Russia’s sanctions threaten both EU farmers and policymakers

Consumer shelves

Russia's ban on European food imports creates problems for Russian consumers and European farmers alike. [Shutterstock]

Russia’s food import ban has become a big problem for Europe’s farmers, and its central bank policymakers. From Polish apples to French pork and Greek peaches, exporters to Russia may either have to slash prices, or destroy their own produce.

As the European Union’s second biggest apple producer, Poland has some 700,000 tonnes of the fruit it usually sells to Russia but can’t, because Moscow has a food embargo on many EU and US goods as part of tit-for-tat sanctions related to the Ukraine crisis.

On 7 August, Russia banned all meat, fish, dairy, fruit and vegetable imports from the EU, the US Norway, Canada, and Australia for one year to retaliate against Western sanctions on Moscow over the Ukraine crisis.

Many of the Polish apples will inevitably head for western Europe, potentially displacing their more expensive European rivals. Others will go to markets in Asia and the Middle East, traditionally supplied by EU countries such as France. It is just about the last thing that the European Central Bank wants to see as it struggles with a flatlining economy and worries about deflation.

George Polychronakis of Greek fruit export association Incofruit-Hellas, for example, watched as some 250 truckloads of peaches and nectarines en route to Russia were halted when the embargo hit.

Greece exported 160,000 tonnes of fruit to Russia last year, worth €180 million to the crisis-hit EU member.

“They’ll either have to sell it at any price to countries along the way or be forced to bring it back to Greece where it will be destroyed,” he said.

“Oversupply will drag down prices for other goods and that will have a domino effect on the entire market. Even today, I went to the supermarket to buy peaches for myself and they were cheaper than three days ago.”

It is also not just fruit.

“In total, a million tonnes of pork, poultry and beef from the EU will remain on the market (rather than go to Russia). It’s a very big blow,” said Paul Rouche, general manager in charge of pork for the French meat trade union SNIV.

Worry over deflation

At the macroeconomic level, this threat of lower prices might not matter in normal times.

Food accounts for about 14% of the basket of goods used to calculate eurozone harmonised inflation. Alone, fruit and vegetables account for just less than 3% the basket. But these are not normal times as far as inflation is concerned.

Despite record low interest rates and money pumping policies, eurozone inflation is running at only 0.4% year-on-year, a number that is way below the ECB’s close-to, but below 2% level and also entrenched in what the central bank considers “the danger zone” under 1%.

This is before any major impact from the sanctions.

“I think it would have to start pervading core inflation before they (the ECB) really freak out. But it doesn’t help,” Deutsche Bank economist Gilles Moec said.

The deflationary potential can already be seen in some places. For example, total Dutch fruit and vegetable sales to Russia were about €600 million last year, according to Frugi Venta, a trade association that represents 420 Dutch companies.

“Prices in some fruit and vegetables have fallen by as much as 75 to 80%,” said spokeswoman Inge Ribbens. “A lot of trucks have been turned back at the border.”

Scrambling to limit damage on their agricultural sector, Poland and others have asked the EU to draw up plans to withdraw the surplus from the market and compensate farmers. On Monday (18 August), the European Commission said it was drawing on provisions in the reformed Common Agricultural Policy (CAP), which includes an emergency reserve of some €420 million in total to compensate for market disruption.

The money will be available between now and the end of November.

Warsaw has also asked the United States to open up its market to Polish apples, said Poland’s ambassador to Washington, Ryszard Schnepf.

Russian struggles

Meanwhile, Russia has said it will allow imports from neighbouring Belarus and Kazakhstan of food processed from Western raw materials to damp down domestic food price rises triggered by its ban on food imports from the West.

However, the government has struggled to control price rises as some 50% of Russian consumption of fish, milk, beef and cheese had been previously met by imports.

“Our Customs Union colleagues can win in this situation because some products, which were previously coming to us directly, will be processed there,” Russian news agencies quoted Deputy Prime Minister Arkady Dvorkovich as saying.

A duty-free Customs Union was set up this year by Russia, Kazakhstan and Belarus to boost economic ties and trade. Russian Prime Minister Dmitry Medvedev said on Monday he hoped Western food import bans would not last too long.

Belarus and Kazakhstan said they will continue to import food banned by Russia, but Minsk has said it will make sure sanctioned goods do not cross into Russia.

The crisis in Ukraine erupted after its former President Viktor Yanukovich cancelled plans to sign trade and political pacts with the EU in November 2013 and instead sought closer ties with Russia, triggering protests that turned bloody and drove him from power.

Moscow annexed Crimea in March following a referendum staged after Russian forces established control over the Black Sea peninsula in the biggest East-West crisis since the Cold War.

Pro-Russian militants control buildings in more than ten towns in eastern Ukraine after launching their uprising on 6 April. On 11 May pro-Moscow rebels declared a resounding victory in a referendum in Donetsk and Luhansk, which the West called illegal and illegitimate.

The situation has worsened since then. In July, EU resolve to punish Russia strengthened after the downing in Ukraine earlier this month of a Malaysia Airlines passenger plane, killing all 298 people on board. 194 of the passengers were from the Netherlands.

Western leaders say pro-Russian rebels almost certainly shot the airliner down by mistake with a Russian-supplied surface-to-air missile. Moscow has blamed Kyiv for the tragedy.

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