Dairy giant Fonterra expanding in Russia with stake in joint venture

The deal will see the dairy Fonterra take a 49 per cent stake in a St Petersberg-based joint venture with Foodline. Picture / 123rf

Dairy giant Fonterra has taken steps to expand its Russian business, months after the new government controversially committed to reopening free trade talks that'd been on ice since the Crimean crisis.

The deal was reported in Russian media in December but not announced by Fonterra in New Zealand, and will see the dairy co-operative take a 49 per cent stake in a St Petersberg-based joint venture with Foodline, its primary distributor in the Russian Federation.

Neither Fonterra or the Ministry of Foreign Affairs were willing to be interviewed about the deal, with both organisations instead responding to questions with brief written statements.

"We have kept the New Zealand government informed of this investment," a Fonterra spokesman said. MFAT confirmed that "Fonterra advised MFAT of its intention to move ahead with a joint venture."

The investment is a matter of some sensitivity. In late 2014 then-Prime Minister John Key said New Zealand stood with the European Union and others including the US and Australia who had imposed sanctions on Russia in the wake of the annexation of Crimea and conflict in Ukraine.

Key then urged New Zealand firms to not opportunistically fill gaps left by retaliatory agricultural sanctions levied by Russia against the likes of the EU

"There would be great opportunities for our companies, in particular dairy companies like Fonterra to exploit that and they're not doing that," he said.

The latest moves by Fonterra appear to signal, if not a sea-change then at least a course correction in trade policy with Russia and follow New Zealand First's successful lobbying during coalition negotiations to include making a free trade deal with a Russia-led bloc a government priority.

The Herald reported late last year the prospect of the new government unilaterally freeing up trade with Russia had caused alarm at the EU, with their ambassador to New Zealand Bernard Savage saying efforts to progress the deal would be viewed "very negatively".

A source familiar with New Zealand First leader, and now Foreign Minister, Winston Peters' thinking on the issue said the Russia market was seen as a potential counterweight to the increasing dependence on China - particularly for dairy - as an export destination.

Both Fonterra and MFAT denied news of the deal was intentionally kept quiet. Fonterra said there was no need for an NZX announcement as "the size of our investment in [joiny venture] Unifood is not considered material". The spokesperson declined to confirm the size of its stake.

The Herald understands Fonterra has committed around $30m to the venture.

Russian media reported the facility would initially process 4800 tons of butter per year, and 1200 tons of cheese, with capacity to quadruple this volume if required.

European agricultural media noted shortages in Russian milk production and speculated on how heavily Unifood would have to rely on repackaging imports from New Zealand.

A spokesperson for MFAT said the trading situation with Russia was complicated by sanctions issued by both Russia and a number of countries concerned about aggression in Ukraine and Crimea.

"Because of the range of international sanctions against Russia, including recently extended sanctions from the US, we recommend exporters do careful due diligence," the MFAT spokesperson said.

New Zealand's dairy trade with Russia was significantly disrupted by the tit-for-tat sanctions, declining from $114m in 2013 to $45m in 2015, but had recovered to pre-crisis levels and last year stood at $143m.

Russia represents only a tiny fraction of Fonterra's $17b annual sales.

Foodline is run by Maskim Ivanov, who took a brave stand in 2014 by co-signing a letter organised by flamboyant British billionaire Richard Branson calling for leaders in Washington, Moscow and Kiev to peacefully resolve conflict over Ukraine and Crimea.

Branson said he approached 100 Russian businesspeople with his letter, and Ivanov was one of only five who were willing to put their names forward.