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Chicken Egg Market in Eastern Europe – Russia’s Production Is Growing Rapidly, Driven by Strong Domestic Demand and Expanding Exports

chicken egg

Chicken Egg Market in Eastern Europe – Russia’s Production Is Growing Rapidly, Driven by Strong Domestic Demand and Expanding Exports

IndexBox has just published a new report: ‘Eastern Europe – Hen Eggs – Market Analysis, Forecast, Size, Trends and Insights’. Here is a summary of the report’s key findings.

The revenue of the chicken egg market in Eastern Europe amounted to $9.7B in 2018, surging by 6.6% against the previous year. This figure reflects the total revenues of producers and importers (excluding logistics costs, retail marketing costs, and retailers’ margins, which will be included in the final consumer price). Over the period under review, chicken egg consumption continues to indicate a relatively flat trend pattern. The most prominent rate of growth was recorded in 2013 when the market value increased by 13% against the previous year. The level of chicken egg consumption peaked at $10.8B in 2014; however, from 2015 to 2018, consumption stood at a somewhat lower figure.

Consumption By Country in Eastern Europe

The country with the largest volume of chicken egg consumption was Russia (2.6M tonnes), accounting for 54% of total consumption. Moreover, chicken egg consumption in Russia exceeded the figures recorded by the region’s second-largest consumer, Ukraine (898K tonnes), threefold. The third position in this ranking was occupied by Poland (345K tonnes), with a 7.2% share.

In Russia, chicken egg consumption expanded at an average annual rate of +1.6% over the period from 2007-2018. In the other countries, the average annual rates were as follows: Ukraine (+1.0% per year) and Poland (-3.8% per year).

In value terms, the largest chicken egg markets in Eastern Europe were Ukraine ($4.5B), Russia ($2.8B) and Hungary ($673M), together accounting for 82% of the total market.

The countries with the highest levels of chicken egg per capita consumption in 2018 were Ukraine (20 kg per person), Belarus (18 kg per person) and Russia (18 kg per person).

From 2007 to 2018, the most notable rate of growth in terms of chicken egg per capita consumption, amongst the main consuming countries, was attained by Russia, while the other leaders experienced more modest paces of growth.

Market Forecast 2019-2025 in Eastern Europe

Driven by increasing demand for chicken egg in Eastern Europe, the market is expected to continue an upward consumption trend over the next seven years. Market performance is forecast to retain its current trend pattern, expanding with an anticipated CAGR of +0.8% for the seven-year period from 2018 to 2025, which is projected to bring the market volume to 5.1M tonnes by the end of 2025.

Production in Eastern Europe

The chicken egg production amounted to 5.1M tonnes in 2018, therefore, remained relatively stable against the previous year. Overall, chicken egg production continues to indicate mild growth. The most prominent rate of growth was recorded in 2010 when production volume increased by 3.2% against the previous year. The volume of chicken egg production peaked in 2018 and is expected to retain its growth in the near future. The general positive trend in terms of chicken egg output was largely conditioned by slight growth of the number of producing animals and a relatively flat trend pattern in yield figures.

In value terms, chicken egg production stood at $11.3B in 2018 estimated in export prices. The total output value increased at an average annual rate of +1.4% from 2007 to 2018; the trend pattern indicated some noticeable fluctuations being recorded in certain years. The most prominent rate of growth was recorded in 2013 with an increase of 39% against the previous year. The level of chicken egg production peaked at $12B in 2014; however, from 2015 to 2018, production stood at a somewhat lower figure.

Production By Country in Eastern Europe

Russia (2.5M tonnes) constituted the country with the largest volume of chicken egg production, comprising approx. 50% of total production. Moreover, chicken egg production in Russia exceeded the figures recorded by the region’s second-largest producer, Ukraine (895K tonnes), threefold. The third position in this ranking was occupied by Poland (600K tonnes), with a 12% share.

From 2007 to 2018, the average annual rate of growth in terms of volume in Russia totaled +1.6%. In the other countries, the average annual rates were as follows: Ukraine (+0.9% per year) and Poland (+0.8% per year).

Producing Animals in Eastern Europe

In 2018, approx. 444M heads of producing animals were grown in Eastern Europe; approximately reflecting the previous year. This number increased at an average annual rate of +1.1% over the period from 2007 to 2018; the trend pattern remained relatively stable, with only minor fluctuations being observed over the period under review. The growth pace was the most rapid in 2012 with an increase of 5.3% y-o-y. Over the period under review, this number attained its peak figure level in 2018 and is likely to continue its growth in the near future.

Yield in Eastern Europe

In 2018, the average chicken egg yield in Eastern Europe totaled 11 kg per head, remaining stable against the previous year. Over the period under review, the chicken egg yield continues to indicate a relatively flat trend pattern. The growth pace was the most rapid in 2009 when yield increased by 7% year-to-year. In that year, the chicken egg yield attained its peak level of 12 kg per head. From 2010 to 2018, the growth of the chicken egg yield remained at a lower figure.

Exports in Eastern Europe

In 2018, approx. 437K tonnes of chicken eggs were exported in Eastern Europe; rising by 6.8% against the previous year. Over the period under review, chicken egg exports continue to indicate resilient growth. The most prominent rate of growth was recorded in 2013 when exports increased by 91% year-to-year. The volume of exports peaked in 2018 and are likely to see steady growth in the immediate term.

In value terms, chicken egg exports amounted to $657M (IndexBox estimates) in 2018. In general, chicken egg exports continue to indicate a buoyant expansion. The most prominent rate of growth was recorded in 2013 when exports increased by 53% against the previous year. The level of exports peaked in 2018 and are expected to retain its growth in the immediate term.

Exports by Country

Poland prevails in chicken egg exports structure, finishing at 267K tonnes, which was near 61% of total exports in 2018. Belarus (40K tonnes) took the second position in the ranking, followed by Russia (33K tonnes), Latvia (23K tonnes) and the Czech Republic (20K tonnes). All these countries together occupied approx. 27% share of total exports. Bulgaria (15K tonnes) and Romania (12K tonnes) followed a long way behind the leaders.

Poland was also the fastest-growing in terms of the chicken eggs exports, with a CAGR of +21.8% from 2007 to 2018. At the same time, Russia (+19.2%), Bulgaria (+15.5%), the Czech Republic (+6.4%), Latvia (+5.8%), Romania (+5.6%) and Belarus (+2.5%) displayed positive paces of growth. From 2007 to 2018, the share of Poland, Russia, Bulgaria, Latvia, the Czech Republic and Belarus increased by +54%, +6.5%, +2.8%, +2.4%, +2.3% and +2.2% percentage points, while the shares of the other countries remained relatively stable throughout the analyzed period.

In value terms, Poland ($402M) remains the largest chicken egg supplier in Eastern Europe, comprising 61% of total chicken egg exports. The second position in the ranking was occupied by the Czech Republic ($43M), with a 6.5% share of total exports. It was followed by Bulgaria, with a 5.2% share.

From 2007 to 2018, the average annual growth rate of value in Poland amounted to +19.0%. The remaining exporting countries recorded the following average annual rates of exports growth: the Czech Republic (+2.1% per year) and Bulgaria (+11.2% per year).

Export Prices by Country

In 2018, the chicken egg export price in Eastern Europe amounted to $1,504 per tonne, picking up by 3.6% against the previous year. Over the period under review, the chicken egg export price, however, continues to indicate a noticeable slump. The growth pace was the most rapid in 2017 when the export price increased by 24% against the previous year. Over the period under review, the export prices for chicken eggs attained their peak figure at $2,301 per tonne in 2007; however, from 2008 to 2018, export prices stood at a somewhat lower figure.

Prices varied noticeably by the country of origin; the country with the highest price was Bulgaria ($2,219 per tonne), while Belarus ($733 per tonne) was amongst the lowest.

From 2007 to 2018, the most notable rate of growth in terms of prices was attained by Poland, while the other leaders experienced a decline in the export price figures.

Imports in Eastern Europe

In 2018, the imports of chicken eggs in Eastern Europe stood at 182K tonnes, jumping by 6.4% against the previous year. The total imports indicated strong growth from 2007 to 2018: its volume increased at an average annual rate of +4.6% over the last eleven years. The trend pattern, however, indicated some noticeable fluctuations being recorded throughout the analyzed period. Based on 2018 figures, chicken egg imports decreased by -6.8% against 2015 indices. The most prominent rate of growth was recorded in 2013 with an increase of 20% y-o-y. The volume of imports peaked at 196K tonnes in 2015; however, from 2016 to 2018, imports stood at a somewhat lower figure.

In value terms, chicken egg imports amounted to $383M (IndexBox estimates) in 2018. Over the period under review, chicken egg imports continue to indicate a relatively flat trend pattern. The growth pace was the most rapid in 2014 when imports increased by 20% y-o-y. In that year, chicken egg imports attained their peak of $489M. From 2015 to 2018, the growth of chicken egg imports remained at a lower figure.

Imports by Country

Russia represented the main importing country with an import of around 84K tonnes, which amounted to 46% of total imports. It was distantly followed by the Czech Republic (20K tonnes), Hungary (17K tonnes), Poland (12K tonnes), Lithuania (11K tonnes), Latvia (8.7K tonnes) and Romania (8.5K tonnes), together creating a 42% share of total imports.

Imports into Russia increased at an average annual rate of +6.5% from 2007 to 2018. At the same time, Hungary (+15.5%), Lithuania (+15.4%), Romania (+7.6%), Latvia (+3.7%) and Poland (+2.7%) displayed positive paces of growth. Moreover, Hungary emerged as the fastest-growing importer in Eastern Europe, with a CAGR of +15.5% from 2007-2018. The Czech Republic experienced a relatively flat trend pattern. While the share of Russia (+23 p.p.), Hungary (+7.3 p.p.), Lithuania (+4.6 p.p.), Romania (+2.6 p.p.), Poland (+1.6 p.p.) and Latvia (+1.6 p.p.) increased significantly, the shares of the other countries remained relatively stable throughout the analyzed period.

In value terms, Russia ($208M) constitutes the largest market for imported chicken eggs in Eastern Europe, comprising 54% of total chicken egg imports. The second position in the ranking was occupied by the Czech Republic ($35M), with a 9% share of total imports. It was followed by Hungary, with a 7.2% share.

From 2007 to 2018, the average annual growth rate of value in Russia amounted to +3.3%. In the other countries, the average annual rates were as follows: the Czech Republic (-4.1% per year) and Hungary (+10.6% per year).

Import Prices by Country

The chicken egg import price in Eastern Europe stood at $2,099 per tonne in 2018, picking up by 3.7% against the previous year. Overall, the chicken egg import price, however, continues to indicate a noticeable slump. The pace of growth was the most pronounced in 2017 an increase of 11% y-o-y. Over the period under review, the import prices for chicken eggs attained their maximum at $3,152 per tonne in 2007; however, from 2008 to 2018, import prices failed to regain their momentum.

There were significant differences in the average prices amongst the major importing countries. In 2018, the country with the highest price was Russia ($2,490 per tonne), while Latvia ($1,300 per tonne) was amongst the lowest.

From 2007 to 2018, the most notable rate of growth in terms of prices was attained by Russia, while the other leaders experienced a decline in the import price figures.

