COUNTRY PROGRESS REPORT ALASKA SEAFOOD MARKETING INSTITUTE FY16 (July 1, 2016 – June 30, 2017) REGION: EASTERN EUROPE (EEU) PRODUCT: ALASKA SEAFOOD I. Market Assessment The expanded EEU market, including Russia, Ukraine, Romania, Moldova, Kazakhstan, Azerbaijan, Georgia, Armenia and the Baltics, present an emerging export destination for Alaska seafood. Russia remains in ASMI’s sphere of interest but has been closed since August 2014 as part of the Russian Food Ban. The remaining region accounts for 100.4 million consumers. The EEU market is minor in comparison to other ASMI regions, however, offers opportunities for selected products, such as pink salmon roe, that have limited demand in other parts of the world. The ASMI marketing program is at an introductory stage and, activities include trade show attendance, business meetings, representational events that feature Alaska seafood assortment, and trial promotions with local partners. Activities primarily target a trade audience with limited reach to final consumers. Alaska products currently available on the market include frozen/smoked/salted salmon, frozen salmon ikura, processed salmon roe, cod, pollock and pollock products, pollock roe, cod roe, flatfish and black cod. The potential for Alaska fish is seen in the expansion of modern retail and HRI, the growth of fish consumption in the region and stabilization of the Ukrainian economy. In most of the EEU countries there are a number of traders already experienced with Alaska seafood and currently involved in direct imports. At the same time, other importers/retailers seek partners in the U.S. that would allow them to do direct business with Alaska. For some, sourcing Alaska seafood is easier via intermediaries in Poland, Germany, Ukraine, or even Southern Europe. These complicated logistics channels prevent ASMI from obtaining exact estimates of the imports entering each EEU country. Alaska seafood exports to the EEU region increased by 24% in volume from 2015 to 2016 and 6% in value over the same time period, up to 15,802 MT, worth $46.2 million. In 2016, groundfish exports grew by 80% in volume (up to 12,898 MT) and 70% in value (up to $27.5 million), while exports of all salmon species to this region fell by 53% in volume (2,362 MT) and 31% in value ($15.3 million). In 2016, the total export of salmon roe to the region was 999 MT, worth $11.5 million. That is 57% less in volume and 28% less in value than in 2015. The decrease is primarily due to the limited catch of pink salmon during summer 2016. In 2016, 30 MT of pollock roe worth $283,000, was exported to the region. This is a new product to the EEU market that shows potential. In 2016, Alaska seafood exports to Ukraine, the main country in the region for ASMI, grew by 1 76% in volume and 56% in value compared to 2015, up to 6,725 MT, worth $21.2 million. In 2016, groundfish exports to Ukraine increased by 214% in volume (up to 5,085 MT) and 158% in value (up to $9.6 million). Export of all salmon species fell by 40% in volume (1,196 MT), but the in value terms it remained stable - $9.3 million. Salmon roe had the biggest share of salmon exports - 614 MT, worth $7.8 million, that is 6% less in volume and 22% more in value than in 2015. Russia In 2016, Russia moved from seventh to sixth place in the world by purchasing power parity (PPP) and kept it twelfth position in the world by nominal GDP. The GDP (PPP) is $3.751 trillion (#7 globally), and GDP per capita $26,500. A combination of falling oil prices, international sanctions, subsequent capital flight and structural limitations pushed Russia into a deep recession in 2015, with the GDP falling by close to 4%. The downturn continued through 2016 when Russian GDP decreased by 0.6% to $1.381 trillion (nominal) and $3.751 trillion (PPP). According to the World Bank projections, Russia is heading towards a moderate growth rate over the 2017/2019 period (between 1.3% and 1.4%), supported by rising oil prices and macroeconomic stability. Russia is one of the world's leading producers of oil and natural gas and is also a top exporter of metals such as steel and primary aluminum. Governmental support for the agricultural sector has noticeably grown over recent years, aiming to increase the country’s food security and diversify the economy from extractive industries. The coastline of the Russian Federation is the fourth longest in the world. Russia is the ninth leading producer of fish, with 2.3% of the world’s total. Over half of Russia’s fish is currently exported in low value-added condition, predominantly H&G to Asian markets, which are