John Helmer Tulip Sanctions Russia Busts the Dutch Flower Trust Almost HTML

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John Helmer: Tulip Sanctions – Russia Busts theDutch Flower Trust, AlmostPosted on July 30, 2015 by Yves Smith

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Yves here. This post is fun. It also gives a case study of how a monopolist connives topreserve its advantaged position.

By John Helmer , the longest continuously serving foreign correspondent in Russia, and the only western journalist to direct his own bureau independent of single national or commercial ties. Helmer has also been a professor of political science, and an advisor to government heads in Greece, the United States, and Asia. He is the first and only member of a US presidential administration (Jimmy Carter) to establish himself in Russia. Originally published at Dances

with Bears

The Dutch auction, as it’s called in the wholesale flower trade of Europe, is a cleverscheme which simulates competitive bidding while it hides premiums in the prices Dutchgrowers and traders rig for their flowers. To cut the cost of flowers you have todeadhead the Dutch. And that’s exactly what Russia is threatening to do this week.

The Dutch are crying foul. That’s what monopolists usually do when the game is up. InDutch history going back to the time when the Amsterdam merchants held a monopolyon the world supply of nutmeg – a prophylactic against bubonic plague , it was believedat the time — they organized slavery, torture, and other atrocities to protect their

TIP JAR

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nutmeg trading scheme. Before you jump to condemn the Russian phytosanitaryauthority for issuing a warning against Dutch flower exports, remember the AmboynaMassacre of March 9, 1623.*

Rosselkhnoznadzor (RSN), the state veterinary and phytosanitary agency in Moscow,has issued a request for the European Union (EU) to suspend its phytosanitary

certification for the shipment of flowers from the Netherlands. Press reports describingthis as an import ban are premature, RSN said yesterday. “The ban has not formallybeen introduced,” according to spokesman Yulia Melano. On the other hand, for practical

purposes she concedes the ban has commenced. “We have only asked for consultationwith our European colleagues. We have asked [them] to voluntarily and temporarily stopcertification of this product for deliveries to the territory of Russia.” RSN has warned thatif the EU will not do that, then RSN will formally introduce its own ban. RSN spokesmanAlexei Alexeyenko said last week the talks with the EU phytosanitary officials had yet tostart.

The Monday, July 27, announcement from RSNclaims the reason for the import control request isthat infestation has been discovered in more thanhalf of test lots of cut flower imports from the

Netherlands over the past three months. One of the culprits identified by RSN inspectors is thewestern flower thrip (right). Another is the evenmore notorious leafminer, Liriomyza trifolii, whomevery gardener knows.

Along with Rospotrebnadzor (RPN), the consumerprotection agency, the RSN’s chief Sergei Dankvert(below, left) has often been accused in the foreignpress of pursuing a trade protection or political agenda, on behalf of the Kremlin. Theformer RPN chief , Gennady Onishchenko (right), was replaced in 2013 after allegationsof excessive zeal, insufficient evidence. Their targets have included cucumbers fromSpain, German cheese, Egyptian potatoes, American pork, Moldovan wine, andAustralian kangaroo and lamb. For the backfile, documenting that the Russians are notalone in running such alleged trade protectionist schemes, see.

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Unlike the foodstuffs, cut flowers have mostly been an import to Russia, though localfarm enterprises and the Kaluga region joint venture with the Dutch, Rose Garden, aregrowing in volume and sales at better than 20% per annum. Until now, domestic marketsales are estimated to be worth at least $1 billion yearly. According to this Russianmarket survey for 2012-2013, more than two-thirds of sales come from imports; up to80% of imports come from Holland. Roses originate primarily from Ecuador;chrysanthemums and carnations from Colombia; orchids from Thailand.

After sharp growth in Dutch exports to Russia of cut flowers in 2012 and 2013 – as thetable shows, Russia ranked 4th largest on the Dutch cut-flower trading table – there hasbeen a sharp contraction.

TOP-10 DESTINATIONS FOR EXPORTS OF CUT FLOWERS FROM THE

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Source: http://www.hbagbloemen.nl

By the end of March 2014 – that’s before the war against Russia had got under way atNATO headquarters – the Dutch export value for Russia, including bulbs and pot plants,was down 5% on the quarter; down 23% on the month. The sharpness of the declinewas even greater if bulbs and potted plants are left out, and only cut flowers counted.

The worm in the bud had started early in the year; the rot accelerated after the Dutchgovernment followed Washington and London in blaming Moscow for the downing of Malaysian Airlines MH17 on July 17. Of the 298 crew and passengers killed, 192 wereDutch.

In 2012 FloraHolland (Koninklijke Coöperatieve Bloemenveiling, Royal Cooperative FlowerAuction), the Dutch floriculture marketing organization, reported its total turnover of cutflowers, bulbs and pot plants at €4.28 billion, growing at just 3%. But growth in Russiansales was more than 40% that year. Last year, the Dutch exports to Russia haddropped substantially, and FloraHolland conceded there was “reason for concern.”

