Moscow’s Food War With West Could Hurt Russia Most
(RFE/RL Explainer – rferl.org – Charles Recknagel – August 21, 2014) Moscow’s sweeping ban on food imports is meant as a slap in the face to Western powers for imposing sanctions on Moscow over Ukraine. But the ban is also causing food prices to rise in Russia, which is a major importer of food and has few immediate supply alternatives.
Here are four things to know about Moscow’s food war and its impact.
Who is getting hurt most?
When the Kremlin announced on August 7 a one-year ban on most foods from the United States, the European Union, Australia, Canada, and Norway, the move took many by surprise.
That’s because Russia imports almost 40 percent of its food — mostly fish, milk, beef, and cheese — so any import bans directly hurt Russian consumers.
Last year, Russia imported $ 17.2 billion worth of food from the countries covered by the sanctions, of which $9.2 billion was in the affected categories, according to the International Trade Center, a joint venture of the UN and World Trade Organization.
As Moscow intended, some Western producers now are feeling pain. Among the worst hit are EU countries on Russia’s border, because their exports are heavily geared toward the Russian market.
The impact on the EU has been enough to spur the bloc to announce on August 18 that it was setting up a fund worth $170 million to help farmers who cannot find alternative export markets for fruits and vegetables that they are currently harvesting.
But while the EU speaks of compensating farmers, no one is talking about helping Russian consumers — the largest group of victims in Moscow’s food war.
Moscow officials say frozen-fish prices in the capital’s major supermarkets have risen by 6 percent, milk by 5.3 percent, and cheese by 4.4 percent since the import ban took effect.
The higher prices come at a time when Russian consumers are already reeling from an inflation rate of around 7.5 percent, sparked in part by Western sanctions against Moscow over Ukraine. Economists warn that Moscow’s sanctions on food imports will help drive the inflation rate higher.
“As a result of these sanctions, inflation will increase,” says Sergei Guriyev, former rector of the New Economics School in Moscow and now a professor at Sciences Po (Paris Institute of Political Studies) in Paris. “Different models give different estimates [but] the idea is that the overall price level will increase by one or two percentage points in 2014.”
He notes that Moscow may try to dampen the higher inflation rate by raising interest rates. However, he says, that would only lead to a further slowdown in Russia’s economic growth. “Instead of one percentage point of growth, which is now projected in 2014, we obtain a lower growth that is likely to be zero.”
Can Russia find domestic substitutes?
Russian Prime Minister Dmitry Medvedev has sought to put a positive spin on things by saying that banning food imports will stimulate Russia’s domestic food industry.
Speaking on August 12 in southern Russia’s Stavropol region, he said the government will also provide resources to “add an extra boost to the development of areas of national agriculture that have previously been neglected and significantly relied on import.”
Russia’s domestic food industry badly needs rebuilding in many sectors, where inefficiencies have given cheaper imports from the West a competitive edge over local products. So, in the short term, the bans could indeed offer domestic producers more breathing space.
“Any elimination of competition is beneficial for the manufacturer, so the ban on imports of food is very good news for Russian agriculture,” Guriyev notes.
But there are many uncertainties that could yet make domestic investors cautious about putting their money into food production. The uncertainties range from how long the ban will actually last if the Ukraine crisis de-escalates to whether the Central Bank would raise interest rates to control inflation, making it more costly for investors to borrow money.
Plus, there are serious supply problems. Russian cheese makers, for example, would need more milk to produce more cheese, but the import bans on EU milk will instead shrink the country’s milk supply. Also, Russian-produced milk today costs 30 percent more than milk produced in Europe, a price that cheese makers would have to try to pass on to their customers.
Can Russia find other foreign suppliers?
Moscow is looking for other suppliers, including European states outside the EU and countries in the Middle East and Latin America. But Moscow can expect the EU and Washington to put up stiff resistance by pressing such countries not to cooperate.
The first shot in the battle may have been fired on August 11 when Russian President Vladimir Putin met with his Egyptian counterpart, Abdel Fattah Sisi, in Sochi and the two sides announced that Russia is ready to buy food from Egypt.
Just days later, an EU foreign ministers meeting on August 15 in Brussels discussed how to form a united response to Egypt, which is a large recipient of EU aid, and any other country trying to take the EU’s place in the Russian market. Details of the response have yet to be announced.
Where do things go from here?
Amid the food war, Moscow officials have sent some signals to the Russian public that the import bans might not last their full advertised lifetime of one year. “Hopefully, they will not last for very long,” Medvedev told a meeting of his deputies on August 18 in Gorki, outside Moscow.
There are also signs that, even if the bans do last, they might not be as severe in coming weeks as they appear now. Russian officials are talking about allowing some banned import goods to still enter the country provided they do so as “products” of Russia’s customs-union partners, Belarus and Kazakhstan.
How EU foodstuffs would become products of Belarus and Kazakhstan, which have no import bans, remains unclear. But Medvedev remarked that if reprocessing in Belarus and Kazakhstan “adds a large part of value to a product, then this is a new product.”
Such vague talk of value added raises the question of whether Belarus and Kazakhstan will effectively become back doors for banned EU products to still enter the Russian market, thus easing the blow to Russian consumers.
If so, that might suggest the Kremlin’s real goal in the food war is more to mobilize Russian public opinion behind Moscow in its fight with the West over Ukraine rather than to maintain a strict embargo.
“The state propaganda machine is working hard to make people associate the looming hardships not with the memories of the failed Soviet economy but with the struggles of World War II,” Russian-American journalist Masha Gessen noted in a recent opinion piece in “The Washington Post.” “They are to think of their losses as heroic sacrifices for the war effort.”
Article from Radio Free Europe/Radio Liberty – rferl.org – © 2014 RFE/RL, Inc. All Rights Reserved. Article also appeared at rferl.org/content/russia-food-ban-explainer/26542681.html