Whether it's the cold weather or simply tradition, Russians are renowned for being great consumers of dairy products. Be it butter, cheese or ice cream, milk products are widely loved in this country.

But increased poverty since the collapse of the Soviet Union and the compound effect of the August 1998 devaluation have forced the population to reduce its consumption of milk products, as real incomes decline and imports are priced out of the market.

For New Zealand Milk Products (NZMP), makers, among other things, of Anchor Butter, this has been a testing time, with total imports of butter to Russia now only a third of the pre-crisis level, and imports of cheese even lower, according to Vitaly Balabanov, general director of NZMP.

In response, the company has broadened its business. With the Russian agricultural sector unable to meet the demand and quality required by domestic dairy-product manufacturers – which since devaluation are much more competitive than importers – NZMP has stepped in to fill the gap by importing dairy-product ingredients.

"Our main product is still butter, but we are currently providing a lot of ingredients for Russian plants producing dairy products," Balabanov said. "These plants demand high-quality ingredients and this is a product we can provide."

The devaluation of the ruble priced many imported dairy products out of the market and stimulated domestic production. In the dairy industry, though, the moribund state of the Russian agricultural sector meant that the demand for ingredients simply could not be met domestically. This is where NZMP has stepped in.

The New Zealand Dairy Board began operations in Russia 20 years ago, in partnership with a state organization here. In Soviet times, Balabanov said, the U.S.S.R. used to import a lot more dairy products than Russia does today.

"Butter consumption today, for instance, is much less than in Soviet times because of financial difficulties. This is topped off by the fact that there was no margarine then either. So if you look at Russia today, butter consumption is much less."

"In Moscow and St. Petersburg, there is still reasonable consumption, but the regions are consuming very little," Balabanov added. "The question is whether once people begin earning more money again, they will come back to butter and to fat products in general."

He cites the case of Russian ice cream, which in Soviet times comprised 10-15 percent of milk fats, much of which has now been substituted by regular oil.

These issues aside, Balabanov says one of NZMP's greatest challenges in doing business in Russia has been dealing with logistical issues in a country so big with a product coming from a country as far away as New Zealand. NZMP sends supplies through both Vladivostok and St. Petersburg – the majority via the latter, because there are only around 35 million people living in the Far East.

"But the issue is that Russia is so big and it takes a long time to transport goods, that we were forced to develop our own logistical network. For instance, there are no refrigeration containers, and Russian roads are very poor," he said. "At the same time, trains, which are the main method of transport, have a minimum carriage capacity of 160 tons, so if you only have 80 tons of goods, that presents difficulties."

The company has circumvented these issues by ensuring it moves its stock in serious bulk and by coming to agreements with other freight handlers. But Balabanov says sorting the logistical issues is hugely important for NZMP.

As well as selling ingredients and products, NZMP provides services and technical advice, explaining better ways to do things to its customers – particularly in the regions – who are not as exposed to new techniques.

"For example, Russians tend to recombine milk powder, and we explained that you can recombine skim with hydrous milk fats. They have found the quality of the milk improved, and they were less dependent on powder," he said

"A lot of factories changed to this method of production because there is an abundance of skim fat and it meant there was no longer the strong taste of powder in the milk."

Indeed, the contradictions between selling ingredients to Russian manufacturers, while competing against these same producers with final dairy products, led to a restructuring in the company last year, with the New Zealand Dairy Board forming two strategic companies. On one hand, there is the NZMP which specializes in ingredients, and on the other New Zealand Milk, which focuses on branded products like Anchor.

Balabanov is cautious about the recent growth in the Russian economy, saying only that further growth could well see the company return to its pre-crisis position. Without saying so directly, he indicated that what was more important than numbers showing growth were the people appointed to the government and the economic program they decided to pursue.

As to the vexed question of land reform in Russia, which, if successful, might allow the agricultural sector to meet the demand of domestic factories, Balabanov said for it to be achieved, there would have to be a very clear and coherent approach to reform.

"It needs to be very clear how much support – and it would require a lot – would be provided to reforming the agricultural sector, and how we want to see the agricultural sector in five to 10 years," he said. "You need to know whether the form of ownership would be a 100-year lease, or freehold and really indicate what type of support would be provided."

"That support does not just mean money," he added. "It means assistance with technology and experience and so forth. It may well be best to encourage Westerners. For instance, a Dutch group has done this [on a small scale], bringing money and knowledge, and has been relatively successful. But of course, this is likely to meet with resistance among the population."