Intra-EAEU trade barriers to Belarussian exports

_ Alex Melikishvili; Alex Kokcharov. London, 1 March 2018. Published for debate.

On 26 February 2018, Russia’s agricultural and food sector regulator, Rosselkhoznadzor, said that the ban on imports of milk and dairy products from Belarus to Russia would become effective from 6 March.

  • The dairy trade dispute between Belarus and Russia undermines trade freedom within the Eurasian Economic Union (EAEU); Russia, the largest economy in the trade bloc, is imposing restrictions to benefit its domestic producers.
  • This specific trade dispute is likely to be aimed at reducing the volume of food contraband of EU products reaching the Russian market mislabelled as made in Belarus.
  • If this and similar trade disputes within the EAEU continue, this will likely lower the efficiency of the trade bloc and its attractiveness to new entrants.

On 22 February 2018, Rosselkhoznadzor announced the introduction of the ban on dairy exports from Belarus, allegedly triggered by product quality concerns about Belarusian dairy exports, from 26 February.

Both Belarus and Russia are members of the Eurasian Economic Union (EAEU), founded in 2015, alongside with Armenia, Kazakhstan and Kyrgyzstan, where trade between the member states should be unrestricted. It was established as a Russian-centred alternative to the European Union (EU) for the post-Soviet states, and is similarly based on unrestricted movement of goods, services, capital and labour. Russia is the dominant economy in the EAEU, representing 87% of the combined GDP.

According to official data, in 2017 Belarus exported USD4.9-billion-worth of food and agricultural products, which makes this sector the second largest export industry in Belarus behind refined oil products (USD5.3 billion exported in 2017). Belarusian dairy exports (such as cheese, milk, butter, and yoghurt) reached USD2.1 billion in 2017. Russia is Belarus’ largest export market, taking more than 70% of food exports.

Russian trade barriers

The Russian government has a long track record of using trade restrictions to penalise other post-Soviet neighbouring states for political reasons, for example the periodic ban on import of wines and fruit from Moldova (see Moldova: 31 July 2014: Doubling of Moldovan fruit export quotas to EU to partly alleviate political, economic effects of Russian ban). EAEU member states are also targeted, as exemplified by regular trade disputes between Russia and Kazakhstan.

Belarus has a long history of multiple trade disputes with Russia, mostly relating to natural gas, crude oil and oil products. This is not the first time that Russia has punished Belarusian dairy producers. In May 2017, the Russian regulator applied a similar ban on a number of Belarusian dairy producers, citing non-compliance with quality and sanitary standards.

The latest bilateral dispute indicates Moscow’s willingness to use regulatory barriers to prevent goods imports and support domestic producers. Russia adopted a policy of import substitution in agriculture and food since 2014, when it introduced embargoes on imports of most categories of food products from the EU, US, Canada, Japan, and Ukraine, among others (see Russia: 5 August 2014: Russia’s import bans on Western foodstuffs largely symbolic but likely to escalate in reaction to future sanctions).

Thus, the Russian government clearly prioritises domestic food suppliers, even if this comes at expense of its trade allies within the EAEU, such as Belarus. The Eurasian Economic Commission (EEC), the governing body of the EAEU, on 23 February expressed its concern about the Russian ban. While there are occasional incidents of product quality control in regards to specific firms in Belarus and other EAEU countries, the politicised use of regulatory barriers is an easy avenue for Russia to channel political pressures against its junior trade partners in the trading bloc.

In particular, Russia has a significant concern about the growing contraband trade in Belarus, which entails mislabelling European food products as Belarusian to circumvent the Russian government’s food import embargo from the EU. The volume of this contraband is estimated in hundreds of millions of dollars annually by credible regional media. The latest ban on Belarusian dairy products is at ostensibly driven by that concern in order to clamp down on the illicit re-exports. However, the regulatory issue also presents an opportunity for Russia to leverage the interests of its domestic food manufacturers. Just before the ban on Belarusian dairy imports to Russia was announced, the Russian milk producers association reported “an oversupply in domestic milk production”.

Outlook and implications

The latest trade dispute indicates that Russia is willing to use regulatory bans as a tool to protect domestic manufacturers at the expense of its EAEU trade partners. As Russia is the dominant economy, and thus export market, in the bloc, it has significant leverage to treat its junior partners from the position of power. If this and similar trade disputes within the EAEU continue for a period of time, this is likely to lower the efficiency of the trade bloc and its attractiveness to new entrants. In the past several years, Russia has attempted to convince several other post-Soviet states, most notably Azerbaijan, Moldova and Tajikistan, to join the Russian-led trade bloc, but with no result to date.

Indicators of change would include the announcement of previously unscheduled talks between the leaders of Russia and Belarus, potentially with the involvement of other EAEU member states, such as Kazakhstan, and initiation of any trade dispute resolution proceedings by the EEC, which has yet to be tested in this capacity. If the mediation of the EEC and the ad-hoc summits fail, it would indicate continued Russian regulatory dominance in the trading bloc as well as Moscow’s willingness to use this dominance for the benefit of its domestic businesses. Another indicator of change would be the emergence of disputes in other important sectors, such as natural gas or refined oil products. These are likely to be used by Belarus for leverage in finding compromises on dairy trade.

Source: https://ihsmarkit.com/

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