Feeling the pinch in Central Europe

By bne IntelliNews August 13, 2014

Jan Cienski in Warsaw -


Moscow's former Central European empire is feeling the effects of tit-for-tat sanctions against Russia for its intervention in eastern Ukraine, with the countries that pushed hardest for sanctions likely to suffer most of the economic pain.

The region's response to Vladimir Putin and his attempts to upend Europe's post-Cold War order varies widely. Countries like Hungary, the Czech Republic and Slovakia have been the most dovish, while Poland and the three small Baltic states have been among the most vociferous advocates of strong EU action against Russia.

The EU's imposition of bans on trade in arms and arms-related goods, as well as restrictions on financing Russian debt, led to Moscow's retaliation, banning many food imports from the EU and other sanctions-adopting countries.

Poland, the largest country in the region and the leader of the anti-Putin bloc, was the first to feel Moscow's anger. Russian health officials banned the import of many Polish fruits and vegetables, most significantly apples. In response, a Polish newspaper editor dreamed up a campaign dubbed “Resist Putin, eat apples and drink cider,” which produced a national outpouring of apple eaters, hoping to lessen the impact of a loss in Russian apple sales.

Poland is the world's leading apple exporter, selling 1.2m tonnes a year, of which 677 tonnes go to Russia. Despite the PR success of the "eat apples" campaign, it is unrealistic to expect Poles to each gobble up over 100 apples over the next year to make up for the loss in Russian sales.

Polityka Insight, an analysis firm, expects average Polish apple prices to drop by 70% because of the embargo. That will be a blow to Poland's apple growers, but will also push down Poland's already very low inflation rate, currently running at only an annual 0.3%.

With Moscow's retaliatory sanctions affecting about 10% of all of Poland's exports to Russia, Polish growth could drop by 0.6 to 1%, according to Marek Ignaszak, chief economist for mBank, a unit of Germany's Commerzbank.

Slower growth and lower inflation mean that Poland's central bank is increasingly likely to cut its record low 2.5% benchmark rate later this year. “We are taking part in an economic war and we'll see who holds out longer,” said Marek Sawicki, Poland's agriculture minister.

Baltic bans

Poland's closest allies in sending a sharp message to Moscow were the three small Baltic countries, which also look to be affected by the sanctions against Russia. All of them do significant trade with Russia, and also transship products from the rest of the EU to Russia.

Lithuania is the EU's third largest exporter of milk and milk products to Russia, selling €160m a year. In all, 2.7% of Lithuania's GDP is tied to agricultural exports to Russia, according to Polityka Insight, the highest level of any EU country. About 20% of Lithuania's exports are sent to Russia, about half of which could be affected by the various embargoes and sanctions.

Neighbouring Latvia and Estonia are not as endangered, with food trade with Russia accounting for 0.3% and 0.4% of GDP respectively. Nomura, the investment bank, estimates Latvia and Lithuania will each see a downward revision on GDP growth of 0.3% in 2014 because of the embargo, and a similar reduction in 2015.

However, all three countries have long experience of Russia using trade as a weapon to influence their policies, and all of them are strongly backing EU and Nato solidarity to change Moscow's behaviour in Ukraine. “There should be no concessions made to an aggressor, who continues an open war and supplies arms to terrorists, and it poses a threat not only to Ukraine, but also to entire Europe, including the Baltic region, and we should not concede, neither fear the aggressor, as then he would never stop,” Dalia Grybauskaite, Lithuania's president, said in a radio interview.

Elsewhere in Central Europe, some countries were affected by the EU's sanctions, particularly the Czech Republic, whose industry sells some weapons and dual-use equipment to Russia; future contracts are now in jeopardy.

Although Russia accounts for only about 6% of the Czech Republic's agricultural exports, the country could also be hurt by knock-on effects from Russia's response. Larger producers like Poland will be frantically looking to get rid of unsold production, driving down prices and hurting Czech producers. “If European Union countries cannot export their goods to Russia, then these goods will create overpressure in the EU market and there may be a significant drop in the prices of some commodities,” Czech Agriculture Minister Marian Jurecka told Czech Television.

Going Hungary

Russia is Hungary's largest non-EU trading partner, one of the reasons that Budapest has been one of the EU's most lukewarm members on imposing sanctions against Russia. Hungary also signed a €10bn deal with Russia's Rosatom to expand its Paks nuclear power plant.

Viktor Orban, Hungary's prime minister, in July denounced the EU's drive to impose sanctions against Russia, complaining that they ran counter to Hungary's interests.

Although EU members in Central and Eastern Europe are likely to feel most of the impact of sanctions, countries from the region that are not in the EU, such as Serbia, may even see some benefit as Russia shifts its purchases away from the bloc. “Non-EU/US economies with agro-food sector potential should benefit,” writes Timothy Ash of Standard Bank, pointing out that Serbia and Belarus in particular could see an economic boost.


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