Source: IndexBox AI Platform

arms trade

GLOBAL ARMS TRADE HIGHEST SINCE END OF COLD WAR

Hotter Since the Cold War

For obvious reasons, trade in arms is not governed by the same global trade rules as selling a doggy snood on Etsy. The rules of engagement are different and global flows of arms tell stories not of lighthearted fashion trends but of the enduring reality of global conflicts, the escalating and diffusing of tensions – the arming and disarming that reflects the current and projected state of international security.

Governments, formal military alliances and international organizations procure and sell arms for defense, for peacekeeping operations, and to engage in conflict. Conflicts today routinely intertwine regular military forces, militias and armed civilians. After a decade of steady increase, the volume of arms trade by 2012 had reached levels not seen since the end of the Cold War.

Up in Arms

2018 saw the continuation of armed conflicts throughout the Middle East and North Africa in Egypt, Iraq, Libya, Syria and Yemen. In sub-Saharan Africa, armed conflict raged in eleven countries including Nigeria, Somalia, South Sudan, the Central African Republic and the Democratic Republic of Congo. Afghanistan remains among the world’s most lethal states after decades of fighting.

India and Pakistan, Myanmar and other countries in Southeast Asia experienced armed conflict throughout the year and Russia’s annexation of Crimea from Ukraine remains unresolved. Colombia’s peace process hit rough patches, armed gangs threaten security in Central America, and Venezuela remains turbulent. This list is long, incomplete, and in flux, fueling demand for arms in conflict areas. At the same time, some sixty multilateral peace operations were active in 2018.

For fifty years, the Stockholm International Peace Research Institute (SIPRI) has gathered original data on world military expenditure and international arms transfers, analyzing trends in conflict, arms production and arms controls. In all, SIPRI estimates global military expenditure at $1.8 trillion and puts the total value of the global arms trade in 2017 at some $95 billion with weapons exports valued around $27.6 billion.

Arms transfers between 2009 and 2013 were 23 percent higher than in the period between 2004 and 2008. In the period 2014-2018, arms transfers reached the highest level since the end of the Cold War.

Global Weapons Exports

Who Sells and Who Buys in the War Economy

Official reporting is scant. Government to government transfers occur through varying types of complex and opaque arrangements. Pinning down numbers is also complicated by the existence of covert trade in arms. Within the realm of what SIPRI can track, the market is dominated jointly by the United States and Russia. According to SIPRI’s numbers, 202 states, 48 non-state armed groups, and five international organizations received arms shipments sometime in the last five years.

The United States, Russia, France, Germany and China are the five largest exporters of major arms, accounting for 75 percent of all arms exports, but SIPRI has identified as many as 67 countries that exported major arms in the last five years. The United States and Russia together comprise 57 percent of the total. The five largest importers were Saudi Arabia, India, Egypt, Australia and Algeria, together accounting for 35 percent of total arms imports between 2014 and 2018. The political alignments can be seen by matching the buyers and sellers.

Buyers and Sellers of Arms

Notably, advanced combat aircraft accounted for more than half of all U.S. major arms exports over the last five years and will remain the main driver with nearly 900 orders in the pipeline. Guided missiles accounted for 19 percent of U.S. major arms exports and the United States is the primary exporter of ballistic missile defense systems.

Russia’s exports declined over the last five years as sales to India and Venezuela dropped by 42 percent and 96 percent respectively. Over the same period, Russia’s sales to the Middle East increased 19 percent, mainly to Egypt and Iraq. SIPRI reports that China supplies relatively small volumes of major arms spread across 53 countries, up from 41 five years ago. At the same time, China is the world’s sixth largest importer of arms. Russia supplied 70 percent of China’s arms imports over the last five years.

Under Control

Seven of the world’s largest defense companies by arms sales are American. They include Lockheed Martin with international arms sales worth $40.8 billion in 2016, and Boeing at a distant second with $29.5 billion in sales. Raytheon, Northrop Grumman and General Dynamics come in the next tier with sales between $19 and $23 billion. Among the top 100 firms, U.S. companies accounted for 58 percent of total global arms sales in 2016.

When it comes to production and trade in military supplies, the WTO steps out of the way. Article XXI of the General Agreement on Tariffs and Trade provides a national security exemption:

“…nothing in this Agreement shall be construed…to prevent any contracting party from taking any action which it considers necessary for the protection of essential national security interests…relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment.”

Trade in conventional arms and dual-use goods and technologies (those with both military and commercial applications) is regulated through other policies that include government defense procurement regulations, national export control licensing regimes and embargoes. In the United States, under the Arms Export Control Act and the International Traffic in Arms Regulations, exports of defense materials and services by U.S. firms are tightly controlled through licensing approvals.

Wassenaar Arrangement

Forty-two member countries maintain national export controls in conformance with items included on the 1996 Wassenaar Arrangement’s two control lists. As part of the Arrangement, members also agree to voluntarily and confidentially exchange information about transfers to non-Wassenaar countries of conventional weapons and dual-use goods and technologies on these lists. Weapon categories to be reported include armored combat vehicles, large-caliber artillery, military aircraft, missile systems, small arms and light weapons.

Wassenaar members are encouraged to use non-binding criteria to help determine whether potential arms exports could lead to “destabilizing accumulations,” and to guide their disposal of surplus military equipment. Wassenaar and other efforts to restrain arms transfers through international treaties and multilateral embargoes suffer, however, from low levels of national government engagement by important producers and importers of weapons.

Military-Industrial Complex-ity

Governments seek to procure technologically advanced weaponry for their own national security. At the same time, they must prevent the sale of such weapons to others who would use them against the state or who would deploy them to fuel conflicts that run counter to national security interests.

