CEE on the front line as Russia declares trade war

By bne IntelliNews August 7, 2014

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Russian President Vladimir Putin on August 6 announced a ban on agricultural products from countries waging sanctions against his country. Moscow's official move towards retaliatory trade war puts several CEE states on the front line.

The announcement, made via a decree published on the Kremlin website, tasks Russian officials with producing a list of products that will be barred for a year. The move makes clear the retaliatory nature of recent bans on many food imports from the Central and Eastern European states, which Moscow has claimed are the result of public safety concerns.

Taking aim at the sanctions imposed by the US and EU over the annexation of Crimea and what the West says is Moscow's ongoing role in the Ukraine crisis, Putin's decree was vague. Under the order, Russian importers “shall, in carrying out their activities, respect for a duration of one year… a ban or restriction on foreign economic operations involving the import to Russia of particular kinds of agricultural produce, raw materials and foodstuffs originating in countries that have decided to impose economic sanctions on Russia…”

Follow-on comments from Moscow officials have offered little additional detail. “Everything [in the agricultural sector] that is produced and imported to Russia from the United States will be banned,” Aleksei Alekseenko, an aide to the regulator in charge of food inspections, told Ria Novosti. “Fruit and vegetables from the European Union will also be under a full ban.”

Russian imports of EU fruit and vegetables are reportedly worth an annual €2bn. However, a blanket ban looks tricky for Moscow. Russia imports around 40% of its food and retailers say instant import substitution from domestic production is impossible.

At the same time, restricting supplies threaten to antagonize the traditional bugbear of the economy. The central bank is already busy trying to douse inflation, which has been bubbling just below 8% this year. The announcement from the Kremlin also saw the ruble continue to slide.

"As diplomatic relations with the West sour, the protectionist rhetoric from Russia has been gaining momentum," note analysts at VTB Capital. "The scope of both the food products and the regions that are subject to import restrictions has already been extended visibly since the start of the year, and that has helped to prop up local production, but at the same time it is the primary reason behind elevated food inflation in Russia."

De facto trade war

The move will clearly hit EU markets hard, and especially CEE. The states to the eastern end of Europe have been suffering from de facto trade war waged by Russia over Ukraine since well before any sanctions were levied by the EU or US.

The Baltic states - feisty Lithuania in particular - as well as Poland have seen numerous exports blocked over the last nine months or so by Russia's notorious veterinary and consumer watchdogs. Vilnius was hit particularly hard in the second half of 2013 as it prepared to host the EU summit at which Ukraine was originally set to sign a pact with Brussels.

Moscow persuaded then Ukrainian president Viktor Yanukovych otherwise - via the use of cheap gas and loans, as well as threats of a devastating trade war - while Lithuania was punished with a ban on dairy imports. Special customs measures also halted Lithuanian trucks for weeks, costing the small country's strategic transport sector huge losses.

Latvian canned fish and milk powder have also been turned away, as has Moldovan wine. The latter ban, carried out as Moscow sought to deter Chisinau from signing an EU pact last November, was reminiscent of the clampdown on Georgian wine in 2006 - two years before the brief war that saw the Georgian regions of South Ossetia and Abkhazia declare independence.

In the wake of the strengthened sanctions by the EU and US in late July targeting Russian state-controlled banks - the economy's Achilles' heel - Russia's watchdogs have gone into overdrive. Over the past two weeks, Romanian beef, Latvian pork, Ukrainian dairy, cereals and juice, and Moldovan plants, fruit and meat have been hit.

Of particular note was a ban on Polish fruit and veg - a punishment for Warsaw's confrontational stance towards Moscow throughout the Ukraine crisis. Poland exported around €8bn worth of goods to Russia in 2013, mostly machinery, chemicals and food.

Dairy products are one of the first targets of the new push from Moscow, according to unnamed sources quoted by Itar-Tass. “The list includes powdered milk, butter and cheese,” the sources tells the Russian newswire. According to the Russian Federal Customs Service, Estonia, Poland and Lithuania joined Finland in leading milk product supplies to Russia in 2013, each earning $8m-20m.

Analysts at Alfa Bank worry that the Russian action officially moves the standoff between Russia and the West into the sphere of global trade. "The news confirms that the effect of foreign sanctions is spreading from financial to trade channels, which is a negative development," they write. "Unlike Russia-imposed trade restrictions YTD, the latest ones may contradict WTO regulations, thus further complicating trade relations."

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