close to saturation, and profitability in the industry will start to shrink.

Concerns about the future​

As for long-term prospects, the picture is not very bright, as the Central Bank predicted the main competitive advantages of the Russian agricultural industry could disappear at some stage. Among the advantages listed by the Central Bank were the relatively low price of the agricultural land, low labour costs and low animal feed prices.

At the moment, the Central Bank saw no real opportunities for Russia's agriculture producers to become more competitive. Some decrease in prices currently seen on the domestic market was taking place - not due to improved production costs, but at the expense of reduced profitability, it said.

With this background, the only way to improve the situation was for the Government to change its focus, no longer targeting absolute self-sufficiency on food products from the domestic market, but encouraging technological modernisation in the industry instead, said the Central Bank.