FloraHolland reports in its annual financial statements that on turnover of more than €4billion – comprising more than 6 million lots, almost 13 million units – the market

expenses run to about 9%; after-tax profit is 0.2%. For the accounts, click.

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y c o er o , anays s o e u c ower ra e c ame e reasons or etrade reversal were the Ukraine conflict; the introduction of sanctions against Russia;and the devaluation of the rouble. This has been amplified by US Government outlets likeRadio Liberty and Bloomberg. According to the radio this week, the proposed import ban“would aggravate tensions between the two countries already at odds over the downingof flight MH17”. The Dutch Federation of Agriculture and Horticulture (LTO) was morecautious, saying nothing about the export ban. But Bloomberg got the LTO spokesman,Maarten Leseman, to claim the phytosanitary violations announced by RSN in Moscoware “just an excuse for the Russian government to ban flowers. The real reason ispolitical. The tribunal could be the real reason.”

He is referring to Dutch demands for a United Nations tribunal to prosecute thoseresponsible for the MH17 crash. For the Dutch rush to judgement, read the backfilehere. On July 16 President Vladimir Putin (left) warned Dutch Prime Minister Mark Rutte(right), in a telephone call the latter initiated, that the Dutch and Americans were“leaking various overtly politicized versions of the events to the media”.

A closer look at the Russian cut flower trade reveals just as much disinformation. Here isan American business school study of how the Dutch work to rig the international flowermarket. “In a number of ways, the Dutch auction (pictured below) favors growers over

buyers. First, the clocks move at high speeds, reducing buyer decision-making time andcausing higher bid prices. Experiments have shown that higher speeds result in higherprices. Second, the service costs to buyers favors small lots over large lots. Thus no oneparty can purchase the entire lot without competition.”

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The Aalsmeer flower market, world’s largest trading centre for cut

flowers, near Schiphol airport, Amsterdam.

The scheme is already generating resistance among buyers, encouraging direct tradebetween the lowest-cost flower-producing countries and the high-value flower-consuming countries. According to the US study, “some large retailers like Marks andSpencer [UK] are bypassing the Dutch auctions and their commissions to source directly

from growers in Spain and other countries.”

The Dutch acknowledge the result is a visible shift in import flows, and the elimination of the Dutch trade intermediaries. Here’s Rabo, the Dutch bank, admitting in January of thisyear, that African, Asian and South American countries are taking market share awayfrom Holland:

Source: RaboBank: https://www.rabobank.com

FloraHolland admits “the Dutch share in global flower and plant production is decreasing.Growers increasingly sell their products without the direct intervention of FloraHolland

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and they operate further up the chain more often than before. The importance of theauction clock decreases as the use of electronic sales resources rises. It has to be said,however, that in 2014 this took place slower than expected.”

Source: RaboBank: https://www.rabobank.com

The map suggests there’s no obvious geographic reason why flower shipments

shouldn’t go direct to Russian ports on the Black or Baltic Sea, and why the Russianflower trade shouldn’t move upstream, investing in flower cultivation, just as the Russianbanana trade did in Ecuador several years ago. For the banana story, read this.Smuggling, other corruption and bankruptcy have put a sorry end to that tale.

For the start of Russia’s affair with Ecuadorian roses, start reading in 1998, whenRussian flower entrepreneurs began using Miami as their transhipment point, avoidingAmsterdam. The high cost of air freighting flowers paid off on special occasions, like

Women’s Day March 8. But on an all-year round basis, the profit margin for theimporters was a modest 12%. This was also the result of the large number of importers

VIEWALL

PARTNERPARTNERCENTERCENTER

TODAY'STODAY'SOFFERSOFFERS

COMPARCOMPARBROKERSBROKERS


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and wholesalers in the Russian market, and the intensity of competition between them.In 1998, Business Bouquet, headed by Valery Stayen, estimated that the regularcompanies on the market numbered 20, importing 300,000 roses per week. For specialflower days on the Russian calendar, the number of importers tripled.

Today, 17 years later, Stayen and Business Bouquet are still in business. But Stayen

refuses to name the top-5 or top-10 companies in the trade. He won’t answerquestions either about the scope for direct trade, avoiding the Dutch market, or theimpact of the proposed ban.

Talia Akhmetova, head of the press service at Florist.ru, a leading Russian internetretailer, estimates that “about 90% of all flowers sold in the country are imported.About 60% of them are imports from the EU. They not only provide almost the entirevolume of the Russian market, but also the range. Holland, Italy and France, the largestproducers of flowers and plants, in Europe, have a huge territory with a first-classequipment, and in addition, a suitable climate for growing flowers. All this affects thequality of the flower, which has remained unchanged throughout the year. Among theflowers imported from the EU countries there are re-exports from Colombia, Kenya,Ecuador, Israel, Turkey and other countries, but the proportion is very small, about 10%to 20%. There are also direct deliveries from South America, but this amount is not

systemically significant, except for roses.”

