Five years of Russian sanctions — who are the winners and the losers?

On the one hand, the Russian embargo was supposed to be a “punishment” for Western exporters for the sanctions imposed on Russia. On the other hand, it was supposed to serve as a tool to support domestic production. However, in the end Russia failed in both areas.
Five years of Russian sanctions — who are the winners and the losers?

Tver, Russia (Rakoon, Public domain)

August 2019 marked the fifth anniversary of Russian sanctions on the imports of agricultural and food products — meat, fish, dairy products, fruits and vegetables — from the European Union, United States, Canada, Australia and some other countries. On this occasion, many analyses and statements were published in Russia — although publications in that vein also appeared in some Western countries — which indicated that Western countries are bearing a disproportionately high burden of the sanctions compared with Russia. Meanwhile, Russia itself is sometimes presented as a country that has achieved significant success thanks to the sanctions, which supposedly resulted from the launch and effective implementation of the production of goods covered by the sanctions. This applies, in particular, to the agricultural market, where the embargo on imports allowed a significant increase in domestic production, thereby reducing the country’s dependence on imports. However, deteriorating economic situation in Russia and statistical data contradict these optimistic assessments. So, what are the facts and myths in relation to the Russian embargo on the imports of agricultural and food products?

When did Russia impose the embargo?

The Russian embargo on imports of agricultural and food products was formally introduced in early August 2014, in response to the Western sanctions imposed on Russia after its occupation of Crimea. In reality, however, Russia merely used the opportunity to formalize and intensify activities that it had been implementing for several years.

However, further “improvement” of the situation was then hindered by imports, which were more competitive both in terms of quality and prices. This included especially imports from Poland, which were growing the most. Thus, in 2005, the Russians banned pork imports under a concocted excuse. In response, in 2006, Poland vetoed the decision to launch negotiations on a new agreement on EU-Russia cooperation.

The “Food Security Doctrine of the Russian Federation” was adopted in January 2010. In accordance with this document, the share of domestic production satisfying domestic demand in Russia should significantly increase at the expense of imports. In the context of the Russian embargo, it is interesting to compare the adopted goals and their implementation at the end of 2014. Here are some of them:

  • In the case of meat and meat products, the share of domestic production in the consumption should be at least 85 per cent (in 2014, domestic production reached 7.4 million tons while consumption stood at 10 million, which means that domestic production reached a 74 per cent share in consumption).
  • In the case of milk and dairy products, domestic production should account for no less than 90 per cent of consumption (in 2014, domestic production reached 30.6 million tons, while consumption reached 40 million tons, which means that domestic production had a 77 per cent share in consumption).

In January 2018, the Food Security Doctrine was extended to include security parameters concerning the domestic production of vegetables and fruits.

In 2012, Russia adopted the “State Program for the Development of Agriculture and Regulation of Agricultural Commodities Markets in the years 2013–2020” whose primary objective was to reduce the imports through the development of domestic anti-import production. In the case of meat, the share of domestic production satisfying the domestic demand should reach 91.5 per cent in 2020, while in the case of milk it should reach 90.2 per cent.

Russia has allocated significant budgetary funds for the promotion of agriculture, and especially for the development of anti-import production. The value of subsidies and various other forms of support in the years 2012–2018 exceeded the RUB1,745bn (more than USD35bn). Out of this, the amount of the RUB1,406bn (approx. USD25bn) was spent in the years 2014–2018, that is, after the introduction of the embargo. Further funding in the amount of the RUB303.6bn (about USD5bn) is planned for the year 2019. In the years 2013–2025, the overall support for agriculture from the federal budget will amount to the RUB3.42 trillion, while the RUB477bn will be provided from regional budgets and the RUB300bn will come from other sources. This gives a total of approximately USD65bn.

Thanks to the sanctions and the embargo, since 2014, Russia has been able to pursue the previously launched programs without exposing itself to lawsuits and criticism in the WTO, in particular with regard to the use of agricultural subsidies.

Russia’s success or failure?

In Russia, the decision on the introduction of the embargo in 2014 is presented as an event that started the success of Russian agriculture in recent years. The supporters of this view may present strong arguments in the form of measurable production volumes. In the five-year period of 2014–2018 the agricultural production in Russia increased by 14.4 per cent. Considering that the GDP growth in the same period reached 2.6 per cent and industrial production increased by 9.2 per cent, the agriculture could be seen as a primary driving force of the increasingly stagnating Russian economy.

