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Has the Embargo Damaged Farmers in Europe?

Summary:
Photo: Wayne Stadler EU food products exporters have not been affected as much from the counter-sanctions as Russian consumers. In November, at an ‘Action Forum’ of the All-Russia People’s Front, Vladimir Putin promised not to reverse the food embargo for as long as possible. Russia had been forced to restrict the import of farm produce in response to Western sanctions, the President stressed. Russian counter-sanctions, however, did not deal a serious blow to EU farmers. According to estimates from the Gaidar Institute, the value of exports from the EU increased by 6% over the period from 2013-2015 – from €455.1 billion to €482.1 billion. Only Russia’s closest neighbours have incurred losses: these countries previously enjoyed close food sector co-operation with Russia.

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Has the Embargo Damaged Farmers in Europe?

photo: Wayne Stadler

EU food products exporters have not been affected as much from the counter-sanctions as Russian consumers.

In November, at an ‘Action Forum’ of the All-Russia People’s Front, Vladimir Putin promised not to reverse the food embargo for as long as possible. Russia had been forced to restrict the import of farm produce in response to Western sanctions, the President stressed.

Russian counter-sanctions, however, did not deal a serious blow to EU farmers. According to estimates from the Gaidar Institute, the value of exports from the EU increased by 6% over the period from 2013-2015 – from €455.1 billion to €482.1 billion. Only Russia’s closest neighbours have incurred losses: these countries previously enjoyed close food sector co-operation with Russia. From 2013-2015, Norway reduced food exports by 11.3%, which includes 10.3% due to losing the Russian food market; Finland reduced exports by 24.5% and 20.9% accordingly, Lithuania – by 20.7% and 20.6%, Latvia – by 21.5% and 11.5%, Estonia – by 22.8% and 12.2%, and finally Poland – by 4.8% and 4.6%.

Dairy produce was the sole food products exports segment to be significantly affected: although the EU successfully increased the physical volume of foreign exports (by 2.47 million tonnes) from 2013-2015, their value contracted by $1.14 billion. This can also be explained by the fact that high-priced cheeses, which proved to be less popular in the alternative markets, were imported into Russia. Poland was most affected by the fruit market: from 2013-2015, the country reduced both the volume (-348.5 thousand tonnes), and the value of exports (by €141.5 million). Lithuania incurred the most sizeable losses on the vegetables market: despite increasing the volume of exports (+206.3 thousand tonnes), its value contracted (-€202.9 million). Overall, however, cases such as these are rare.

Consumers in Russia felt the brunt of the food embargo to an even greater extent, initially because of the price hike on sanctioned food items. In 2015, prices for butter surged by 11%, for milk powder by 20%, for beef by 16%, for frozen fish by 24%, and for apples by 14% (hereinafter – data from the Analytical Centre for the Government of the Russian Federation). Reduced competition on the food products market in 2015 also resulted in price increases on those products not subject to the sanctions ban: bread (by 13.2%), pasta products (by 19.5%), sunflower oil (by 37.2%) and granulated sugar (by 12.9%).

The currency devaluation also prompted food products inflation. However, consumers would have faced smaller prices increase, were it not for the food ban. Neighbouring Belarus is confirmation of this. In 2015, the Belarussian ruble exchange rate against the dollar plummeted by 56%, but, despite this, in December last year, prices for beef were 19% lower than in Russia, for pork by 15%, for chicken by 11%, for apples by 38%, and for milk by 24%.

The positive impact of the food ban on agriculture and the food industry should not be overestimated. In 2015, the agriculture and food sectors achieved an increase in output of 3% and 2% accordingly; these figures are down on those for 2014 (3.5% and 2.5%), and the average annual rates of growth over the period from 2000-2014 (3.5% and 4.6% – ACF estimates). The fact that agriculture and the food industry are surviving the crisis better than the economy in general (in 2015, Russia’s GDP contracted by 3.7%) is due not only to the effect of the food embargo, but also because of the stable demand for food items. A testament to this, for a crisis now in its seventh year: in 2009, GDP contracted by 7.8%, while the agriculture and food sectors attained growth of 1.4% and 0.3% respectively.

The food ban should be repealed: Russia’s citizens will benefit from increased competition in the food market. Consumers have not only been faced with a two-digit rise in prices in recent years, but product quality has also deteriorated. As per Rosselkhoznadzor data, in October 2015, 50-78% of cheese across Russia was counterfeit, comprising vegetable fat.

The case for lifting the food products ban with immediate effect is also a result of the limited import substitution opportunities. Over the period from January to September 2016, the average monthly dollar exchange rate fell from 77.9 to 62.6 rub./dollar. This partly accounts for the rise in Russia’s imports figures for the second consecutive month: in September, imports increased by 13% in annual terms, reaching $18.4 billion, and in October, by 7.9% (to $18.2 billion).

Should the food embargo be lifted, the imports growth pattern will be even higher, despite the weak ruble (against its pre-crisis level). Producing competitive products, which consumers would choose over imported alternatives, is challenging without firm guarantees of private property, suitable labour taxation and low business administration costs. Agricultural products would be no exception to this.

Kirill Rodionov is an analyst at IndexBox Russia

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