In balancing these objectives, national export control regimes have struggled against the pace of technological innovation and the proliferation of technologies that have dual commercial and military applications. The defense industry itself is defined by this paradox – it is propelled forward by government protected from competition but also shaped by market forces that induce innovation, specialization and consolidation.

As the costs and complexity of developing and manufacturing advanced weapons increase, firms specialize in facets of production. Interdependence among firms has deepened as global supply chains tend to be anchored by a handful of large tier-one firms. The industry has consolidated, including by merging across borders. In circular fashion, these developments make it harder for governments to regulate foreign investment and maintain appropriate controls on arms transfers.

Adding the complexity of this unique industry, firms that enjoy a special status under trade rules for military production also have commercial products and sales for which the normal rules apply. It’s a heavy invisible hand in the market for arms. Global trade rules need not apply.

____________________________________________________________

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

Russia

U.S. HITS RUSSIA & VENEZUELA WITH TOUGHER SANCTIONS

The Trump Administration on Aug. 2 imposed a second round of sanctions on Russia in response to Moscow’s 2018 use of chemical weapons in the United Kingdom to poison a former Russian spy. Three days later, the White House intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with China and … wait for it … Russia!

So much for collusion.

For the seed that planted the intensified economic pressure on the Kremlin, you have to go back to March 2018, when former Russian double agent Sergei Skripal (a British national) and his daughter were poisoned with Novichok, a military-grade nerve agent developed in the Soviet Union, at their home in Salisbury, England. 

The UK determined that the Russian government was responsible for the attacks and, in response, the U.S. expelled Russian officials, closed the Russian consulate in Seattle and, in August 2018, announced sanctions that impacted arms sales and foreign assistance to Russia. The second round of sanctions concern restricted export licensing and loans and other financial assistance from U.S. banks and international financial institutions to Russia. 

As was the case with Russia, the Venezuela sanctions came as a result of a late-night Executive Order by President Donald Trump, who blocked all property, and interests in property, of the South American country’s government that are within the jurisdiction of the U.S. The Secretary of the Treasury is also authorized to impose secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Venezuelan government. 

Trump’s order accuses the Maduro regime of “human rights abuses,” “interference with freedom of expression” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

trade war

How Has the Trade War Affected China?

In the last two weeks the stakes in the ongoing trade conflict between the United States and China have increased significantly. After negotiations stalled in July, President Trump expanded his tariff targets to cover nearly all imports from China. But the weapons in this conflict have become increasingly more sophisticated. Beijing retaliated by suspending purchases of U.S. agricultural products and by lowering the value of its currency to make Chinese goods less expensive abroad. In response, the U.S. Treasury named China a currency manipulator and vowed to take actions to eliminate the alleged unfair competitive advantage. In addition, President Trump announced that the United States is not going to do any business with China’s tech giant Huawei. 

While these escalations have recently uneased investors and rattled the markets, they have yet to make an obvious impact on the U.S. economy, albeit U.S. farmers have begun to experience the negative effects of lost sales to China. But how have these actions resonated in China? There are some indicators that the trade war has had an impact on the Chinese economy, as well as public perception in that country. 

At the moment, the U.S. can claim a short term victory, although China appears to be playing the long game. Official reports indicate that Chinese economic growth has decelerated to its slowest pace since 1992, as businesses have held back on investment in light of the ongoing trade tensions with the United States. Also, Chinese exports to the U.S. declined by $5.6 billion in June, versus a $1.8 billion decrease in U.S. exports to China. 

The Trump administration has claimed that its trade policy seeks to remedy problems which have been neglected for too long, and to defend America’s economic interests against perceived abuses by its trade partners. The administration has introduced tariffs as a means to address alleged intellectual property violations by China and a growing trade deficit. Its trade policy takes into account that some pain will need to be absorbed by the United States. However, it is not evident that the U.S. consumer has suffered yet. U.S. importers have to pay the tariffs, and so far many have sough ways to absorb them in whole or in part to minimize any price increases for the consumer. They have also begun to shift sourcing to third countries, including bringing some production to the United States. 

Concurrently, Beijing has implemented a robust domestic stimulus by encouraging banks to relax controls on borrowing and by cutting 2 trillion yuan ($291 billion) in taxes. Furthermore, investment in infrastructure has increased in the first half of the year and Chinese factory output rose 6.3% in June from a year earlier, compared with 5.3% in May. Also, by letting the value of the yuan fall and making Chinese goods cheaper, China has in effect offset some of the impact of the U.S. tariffs – essentially giving the U.S. consumer a tax cut.

The efforts by the Chinese government to lower domestic taxes and support an easier fiscal policy appear to have been, at least temporarily, beneficial to economic growth. If these actions are to be expanded, they may continue to serve as a further stimulus in the second half of this year in areas such as consumption and investment. Although Chinese shipments to the United States have declined, they comprise only about a fifth of its overall exports. By allowing the yuan to fall, China can boost its sales to other countries to offset declines to the United States. 

The trade conflict also does not appear to have had a negative impact on the mindset of the Chinese population at large. Skilled workers and professionals have expressed an open mind to the ongoing trade negotiations, some even welcoming them with a sentiment that “Trump is good for Chinese people” because he has opened up the dialogue between the two countries on trade which in turn has fostered certain welcome reforms in China, as well as tax cuts. Indeed, if Beijing had already planned to institute such measures, then U.S. policy may have provided ample cover for them.

The trade war has also led China to reevaluate existing global alliances, such as those with Japan and Russia. Mending fences with Russia, for instance, is key to the continuation of China’s ambitious “Belt and Road Initiative” of investment and infrastructure projects to connect Asia with Africa and Europe via land and maritime networks. 