located close to the main fish-producing areas in the Russian Far East. This may be changing in the near future. According to Ilya Shestakov, deputy minister of agriculture, head of the Federal Agency for Fishery, planned investments into Russian fishery sector between 2017 and 2023 are estimated at 620 billion rubles ($10.6 billion). Investments will go into fleet renewal, coastal factories constructions, and more. The same source reports that the fishery sector to be among fastest- growing contributors to country’s GDP over past years. According to the Federal Agency for Fishery, in 2016, the domestic fish and seafood catch increased by 5.5% to record-setting 4.8 million MT. The pollock catch increased by 7% to 1.74 million MT, Pacific herring catch increased by 3.4% to 398,900 MT, cod - by 4% to 481,900 MT, crab increased by 14.3% to 57,000 MT. Seafood exports from Russia increased by 6% to 1.9 million MT, taking 40% of total production. Frozen pollock is the leading export category - 53% (789,000 MT). The export of frozen herring declined by 27.8% to 95,600 MT, representing 7% of seafood exports according to the State Statistic Service. In 2016, seafood imports to Russia decreased by 8.7% to 511,600 MT, value $1.37 billion. The supply of frozen capelin declined by 67.9% to 9,800 MT; frozen herring - by 31% to 36,100 MT; 2 frozen salmon - by 21.2% to 46,900 MT. At the same time, imports of frozen mackerel increased by 22.1% to 75,800 MT; frozen trout - by 18.4% to 11,600 MT. The top-5 countries are Chile with 24%, Faroe Islands (20.5%), China (15.7%), Vietnam (6.5%), Belarus (6.1%). According to the Federal Agency for Fishery, current actual production of aquaculture in Russia grew by 14% to 174,000 MT, compared to 2015, which is around 4% of total local production. The top-5 aquaculture species are carp, silver carp, trout, Atlantic salmon, and Chinese carp. Ukraine Economic and political instability in 2013/15, the loss of major heavy industry plants to the separatist’s regime, and confrontation with Russia continues to have a negative effect on Ukraine’s economy. In 2014, Ukraine’s GDP contracted by 6.6%, while in 2015 it dropped by 14.3%. The year 2016 hopefully was a turning point; GDP recovered by 2.3% as key reforms took hold. After the EU and Ukraine enacted the Deep and Comprehensive Free Trade Area, while Russia introduced series of trade restrictions, the EU replaced Russia as Ukraine’s largest trading partner. In 2016, GDP (PPP) was $353 billion (#50 globally), and GDP per capita $8,300. The enormous currency devaluation observed in late 2014 – early 2015 resulted in sudden seafood consumption drop. Early February 2014, the National Bank of Ukraine changed the hryvnia (UAH) into a fluctuating/floating currency in an attempt to meet IMF requirements and to try to enforce a stable price for the currency in the Forex market. In 2014/2015 the UAH lost up to 70% of its value against the U.S. dollar, reaching 42 UAH for 1 USD in January 2015. In 2016, the domestic currency stabilized, and the National Bank of Ukraine imposed prudent controls on the banking and financial sectors. Increased import costs resulting from unpredictable currency devaluation curtailed. Early February 2016, 1 USD was worth about 26 UAH. The most significant factor depressing imports is the low disposable incomes of the Ukrainian population. Disposable income decrease had a major impact on seafood imports. At the same time, according to the State Statistic Service, during 2016, real wages grew by 6.5%. Ukraine is a price- taker on the world seafood market, with the exception of salmon roe where its demand and share are significant. According to the Ukrainian State Statistics Service, the inflation in 2016 came down to 13.9%; while it was 43.3% in 2015 and 24.9% in 2014. An IMF four-year loan program, worth about $17.5 billion, was agreed in eight tranches over 2015 and 2016, subject to conditions regarding economic reforms. However, due to the lack of progress on reforms, only two tranches worth $6.7 billion was paid in 2015. The third tranche of $1.7 billion was planned for June 2016 subject to the bringing into law of 19 further reform measures. Ukraine failed to fulfill the conditions and the fund reduced the size of the tranche from $1.7 billion to $1 billion and realized it in September 2016. Some Western analysts believe that large foreign loans are not encouraging reform, but enabling the corrupt extraction of funds out of the country. In 2016, Ukraine’s seafood market stabilized as the government got inflation and other indicators under relative control.