After 2013, the production of cereals increased by 22.6 per cent (from 92.4 million tons in 2013 to 113.3 million tons in 2018), while soybean production almost tripled (from 1.5 million tons to 4 million tons). The production volumes of many other goods also recorded significant growth. Pork production increased by 60 per cent (from 2.6 million tons to 4.1 million tons), while poultry production rose by 74 per cent (from 3.5 million tons to 6.1 million tons). The production of sugar and sunflower oil also increased significantly. Russia’s strong agricultural lobby claims that as a result of these achievements in the last five years the imports of agricultural and food products decreased by 31.2 per cent, while their exports rose by 53.6 per cent. At the same time, the share of imported food products in retail trade in Russia decreased from 36 per cent in 2013 to 22 per cent in 2018.

However, analysts indicate that this optimistic interpretation of the effects of the embargo does not provide the complete picture of the situation. The greatest success was achieved in the leading segments of the agricultural market — such as cereals, oilseeds and oils, as well as sugar — which determine its exports potential. These goods are not covered by the embargo, which means that its introduction cannot be seen as an impulse for the development of these segments of the agricultural market.

However, the fundamental criticism relates to the costs associated with the implementation of these anti-import production policies. This involves not only the direct costs borne by the state budget, but above all the indirect costs, such as the increase in food prices. These prices almost doubled in Russia in the years 2014–2018 (an increase of 47.6 per cent). The rate of growth in food prices was especially high in the period immediately following the introduction of the embargo, reaching 16.4 per cent in 2014 and 14.8 per cent in 2015 (compared to just 6.0 per cent back in 2013, before the introduction of the embargo). The highest rates of price increase were recorded in the case of goods from the segments of the food market, that were covered by the embargo, which clearly indicates that the imports ban introduced by Russia had strong pro-inflationary effects.

Statistical data — and in particular the data from the years 2014–2016, that is, soon after the introduction of the Russian counter-sanctions — confirm that neither the imported supplies from non-embargoed countries nor the increased domestic production were ultimately able to replace the supplies from the traditional import markets while maintaining unchanged values in the three key criteria of quantity, quality and price. In the absence of competition from imports, domestically produced goods and non-embargoed imported goods were unable to “meet” the price criterion. This also applies to goods in the sectors that recorded an increase in domestic production due to budget subsidies (e.g. the pork and poultry industries). Meanwhile, domestic and non-embargoed foreign dairy products were also unable to fulfill the quantity and quality criteria. According to official studies, more than 95 per cent of hard cheese sold in Russia in early 2016 were substitutes produced on the basis of palm oil. The deterioration of food quality, and in particular that of dairy products, has become a phenomenon seemingly accepted by the state services established to combat it. This is evidenced by the rapidly increasing imports of palm oil, which have grown by more than 50 per cent in recent years (from 706 000 tons in 2014 to 1 060 000 tons in 2018). As a result, Russia has become the leading global importer of this product.

Despite the embargo, the dairy industry had the most disappointing results. Analysts were not able to identify any positive changes in this sector. The share of domestic production in the supply to the market has stalled at 75 per cent, milk production has not grown for years (compared with 2006 the production volumes fell by more than 2 per cent, to the level of 30.6 million tons), dairy products are getting more expensive, their quality is deteriorating and the consumer demand is decreasing. This assessment also applies to fruits and vegetables, the supply is still highly dependent on imports, while domestic production has not recorded any significant success. Fruit production has stalled at 3.3 million tons (back in 2013 it reached 3.2 million tons), while the imports have amounted to 6.5-6.7 million tons in recent years.

The industries, such as meat and meat products, that have been the most successful according to statistical data, are also criticized. As a result of the increase in domestic production, the share of imports decreased from 11 per cent in 2014 to 2 per cent in 2018 in the case of pork, and from 10 per cent to 4 per cent in the case of poultry. However, this success cannot be equated with an increase in Russia’s food security or any genuine independence from imports, because this sector is still heavily dependent on imported goods. Russia currently imports up to 60-70 per cent of the feeds and ingredients for feed production used in the pork and poultry sectors. Additionally, the Russian poultry industry imports 95-98 per cent of the breeding stock (chickens and eggs) from the German company Aviagen Brands and the American company Cobb-Vantress.

Many segments of Russian agriculture and food processing sectors are also highly dependent on imported machinery, equipment and seedlings.

The consumers are paying the price

The closure of the borders showed that in the situation where imports accounted for a significant portion of the supplies to the domestic market Russia was not really prepared for a rapid substitution of the embargoed imports with supplies from alternative sources. This resulted in accelerating inflation and impoverishment of the Russian citizens. This is reflected in the decline in real incomes and the significant decline in consumption, which have now lasted for six years.

In the paper entitled “Losers and winners of Russian countersanctions: A welfare analysis” Russian economists, Natalya Volchkova and Polina Kuznetsova, analyzed the changes in consumption, production and prices of goods covered with the embargo between 2018 and 2013. Their analysis shows that the fundamental costs of counter-sanctions and the implementation of the anti-import program are borne by the consumers, and that they are manifested by simultaneous changes in two areas: a decline in consumption and an increase in prices.