With further entrenchment by both sides, and a trade deal increasingly unlikely before next year’s U.S. presidential elections, China appears to be bracing itself for a protracted conflict and may have reason to believe it can “win” if President Trump faces increased political pressures entering the election. As the President recently announced, China may be counting on a Democrat to win the White House to strike a new trade deal. On the other hand, a continuing conflict between two of the world’s greatest economies which has evolved from measures to address intellectual property protection and trade imbalances to currency manipulation, may in the long run lead to recession and hurt growth globally. 

Mark Ludwikowski is the leader of the International Trade practice of Clark Hill, PLC and is resident in the firm’s Washington D.C. office. He can be reached at 202-640-6680 and mludwikowski@ClarkHill.com

U.S. Strengthens Sanctions Targeting the Government of Venezuela

On August 5, 2019, the Trump Administration intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with Venezuela’s supporters, Russia and China.  In a late-night Executive Order, President Trump announced that all property, and interests in property, of the Government of Venezuela, including its agencies, instrumentalities, and any entity owned or controlled by the foregoing, that are within the jurisdiction of the United States would be blocked.

The Order further suspended entry into the United States of sanctioned persons absent a determination from the Secretary of State. The Order also authorizes the Secretary of the Treasury to impose additional secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Government of Venezuela.

Background

In January 2019, after months of economic turmoil and political unrest under Venezuelan President Nicolás Maduro, the United States formally recognized Juan Guaidó, the leader of the Venezuelan National Assembly, as the country’s legitimate head of state.  More than fifty nations followed suit, asserting that President Maduro’s 2017 reelection was illegitimate and that Guaidó was the rightful interim president under the Venezuelan constitution.

The Trump Administration followed its recognition of Mr. Guaidó as interim president with sweeping sanctions on the Venezuelan government. The measures included designating Venezuela’s state-run oil company, Petróleos de Venezuela, S.A. (“PdVSA”), as a Specially Designated National (“SDN”), thereby prohibiting U.S. persons from engaging in transactions with PdVSA, as well as transactions by non-U.S. persons conducted in U.S. dollars, unless otherwise authorized by the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”).  (We previously summarized the PdVSA SDN designation here.)

Despite the increasing U.S. pressure, President Maduro has refused to cede power.  He retains the support of the Venezuelan military, and Russia, China, Iran, Cuba, and Turkey have continued their economic and diplomatic relationships with the regime.

Sanctions Overview

Through this new Executive Order, the Trump Administration has ratcheted up its efforts against the Maduro regime, asserting that further measures are necessary to combat “human rights abuses,” “interference with freedom of expression,” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

However, contrary to initial press reports, the action does not create a comprehensive embargo against Venezuela (on the model of the U.S. sanctions against Iran) that would prevent U.S. persons from engaging in almost all transactions. Instead, the new measures focus on the Venezuelan government by blocking all property and interests in property of the government that are currently in the United States, will be brought into the United States, or come into the possession or control of a U.S. person. There is, however, an exception for humanitarian goods, such as food, clothing, and medicine.  The Order applies regardless of contracts entered into, or licenses or permits granted, prior to the Order.

Further, the Order could have a broad impact outside of the United States by authorizing secondary sanctions against any party determined by OFAC to “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” the Government of Venezuela.  U.S. National Security Advisor John Bolton warned the day after the Order, “We are sending a signal to third parties that want to do business with the Maduro regime: proceed with extreme caution.  There is no need to risk your business interests with the United States for the purposes of profiting from a corrupt and dying regime.”

In conjunction with the Order, OFAC also revised twelve existing general licenses (“GLs”) and issued thirteen new GLs.  Notably, GL 28 authorizes through 12:01 a.m. on September 4, 2019, transactions necessary to wind-down contracts with the Government of Venezuela.  GL 31 also authorizes transactions with the Venezuelan National Assembly and the shadow government of Interim President Juan Guaidó, underscoring that the target of the action is the administration of Nicolás Maduro.

The GLs and related guidance make clear that the people of Venezuela are not the target of the sanctions.  Specifically, OFAC released a document entitled “Guidance Related to the Provision of Humanitarian Assistance and Support to the Venezuelan People,” which emphasized that “humanitarian assistance and activities to promote democracy are not the target of U.S. sanctions and are generally excepted from sanctions . . . ”  OFAC simultaneously issued four new Frequently Asked Questions (FAQs).  FAQ 680 stresses that “U.S. persons are not prohibited from engaging in transactions involving the country or people of Venezuela, provided blocked persons or any conduct prohibited by any other Executive order imposing sanctions measures related to the situation in Venezuela, are not involved.”

OFAC also issued a number of GLs to authorize humanitarian transactions and transactions necessary for communications involving Venezuela, including new GLs 24 (telecommunications and common carriers), 25 (Internet communications), 26(medical services), and 29 (broadly authorizing certain non-governmental organizations).

Further, U.S. persons in Venezuela are not targeted by the sanctions.  Section 6(d) of the Order exempts from the definition of Government of Venezuela “any United States citizen, any permanent resident alien of the United States, any alien lawfully admitted to the United States, or any alien holding a valid United States visa.”  Further, GL 32authorizes U.S. persons resident in Venezuela to engage in ordinary and necessary personal “maintenance” transactions, including “payment of housing expenses, acquisition of goods or services for personal use, payment of taxes or fees, and purchase or receipt of permits, licenses, or public utility services.”

Such measures targeting an entire government have rarely been used by the United States, and there are many questions about how the restrictions and related authorizations will be interpreted and applied.  As Bolton observed, “This is the first time in 30 years that [the U.S. is] imposing an asset freeze against a government in this hemisphere.”

