As the conflict in Eastern Ukraine drags on, Russia and the West are also continuing their diplomatic back-and-forth with each accusing the other of unwarranted interference in Ukrainian matters and aggression towards the opposing side. Following a series of sanctions against Russia by the US and the EU, Russia fired back earlier this month with an extensive list of sanctions against the US and the EU, mainly focused around agriculture and food products. But the size of the agricultural trade at the heart of these sanctions means that this tit-for-tat may wind up having global ramifications.
Starting in March following the unrecognized pro-Russian referendum in Crimea, the US, EU, Australia and Canada levied travel restrictions for key Russian officials and business people, which were expanded in the second round of sanctions announced in April. As the conflict escalated between pro-Russian rebels and the Ukrainian government in the east, new sanctions were announced by the US, EU, Canada and Norway in July and August targeting the Russian financial and energy sectors while Switzerland and Japan announced new travel restrictions.
In response, Russia issued their own travel bans against high ranking Western officials in March but the biggest blow came earlier this month when it announced a one year ban on the import of most agricultural products from the US, EU, Canada, Australia and Norway in retaliation.
While there is significant trade between Russia and the US, Canada, Australia and Norway, it is the EU that is poised to bear the brunt of these sanctions. Russia represents the EU’s second largest food export market at nearly $16 billion a year, a full 10% of the EU market. This means two things: Russia must now find a way to fill the gap on their own shop shelves while producers in the EU must find a way to keep producers afloat as they lose one of their biggest markets.
For Russia, this means finding new trading partners and improving accounts with existing partners not on the sanctions list. While domestic farmers constitute a significant minority of the Russian population and President Putin’s base, it is unlikely they will be able to fill the gap especially in major cities where 60% of food is imported. Belarus, Turkey and Brazil are already major partners and could benefit enormously from a trade boom but are also facing increasing pressure from the EU to not ramp up exports to Russia in wake of the sanctions as it would undermine the intention of leveraging diplomatic pressure in Ukraine. Such pressure is limited to diplomatic urging but depending on how long the sanction battles last, could easily develop into more robust efforts to stop agricultural trade from key partners who also have significant trade relations with the EU.
The long term impact on the EU is unclear, with growth forecasts downgraded but the emergency funds issued to producers representing a much smaller number than anticipated. In the immediate future producers are left struggling to find something to do with their produce. The current surplus helps European food banks and may drop food prices locally but could serve as yet another setback for economic recovery in countries such as Greece and Spain which have little margin to absorb more austerity measures. Increasing exports to other trading partners is not particularly feasible for the current summer harvest and only time will tell if the EU can successfully adjust in future months through new trading deals and increased domestic consumption. Encouraging local sales will help European producers but may hurt current agricultural exporters outside the continent. It appears that incentives will also be given to farmers to curtail production as a means of stabilizing food prices for member states.
Thus while this may be a diplomatic battle between the EU and Russia, it will likely have far-reaching trade consequences for states in Latin America, Africa and Asia. It also comes at a time when several African countries are facing potential food shortages due to conflict, the current Ebola outbreak and drought in the Sahel. These shortages are typically due to lack of funding and the disruption of supply chains but the sanctions game Russia and the EU are playing may wind up disruption the global agricultural market even more at a time when millions are already vulnerable. One thing is for sure: the aftermath of these August announcements will affect countries far beyond Ukraine for some time to come; what happens next depends on whether cooler heads prevail or if the sanctions continues to escalate into a war of attrition.