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Russia’s New Dilemma

By JAKOB MURATOV 02/10/2014

Russia
On Aug. 7, President Putin signed a Kremlin decree banning imported agricultural products from the European Union, the United States, Australia, Canada and Norway. According to Putin, the first and foremost reason for this action was to help domestic producers raise their competitiveness by producing and selling more.1 Although this may seem reasonable on the surface, it has to be seen in the light of the current conflict in Ukraine.

Russia is in a geo-political confrontation with the West, one not seen since the Cold War, and this measure was a response to the West for its hostility against Russia. Specifically, financial and energy sanctions aimed at punishing Russia for its role in annexing Crimea and destabilising eastern Ukraine. The consequences of this retaliation will be explored.

From one perspective, Russia’s actions can be seen as a textbook example of protectionism. The Russian agricultural market will experience a straightforward reaction. Foreign suppliers will lose out on profit because of the ban, Russian producers will sell more products at home, whilst Russians themselves will be forced to pay a higher price. Although an oversimplified way to explain the consequences, there will be more difficulties for everyone across Russia.

Russia is in a geo-political confrontation with the West, one not seen since the Cold War,

Putin’s underlying aim was to retaliate against countries that supported sanctions against Russia over Ukraine. Undeniably, the consequences of the Russian sanctions have been felt in some EU countries. For Lithuania and Poland, Russia is a profitable export market where they earned 927 million euros and 841€ million respectively last year.2 Yet, the European Commission has been quick to announce counter-measures by establishing an emergency fund of 420 million euros to compensate farmers across the EU.3 Thus, some suppliers will be reimbursed, some produce will be distributed to schools and hospitals, yet most of it will go to waste, giving Putin his desired retaliation.

All the while, most Russians still approve of the direction their country is heading towards in world affairs. A majority of Russians are in line with state-controlled media concerning these counter-sanctions and expect the embargo to leave prices largely untouched while enabling Russia’s agricultural sector to flourish. There has been a small drop in Putin’s support, from 87 percent to 84 percent4, yet it is unlikely that this will put Putin off course. Particularly, as domestic producers are able to sell more of their products at home.

Russian producers will see less competition and expect to sell more on the market. Keeping in mind, however, that imported food accounts for a quarter of the Russian agricultural market, the question of whether a stagnating Russian economy will be able to increase output enough to replace the sanctioned imports remains unanswered. Moscow’s decrease in supply of specific foods is not as visible right now as most supermarkets have Western imported stocks lasting one month, but Russian farmers will have to produce more goods at a faster rate in the coming months. This poses a challenge to the already underinvested Russian agribusiness industry which lacks the ability to develop food at the high rate of its Western counterparts. Despite many Russians believing that this is an opportunity to develop the domestic agriculture business, Russia’s capacity to do so is thwarted by the ban’s timespan. It is in effect for only one year: to prop up businesses and suppliers with new farms, factories and various technologies, Russia needs to invest in the long term at a price it is uncertain to pay for.

As supply is squeezed, there is hope that politically neutral countries will stock up shelves in Russian supermarkets. Russia will replace specific products from the West with imports from Latin American countries, China and Turkey. Hopefully, with the time span put in place, this will fill in the gap left by Western imports. It is not impossible, just difficult, to imagine how these countries will replace tonnes of imported pork, poultry and fish products in just a year.

As economics dictates, some of the burden will fall on the consumer. An immediate result for Russians will be a gradual increase in food prices. Admittedly, this has already started. St. Petersburg, Russia’s second largest city has seen an increase in overall food prices of 10 percent.5 Russians will enjoy less food as supply decreases without an immediate alternative market that replaces product-specific demand. In some of Russia’s more remote places, like the Primorsky region, the price of meat rose by 26 percent and fish prices has gone up by 40 percent.6 Undoubtedly, this is because remote regions completely depend on imports and lack local suppliers. Developments like these have led some to expect price controls and shortages, similar to the ones in the Soviet Union, to occur. This will not happen for two reasons. Firstly, Russia has developed its market economy quite rapidly through the years and although imperfect it will cushion the effects of the restrictions. Secondly, the decree has a number of exemptions that will allow for ‘exotic products’ like lamb, meat conserves, alcohol, coffee and other products to be traded without restriction, leaving room for consumers to choose between certain products.

So what happens next? As always, Russia and its people will endure. Russians will enjoy less Spanish ham and Norwegian salmon while Putin shapes his new foreign policy. A year is not so long, especially when Russia re-invigorates economic ties with countries other than its traditional partners. More importantly, Russia will need rational allies and diplomacy to help it escape isolationism and resolve the crisis that created these sanctions in the first place.

JAKOB MURATOV

Jakob is a 2nd year Bsc Political Economy student at King’s College London

 

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