In the sampled period, the consumption of beef fell by 30 per cent and the consumption of apples decreased by 27 per cent (before the introduction of the embargo more than 50 per cent of apple imports came from Poland). Declines were also recorded in the consumption of fish (22 per cent), cheese (14 per cent), condensed milk 11 (per cent), butter (10.5 per cent), grapes (10 per cent), and meat products (10 per cent). Only three groups of products saw consumption increase: poultry (18 per cent), pork (40 per cent) and tomatoes (8 per cent).

The analysis indicates that in 12 of the 15 surveyed groups of goods covered by the embargo the consumers are incurring welfare losses of the RUB520.5bn (USD16.3bn), while in three product groups (poultry, pork, tomatoes) they are achieving welfare gains of the RUB74.8bn (USD2.3bn). The annual net welfare losses of consumers amount to the RUB445.7bn (USD14bn), which translates into approximately the RUB3,000 per citizen. Russian manufacturers are raking in the RUB374bn (USD11.7bn), that is 84 per cent of the additional costs incurred by the consumers, while the amount of RUB16bn (USD503m; 3.6 per cent) goes to foreign suppliers.

The analysis shows that in the last 5 years consumers supported the agricultural and food sector with an additional amount of the RUB1,817bn (USD57bn), compared with the amount of RUB1,406bn (USD44.2bn) that the sector obtained from the state budget. This indicates that consumers are the biggest donor supporting this sector.

Losses for food exporters?

The prevailing view in the media — including some non-Russian outlets — is consistent with the official position of the authorities, i.e. that the Russian embargo has been very effective from the beginning and that it has generated significant losses for the exporters from the embargoed countries. These losses are equated with the decrease in their exports to Russia. However, in light of the depreciation of the Russian ruble, which exceeded 100 per cent, the deep decline in real incomes of the Russian population and the deepening economic stagnation, a decline in Russian imports, including the imports of food products, would have occurred regardless of the embargo. But even aside from that, the claims of substantial losses incurred by the Western exporters are nothing more than an unsubstantiated myth.

In 2013, Russia was the destination for 10 per cent of exports of agricultural and food products from the European Union, while the items covered by the embargo accounted for only 4 per cent of the overall exports. According to Eurostat data, as a result of the introduction of the embargo, the value of these exports fell from the EUR10.4bn in 2013 to the EUR4.5bn in 2015. Meanwhile, in 2018, it reached the EUR5.3bn. The European Union very quickly (by the end of 2015) compensated for the losses incurred on the Russian market (a decline of the EUR5.95bn) by increasing the value of exports of agricultural and food products to other markets (an increase of the EUR8.82bn). By 2018, the decline in the value of agricultural and food exports to Russia compared with 2013 (EUR5.1bn) was more than offset by the increase in the value of exports to other markets (EUR17.3bn).

It’s hard to speak of any significant losses in the case of the United States as in 2013, Russia only accounted for 0.9 per cent of American exports of food and agricultural products. In 2018 Russia’s share in the United States’ food and agricultural exports dropped to 0.2 per cent and the value of American food and agricultural products exported to that country amounted to USD240m.

What’s next for the Russian embargo?

The Western exporters proved that they can do very well without the Russian market. Meanwhile, the Russians cannot boast of any tangible success which could be clearly linked to the functioning of the embargo.

According to the economists from the Russian Academy of Sciences, the Gaidar Institute and the industry institutes, the success of the agricultural and food sector in the years 2014–2017 was only initially owed to the effects of the embargo. In the later period, the sector’s good performance was the result of favorable climatic conditions, record-breaking harvest volumes, and the completion of a number of large investment projects in the sector, which were launched prior to 2014. According to the scholars, the continuation of this trend will not be possible without imports, as evidenced by the recent underwhelming results of Russian agriculture (in 2018, agricultural production decreased by 0.2 per cent).

The producers from the agricultural and food sector want the existing forms of support to be maintained, i.e. the continuation and expansion of budgetary inflows in the form of various types of incentives, subsidies, and preferential loan rates, etc. (the dairy industry even expects a 5-fold increase in the provided support). At the same time, they want to maintain the protection of the Russian internal market against foreign competition.

After 5 years of this anti-import “experiment”, the consumers are opposed to its continuation. By paying higher prices for food products of lower quality, they ultimately bear the main burden of financing the import-substitution policies.

The continuation of the status quo will entail further costs with no guarantee of the expected success. This also involves costs to welfare, as the increase in inflation resulting from the rising food prices in the years 2014–2015 was an important factor initiating the decline in real incomes of the population, which has now lasted six years. This is not the first time when simple economic calculations are outweighed by geopolitical considerations, which are increasingly difficult for ordinary Russians to comprehend.

Tver, Russia (Rakoon, Public domain)

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