Kazakhstan falls victim to Russia-inspired sugar shortage

ALMATY -- Russia's coercive economic policies have led to a massive shortage of sugar in Kazakhstan, threatening the livelihoods of local businesses and harming the nation's citizens.

Earlier this year, Kazakhstan agreed, after negotiations with Moscow, to raise custom duties on sugar imported from countries outside the Eurasian Customs Union (EACU), Suren Abibulayev from Almaty, supply chain manager of the Kazakh food conglomerate Raimbek Group, said in Almaty September 13.

As a result, the Kazakh government issued a resolution that went into effect on August 1, imposing a new $340 (122,951 KZT) customs duty per tonne of sugar, he said.

Sugar costs $330 (119,335 KZT) per tonne on the London exchange, Abibulayev said, which means the duty costs more than the sugar itself.

At the same time, inexplicably, domestic production of sugar Kazakhstan has come to near a stand still.

Kazakhstan consumes about 550,000 tonnes of sugar annually, and until recently the Almaty-based Central Asian Sugar Corporation (TsASK) produced 70 to 80% of this amount, Abibulayev said.

However, on August 1, the same day that new resolution came into effect, three plants belonging to TsASK "stopped working for certain reasons", he said.

No official reason has been given as to why this stoppage has occurred, but the consequence has been the creation of a massive sugar shortage in Kazakhstan, and sugar imports from Russia are now the only available option.

This shutdown puts all local companies that depend on sugar at risk, said Abibulayev.

"In two weeks, the sugar in our retail chains will run out," he said.

"Sugar has become expensive," Aliya, who gave no last name and works in an Almaty market, told Caravanserai Monday (September 17). "Last week, we were selling it for 250 KZT [$0.67 per kg], but now we have to buy it at 350 KZT [$1 per kg], which means we have to sell it for even more than that. That is unprofitable, so we aren't buying it now."

Coercive policies

The lack of imports and of domestic production means that Kazakhstan has no choice other than to buy sugar from Russia.

However, unfavourable climate conditions this year led to a drop in the yield of Russian sugar beets, which factories turn into white sugar.

As a result, major Russian producers have already stopped exporting sugar, admitting to their Kazakh partners that they are doing so in expectation of a price increase for their goods.

Such producers were selling sugar for $500 (180,810 KZT) per tonne even before they halted exports, according to Abibulayev.

Russian sugar, even though it costs so much, is of so low quality that some major buyers like the confectionary industry cannot use it, according to Konstantin Fedorets, the Almaty-based managing director of the Rakhat Co., which sells confectioneries across Kazakhstan.

"We need a higher-quality product that Russia is unable to make and will not learn to make soon," he said at the September 13 press conference.

But that is not the entire problem, he warned.

For Russian confectionary companies, the cost of sugar will remain the same, while Kazakh companies will pay more. On top of everything else, that problem will intensify the strong competition on the Kazakh market between Russian and local companies, in which the local companies will lose, he said.

Seizing markets

Part of the issue is Kazakhstan's membership in the Russian-led EACU, which limits its ability to import raw materials from non-members.

The EACU was founded by Belarus, Kazakhstan and Russia in January 2010. Armenia and Kyrgyzstan joined in 2015. It includes all members of the Eurasian Economic Union.

Union members levy no customs duty on goods moving between member states. However, members must impose a common tariff on goods imported into the union.

As such, some analysts say that Russia's goal in establishing the union is to stop member states, including Kazakhstan, from importing raw materials except from Russia.

Before Kazakhstan joined the union, many economists warned that the move would be detrimental to the country, Rasul Zhumaly, an Almaty-based political and economic scientist, told Caravanserai.

In fact, this is not any sort of integration; the talk from the beginning was about Russia taking over the markets of the neighbouring countries, he said.

"Kazakhstan opened the doors for the penetration by Russian goods and companies of our market," he explained.

"We have a few competitive branches of the food industry -- the confectionary branch, non-alcoholic drinks and animal products. Basically, we don't export anything else to Russia," said Zhumaly.

Trade as political leverage

Russia is using trade to politically intimidate Kazakhstan, according to Zhumaly.

"We note that in April Kazakhstan abstained when voting in the UN Security Council on the Russian resolution about Syria," said Zhumaly.

"For that, [Russian] television channels aired criticism of Kazakhstan's leaders," he said, adding that the Kremlin has acted the same way toward Georgia and Ukraine.

"In 2006, Rospotrebnadzor [Russia's consumer protection agency] prohibited the import of Borjomi mineral water [from Georgia], ostensibly for failing to meet sanitation standards," he said. But the real reason was more likely Georgia's growing anti-Russia stance at the time.

"There was a similar situation for goods from Ukraine; Rospotrebnadzor prohibited the import of Roshen candy [in 2013]," said Zhumaly, referring to a Ukrainian manufacturer then headed by current Ukrainian President Petro Poroshenko, who was running for office and supported a European Union trade agreement.

"Russia is a country that uses all the tools in its arsenal to pressure various states," he said.

Sugar only the first victim

Russia's attempt to manufacture a sugar shortage in Kazakhstan is only one example of its strategy to destroy local businesses in the country, say analysts and business owners.

Sugar is only the first warning bell for Kazakhstan, Aliya Mamytbaeva of Almaty, director of Kazakhstan's Association of Non-Alcoholic Beverage Producers, said in Almaty on September 13.

"Soon [Kazakh authorities will examine] the entire list of raw materials transported under special investment contracts," she said. "If [we don't solve] the issue of sugar acquisition, Kazakh producers of non-alcoholic beverages [will cede] their market positions."

Russia's latest effort at economic coercion is already under way, as Moscow prepares to ban the import of animal products from Kazakhstan starting on October 1.

"Right now, animal products are imported [from Kazakhstan] into Russia, including some for which the location of origin has not been established," Yulia Melano, spokeswoman of Rosselkhoznadzor (Russia's food safety watchdog), told journalists in Moscow on September 13.

"That poses risks to the health of Russian consumers and the epizootic welfare of the country," she claimed.