Europe Braces For Russia Food Ban, But McDonald's, Mondelez Shrug It Off

MOSCOW -- In a shiny food store in southern Moscow on Sunday, a young clerk emptied cartons of donut-shaped peaches from Spain into a display, pieces of fruit bouncing on the floor as he made an ever-higher mound. To the side was a smaller mountain of nectarines, also from Spain.

The store is just one of thousands of supermarkets in Russian cities and suburbs with reams of fresh vegetables and fruits, deli counters with cheese wheels and sausages, and freezer cases full of prepared meals, much of it from Europe. Smaller stores are also filled to the brim.

So far in food stores, the effects of Russia's ban on virtually all prepared and fresh foods from the European Union, Norway and the United States -- as well as Canada and Australia -- haven't yet materialized. European fruits are still piled high. Packaged goods will remain on shelves or in refrigerators for months to come.

But those scenes of plenty may change soon. With Russia's sweeping import ban, Europe's farmers, dairy producers and fishermen are going to find themselves shut out of the huge Russian market, Europe's largest by population.

Farmers and seafood providers, especially in Europe, have been scrambling to find new buyers for hundreds of tons of food that had been destined for Russia until late last week.

That's when the Russian government imposed its one-year ban on meat, dairy products, produce and fish from the targeted countries, a response to the latest economic sanctions against Russia by the US and EU.

The food ban, signed by President Vladimir Putin on Wednesday and enacted on Thursday, derails more than $8 billion in exports.

Retailers, importers and producers have had scant time to react. The day the ban took effect, representatives of major Russian food store chains met with government officials and asked them what to do with goods already in transit. "The answer was, 'Turn them around,'" Russian newspaper Vedomosti reported.

The foods falling under the ban accounted for about 8 percent of Russia's total food supply last year, said Valery Mironov, deputy director of the Center of Development Institute at Moscow's Higher School of Economics. According to the institute's calculations, the banned items amounted to $8.3 billion in 2013 sales.

The actual number might be even higher: Citing Russian customs data, the Wall Street Journal said the banned foods totaled close to $9 billion in 2013, out of about $43 billion of imported food.

Most of the affected imports came from Europe. The United States accounted for just about $440 million in 2013, the Journal reported.

Moscow is already making overtures to Brazil, as well as Argentina and Paraguay, to find new exporters. Russia's food inspection agency, one of the departments handling the ban along with the Federal Customs Service, is heading some of those replacement efforts. Inspection agency director Sergei Dankvert has held phone negotiations with Argentina's ambassador to Russia, and Argentinian and Russian officials will meet in Moscow in the next two weeks, said inspection agency spokeswoman Yuliya Trofimova.

On Tuesday, Dankvert was in Belarus, where he planned to meet with officials to obtain more exports from that former Soviet republic, Trofimova said. Officials in Belarus, a member of a Russian-led free-trade zone with Kazakhstan and a staunch political backer of Putin's, already have offered their farm products to help Russia fill the gap.

The eastern part of another ex-Soviet state, Ukraine, is a breadbasket that already feeds the entire country. But Ukraine and Russia are at loggerheads over the issue of Russian-backed separatists, with swaths of Eastern Ukraine under siege as government troops try to end rebel control. And using Ukraine's agricultural products would entail other giant hurdles: Ukraine already is facing its own Russian food ban on its dairy products. Meanwhile, the Kievgovernment is preparing its own sanctions against Russia, raising the prospect of more retaliatory trade moves from the Kremlin.

Unlike individual governments, major international food companies are largely insulated from the embargo. That's partly because the measure doesn't touch the import of chocolate, coffee beans, tea leaves or alcohol, according to Trofimova.

Those conpanies are also protected by their substantial investment into Russia during the past two decades, when many of them built their own factories and began to source ingredients locally -- thereby avoiding the new ban on imported foods.

Mondelez International Inc. (NASDAQ:MDLZ), the maker of Milka chocolate and Jacobs Monarch instant coffee, is one such company that has built up manufacturing here. Mondelez has 3,200 employees and five factories in the Russian Federation, and in April announced plans to spend $110 million on a new plant in Western Siberia, with construction to finish by the end of 2015.

Sales in Russia made up $1.2 billion out of $35.3 billion net revenue for Mondelez in 2013, spokesman Michael Mitchell said. He said "almost all" of the company's Russian products are made domestically.

Anglo-Dutch company Unilever plc (LON:ULVR), which sells Lipton teas and Inmarko ice cream in Russia, can manufacture almost all of its items here, using factories in European Russia and Siberia, said Unilever spokeswoman Keti Tavdishvili.

The Russian division of Swiss chocolate and coffee powerhouse Nestle SA (VTX:NESN) said more than 90 percent of what it sells is made in-country. Exports from Switzerland would be exempt from the ban, in any case, since the country isn't an EU member.

Fast-food giant McDonald's (NYSE:MCD), which operates more than 400 restaurants throughout the country, gets 85 percent of its menu items from domestic suppliers, it said in a statement.

Even with Russian suppliers and factories, however, replacing 15 percent of the product chain overnight is a Herculean task. In addition, McDonald's efforts come on top of legal challenges from the Russian food inspection agency and consumer protection agency over the nutritional value of the chain's burgers and ice cream and the safety of its salads and cheese. A McDonald's Russia spokeswoman declined to comment on how the food ban might affect the government inquiries.

Traditional cafes and restaurants have seen their menus hit by the embargo, as well. "Restaurants of course aren't thrilled, because in general the Russian market already has gone through more than one ban on various products for various reasons," said Anna Kukulina, an editor at Russian magazine Simple Wine News. Wines from Georgia, for example, were blacklisted after the short Russo-Georgian war of 2008.

"The detailed list of food items falling under the [ban] appeared only on Thursday, and even the suppliers haven't figured it out entirely," Kukulina said. "It is impossible to give specific prognoses in percentages and rubles just yet. There are too many factors that still haven't been studied and accounted for," she said.

Yet the vast majority of Russians probably won't see radical changes at their neighborhood grocery stores. That's because most of the country's 143 million people live in underdeveloped or rural areas, where Western food isn’t really a part of everyday life.

In Moscow and St. Petersburg, the two largest cities, roughly 40 percent of the food is imported, but for Russia as a whole, that figure is under 20 percent, Mironov said. Those numbers include imports from all countries, he noted.

One other international relationship being strained by the food ban is Russia's role in the World Trade Organization, which it entered less than two years ago after a nearly 20-year process to join. Under WTO principles, member nations must avoid discriminating between trading partners or between foreign and domestic products.

After the last EU and U.S. sanctions, Russia's WTO representative, Gennady Ovechko, said the measures violated WTO rules. Now the nations targeted by the food embargo could turn to the trade group to press a case against Russia.

The array of business affected is easy to see in the Perekrestok supermarket in southern Moscow. In two aisles of refrigerated packaged cheeses, only about a quarter of the cheeses are produced in Russia, either by Russian companies or foreign brands.

Cheeses not made in Russia included Arla's feta cheese produced in Denmark, Svalya's sliced Edam made in Latvia, Valio's Viola spread from Finland.

Finnish-based Valio is one of the European companies hardest hit by the embargo. It has been making almost all of its products in Finland and then shipping them over the border. Last year, Russia generated nearly 20 percent of sales for the company. Valio stopped the production of all of its Russia-bound products last week.

In a Monday statement, Valio said its subsidiary in Russia, which employs about 500 people, "has begun preparations for the gradual run-down of operations as the current inventory becomes exhausted and sales end."