Effect of the Sanctions

There has been some confusion in the media over the breadth of the measures.  Some reports have mischaracterized the Order as a “total embargo;” however, the scope of the Order is limited to property, and interests in property, of the Venezuelan government, its agencies, instrumentalities, and entities owned or controlled by these.  Because many major Venezuelan government entities have already been designated as SDNs in earlier actions, including PdVSA and the Central Bank of Venezuela, the measures appear to be only an incremental expansion of the existing sanctions program.

More significantly, the Order creates a secondary sanctions regime for OFAC to designate non-U.S. parties who continue to do business with the Maduro government.  While these secondary sanctions are most likely to target Cuban, Russian, and Chinese entities that continue to provide aid to the ailing regime, all non-U.S. persons engaging in transactions in the country should carefully assess whether those transactions could benefit the government.  In particular, companies trading with Venezuela should conduct due diligence sufficient to ensure that their counterparties are not owned fifty percent or more by the Government of Venezuela, or are not otherwise controlled by the government.

In addition, from a practical standpoint, although the sanctions only apply to Government of Venezuelan and related entities, the measures may cause financial institutions, insurers, freight forwarders and other companies – who often apply a heighted level of compliance going beyond the minimum required by OFAC – to avoid dealing with Venezuelan entities altogether.

The measures against Venezuela could also escalate existing tensions with Russia and China if the sanctions further restrict the countries’ access to Venezuelan oil.  Russia and China, which have continued to back the Maduro regime, currently import Venezuelan oil as part of a debt relief program.  China is slated to continue receiving oil from Venezuela until 2021, so it stands to suffer substantial losses if it is unable to continue the shipments.  This uncertainty comes in the midst of deteriorating relations between the United States and China due to the ongoing trade war, relations which suffered another blow this week when the Trump Administration labeled China a “currency manipulator.”

U.S. Issues Second Round of Chemical Weapons Sanctions Against Russia

On August 2, 2019, the Trump Administration imposed a second round of sanctions on Russia in response to Russia’s 2018 use of chemical weapons in the United Kingdom to poison a former Russian spy.  The sanctions could exacerbate tensions between the United States and Russia, as they add to a sanctions regime that has already significantly burdened Russia’s economy.

Background 

In March 2018, former Russian double agent Sergei Skripal (a British national) and his daughter were poisoned with Novichok, a military-grade nerve agent developed in the Soviet Union, at their home in Salisbury, England.  The United Kingdom determined that the Russian government was responsible for the attacks.  In response, the United States, along with Canada and a number of European countries, expelled dozens of Russian officials, and also closed the Russian consulate in Seattle.  In retaliation for the attacks, the United States announced a first round of sanctions on Russia in August 2018. Those sanctions impacted, inter alia, arms sales and foreign assistance to Russia (aside from urgent humanitarian assistance and food and other agricultural products).

Overview of Sanctions 

Administration officials stated that a second round of sanctions in response to the chemical attacks was necessary after Russia failed to provide adequate assurances, in accordance with the requirements of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (“the Act”),  that it would halt the use of chemical and biological weapons.  The State Department and Treasury Department announced these sanctions after the Trump Administration issued a late-night Executive Order on August 1, 2019, granting the two agencies the power to impose sanctions on countries that violate the Act.  According to the State Department, these new measures will include:

Sanctions preventing the extension of any loans or financial assistance to Russia by international financial institutions, such as the World Bank Group or International Monetary Fund;

-Sanctions prohibiting U.S. banks from participating in the primary market for non-ruble denominated Russian sovereign debt and lending non-ruble denominated funds to the Russian sovereign; and

-Additional export licensing restrictions on Department of Commerce-controlled goods and technology.

The measures will go into place after a 15-day Congressional notification period and will remain in place for at least one year.

On August 2, 2019, the Treasury Department Office of Foreign Assets Control (“OFAC”) issued a Russia-Related Directive implementing the second measure announced by the State Department.

The measures go into effect after August 26, 2019, and they apply to U.S. banks, which are defined to include “any entity organized under the laws of the United States or any jurisdiction within the United States (including its foreign branches), or any entity in the United States, that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures, or options, or procuring purchasers and sellers thereof, as principal or agent.”  The term “Russian sovereign” includes any ministry, agency, or sovereign fund of the Russian Federation, but the term excludes Russian state-owned enterprises.

According to recently-published OFAC FAQs, the measure prevents U.S. banks from participating in the primary market for Russian sovereign debt, but the prohibition does not extend to the secondary market. Additionally, the prohibition does not apply to loans or bonds denominated in rubles.  While the OFAC Directive is limited to the activities of U.S. banks as defined in the Directive, it is not clear if the secondary sanctions provisions of the Countering America’s Adversaries Through Sanctions Act of 2017 (“CAATSA”) could reach non-U.S. actors.  Persons dealing in Russian sovereign debt that are not U.S. banks should also be alert to future changes in these rules that could affect their activities.

Written by: Ryan Fayhee, Roy (Ruoweng) Liu, Alan Kashdan, Tyler Grove and Sydney Stringer at Hughes Hubbard & Reed LLP

Update on Russia: Restrictions Expanded to New Actors, Industries

Since the beginning of August 2018, the United States has taken multiple actions that will affect U.S. trade with Russia.  The actions cover exports to Russia, doing business with Russian partners, and potential Russian investment in the United States.  These actions have added to the already challenging landscape of conducting business in and with Russia.

 

Economic Sanctions in Place Since 2014 Are Expanded Again

The United States has maintained targeted economic sanctions on Russia since 2014.  Most of these sanctions are administered by the U.S. Treasury Department, Office of Foreign Assets Control (OFAC).

