Russian embargo: The economy is overtaken by geopolitics
Report by Thierry Pouch,
Economist, in charge of research at APCA,
Research associate at the Reims University REGARDS laboratory,
Institut des Relations Internationales et Stratégiques (IRIS)
The report we are publishing below1 with the kind permission of IRIS was released in September 2014. Yet its analysis is particularly enlightening concerning the current tensions. Thierry Pouch gives his opinion on one of the key reasons of the distress felt by European farmers––the Russian embargo on agricultural commodities from the European Union nations that was implemented in August 2014 and extended to August 2016.
Today, the situation is even more tense, since the European Commission’s September 7 response to deal with the embargo is not up to the measures expected. As recently stated by Pekka Pesonen, Secretary General of Copa-Cogeca, we must remember that Russia is the EU’s chief export market. Its elimination represents a $5.5 billion yearly loss.
As he reviews the embargo’s immediate consequences, Thierry Pouch raises a more global key point to understand international power relations––the spill-over of geopolitical tensions on economic activity in an increasingly more interdependent world.
This confirms the fact that agriculture has become a major strategic weapon, especially for emerging economies. Is it not time for the European Union to reconsider the status it reserves to agriculture in order to better anticipate the upcoming geopolitical tensions?
momagri Editorial Board
Russia is often, and rightfully so, presented as one of the major players in global agriculture, especially in view of its grain output. In 2013, the country ranked fifth among world grain producers behind the United States, China, the EU-27 and India, and qualified in seventh position for exports. Russia’s place among the ten top producing and exporting countries is mostly due to wheat. Yet Russian agriculture is far from being self-sufficient, since year in and year out, it only covers 60 to 80 percent of its domestic food requirements, the balance being made up by imports, especially from the EU. On average, EU agro-food exports account for eight to nine percent of the zone’s total exports.
The hasty manner with which the European––and interestingly the French––commodity producers and processing executives reacted in attempting to assess the consequences of the August 7 embargo, really shows the anxiety provoking nature of the Russian decision in a context of economic slump. Almost simultaneously, the European Commission showed responsiveness in releasing the budgetary means and tools to manage agricultural markets.
The Russian decision to close its markets to EU agricultural and food products mostly concerns dairy products (Russia is one of the top importers of cheese and butter for instance), fruit, vegetables and meats. The most exposed nations are, in order of importance, Poland, the Baltic nations, the Netherlands, Spain, Germany, France and Greece, and this due to the weight of agro-food exports to Russia in their total exports.
Three kinds of after-effects are already in action. The first one is that the contraction of the Russian market certainly leads to a genuine loss for European producers, but the European market should substitute for the Russian market due to the high economic interdependence of EU member states. The internal EU market should thus experience near saturation conditions. Beyond the decline of Polish, Spanish, Dutch and other outputs on the European internal market, this is occurring at the worst possible time, that is to say during a phase of acute economic turmoil, since demand is especially lackluster ever since the implementation of austerity policies in the economies of Euro zone members. The second impact concerns the falling prices of dairy products, fruit, vegetables and meat products.
Lastly, the embargo is driving Russia to conclude contracts with countries outside Europe to meet its food requirements. An economy, such as Argentina’s that is struggling financially, might benefit from the windfall effect to restart its economy by increasing exports of fruit, dairy products or meat to Russia. That is also the case of Brazil, of Chile and, closer to us, Turkey and even Morocco. In addition, all these economies hold the weapon of currency depreciation to stimulate the competitiveness/price ratio. Such supply sources will assist Russia in warding off the inflatianory risk due to an inadequate food supply. So, did the EU shoot itself in the foot?
Once again, the embargo decided and implemented by Moscow provides a fine illustration of the close interweaving of economics and geopolitics. Beyond the fact that the sanctions (jointly imposed with the United States, Canada, Norway and Australia) implied Moscow’s reaction, which is occurring at the worst time for the European economy, we note that any geopolitical decision almost instantly affects economic activities. This is even more evident since both globalization and European integration considerably raised the degree of interdependence of each nation. Shocks are spreading very quickly. This is the reason why filing an EU complaint with the World Trade Organization seems most risky. The WTO, whose membership officially includes Russia since the summer of 2012, is in fact qualified to deal with trade barriers, and not really to statute on economic biases created by a geopoliotical decision.
As geopolitical tensions are increasing in an uncertain and complex world, it is now a requisite to prepare for––or even better to anticipate––the geopolitical turmoil they generate.
1 The full text of Thierry Pouch’s report is available from the IRIS website: