August 6 marks five years since Russia imposed counter-sanctions in response to Western sanctions, banning the import of agricultural products from several European countries. Invest Foresight discusses the results of the five years of food embargo with economist Sergei Aleksashenko.
– Who was hardest hit by the counter-sanctions?
– Naturally, Russian consumers – because they lost quality food. We are talking about food-related counter-sanctions here, right?
– There haven’t been a lot of non-food restrictions, as far as I know.
– In the defense industry, there was a ban on the use of components from NATO countries, but I do not think it was very strictly enforced.
– So, back to the food embargo and our losses…
– Russians also had to deal with a sharp spike of inflation in the first quarter of 2015. It is probably impossible to evaluate the damage in money terms, because inflation peaked at 17%. And the deepest drop in people’s incomes also occurred in 2015.
– But there is an upside, they say – the fast growth of the Russian agricultural industry.
– The statement that Russian agriculture has benefited from counter-sanctions is not true. It is a seasonal industry. It is impossible to speed up the calendar: Russia does not have such a favorable climate as to have four harvests a year. So, given that Russia banned the import of Polish apples in 2014, even if an apple orchard was planted in the spring of 2015, at best it will begin to bear fruit after five years. So this talk about the positive effect on Russian agriculture is not true: the industry’s cycle cannot change.
– But agriculture is really growing.
– Russian agriculture has been growing steadily since 1999. Do not forget that back in the mid-1990s, Russia imported grain, and now it is one of its largest exporters in the world. If you look at the statistics published by the Federal Statistics Service, you will see that it is the most steadily growing sector of the Russian economy. It grew every year by an average of 3.4% except for 2010 and 2012 when there was drought. Since the counter-sanctions the growth rate did not accelerate.
– It is claimed that direct investment in agriculture has increased.
– It is a normal process. Business is a creature that clearly understands where you can and cannot work. When they say that the agricultural sector grows by 3% to 4% a year, we must understand that it will not grow without investment.
– At the same time, statistics shows that over these years Russia succeeded in completely securing its own food supply – in particular, pork and chicken.
– There is no argument about that. When I say that the agricultural industry has been steadily growing since 1999 I mean that it has been growing partly thanks to pig and poultry farming. These are the two most rapidly growing niches where the growth rate exceeded 20% in certain years. But again, these niches started growing relatively long ago, way before the counter-sanctions. It would be ridiculous to say that the counter-sanctions forced somebody out of our pork and poultry market because by 2014 Russia basically did not have to import any pork or poultry. The country was self-sufficient in these supplies. Instead, they banned cheese, dairy, fruit and fish. All these products disappeared from the shelves overnight and were replaced by poor-quality substitutes.
– You mentioned low-quality products several times. Are you saying Russia doesn’t produce any quality food?
– Of course it does. For example, pork and poultry. You see, you can’t substitute fish with anything. You either have it or you don’t. When the counter-sanctions were imposed, fish production fell dramatically. We don’t have enough fish. Dairy – yes, and the quality may be good or bad. Practice has shown that the quality of dairy products manufactured in Russia has deteriorated since counter-sanctions were introduced. Surely, food industry has benefited from them. However, it started producing various substitute foods such as analogue cheese instead of quality imported cheese that Russian citizens had consumed.
– Russian Dairy Union representatives claim that one third of their products is manufactured without the use of palm oil, with another one third containing it and the remaining part made with additives such as fruit and nuts, with no palm oil.
– One third is still more than zero. I’d rather see Russian citizens consume only natural foods instead of partial dairy products that contain palm oil. I think you’ll agree that transition to imitation foods means lower living standards, and it is no good. But we have adapted to it.
– Is it possible that no Western country has been considerably affected by the counter-sanctions?
– There are four that have felt the impact: Latvia, Lithuania, Poland, and Finland, which on average had 30% of their agricultural exports going to Russia. The first two years proved to be very difficult for these countries; they actually lost a considerable part of their market. But during the third year, their agricultural exports exceeded the 2013 volumes as they found other distribution channels. Their economies are now not in the least affected by the counter-sanctions.
– This past June, EU High Representative for Foreign Affairs and Security Policy Federica Mogherini said Russia’s counter-sanctions nevertheless had a dampening impact on the European economy, although it has adapted to them due to support measures. What do you think about such measures taken in our country?
– Back in the early 2000s, an organized system of subsidies and grants was initiated in Russia. There are many kinds of these programs and hundreds of billions of rubles are allocated annually for this purpose. The government outlined how and when it is ready to support agriculture. These programs are quite beneficial for the sector.
A different story is that you can always find theft and fraud there. Thus, last December the Presidential Academy of National Economy and Public Administration (RANEPA) published a report with the following information: when the Federal Service for State Statistics made an agricultural census, it found that false reporting reached 10% for many agricultural sectors. Considering that in the regions, subsidies are provided in accordance with production volume, some companies overstated their results.
– If Russia abandons the counter-sanctions, will we be receiving lots of imports? Or have the western markets adjusted to Russia’s policy so it will make no difference for our economy?
– If the counter-sanctions are canceled, we will not see the previous volume of imports: it has become too pricey (and the ruble has dropped 50% since then). But imports will definitely return to Russia and force some Russian products from the market. Imports compete with the high-quality Russian products, so our producers will be forced to lower the prices and force out those who work in the medium price bracket. They, in turn, will drive out those who work with substitutes. Palm oil imports will end here.
It will not happen in one week, of course, but gradually all low-quality, substitute foods will disappear. The problem is that Russia does not seem to cancel the counter-sanctions anytime soon since there have been no changes in its foreign policy.
By Elena Skvortsova