Inflation from Turkey sanctions manageable, says Russia

Inflation from Turkey sanctions manageable, says Russia
By bne IntelliNews December 2, 2015

Russia's embargo on Turkish food products over the Syria warplane incident will only hamper efforts to curb inflation if local retailers fail to quickly replace banned items, government officials in Moscow said, while Turkish exporters reportedly face a pile-up of almost 200,000 tons of affected produce. 

Addressing the consequences for one of Russia's main policy goals, the reduction of inflation caused by falling oil prices and Western sanctions over Ukraine, Economy Minister Alexei Ulyukayev said the sanctions against Turkey are "not introduced forever" and "some might be lifted, depending of the development of the situation", TASS news agency reported.

On December 1, Prime Minister Dmitry Medvedev signed into effect a package of sanctions against Turkey in response to the November 24 downing of a Russian warplane by the Syrian border. Russia's relations with NATO-member Turkey plummeted after the incident, which President Vladimir Putin called "a stab in the back".

In addition to lifting the current visa-free regime with Turkey and banning charter flights to Turkey, the import of Turkish poultry, fruits and vegetables will be banned as of January 1.

Turkey's share in Russia's overall imports might be only 2% but it is high in some segments such the seasonal foods sector. Turkey accounts for up to 20% of fruit and vegetable imports to Russia, which in turn translates into 10% of Russia's overall fruit and vegetable consumption, according to the Higher School of Economics Development Center.

"This effect will be even more acute now, as in winter the ability of local producers to substitute is much lower," Alfa Bank's chief economist Natalia Orlova said in a research report. Orlova estimated that the restriction on Turkish imports could add 1.5pp to local CPI, but this counted in a potential ban on non-food items, such as textiles and clothing, which has not yet materialised.

According to new Rosstat data, annual inflation seems to be heading comfortably towards the 12-13% target set by the Central Bank of Russia (CBR) and the key ministries. As of November 23, annual aggregate inflation rate reached 11.8% ytd, inching up by 10bp from 11.7% as of November 16.

The CBR believes that tight monetary policy and weak domestic demand will curb inflation towards 7% by autumn 2016 and to the policy goal of 4% by 2017-2018, with the regulator's target for 2016 being in line with broad consensus. Russia posted 11.4% inflation in 2014.

Meanwhile, Turkish import limitations coming into effect with a one-month lag could potentially allow local retailers to adjust their supply chains. However, such a delay could also fuel inflationary expectations, which have a strong influence on consumer price dynamics in Russia and are monitored monthly by the central bank.

The Vedomosti business daily reported on December 1 that sanctions on food imports from Turkey may yet be watered down to avoid hitting Russians' menus during the New Year holidays, which could be another reason for the one-month delay.

The New Year celebration is the biggest national holiday, with Russia effectively shutting down from January 1 to January 8.

In Turkey, exporters of vegetables and fruit to Russia may lose about $150mn because of the tensions, Turkey's Dunya newspaper reported on December 2, citing its own sources.

According to the newspaper, there is a risk that about 190,000 tonnes of fruit and vegetables will not now be delivered to Russia or can be spoiled. Exporters are worried because the Turkish domestic market is not prepared to receive such a large amount of produce at once.