It has been three months since Russia issued the embargo, banning for a year the import of farm goods from the countries that have imposed sanctions against Russia. The elapsed time is enough to make the first results of Russia’s counter-actions for the economies of the main heralds of the sanction wars – the Baltic and Polish “hawks”.
Denying the obvious
For the Baltic states, the limiting of trade with Russia is foremost a loss of an export market, which can’t be quickly replaced. Being immediate neighbors with Russia and having long-standing trade relations with it, the Baltic states and the Poles feel the effects of the product embargo more than other European countries.
On the first stage of the sanction war the ruling elite of the Baltic states, in their usual manner tried to make a good face during a bad game. They belligerently added more people to the sanction lists and said that retaliation from Russia will not have a significant effect on the republics’ economies. Doctor of economic sciences and Lithuanian president Dalia Grybauskaitė declared on the next day after the Russian countersanctions that “effects on our economy will be small, practically I don’t see any chance of bankruptcies, it’ll be a partial loss of income in particular businesses. Most of all this will affect the transporters, all the others will manage and we are ready to look into ways of helping the businesses. That way, I assume that we must act calm and with the knowledge that we can’t expect our neighbor to be more logical and to adhere to international laws and we must learn to live with this knowledge.” Latvian PM Laimdota Straujuma was a lot less optimistic: the head of the Latvian government said “The Russian embargo on farm goods from Western countries will not cause significant damage to the Latvian economy” however she urged Latvians to buy local products.
Consequences of the sanctions
Despite the optimistic declarations from the more ardent supporters of anti-Russian measures, we need only look at the trade relations of these republics with the “Eastern Aggressor” to make a conclusion on the actual consequences of the sanction war.
According to Business Lithuania, the export of Lithuanian products to Russia in 2013 was estimated at 2.45 billion litas. This number which reflects the core of the trade relations between the two countries, because re-export (exporting goods that were imported) gives minimal added value unlike actual produced goods. Based on European Bank for Reconstruction and Development calculations, the amount of food product exports to Russia was around 2.7% of Lithuania’s GDP. According to representatives of Lithuania’s dairy business, the embargo led to losses of 114-160 million litas by the end of 2014 in their segment alone.
Former PM and economy minister Juhan Parts said that a fifth of the Estonian export last year accounts to Russia and was about €300 million.
In turn, Poland, who was most vocal about causing economic pressure on behalf of Europe, according the European Commission, in 2013 shipped €340 million worth of fruit and €174 million worth of vegetables to Russia. Polish farmers suffered the most from the embargo. As said, be careful what you wish for…
As evident from Eurostat, most EU countries have seen a significant decline in fruit and vegetable prices, which were actively exported to Russia prior to the embargo. Pear prices have dropped almost 50%, 40% for peaches and apples dropped about 20% off.
Mirosław Maliszewski, head of the Polish Fruit-Growers' Association:
“Not a single country in the world can consume the millions of tons of Polish apples, which Russia refused to take as part of its reactive measures to the imposed EU sanctions. Maybe with financial support from Poland or EU we’re supposed to find new ways of using these apples, like say, transforming them into biogas”.
Juhan Särgava, head of the Central Union of Estonian Farmers: “Around eight thousand tons of Estonian cheese are in need of a new market, we also have a surplus of sour cream and milk. The production of large shipments of cheese began in July and August, when Russia cancelled the ban on Estonian dairy products at the start of the year. However when a part of the cheese was ready for sale, Russia issued the embargo on all EU cheese. This is something that no one in Estonia is capable of eating. When the warehouses will be full, this cheese will have nowhere to go. A solution would have been to sell the products, but there would have to be drops in the price. Selling at half the price is not an option”.
Latvian PM Laimdota Straujuma said that the embargo on food products to Russia from Western countries will lead to €55 million losses for Latvia. As the state income service reports, 31 Latvian companies, most of them from the transport industry, have requested tax holiday due to Russian embargo on EU products. According to the companies, the aggravation of the international situation and war have had a significant effect on the monetary flow and have led to drops in prices and income.
