News / Economy

Amid Defiant Russian Sanctions, Serious Doubts About Economic Future

Russia has banned most food imports from the West in retaliation for sanctions over Ukraine, which will also likely lead to empty shelves in Russian cities.
Russia has banned most food imports from the West in retaliation for sanctions over Ukraine, which will also likely lead to empty shelves in Russian cities.
Mike Eckel

This is the season of economic discontent in Russia, with Moscow and the West tit-for-tatting sanctions in response to the ongoing Russian-backed insurgency in eastern Ukraine.

The Kremlin issued a not-so-subtle threat this week that it might impose sanctions on car imports if United States and its Western partners slapped new restrictions on Russia. The respected daily newspaper Vedomosti on Monday, citing unnamed government officials, said the measures being considered include partially or fully banning car imports.

Other possibilities include barring international air carriers from Russian airspace, or putting up new protections for aircraft, shipbuilding and automotive industries.

An earlier round of sanctions announced by Moscow this month was portrayed as both a just response to Western policies, as well as a way of bolstering Russia’s domestic industry and agriculture.  Given how small the Russian economy is relative to other major economies, and how undeveloped many of its industries are, however, this may be wishful thinking, analysts say.

In other words, it’s possible the Kremlin may be shooting itself in the foot.

“Strangely, while the West does not carry out trade sanctions, Russia does ever so often despite being the weaker party,” Anders Aslund, an analyst at the Peterson Institute for International Economics, wrote in a recent op-ed piece. “This is an unwise policy, which may hurt Russia more than Western sanctions.”

The Russian sanctions, announced August 7 by Prime Minister Dmitry Medvedev, targeted imports of fish, fruit, vegetables, beef, pork and dairy products from the U.S., the European Union and other regions, in retaliation to the Western measures.

For the United States, which exported $1.3 billion in agricultural products to Russia in 2013, the new ban affects just over half of those products. The U.S. Agriculture Department estimated the overall impact on U.S. exports would be limited.

Russia Sanctions, Aug. 7, 2014Russia Sanctions, Aug. 7, 2014
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Russia Sanctions, Aug. 7, 2014
Russia Sanctions, Aug. 7, 2014

Even before the ban, the specter of stagnant growth was haunting Russia’s economy. Forecasts had said gross domestic product would grow at 1.8 percent this year. Now, with sanctions, jittery investors and a weakening ruble, the economy may only grow 0.5 percent at best, according to the World Bank.

Inflation was also already creeping up, reaching an annualized 7.8 percent in June, the World Bank reported. Food prices rose as much as 2 percent last month, and that was before the effects of the ban were felt. Some cities like St. Petersburg have reported as much as a 25 percent jump in prices for goods like pork and beef.  

In an echo of the tumultuous 1990s, capital flight is also accelerating, with an estimated $100 billion in outflows from Russia this year, according to the Economy Ministry, up from $61 billion last year. Many analysts say even that’s probably an understatement.

Grumbling businesses

Businesses are already grumbling about the import ban, some openly. Some complain adjusting to the loss of Western partners will require years of adjustment, plus finding new sources for credit to shift production or find new sources of raw materials. Then there’s no guarantee there will even be consumer demand.

For example, Belaya Dacha, a major agriculture grower with greenhouses around the Moscow suburbs, said it would be impossible to shift its domestic lettuce production from leaf to iceberg. One official in the Federal Agency for Fisheries told Vedomosti that banning salmon imports from Norway would make Russian processers suffer: “The decision to ban fish imports was taken quickly and unprofessionally.”

“How are these sanctions going to help? They’re not forever, and support measures [(for domestic business] need to be long-term,” Alexander Nikitin, vice president of a major Russian meat producer, was quoted as saying.

President Vladimir Putin, who has pushed for more domestic military and aerospace production to avoid relying on Ukraine for a source of crucial hardware, said the sanctions weren’t just retaliatory measures.