Asked whether the Russian market can reorient its imported supplies from the othercountries, she said “it is more expensive to carry flowers directly from South America,Kenya, Ecuador, etc. into Russia because the volumes will be smaller than those flowinginto and out of the Dutch auctions. The cost of logistics for transportation to Russia of relatively small volumes undoubtedly affects the purchase price.”

Asked to identify the top-5 Russian importers of cut flowers, and their market shares,Akhmetova said: “unfortunately, because of the opacity of the flower market, such datacannot be identified. Accurate estimation of the volume of imports is impossible becauseof illegal, gray market deliveries. That is, the flowers which have not passed throughcertification and control at [the Dutch] flower auctions, are transported across theRussian border without documents.”

Philip de Jong, the Dutch trade representative at his embassy in Moscow, is also mute.Asked to identify the principal Russian importers and traders of Dutch cut flowers, herefused, and referred instead to the Russian Agriculture Ministry, which has yet torespond.

Reports on the domestic industry between 2012 and 2014 by Olga Ivanova identify theSave web pages as PDF with http://www.htm2pdf.co.uk! Unblock any website

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top-5 importers of cut flowers as Uraltorgservice, Impulse, Exim, Baltic Gift, andImpulse-Fruit. They reportedly account for no more than 31% of the import volume. The

five leading wholesalers, according to earlier data for 2012, were Obi Logistics, CFC,Moneymaker, Agricultural Services, and Uraltorgservice. They account for no more than40% of volume. In Moscow, Obi and CFC are in the top-5; also Flower Jet, Starlight, andImdeko. They have a combined market share of 50%. According to Ivanova, Moscow cityaccounts for up to 23% of Russia’s flower sales, followed by St. Petersburg and Moscowregion, with 13% and 18%, respectively.

Part of the reluctance of industry sources to identify the market leaders is that theirmarket shares are relatively small; their names keep changing; and the gray trade issizeable. Comparing the Dutch export numbers for Russia with the correspondingRussian import numbers for the Netherlands reveals that about $30 million worth of flowers have been crossing the Russian border which haven’t been registered at originas Russia-bound exports. That’s about 10% of the Russian import total. Industrysources estimate the value of the gray market in imported flowers as larger than that.Dutch export sources say they have no idea of the value of the gray trade, and can’taccount for the $30 million discrepancy in the trade figures.

Speaking from Holland for the Dutch flower traders today, Leseman expressed the hope

that the ban will not be introduced. “So far there is no official decision by the Russianside, or by the EU, to suspend certification and ban Dutch flower exports.”

NOTE: the lead image is of The Tulip Folly, a painting of 1882 by the

French artist, Jean-Léon Gérôme. He was depicting the scene in 1632 when

speculation on the price of tulips created a bubble the Dutch market

authorities tried to let down by ordering soldiers into the tulip fields

to destroy the supply. A nobleman has drawn his sword to protect his

investment in an unusual potted tulip. A decade earlier, the Dutch in

the islands now known as Indonesia bribed local plantation owners,

attacked British merchants, and put the Balinese into slavery to keepthe supply of nutmeg to themselves. At Amboyna the Dutch governor

trumped up treason charges against 17 Englishmen; waterboarded them into

false confessions; and chopped their heads off. The murders became a

cause for the first Anglo-Dutch war, which the British won in 1654. The

Dutch were then obliged to pay compensation to the families of the

victims. That came to £3,615. The nutmeg story can be read in full here.

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by TaboolaPromoted Links

This entry was posted in Europe, Free markets and their discontents, Guest Post,Market inefficiencies, Russia on July 30, 2015 by Yves Smith.

3 COMMENTS

PeterP July 30, 2015 at 8:46 am

Bugs live on flowers! Who knew. Now 2% of dutch flower exports are threatened! Wow!Russians are funny.

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oho July 30, 2015 at 10:30 am

Who knew. Now 2% of dutch flower exports are threatened! Wow! Russians arefunny.

i guess you’re a pro at irony cuz you point out the typical “look at russians they’re

country bumpkins” attitude endemic among the powers that be. pretty muchsums up the US diplomacy with Russia which is—why bother conducting diplomacywith bumpkins.

Reply ↓

Yonatan July 30, 2015 at 11:56 am

“Bugs live on flowers! Who knew. Now 2% of dutch flower exports are threatened!Wow! Russians are funny.”

So the Dutch are going to have to check 100% of their flowers heading to Russiato legally certify that thay are free of pests. That should start eating into growers

profits quite quickly. If they don’t certify, then all 100% can be blocked.If the Dutch want to pay fast and loose, then can’t complain when they sufferblowback.

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