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Western sanctions, Russian counter-sanctions and agricultural trade

15.08.2014 - (idw) Leibniz-Institut für Agrarentwicklung in Transformationsökonomien (IAMO)

Halle (Saale), 15 August 2014 In response to the Wests economic sanctions, the Russian government announced on 6 August an import ban on most foods and agricultural products from the European Union, the United States, Norway, Canada and Australia. The full extent of the measures and their effects on agricultural trade, consumers and producers are as yet unclear. Various facts, the mechanism of international agricultural trade relations and a look back into the recent past, however, permit first conclusions. Agricultural markets will react to such drastic political actions as the ban on agricultural imports by the Russian Federation. In the medium term, adjustment reactions by the trade sector will dampen negative impacts on European agro-industry and Russian consumers, argues IAMO director Prof. Dr. Thomas Glauben.

The facts: Russia imports more than 50 per cent of its foods; notably meat, fruit and vegetables, fish and dairy products. The import value in 2013 was well above USD 40 bn. Russia, with some 13 per cent of the EU agricultural export volume (just under USD 16 billion), is the second most important sales market of the European food industry. As regards products affected by the ban, EU countries delivered in recent year approx. 20 per cent (ca. 1bn USD/year) of pork exports and up to 40 per cent (ca. 200mn USD/year) of their beef exports to Russia. Major dairy export products include butter, cheese and curd products which take up almost one quarter of total exports. Russia is also one of the most important sales markets for various vegetables (tomatoes, cabbage and carrots) and fruit (apples, apricots, citrus fruit). Up to 50 per cent of EU exports are sold to Russia. At the same time the EU is a key exporter to world markets (e.g. dairy products and pork, with up to 20 per cent of world trade). Russian imports also absorb a not insignificant portion of global trade (up to 15 per cent) with products such as frozen beef, fruit and butter.

What can be expected: In the short term, tangible effects may be expected both for agro-industry and consumers. This view is underlined by experiences from ad-hoc agricultural trade restrictions of several grain export nations in the context of the most recent price boom in international grain markets. Those measures had a reverse effect. Several main grain exporters, including Russia and Ukraine, had massively restricted their wheat exports during the high-price years 2007/8 and 2010/11 through quotas and export bans. The consequences: Wheat supplies in international market were constrained (short-term), wheat prices increased and consumers, in particular in developing countries, had to cope with higher bread prices. Simultaneously, the national markets of those grain exporters were decoupled from global market transactions and considerably upset. Ukrainian and Russian farms and agricultural traders had were confronted with massive income losses.

In a certain analogy to the above, the following short-term effects may be expected from the Russian agricultural import ban. The search by Europeans, North Americans and Australians for new sales markets will shortly boost supplies in international markets. Markets will be unstable and prices will come under pressure. European trade business will experience losses in export revenues. Should price decreases be passed on by the wholesalers and retailer to farmers and consumers, which we doubt, European farmers will suffer slight income losses while European consumers will profit. The assessable share of agricultural added-value in export revenues would dampen potential price effects. Russian consumers would initially have to face a limited range of products and higher food prices which is unlikely to be fully prevented by the planned capping of various food prices. It is presumed that the Russian agricultural sector will not be affected substantially in the short term. The sector will slightly profit from temporary price rises and stepped-up government grants.

In the medium term, many of the cited short-term effects will be mitigated or reversed through adjustment reactions, notably trade diversion measures. What will be demonstrated is that global trade structures are suitable to counter crises. European trade companies will be capable of servicing other sales markets, e.g. in Asia. Russia will satisfy its import demand by imports from elsewhere, e.g. in Brazil, Argentina and Turkey. First initiatives have already been launched. In other words, it can be anticipated that the world trade volume on the whole, i.e. global supply and global demand, will not change dramatically. Only international agricultural trade flows will take on different directions. Trade, however, will be organized in a sub-optimal manner due to the diversions of trade flows. This means that prices will advance due to increasing transport expenditures and other transaction costs but surely not in a dramatic manner. Consumers both in Europe and Russia will have to shoulder the price burden. There are no far-reaching impacts anticipated for European agriculture in the medium term.

It is difficult to assess the long-term effects of the Russian import ban. This will depend on the duration of the measures, both Western sanctions and the Russian agricultural produce boycott. The most decisive factor will be the conditions under which the sanctions are eventually lifted and, most important, how the Ukraine conflict will be solved. A continued conflict, beside serious humanitarian consequences, will bring about lasting uncertainty among investors, deterioration in economic relations with Russia and impairing economic development in Europe.

A permanent conflict will also have a negative long-term impact on both the European and Russian agricultural sector. Russia is a key sales market for the European and German agricultural and food industry. It bears substantial long-term potentials for mutual benefit. A loss of European-Russian agricultural trade relations and Russias intensified efforts to achieve autarchy will hamper the further development of the agricultural sector and rural areas in the Russian Federation. It is important to warn against a long-lasting trade conflict between the EU and the Russian Federation. Sanctions and counter-sanctions will ultimately also endanger the exchange of knowledge and science a prerequisite of innovation, growth and prosperity, says IAMO director Thomas Glauben.

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Further Information

Glauben, T., Djuric, I., Götz, L., Koester, U., Loy, J.-P., Pàll, Z., Perekhozhuk, O., Prehn, S., Renner, S. (2013): Are Eastern European agricultural markets working? Beware of state-prescribed market interventions! IAMO Policy Brief No. 11, Halle (Saale).

Glauben, T., Belyaeva, M., Bobojonov, I., Djuric, I., Götz, L., Hockmann, H., Müller, D., Perekhozhuk, O., Petrick, M., Prehn, S., Prishchepov, A., Renner, S., Schierhorn, F. (2014): Eastern breadbasket obstructs its market and growth opportunities. IAMO Policy Brief No. 16, Halle (Saale).

Petrick, M. (2014): Russias agricultural modernization policy under WTO commitments: Why the EUs Common Agricultural Policy is a poor model. IAMO Policy Brief No. 18, Halle (Saale).

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About IAMO

The Leibniz Institute of Agricultural Development in Transition Economies (IAMO) analyzes economic, social and political processes of change in the agricultural and food sector, and in rural areas. The geographic focus covers the enlarging EU, transition regions of Central, Eastern and South Eastern Europe, as well as Central and Eastern Asia. IAMO works to enhance the understanding of institutional, structural and technological changes. Moreover, IAMO studies the resulting impacts on the agricultural and food sector as well as the living conditions of rur
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