“This is, first and foremost, a measure for supporting Russian manufacturers as well as opening our markets to the nations and manufacturers that want to cooperate with Russia and are prepared for that kind of cooperation,” Putin said in a speech last Thursday.

Russian Parmesan?

Medvedev, meanwhile, called for a government program to reform Russia’s agriculture sector. That was met with derision in parts of the Russian blogosphere, where readers and bloggers recalled Soviet-style reforms in the 1970s and 1980s that went nowhere.

“Comrades! We will complete the food program that was approved in May 1982,” wrote one reader named ‘kottigr’ on the website of the independent news outlet Ekho Moskvy. “The Plenary of the Central Committee of the Communist Party of the Soviet Union is forever correct!!”

“Russia seems has grown so proud of its ability to produce missiles it now decided it can produce Parmesan as well,” Pavel Podvig, a Russian-born Geneva-based analyst of Russian military forces, told VOA. “That shouldn't be more difficult, should it?”

To be sure, recent government reform programs have also fared poorly. According to Vedomosti,  a five-year program called “Accelerated Livestock Development” that started in 2007 saw around $11 billion in state and public funding invested in dairy production nationwide. But milk output rose less than 3 percent by 2013.

“Even before the sanctions began the prospects for the Russian economy were not good.  They are worse now, especially in the area of high technology, where the Russians so desperately need improvement,” said Loren Graham, professor at the Massachusetts Institute of Technology and author of the book “Lonely Ideas: Can Russia Compete?” “The nature of Russian society itself … does not foster innovation that is economically successful.”

China rushes in

While Russia’s capacity to make up for the loss of Western imports is doubtful, countries like China are happily waiting to fill in the gaps.

One executive at the largest Chinese exporter of apples, garlic and ginger— a company called Shandong Goodfarmer— said Russian demand for Chinese produce was already surging.

“The decree was a surprise to many, there was no buffering time at all,” Lu Zuoqi told the trade publication, freshfruitportal.com. “With an entire year of the ban, the Russian produce market is bound to experience a shortage of supply in the coming year, which is a huge opportunity for the Chinese produce industry.”

The one sector of the Russian economy that has fared well is oil and gas, which has been spared sanction mainly because Europe’s heavy reliance on Russian natural gas.

Underscoring that fact was the Kremlin announcement last week that a $700 million exploratory drilling project was beginning at an Arctic Ocean site overseen by the state-owned oil giant Rosneft.

The company doing the drilling?

The U.S. oil giant, Exxon Mobil Corp.

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Comment Sorting
Comments
     
by: Balajoji from: India
August 21, 2014 3:19 AM
According to the law of supply and demand, Russians will find alternatives, but this will create a new demand elsewhere, much of which will eventually be filled to some extent by Europeans. Soon the Russians will be buying "Chinese apples" that actually come from Poland if the Chinese don't eat them to make up for what they sent to Russia! In any event, the Russian consumer will be the loser and ultimately Putin himself.

by: Anonymous
August 21, 2014 2:35 AM
".... Russia being the weaker party !" Have a look on the weak economy bankrupt of EU Member States
especially Belgium France Italy ? According to FMI Ch. Lagarde "France closed to be en cessation de
paiement. Voice of America "America uber alles" constant fake propaganda anti-Russia,
not to be trusted anyway. As press agency you don't do the job as should be. President Putin, great Head of State, will "do the job" in the best way for Russia. = Will Barn, Brussels EU

by: meanbill from: USA
August 20, 2014 8:39 PM
THE WISE MAN said it;.. All the communist countries have suffered through many numerous sanctions and embargos, and they have always survived, and like Putin said, it's time Russia started making more Russian products with China and other countries, and producing more food in the largest country in the world, and the largest producer of oil and gas, and they just may have needed this crisis, to kick-start the Putin economic plan?
In Response

by: Vasileios from: Goldingen
August 21, 2014 6:47 AM
The USSR has not survived eating and wearing difficulties though imported all kinds of commodities: from wheat to washing pouder and trousers zippers. Exist no more.

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