Thursday, August 7, 2014

Global Impact: Putin's Ban Against Food Products from the West "Takes No Prisoners"

According to Reuters, Moscow banned imports of most food items from the West on Thursday (August 7) in retaliation against sanctions over Ukraine, a stronger than expected measure that isolates Russian consumers from world trade to a degree unseen since the  Soviet days.

That being said, Mr. Putin is "one tough hombre" to characterize it in Old West parlance.

NATO's secretary-general, visiting Kiev in a show of support for Ukraine, called on Russia to pull back from the brink of war against its neighbor. The Western military alliance says Moscow has massed troops on the border in preparation for a possible ground invasion.

Russian share prices fell after the announcement of Moscow's one year ban on all meat, fish, dairy, fruit and vegetables from the United States, the 28 European Union countries, Canada, Australia and non-EU member Norway.

Russia has become by far the biggest consumer of EU fruit and vegetables, the second biggest buyer of US poultry and a major global consumer of fish, meat and dairy products.

President Vladimir Putin ordered his government to adopt the measures in retaliation against Western countries which imposed sanctions on Russia's defense, oil and financial sectors over its support for rebels waging an insurrection in east Ukraine.

Putin had promised to ensure that the measures would not hurt Russian consumers, which suggested he might exclude some popular products. But in the end, the bans announced by Prime Minister Dmitry Medvedev, mentioned no exceptions.

COMMENT: Agriculture Minister Nikolai Fyodorov acknowledged that the measures would cause a short-term spike in inflation, but said he did not see a danger in the medium or long-term. Russia would compensate with more imports from other suppliers such as Brazilian meat and New Zealand cheese.
The EU's executive Commission said it reserved the right to take action to retaliate against the Russian ban.

Food represents a small fraction of Russia's overall imports from the West. Yet, the ban will have a disproportionate impact on farmers in specific sectors in producing countries, and on Russian consumers, who will face higher prices and shortages with inflation already rising and the rouble falling.

The ban affects all meat, fish, poultry, fruit and vegetables from the listed countries, but does not include other food items - mostly commodities such as grains, seed oils, sugar, coffee, tea and cocoa. Russia spent $25.5 billion last year on imports in the affected categories, $9.2 billion of it from the countries hit by the ban.

It spent $39 billion overall on food, including $17.2 billion on all food items from the listed countries.

The middle class in Moscow, which buys Italian cheese and American beef at supermarkets, will take a hit, but so will ordinary people who buy Polish apples and Greek cucumbers in street markets. Russia bought 28% of EU fruit exports and 21.5% of its vegetables in 2011. It bought 8% of US chicken meat exports last year.

Moscow may also ban Western airlines from flying transit routes though its air space. This would raise European carriers' fuel costs as their jets fly around Russia on the way to Asia, but would also deprive Moscow of hundreds of millions of dollars in overflight fees.