Russia bans food from West in reaction to sanctions
By Larry Dreiling
Russia has banned most food imports from the West Aug. 7 in retaliation for sanctions over Ukraine, an unexpectedly sweeping move that will cost farmers in North America, Europe and Australia billions of dollars but will also likely lead to empty shelves in Russian cities.
The announcement shows that while President Vladimir Putin doesn’t appear ready to heed Russian nationalists’ calls to send troops into Ukraine, he is prepared to inflict significant damage on his own nation in an economic war with the West.
The U.S. and the European Union (EU) have accused Russia, which annexed Ukraine’s Crimean Peninsula in March, of supplying arms and expertise to a pro-Moscow insurgency in eastern Ukraine, and have sanctioned individuals and companies in Russia in retaliation. Moscow denies supporting the rebels and accuses the West of blocking attempts at a political settlement by encouraging Kiev to use brutal force to crush the insurgency.
The ban, announced by a somber Prime Minister Dmitry Medvedev at a televised Cabinet meeting, covers all imports of meat, fish, fruit, vegetables, milk and milk products from the U.S., the EU, Australia, Canada and Norway. It will last for one year.
“Until the last moment, we hoped that our foreign colleagues would understand that sanctions lead to a deadlock and no one needs them,” Medvedev said. “But they didn’t, and the situation now requires us to take retaliatory measures.”
Although the U.S., Canada and the EU together will take more than a $17.5 billion hit, Russian consumers may feel it more than Western farmers. Russia depends heavily on imported foodstuffs, most of it from Europe, particularly in Moscow and other large, prosperous cities.
In 2013, the EU exported 11.8 billion euros ($15.8 billion) in agricultural goods to Russia, while the U.S. sent $1.3 billion in food and agricultural goods.
Chris Weafer, an analyst at Macro Advisory in Moscow, said the ban would likely speed up inflation and further cloud an already grim economic outlook.
“Along with higher interest rates, higher food costs will mean that households have less money to spend and that will depress the economy,” Weafer said.
European farmers, by proximity, stand the most to lose by the embargo. Exports to Russia account for about a tenth of EU agricultural exports.
Perhaps the biggest loser is the Netherlands, one of the world’s largest agricultural exporters, sending 1.5 billion euros’ ($2.0 billion) worth of agricultural products to Russia annually.
President Xavier Beulin of a French farm union said the Russian import ban could affect the country’s fruit and vegetable industry.
“Russia is a significant market for us and one that grows by about 10 percent each year. It’s not trivial,” he told European television network LCI.
The chairman of the Dutch Federation of Agriculture and Horticulture, Albert Jan Maat, warned the Russian ban will cause prices to drop across Europe because of oversupply and called on the Dutch government and the EU to help farmers.
“We’re thinking of either removing products from the market or temporarily storing them,” Jan Maat said.
Xavier Beulin, president of the French farm union FNSEA, voiced similar concerns.
“These are market losses, but there’s also a chance that it will flood the European markets with summer crops that are no longer going to Russia, and that could lower prices,” he told the LCI television network.
The ban also dealt a blow to Norway’s fishing industry. The Norwegian Seafood Federation said Russia was its biggest single market last year.
Russia’s ban on Polish apples, already announced a few days earlier, led to a popular campaign in Poland, with media and officials urging citizens to eat more apples and drink more ciders. A widely used slogan was “An apple a day keeps Putin away.”
A number of agricultural products have seen their prices fall following the Russian ban. Among major products, wheat for September delivery fell 1.4 percent, while corn fell 1.1 percent.
EU Commission spokesman Frederic Vincent voiced regret about the ban. He said the Commission still has to assess the potential impact and reserves “the right to take action as appropriate.”
Medvedev argued that the ban would give Russian farmers, who have struggled to compete with Western products, a good opportunity to increase their market share. But experts said local producers will find it hard to fill the gap left by the ban, as the nation’s agricultural sector suffers from inefficiency and a shortage of funds.
Agriculture Minister Nikolai Fyodorov said the sector would need additional subsidies equivalent to $3.8 billion in the next few years to pump up production. The government may find it hard to increase funding as it tries to shore up the currency and support banks and companies affected by Western sanctions, which included an EU ban on long-term borrowing for key Russian state banks.
While the government claimed it would move quickly to replace Western imports with food from Latin America, Turkey and ex-Soviet neighbors, analysts predicted shortages and price hikes. The damage to consumers will be particularly great in big cities like Moscow, where imported food fills an estimated 60 percent to 70 percent of the market.
Market watchers said consumers in the expensive food segment will suffer the most, losing access to goods like French cheeses and Parma ham, but others will also eventually feel the brunt as food variety will shrink and inflationary pressures increase. With retail chains stocked up for months ahead, the ban will take time to hurt, however.
The measure led to sardonic comments across Russian online media and liberal blogs, bringing reminiscences of empty store shelves during the Soviet times, but there was no immediate indication of consumers trying to stock up.
Russian stock indexes initially fell by about 1.5 percent on the news before recovering most of the losses a few hours later.
Medvedev said Russia hopes the ban will stop the West from ramping up sanctions, which it has done several times this year as the crisis in Ukraine has deepened.
“We didn’t want such developments, and I sincerely hope that our partners will put a pragmatic economic approach above bad policy considerations,” he said. He said Russia’s ban could be lifted before the year is up if “our partners show a constructive approach.”