These sanctions ensnare many prominent Russian individuals and entities.  They have also ensnared prominent U.S. companies: see our July 2017 blog post on penalties imposed against Exxon for Russia sanctions violations.  For an example of how sanctions have been periodically and consistently extended, see our September 2016 blog post.

There are also more recent examples.

First, in Executive Order 13,848, issued on September 12, 2018, President Trump established a process to investigate and impose sanctions against foreign parties and their agents that interfere in U.S. elections.  Under the Order, no later than 45 days after an election is concluded, if there is an indication of actions taken to interfere with the outcome of the election, an assessment must be conducted.

When the assessment is concluded, the outcome must be reported to the President, the Attorney General, and the Secretaries of Defense, Homeland Security, State, and Treasury.  Within 45 days of receiving that assessment, the Attorney General and Secretary of Homeland Security must report on whether there was foreign interference in the election.  Any party deemed to have been involved in that interference can be designated as a Specially Designated National (SDN).  As a general matter, U.S. persons cannot conduct any business with an SDN.

In addition, the Order authorizes the imposition of sanctions against the largest business entities licensed or domiciled in a country whose government authorized, directed, sponsored, or supported election interference, including at least one entity from each of the following sectors: financial services, defense, energy, technology, and transportation (or, if inapplicable to that country’s largest business entities, sectors of comparable strategic significance to that foreign government).

While the Executive Order does not say so specifically, it is safe to conclude that the Order is directed at least in substantial part toward Russia.

Second, sanctions were imposed pursuant to the Countering America’s Adversaries Through Sanctions Act (CAATSA).  (More information about CAATSA is available in our August 2017 blog post.)  Under CAATSA, among other things, the U.S. government designates parties that are affiliated with the Russian government’s defense or intelligence sectors, and can impose sanctions against persons that transact with those designated parties.

On September 20, 2018, the U.S. State Department designated 33 such parties and added them to the list of 39 parties designated previously.  Those 72 parties are listed on the CAATSA section 231 List of Specified Persons (the LSP).

There is no outright prohibition on conducting business with these 72 parties.  However, any person – regardless of nationality – that engages in a “significant transaction” with a party on the LSP is subject to sanctions, including designation by OFAC as an SDN.

What constitutes a “significant transaction” is not well-established in OFAC regulations or guidance.  But some insight was offered on September 20.  On that day, acting in concert with the State Department, OFAC designated one Chinese individual and one Chinese entity as SDNs for involvement in a significant transaction with parties on the LSP.

The designations, and additional trade restrictions imposed on these two Chinese parties by the State Department, were made because the Chinese parties were involved in a transfer to China from Russia of combat aircraft and surface-to-air missile system-related equipment. The State Department characterized this as a significant transaction which triggered designation under CAATSA, though State did not specify whether the size of the transaction, the nature of the equipment transferred to Russia, and/or other factors rendered this a significant transaction.

 

New Export Restrictions Announced Under Chemical and Biological Weapons Law

On August 6, the State Department announced its determination that the government of Russia used chemical weapons in England in an effort to assassinate Sergei Skripal, a former Russian spy, and his daughter.  The determination was made pursuant to the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the CBW Act).

On August 27, acting in accordance with the CBW Act, the State Department announced the following restrictions on Russia:

-Termination of sales to Russia of defense articles and defense services, including termination of existing licenses for exports of such articles and services, except for exports in support of government and commercial space activities; and

-The prohibition on exports to Russia of commercial products and technology (e., items controlled for export under the Export Administration Regulations) subject to national security controls, with exceptions for certain exports specifically authorized under new licenses and specific license exceptions.

The State Department also imposed limits on certain financial assistance and aid for Russia.

The restrictions, which will remain in place for at least one year, augment existing restrictions on exports to Russia of certain oil and gas exploration equipment and exports to military end-users and for military end-uses.

 

Russian Investment in United States Likely to Be Subject to Greater Scrutiny

In August 2018, President Trump signed the Foreign Investment Risk Review Modernization Act (FIRRMA) into law. FIRRMA expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review more types of transactions for potential national security concerns.

Much attention has understandably been paid to the impact that FIRRMA will have on investment from China. The impact on investment from Russia is likely to be significant, too.

For one, FIRRMA specifically contemplates scrutiny of investments originating in countries of “special concern.” In addition, the new law anticipates careful review of transactions that could create or expose U.S. cybersecurity vulnerabilities, including if the acquisition could facilitate election interference.

Russia is one of the countries that will be most impacted by these new provisions. Moreover, Russian investment in the United States will likely trigger CFIUS interest simply given how aggressively the Trump Administration has used national security as a basis for implementing trade restrictions. (In one particularly obscure example, OFAC recently emphasized how North Korea is using a large number of North Korean laborers in Russia to evade U.S. sanctions.)

 

Conclusion

We do not foresee the U.S. government easing trade restrictions on Russia anytime soon. To the contrary, we believe the U.S. government will continue to expand restrictions on Russia using mechanisms such as those described in this article.

It is therefore essential for companies to fully understand the scope of their Russia business. Screen transaction parties against the U.S. government restricted and prohibited parties lists, including – now – the LSP. Recognize that many U.S. exports to Russia are restricted based on the recipient or end-use of the product. Beware that Russian investment in the United States may face extra scrutiny.

Unfortunately, due diligence on Russian counterparts presents unique challenges. The ownership and organizational structures of such entities can be convoluted and obscure.  Accordingly, if a company has any reason to think a Russian business partner is affiliated in any way with a sanctioned entity, it is essential to enlist expert assistance to fully tease out ownership and control before proceeding.

Thad McBride is a partner in Bass, Berry & Sims PLC’s Washington, D.C. office in the firm’s International Trade Practice Group. They focus on counseling clients on compliance with economic sanctions and embargoes, US export regulations (ITAR and EAR), and the Foreign Corrupt Practices Act (FCPA). He may be reached at tmcbride@bassberry.com.

