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Biting the Hand that Feeds Them

Russia’s embargo on agricultural imports: who wins, who loses, and what it all means

On August 5, Russian President Vladimir Putin announced a list of bans on agricultural imports from countries that have recently imposed sanctions on Russia.

These retaliatory measures are part of a series of tit-for-tat moves set in motion by Russia’s annexation of Crimea in April 2014 and the Kremlin’s subsequent support of separatist rebels in eastern Ukraine.

Russian Prime Minister Dmitry Medvedev said the embargo, effective immediately, would be valid for one year. It covers imports of meat, fish, vegetables, fruit, nuts, and dairy products from the US, Australia, Canada, Norway, and the 28 countries of the EU.

 

Adding insult to injury

The effect that these bans will have on each economy is uncertain. David Cohen, US Treasury undersecretary for financial intelligence, says the biggest loser will be Russia. “What the Russians have done here,” he said, “is essentially impose sanctions on their own people.”

The Russian economy is already not as strong as Putin makes it out to be. The International Monetary Fund (IMF) predicts that its GDP growth rate will be 0.2% this year, down from 5% in 2012. The recent political turmoil does little to help the situation. In the four weeks following the early round of international sanctions, the ruble went down 6.7% due to uncertainty.

Add to that, the effect of food embargoes on a country that relies heavily on imports, and the outlook is less than optimistic. In urban centres such as Moscow, imports make up an estimated 60-70% of the food supply. In 2013, Russian imports of food from the EU alone were worth $15.8 billion.

The Kremlin plans to make up for large parts of this deficit by ramping up domestic production. While the deficit still exists and there is a shortage of agricultural goods, Russia will continue to experience sharp rises in food prices. Meanwhile, as high prices hurt consumers, Russian businesses will continue to suffer from significant reductions in foreign investment. Robert Kahn, a senior fellow in international economics at the Council on Foreign Relations, says that over $75 billion of investments have been withdrawn from the country so far this year.

The impacts of both the sanctions and the embargo over time will be hard to measure, especially with the Russian economy already ailing. In the event of a recession, Kahn says some people will argue that it would have happened anyways.

 

Supply side woes 

The repercussions of these embargoes will by no means be contained within Russia’s borders. With 10% of the EU’s agricultural exports going to Russia, European suppliers will bear much of the burden. Poland, France, the Netherlands, and Germany are already feeling the impact. Prior to the bans, Germany’s main stock index, the DAX, fell by 11% from late June to early August due to fears of a trade war. Norway’s fishing industry is another likely loser. The Norwegian Seafood Federation’s exports to Russia were worth $1 billion last year. Even Canada, whose pork exports to Russia were worth $449 million in 2013, will need to make rapid adjustments.

Prices in Europe are expected to drop in the short run due to the surplus of agricultural goods. Albert Jan Maat, chairman of the Dutch Federation of Agriculture and Horticulture, called on the Dutch government and the EU to help farmers manage this surplus. Many leaders have already begun offering compensation to certain businesses, such as fruit farms that are likely to be hurt most by the bans.

In addition, agricultural firms throughout the EU have begun searching for ways to circumvent the bans. One way they may seek to do this is by shipping their products via another country. Franz Fischler, former EU Commissioner for Agriculture, told Austrian radio that this is completely legal. “Any company in, say, Switzerland or the Balkans, is free to buy products from Austria and then export them to Russia,” he said. “The problem is significantly reduced this way.” It seems likely that a black market for food may emerge. 

 

Any takers? 

Import substitution for all agricultural goods, however, is not feasible. Craig Botham, an economist for UK investment bank, Schroders, says, “Domestic consumption exceeds production for a number of the banned items, so Russia will not be able to fill the gap domestically.”  In fact, Russia’s agricultural minister, Nikolai Fyodrov, immediately announced that Russia will find new suppliers for many of its imports. 

Grain traders in Latin America have the greatest potential to gain from these openings. Daniel Funes de Rioja, head of Argentina’s Copal food industry chamber, said, ”This is a concrete opportunity that we have to take advantage of.” On August 19, a team of Argentine trade and agricultural ministers was sent to Moscow to discuss increasing its agricultural exports to Russia. If successful, this could help Argentina stabilize its central bank reserves, which fell by more than 5% over the past year. 

Brazil has already capitalized on this opportunity. Secretary of agricultural policy for Brazil, Seneri Paluda, said that within two weeks of the embargo, approximately 90 new meat plants were approved to export their products to Russia. The country also began working to increase its soybean and corn sales right away. On August 8, just two days after the announcement of the bans, investors bought large stakes in Brazilian food exporters, Minerva and Brasil Foods (BRFS).

 

There is reason to believe that the Kremlin will favour Brazilian imports over Argentine ones, given their shared membership of BRICS, an economic bloc that also includes Russia, India, China, and South Africa. Data from the agriculture ministry shows that Russia already buys significantly larger amounts of soybeans from Brazil than from Argentina.

The issue these countries face is the uncertainty of the current situation. How long will these embargoes last? Will the black market and the methods that firms use to circumvent the bans eliminate potential gains? In a volatile political climate, it would be unwise to place too much trust in what appears to be a profitable opportunity.