Weafer said that the import ban was obviously aimed at discouraging the EU from imposing further sanctions. “It was already quite difficult to get the consensus for the last round of sanctions, but now there that there are clearly consequences, especially for some countries more than others, it will make it even more difficult,” he said.
If the West doesn’t change course, Russia may introduce restrictions on the import of planes, navy vessels, cars and other industrial products, Medvedev warned. He also said that in response to EU sanctions against Russian low-cost airline Dobrolet, Russia is also considering a ban on Western carriers flying over Russia on flights to and from Asia, which would significantly swell costs and increase flight time.
He announced a ban on Ukrainian carriers operating transit flights over Russian territory.
Closer to home, Jason Furman, the chairman of the White House Council of Economic Advisers, shrugged off the import ban’s impact as negligible, in contrast to Western sanctions on Russian individuals, businesses and economic sectors that he said have sent investors fleeing Russia and made a weak Russian economy even weaker.
There’s a “cruel irony” in Russia’s import ban, said David Cohen, the Treasury Department undersecretary in charge of economic sanctions.
“What the Russians have done here is limit the Russian people’s access to food,” Cohen told reporters. “We don’t do that. Our law doesn’t allow us to do that.”
The largest U.S. export to Russia is poultry, mainly chicken, followed by tree nuts such as almonds, and also soybeans. In a statement, the National Chicken Council and the USA Poultry and Egg Export Council said Russia buys a little more than $300 million in U.S. chicken annually, about 7 percent of the industry’s total exports.
Alexis Rodzianko, president of the American Chamber of Commerce in Russia, played down the effects of the import ban on Russian food supplies. “The price will go up and the selection will go down, but basically I think Russia can feed itself now,” Rodzianko said.
Many U.S. food companies that sell to Russia have already set up some operations there. A spokeswoman for Mondelez International, Inc., which makes Oreos, Chips Ahoy cookies and Ritz crackers, said the company uses local suppliers and local production facilities.
Worth Sparkman, a spokesman for Springdale, Arkansas-based Tyson Foods, one of the world’s largest processors of chicken, beef and pork, said the chicken the company ships to Russia will be absorbed by the 130 other markets the company sells to.
Mike Cockrell of Laurel, Mississippi-based Sanderson Farms, Inc., said Russia is not as big a market as it once was. But still, “an 87.5 million-pound customer is a good customer, and we’ll have to replace that.”
Moving to a single state, Russia’s ban on U.S. food imports will hurt Russia more than it will hurt Kansas farmers, the state’s trade director also said.
Kansas sells more than $50 million worth of ag products each year to Russia, said J.J. Jones, the Kansas Department of Agriculture’s international trade director. The commodities vary from year to year, but in recent years it has been mostly soybeans and breeding cattle, according to state agriculture statistics.
“While the Kansas Department Agriculture hopes that this market will reopen soon, Kansas farmers, ranchers and agribusinesses have many other markets around the globe that desire high-quality Kansas agricultural products,” Jones said in an email to The Associated Press. “Ultimately, these sanctions will hurt Russia more than Kansas farmers, ranchers and agribusinesses.”
Kansas is a major producer of cattle as well as wheat, corn, sorghum and soybeans. The first half of this year alone, the state sold $15 million worth of soybeans to Russia, Jones said.
Russia typically buys $149 million worth of live cattle each year from the United States, and Kansas is one of its top three suppliers, Jones said in a phone interview. But sales of breeding cattle to Russia already had been dwindling because of domestic demand as U.S. ranchers rebuild their own herds amid easing drought conditions.
“Russia can’t compete with domestic prices,” he said.
Plus, Kansas producers already had started learning to live without a Russian market for beef. Kansas hasn’t sold beef there in the past two years because of the country’s ban on growth additives fed to cattle.
“The ban’s impact has been softened because Russia has already banned so many U.S. products in the past,” said Brett Stuart, co-founder of the Denver-based market analytical firm Global AgriTrends.
Russia grows its wheat and is a competitor of Kansas in global markets, according to Aaron Harries, marketing director for the trade group Kansas Wheat.
“In terms of Kansas farmers, there is not going to be any impact,” Harries said.
Russia bought only $160,000 worth of Kansas wheat this year, most likely a single shipment of either a specialty or high-quality wheat to mix with its own supplies, Jones said.
Russia also used to be the No. 1 market for U.S. poultry, but through a variety of bans and other trade barriers, “We have mostly weaned ourselves away from Russia” on poultry, Stuart said. Russia’s peak import came in 2001 when it purchased about 1.99 million metric tons of U.S. poultry exports, or 37 percent. That had fallen to 6 percent before the new sanctions, he said.
All that added chicken on the market could potentially affect prices of other meats such as beef, Kansas Livestock Association spokesman Todd Domer said.
A disruption of wheat supplies coming out of Ukraine or Russia could disrupt world markets and drive up grain prices, as the Black Sea region is a major supplier of wheat and some feed grains, said Dan O’Brien, a Kansas State University Extension grain market specialist.
“The trend has been toward escalation there, rather than not,” O’Brien said. “So, despite assurances we have given, it sure bears watching as to the potential market impact of in essence grain exports being unable to safely and reliably come out of that part of the world.”
The Associated Press contributed to this story.
Larry Dreiling can be reached by phone at 785-628-1117 or by email at email@example.com.