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Russia retaliates on West's sanctions over Ukraine

Published: Thursday, Aug. 7, 2014 2:11 p.m. CDT
Caption
(Ilnar Salakhiev)
Customers look at shelves with imported fruit and vegetables at a supermarket in Novosibirsk, about 2,800 kilometers (1,750 miles) east of Moscow, Russia, Thursday, Aug. 7, 2014. Russia banned most food imports from the West on Thursday in retaliation for sanctions over Ukraine, an unexpectedly sweeping move that will cost farmers in North America, Europe and Australia billions of dollars but will also likely lead to empty shelves in Russian cities. (AP Photo/Ilnar Salakhiev)
Caption
(Ivan Sekretarev)
Dutch sweet peppers on a display at a supermarket in downtown Moscow on Thursday, Aug. 7, 2014.The Russian government has banned all imports of meat, fish, milk and milk products and fruit and vegetables from the United States, the European Union, Australia, Canada and Norway, Prime Minister Dmitry Medvedev announced Thursday. The move was taken on orders from President Vladimir Putin in response to sanctions imposed on Russia by the West over the crisis in Ukraine. The ban has been introduced for one year. (AP Photo/Ivan Sekretarev)

MOSCOW – Russia retaliated Thursday for sanctions over the crisis in Ukraine by banning most food imports from the West, dealing a blow to Europe that also takes aim at hurting farmers in the U.S., Canada and Australia.

In choosing to make an economic move, President Vladimir Putin signaled he isn't ready at this point to send troops into Ukraine. He also showed he's willing to inflict significant pain on his own people to make a point.

The U.S. and the European Union have accused Russia, which annexed Ukraine's Crimean Peninsula in March, of supplying arms and expertise to a pro-Moscow insurgency in eastern Ukraine, and have responded by slapping sanctions on Russian individuals and companies. Tensions rose further last month when a Malaysian jetliner was shot down over rebel-held territory, killing all 298 people aboard, and the West accused Russia of most likely providing the militants with the missiles that may have been used to bring the plane down.

Moscow denies supporting the rebels and accuses the West of blocking attempts at a political settlement by encouraging Kiev to use its military to crush the insurgency.

The ban, announced by a somber Prime Minister Dmitry Medvedev at a televised Cabinet meeting, covers all imports of meat, fish, fruit, vegetables, milk and milk products from the U.S. and Canada; all 28 EU countries, plus Norway; and Australia. It will last for one year.

"Until the last moment, we hoped that our foreign colleagues would understand that sanctions lead to a deadlock and no one needs them," Medvedev said. "But they didn't, and the situation now requires us to take retaliatory measures."

That retaliation, however, could hurt Russia as much as the West. With the inclusion of Ukraine, most of whose food products also have been banned, Russia has now cut off 55 percent of its agricultural imports, including about 95 percent of its imported milk, cheese and yogurt.

In 2013, the EU exported 11.8 billion euros ($15.8 billion) in agricultural goods to Russia, while the U.S. sent $1.3 billion in food and agricultural goods, including about $300 million worth of poultry. Russia accounts for about a tenth of EU agricultural exports, its second-largest market after the United States.

Washington dismissed Moscow's ban as trivial to the U.S. but destructive to Russia's own population.

"What the Russians have done here is limit the Russian people's access to food," said David Cohen, the U.S. Treasury undersecretary in charge of economic sanctions. He said the U.S. is ready to impose more sanctions against Russia if it doesn't de-escalate the conflict in Ukraine.

Imports from the countries sanctioned Thursday not including Ukraine account for anywhere from 10 percent to 30 percent of the consumer food market.

The Russian government insisted it will move quickly to replace Western imports with food from Latin America, Turkey and former Soviet republics, including Belarus, a major dairy producer. But market watchers predicted shortages and price increases that will further cloud Russia's already grim economic outlook.

"Along with higher interest rates, higher food costs will mean that households have less money to spend and that will depress the economy," said Chris Weafer, an analyst at Macro Advisory in Moscow.

The damage to consumers will be particularly great in big cities like Moscow, where imported food fills an estimated 60 percent to 70 percent of the market and affluent consumers have grown accustomed to shops stocked with a wide range of French cheeses and Parma ham.

The measure led to sardonic comments on Russian online media and liberal blogs, bringing back memories of empty store shelves during Soviet times, but there was no immediate indication of consumers trying to stock up.

"And so what? Instead of Spanish fruit we'll have, I don't know, fruit from Israel. It doesn't bother me," said Irina Ivanova, who was shopping at an upscale grocery store in Moscow.

The Moscow Zoo was among those who were going to need to find new suppliers. The animals eat 300 kilograms (660 pounds) of fruit and vegetables daily, which until now came from Poland and Hungary, zoo spokeswoman Anna Kachurovskaya told the Interfax news agency.

Medvedev argued the ban would give Russian farmers, who have struggled to compete with Western products, a good opportunity to increase their market share. But experts said local producers will find it difficult to fill the gap left by the ban, as Russia's agricultural sector suffers from inefficiency and a shortage of funds.

Agriculture Minister Nikolai Fyodorov said the farm sector would need more subsidies equivalent to $3.8 billion in the next few years to pump up production. The government may find it hard to increase funding as it tries to shore up the ruble and support banks and companies affected by Western sanctions, which included an EU ban on long-term borrowing for major Russian state banks.

Russian stock indexes initially fell by about 1.5 percent on the news before recovering most of the losses a few hours later.

Medvedev said Russia hopes the ban will stop the West from ramping up sanctions, which it has done several times this year as the Ukraine crisis has deepened. He said Russia's ban could be lifted before the year is up if "our partners show a constructive approach."

Weafer said the import ban was obviously aimed at discouraging the EU from imposing further sanctions. "It was already quite difficult to get the consensus for the last round of sanctions, but now there that there are clearly consequences, especially for some countries more than others, it will make it even more difficult," he said.

If the West doesn't change course, Russia may introduce restrictions on the import of aircraft, navy vessels, cars and other industrial products, Medvedev warned. He also said that in response to EU sanctions against Russian low-cost airline Dobrolet, Russia is considering a ban on Western carriers flying over Russia on routes to and from Asia, which would significantly increases costs and flight time.

He announced a ban on Ukrainian carriers operating transit flights over Russian territory.

The largest share of the agricultural losses will fall on Poland, France, the Netherlands and Germany. Poland is Europe's largest producer of apples, with more than half of its production usually going to Russia.

The ban also dealt a blow to Norway's fishing industry. The Norwegian Seafood Federation said Russia was its biggest single market last year, worth $1 billion. Shares of Marine Harvest, the world's largest producer of Atlantic salmon, dropped 8.3 percent Thursday on the Oslo stock exchange.

Albert Jan Maat, chairman of the Dutch Federation of Agriculture and Horticulture, warned that the Russian ban will cause prices to drop across Europe because of oversupply, and called on the Dutch government and the EU to help farmers.

Xavier Beulin, president of the French farm union FNSEA, voiced similar concerns. "These are market losses, but there's also a chance that it will flood the European markets with summer crops that are no longer going to Russia and that could lower prices," he told the LCI television network.

EU Commission spokesman Frederic Vincent voiced regret about the ban, saying the commission still has to assess the potential impact and reserves "the right to take action as appropriate."

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