Putin’s sanctions punish Russia

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IOL BR _UKRAINE-CRISIS-_0808_11 Reuters. A customer visits a fruit department at a Metro Cash and Carry store in Moscow on Friday. Moscow imposed a total ban on imports of many Western foods on Thursday. Photo: Reuters.

Russian President Vladimir Putin chose a funny way to punish his American and European adversaries.

By imposing sanctions on imports of US and European agricultural goods, as he did last week, Putin will make it harder for his own people to find and afford foreign-made meat, cheese and fruit.

And a Russian economy that is already near stall speed will probably slow further as the central bank comes under pressure to raise interest rates for the fourth time this year to battle an expected increase in inflation.

“This is really bad economic policy,” Anders Aslund, an economist at the Peterson Institute for International Economics in Washington, said.

“Putin is really shooting himself in the foot.”

Though the trans-Atlantic hostility over the Ukraine crisis may be reminiscent of the Cold War, Putin’s move was less an echo of Nikita Khrushchev’s 1956 boast: “We will bury you,” than a truculent, “Who needs you?”

He may not like the answer. In Washington, Obama administration officials projected on Thursday an air of detachment over what they described as the Russian leader playing a bad hand badly.

“The steps that Russia announced are likely insignificant as an impact on the US economy,” David Cohen, the treasury undersecretary for terrorism and financial intelligence, said.

“What the Russians have done here is essentially impose sanctions on their own people.”

American exports to Russia are a barely measurable one-tenth of 1 percent of the US gross domestic product (GDP), according to Jason Furman, the head of the White House Council of Economic Advisers.

The EU depends on Russian customers for eight-tenths of 1 percent of the its economy.

American exporters sent $1.3 billion (R13.9bn) in food and other agricultural products to Russia in fiscal 2013, according to the US Department of Agriculture.

Russia had barred imported American dairy products for several years, so the new sanctions would have “almost no impact”, Alan Levitt, the vice-president of communications at the US Dairy Export Council, said.

EU officials will meet next week to discuss the sanctions and French Agriculture Minister Stéphane Le Foll said food prices in the domestic market might fall as produce earmarked for Russia swells supply.

The price of peaches and nectarines in France is already down 22 percent after a bumper harvest, according to state statistical institute Insee.

Russia’s exports to the US and Europe, meanwhile, make up 13 percent of its economy.

And the companies that are being blacklisted – from the US, EU, Canada, Norway and Australia – last year provided 38 percent of the imported food products covered by the ban, according to Capital Economics in London.

The effect on some countries, especially the Baltic states of Lithuania, Estonia and Latvia could be greater.

“It seems likely the biggest loser will be Russia itself,” Neil Shearing, the chief emerging markets economist at Capital Economics, said in a research note.

Russia’s economic slowdown began in 2011.

The International Monetary Fund (IMF) last month forecast growth this year of just 0.2 percent.

Now, the prospect of recession looms. Even before the Russian retaliation, BNP Paribas was forecasting a contraction of 2 percent this year and 3 percent next year.

Putin’s domestic popularity has soared amid the Ukraine crisis and the annexation of Crimea, with his approval rating reaching 87 percent.

And he’s caught between the sanctions’ economic bite and the danger of alienating his domestic supporters by backing down.

“Putin has created for himself a trap,” Angela Stent, the director of Georgetown University’s Center for Eurasian, Russian and East European Studies, said.

Still, though the import ban is likely to exacerbate 7.5 percent inflation – which is already running above the central bank’s target – Russian patience in the face of a stand-off with other nations shouldn’t be underestimated. Plus, GDP per capita last year reached $14 818, up 27 percent from five years earlier, according to IMF data.

“Prices may go up a bit, but this is not so terrible,” Leonid Tikhonsky, 66, the director at a secondary school in Kolomna, Russia, said.

“Russia passed through the most difficult times in its history.”

 

Brazil opportunity

Putin, a former KGB officer who had effectively ruled Russia for almost 15 years, probably believed he could outlast his adversaries, said Steven Pifer, who was US ambassador to Ukraine from 1998 to 2000.

“For a country that imports 40 percent of its foodstuffs, banning imported food would seem to be an odd strategy,” he said.

“But the calculation he’s making here is that he can find a way to ride this out.”

Russia’s turn away from the US and Europe may mean opportunities for other countries. Production of chicken and pork can be increased more quickly than beef, according to Jose Augusto de Castro, the president of the Brazilian Foreign Trade Association.

“Certainly, Brazil will benefit,” he said.

Russia’s flat prohibition on imports from certain countries might run afoul of its commitments as a World Trade Organisation member, Trevor Kincaid, a spokesman for the US trade representative’s office, said.

Russia joined the global trade body in 2012 after almost two decades of negotiations.

Co-operation on trade has turned to conflict, with the US last month adding to sanctions on Russia over the fighting in Ukraine, barring two Russian banks and two large companies from obtaining financing in the US.

The latest measures also freeze US assets and bar new contracts for eight Russian arms makers, including the manufacturer of the AK-47 assault rifle.

The EU has imposed a range of sanctions.

More sanctions by the US and EU may lie ahead. With Russian troops poised for possible intervention in eastern Ukraine, Nato Secretary-General Anders Fogh Rasmussen said Russia risked further penalties and international isolation if its soldiers moved in.

If Russian troops cross the border, “there’s no question you’ll see harsher American and European sanctions”, Pifer said.

Putin is also threatening to go further. Russia was weighing a possible ban on foreign airlines flying in its Siberian and polar airspace, Prime Minister Dmitry Medvedev told a televised cabinet meeting.

That would hit airlines such as Air France-KLM Group and Deutsche Lufthansa on their flights from Europe to Asia, forcing consideration of added stopovers and higher fares to cover higher fuel costs.

Yet here, too, Russia would likely suffer more than its foreign targets. Aeroflot, the nation’s biggest air carrier, earned about $170m last year in royalties from foreign airlines for overflight rights, according to Irina Stupachenko, an analyst at Otkritie Capital in Moscow.

Any restrictions would be “very negative” for the Russian airline, which received the equivalent of 18 percent of its full-year earnings from the payments, she said.

The Russian government also was studying the possibility of eliminating imports of foreign-made cars and airplanes, Medvedev said.

Russia’s latest trade tightening is part of a years-long turn toward protectionism, according to Simon Evenett, a professor of international trade and economic development at the University of St Gallen in Switzerland.

Russia had implemented 38 protectionist measures this year, including 28 trade-distorting subsidies and six new tariffs, said Evenett, who co-ordinates the Global Trade Alert monitoring network.

“No other government has introduced more protectionist measures since the beginning of 2014,” he wrote on Thursday. – David J. Lynch for Bloomberg



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