By Araya & Cía international trade lawyer Karen Meier

There is no doubt that Russia is an interesting market. Its dependence on a few countries to top up its insufficient domestic fruit and vegetable production, in addition to the current decision to ban these products originating from the EU, makes it a great opportunity for our exporters. However, the companies must be careful when carrying out their business in this market, as it can present some risks from a contractual point of view.

In early August, Russia shook up the global fruit and vegetable market by reacting to economic sanctions imposed on it by the European Community and the United States, due to the ongoing political situation with the Ukraine.

The Russian Federation responded to the sanctions of the "Western Bloc" by banning - initially for one year - almost all important food and agricultural imports, along with raw materials, from the EU, U.S., Canada, Norway and Australia. As far as food is concerned, the import ban extends to beef, pork, vegetables, fruits, poultry, fish, cheese, milk and dairy products.

Russia is net importer of fruits and vegetables, principally from neighboring countries - the Ukraine, The Caucasus, and other Asian and European countries. Therefore, on one hand this decision will create complications inside the country, and on the other hand it will mean a drastic decline of imports from the United States, which during 2013 reached US$1.3 billion, while imports from Russia's main trading partner, the EU, amounted to €12 billion (US$15.3 billion) last year. Breaking down the fruit products individually, it is estimated that the Russian ban will affect 8% of European pear production, 7% of apples, 6% of red fruits, strawberries and kiwifruit, and 4% of peaches and nectarines, amongst others.

The effects of the measure have manifested themselves since early September with an oversupply of many products within the EU. European producers and exporters will be expecting the European Commission to respect the provisions of the European Parliament and the single common market organization (CAP) and act immediately, efficiently and effectively in this situation.

Chile and its trade with Russia

The decision of Putin's government was accompanied by immediate steps to remedy the supply shortage of the affected products, so as to avoid a domestic inflation crisis from the instability. As such, the director of the Russian Federal Service for Veterinary and Phytosanitary Surveillance (Rosselkhoznadzor), Serguéi Dankvert, met with the ambassadors of four Latin American states - Ecuador, Uruguay, Argentina, and Chile. Each one of these four countries was informed of the type of products that could be sent to Russia. In the case of our country, the possibility of increasing fresh fruit exports, amongst other products, was discussed.

Russia is an important market for Chile and progress has been made in recent years to strengthen the commercial ties and boost trade of agricultural products. In terms of figures, the results are undoubtedly encouraging.

According to official reports from ProChile, during 2013 exports to Russia increased 54% year-on-year. The agricultural sector hit US$260 million in 2012, and US$289 million in 2013. The most notable products included in this were pears (2% of all pears consumed in Russia in 2013 were from Chile), apples (3%), peaches and nectarines (1%).

The phenomenon of increased trade between the markets is currently combined with the high value of the U.S. dollar, which has recently hit a five-year peak. The two factors together inevitably generate optimism amongst the authorities and national suppliers.

However, it is likely that the sanctions between countries labeled the "Western Bloc" (the EU and U.S.) and the Russian Federation will continue. It is also estimated that these measures could deepen, or at least extend for a considerable period of time. It is therefore imperative to closely monitor the effects that this conflict can generate in the Chilean fruit and vegetable market, considering that two of its main trading partners are involved, and the third is an emerging market.

Taking this into account, Russia could undoubtedly be a great opportunity for the Chilean fruit industry. However, the industry should act cautiously. Fruit exporters should be very wary when undertaking new business in Russia, and/or increasing the number of shipments based on current agreements. Efforts should be made to determine a business structure in which payments are made based on agreed shipments, and the exporter should always check before signing any contracts to see if the receiving company has credit insurance.

They must also consider that, due to the prohibitive measures adopted, it's likely that European companies re-exporting Latin America products to the Russian market may try and manage direct shipments from Latin American suppliers to continue operating in that way. In that case, it will be important to say in the agreement exactly what the responsibilities of those intermediaries are.

www.freshfruitportal.com