 

 

Moscow Targets McDonald’s Charity Operation

Los Angeles, CA – Ronald McDonald House Charities is the latest target of Moscow’s campaign of investigations into the Russian operations of global fast food giant McDonald’s.

Russian authorities are reportedly preparing to level tax evasion and money laundering charges against the charity, which operates a sports facility for physically and mentally disabled children in Moscow, and a residential facility near a children’s hospital in Kazan, 450 miles east of Moscow.

In an interview with the Washington Post, Russian Duma legislator Andrei Krutov said, “They use donations from ordinary Russians, so that is why we want to know how this money is spent. I am talking only about financial aspects of their activities, and technical questions about their work. We do not want you to think that we have political reasons for doing this.”

In August, Russia’s consumer protection agency ordered four of the company’s largest restaurants to suspend operations over a host of alleged hygiene violations and shortly afterwards added another five to the list.

Since then, 12 restaurant in Russia have been closed for alleged “sanitary reasons” while more than 200 unscheduled hygiene and safety “inspections” have been carried out.

Last week, nine more McDonald’s outlets – four in Moscow, two in Yekaterinburg, two in Volgograd and one in Sochi – were “temporarily” shut-down.

The latest move subjects more than half the McDonald’s franchises in Russia to government scrutiny.

McDonald’s Russia issued a statement on its website over the weekend saying that, “Right now, more than 200 probes have been initiated,” adding that a Russian court had extended the government’s temporary closure of the initial nine restaurants and added that it would appeal against the decision.

The company, which opened its first restaurant in Russia in 1990, has 450 restaurants across the country, more than 100 of which are in Moscow and the surrounding region. More than 60 are in St Petersburg and the surrounding region, the country’s second big metropolitan area.

Moscow’s investigation campaign is seen in the West as a slap-back at the economic and financial sanctions and executive orders put in place earlier this year by the US in response to Russia’s seizure of the Crimea and continued incursions into neighboring Ukraine.

10/20/2014

Exporters to Russia Face Increased Payment Risks

Los Angeles, CA -Russia is currently experiencing a slowdown in economic growth, and the situation is most likely to deteriorate further as a result of the newly imposed sanctions, according to a new country analysis report issued by The Atradius Group, the Netherlands-based global risk management firm.

Atradius is observing an impact across all sectors in the form of decreasing domestic demand, a weaker ruble exchange rate, a rise in inflation, limited access to external financing and international capital outflow.

Exporters to Russia “could experience an increase in payment delays and defaults with some sectors expected to be more affected than others,” the report said.

Russian sanctions on imports of food and agricultural products “will hit the food sector, in particular the fish, meat and dairy subsectors, with a negative impact on the whole value chain, while sectors dependent on consumer demand, such as the consumer durables and consumer electronics sectors are also expected to see further slowdown,” it said.

In addition, the report said, US and EU sanctions on financing are expected to put a toll on Russian businesses dependent on financing.

The oil and gas industry “is still performing well thanks to high commodity prices, but businesses in other strategic sectors such as metals and mining are suffering, and may not be able to refinance their large debts. While the Russian government is ready to provide financial support, its reserves, though ample, are limited.”

Some sectors, however, such as the pharmaceuticals sector, “are expected to be less impacted and local agricultural production could even benefit from restrictions on food imports,” the report said.

“In case of price controls, however, business profits may be hit with higher costs that cannot be transferred to consumers in such cases,” the report concluded.

09/23/2014

 

 

All-Out Ban Urged on Russian Seafood Imports

Los Angeles, CA – A number of companies from Alaska’s $6 billion seafood industry are voicing their support for a ban on Russian seafood imports to the US, while urging Moscow to rescind its August ban on US food imports.

Such a move, they say, “would not only further squeeze Russia’s faltering economy as Russia threatens European stability, but would support America’s sustainable, high-quality fisheries.”

Companies calling for the action reportedly include some of the largest seafood producers in the Pacific Northwest including Alaska General Seafoods, Alyeska Seafoods, Icicle Seafoods, North Pacific Seafoods, Ocean Beauty Seafoods, Peter Pan Seafoods, Trident Seafoods, Westward Seafoods, and UniSea Inc., all based in Washington state, as well as the entire membership of the Alaska Bering Sea Crabbers Association.

The proposed US ban, the group says, would remain in effect “until Russia rescinds its ban on US imports, and would include mechanisms to prohibit all seafood imports of Russian origin, including Russian-caught seafood that is transferred through other countries such as China before reaching the US.”

Hundreds of millions of dollars of Russian seafood imports are sold in the US every year, with much of the imported Russian fish coming through China.

The Alaska seafood industry is seeking support from the state’s Congressional delegation for the ban, as well as from the Office of the US Trade Representative, while also seeking diplomatic efforts to immediately end Russia’s ban on US seafood products.

Russia has been a major market for US seafood products such as salmon roe, hake, Alaskan pollock, and others, while the US has been an important market for Russian products including crab, Russian pollock, salmon, and caviar.

According to the US Department of Commerce, sales of food and agricultural products to Russia amounted to $1.3 billion in the first five months of this year with more than $86.5 million of that was from US seafood, including shrimp, hake, sole and sardines. The majority of that — $46.4 million — was salmon roe, used for Russian red caviar.

“We did not start this fight, and we hope the Russians will call off their embargo,” said Terry Shaff, president & CEO of Washington-headquartered seafood producer UniSea Inc.

But, he said, “a US ban will signal to President Putin that America will not sit idly by while Russia disregards international law and tries to coerce the world into ignoring its transgressions through retaliatory actions,”

09/19/2014