 

Making sense of Putin’s logic

Although there is much disagreement over the specific impact of Putin’s bans, there is no doubt that they will harm the European Agricultural industry in the short term. The long-term impacts of the ban will depend in part on the president’s objective. There are two distinct possibilities:

The first is that Putin’s ultimate goal is to work towards a self-sufficient country that is not dependent on any imports or military alliances. If so, the administration has taken the first of many steps towards reducing Russia’s interdependence.

There is some evidence to suggest this could be the case. In July, he told his security council that Russia’s absence from any alliances would be a guarantee of its sovereignty. In addition, several Russian officials have voiced concern over their country’s extensive involvement in international trade. Communist party leader Gennady Zyuganov praised the recent bans, saying it was about time Russia adopted protectionist measures.

Maintaining its strength as an independent power would also benefit Russia vis a vis the situation with Ukraine. Tensions continued to escalate in late August, as NATO has released evidence showing Russian troops fighting alongside rebels in Ukraine and proving that weapons used in the fighting are being supplied by Moscow. Until now, the international community has used a carrot and stick approach with Russia. German Chancellor Angela Merkel has taken a leading role, having spoken to Putin over 30 times on the phone this year. Yet these efforts have done little to stop Russian aggression in Ukraine. Putin knows that the West’s influence in the region would be further stifled if Russian consumption and capital no longer depended on the European market.

Isolation in the long run, however, is not a smart move. Russia does not have the capacity to maintain its economic or military strength without international trade. Neither the government nor the Russian people wish to become a Eurasian North Korea.

The second (and more probable) possibility is that Putin intends to use isolationist measures like these agricultural bans as a bargaining tool.

In this case, the agricultural bans are a way to remind the West that interdependence works both ways. If necessary, the administration has already announced its willingness to expand its retaliatory measures, including closing their airspace to foreign carriers flying to Asia, which would cost European airlines up to $1.3 billion over three months. “We are potentially ready to introduce protective measures in aircraft building, shipbuilding, automobile manufacturing industries and in other sectors,” said Medvedev.

Many EU states rely on Russia more than they care to admit. Since the fall of the Soviet Union over two decades ago, Russia has become a major supplier of energy to Europe. Severing these ties, or threatening to do so, may force leaders to make concessions. At the very least, it will lead to disagreement among Western allies, which will weaken their resolve against Russia.

 

Instability ahead 

With these factors in mind, several leaders have questioned the merit of the sanctions that have been imposed on Russia in the first place. In a radio interview on August 15, Hungarian Prime Minister Viktor Orban said, “The sanctions policy pursued by the West, that is, ourselves… causes more harm to us than to Russia.” Slovak Prime Minister Robert Fico similarly denounced the sanctions as meaningless, saying they would hurt economic growth in Europe. 

Yet overall, Western leaders remain adamant that sanctions on Russia are the right move. In fact, at the NATO summit in Wales on September 4 and 5, members agreed to intensify their sanctions against Russia. EU spokesperson Maja Kocijancic said the new package would only be implemented if Russian aggression continues.

There is no doubt that the West wants to resolve the conflict in Ukraine. “Russia’s aggression against Ukraine threatens our vision of a Europe that is whole, free and at peace,” said Obama at the summit. The question is whether they care more than Putin does.

If the West wants to apply any real pressure, its leaders would have to turn to the energy sector. For instance, European countries need to reduce their commitment to financially backing Rosneft, Russia’s largest oil company, in which they currently invest billions of dollars.

Oil and gas currently make up 70% of Russia’s exports and 52% of its federal budget. It is no secret that sanctions in this sector would be effective. On the other hand, with an estimated 30% of the EU’s energy being supplied by Russia, it is unlikely that Europe’s leaders would agree on such a policy any time soon.

At the Nato summit in Wales, UK Prime Minister David Cameron asserted his confidence in the power of sanctions. “At the end of the day, Russia needs Europe and America more than Europe and America need Russia. We have to make that relationship pay,” he said. But with an estimated 30% of the EU’s energy being supplied by Russia, it is difficult to imagine any agreement to that end.

In addition, the Kremlin may consider targeting energy themselves to generate concessions in Ukraine. Although the costs would be enormous, Putin has already proven his willingness to prioritise expansionist policies over economic interests. European leaders are afraid to gamble and Russia knows this.

Opposition from the West is pushing Moscow to strengthen its own influence in Eastern Europe. His support for the establishment of the Eurasian Economic Union (EEU), a regional bloc among Kazakhstan, Belarus, and Russia, is one example. Even if the economic merits of such a union are questionable, the president continues to promote it because it serves to remind others that forming a bloc, not unlike the former Soviet one, is a possibility for Russia.

What this all means for the future of Russian foreign policy remains puzzling. As one Economist article put it: “At this point, it is impossible to divine Mr Putin’s strategy or his goal. Unpredictability appears to have become an end in itself, a way of shrouding a policy of improvisation in a veil of mystic omnipotence.” 

Others have interpreted Putin’s import bans as a sign of panic. Canadian Agricultural Minister Gerry Ritz, for example, recently criticized them as a sign of “short-sighted desperation.” Given Putin’s past record, this is highly improbable. More likely, the president has understood how much Western leaders and businesses fear that he will sever the precious ties among them. If so, he may have tapped into a dangerous source of power. 

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