Sergey Zalizko, co-owner and board member of the largest transport operator in Latvia Kreiss:
“We shipped everything to Russia: vegetables, fruits, meat and dairy products. Now a huge part of the vehicle park is left without work. Now we have to reorient it somehow. In a normal situation the development of new direction would be a rather costly endeavor. But when everything happens so suddenly…And we’re not the only ones who have problems, our competitors, Lithuanian and Polish companies, had a larger part of their transports tied to Russia. So the situation is rather dire. I think the losses of the transport sector from this crisis might surpass the losses from the 2008 crisis. This will depend on the duration of the sanctions. So if Russia will keep its word and the sanctions won’t be cancelled for a year, then in my opinion, this will be equal to a catastrophe”.
The overproduction of milk and the drop in price has forced Latvian farmers who own dairy productions to resort to last measures and start selling their cows.
Ieva Alpa-Eizenberga, owner of the Robežnieki company:
“Purchase prices are 12-25 cents for a kilogram of milk. Nothing indicates that the situation will improve in November. So there are constantly more ads about people selling milk cows and calves. But there are no buyers, so even that can’t help us fill our budget”.
Aside from direct losses, the sanction war has caused collateral losses for the Baltic states. Sweden’s biggest bank for the Baltic region Swedbank already announced that it stopped investing into Latvia’s economy, because sanctions against Russia are destroying all hopes of restoring the credit demand in Estonia, Latvia and Lithuania.
From the numbers we can see that the industries suffering the most from the sanctions are agriculture and transport. However the embargo consequences will be felt by all the levels of the Baltic countries’ population’s wallets, because with less tax income, the budget sector jobs will see a pay cut.
Despite the initial optimism and euphoria of the sanction war, the Baltic hawks now have an unpleasant hangover. While telling their population of the harmless nature of Russia’s reactive measures, the elites immediately lined up in front of the European Commission with requests for compensation for the product embargo damages. For example, Lithuania already asked for €46 million.
Minister of agriculture Virginija Baltraitienė said these funds should be enough for a short period of 3-4 months. “Lithuania is expecting to get at least part of the sum, because Brussels considers Lithuania to be the one who has suffered most from the sanctions imposed by Russia”. Despite Grybauskaitė’s economic forecasts, the minister also noted that Lithuania has had the largest drop in purchase prices for farmers, with wholesale prices halved.
To compensate the farmers’ losses the European Commission has set aside €25 million for 28 member states, although Polish farmers has requested compensation for €146 million. Polish minister of agriculture Marek Sawicki said, that the surplus of products which could have been exported to Russia, has already surpassed millions of tons. However at this moment the Polish government is ready to pay their farmers only 10% of their losses.
Andrzej Gantner - International Association for Food Protection:
“Farmers, gardeners didn’t know for a long while whether they’d get any compensation or in which amount, so half of them decided to sell their harvest on the market. As a result, the prices fell. But, either way, the current market price and the European Commission compensation is not capable of covering the cost production of these products. We’re talking about losses, the question is only at how significant they’ll be”
Life after sanctions
The agrarian lobby today is one of the most influential ones in the EU, which is evident in the giant mechanism of Common Agricultural Policy (CAP) used to secure support for European farmers. So the pressure from the European farmers, which started showing up as street protests can help change the outlook on sanctions. So on November 5 in Warsaw around 300 apple farmers went out in protest to the PM administration with demands of compensation from the national and European funds, due to their losses from the Russian embargo on agricultural products. Massive farmer protests, albeit of a more aggressive nature, happened in other EU countries.
The importance of the Russian market for European producers is also evident in the fact that a number of EU countries today are trying to re-export their banned goods through Belarus. Rosselkhoznadzor (Russian Federal Service for Veterinary and Phytosanitary Surveillance) has stopped attempts of shipping through Belarus from Lithuania, the Netherlands, Poland and Slovenia. Dutch farmers also effectively mastered the ingenuous system of getting their vegetables into Russia through Turkey.
Financial losses from the embargo and the attempts of European businesses of sneaking into the Russian market show the importance of EU-Russia trade relations. One can only hope that pragmatic interests, pressure from the businesses and the realization of the economic loss will allow European and Russian political elites to find a diplomatic solution and end the sanction war by the new year.
Translated by Pavel Shamshiev.