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Mainstream, VOL LIII No 37 New Delhi September 5, 2015

A NEW COLD WAR?

Embargo versus Sanction: Tit for Tat between Russia and the West

Saturday 5 September 2015

by R.G. GIDADHUBLI

In the first half of August 2015, the Russian Government declared its policy of embargo on imports of food products such as fruits, vegetables, cheese, poultry items etc from the Western countries. In early summer Russia initiated a campaign against foreign foods and subsequently enforced a ban on imports. This was a reaction to the policy of economic sanctions imposed by the West on Russia for its alleged involvement in the east Ukrainian conflict and for its annexation of Crimea in August 2014. While this was assumed to be a routine reaction of Russia towards the West, the situation has worsened attracting global attention. Hence an effort has been made here to examine as to why the issue has become serious, what are the factors impacting on Russia and the West and whether Russia will succeed.

Firstly, Russia has been quite serious with its policy-decision of embargo and hence has declared that those caught importing food products would face imprisonment of up to seven years. Russia’s keenness to strictly and swiftly implement its policy-decision is evident from the fact that as per the statement of the Interior Ministry, six members of an alleged mafia involved in a cheese-smuggling ring were arrested on August 23 as they possessed 470 tonnes of forbidden cheese.

Secondly, as per the presidential decree, imported food should be destroyed and what is equally significant is that the destruction should be supervised by two government officials and verified by photos and videos, which indicates that there is foolproof of banned food being destroyed. There are many instances of implementation of this policy by Russian officials during the last few weeks. For instance, on August 6, 10 tonnes of contraband foreign cheese were steamrolled outside Belgorod on the Russian-Ukrainian border. As reported by Radiovesti on August 6, in Altai, near the Kazakh border, some 100 kilos of apples from the Netherlands, mushrooms from Poland, and kiwis from Italy were also destroyed. Again, as stated by the Russian officials, on August 24, 600 tonnes of illegal food had been destroyed and these included fruits, vegetables, cheese, frozen Hungarian geese etc.

While Russia has the legal right to prevent illegal imports, destroying these products has been criticised by some analysts since over 16 million Russians live below the poverty line. The lower and low middle class, constituting about 45-50 per cent of the total population, cannot afford fruits, meat, cheese etc. Hence the rationality of such an action is being questioned and, as rightly opined by some analysts, the Kremlin is sacrificing the welfare of Russians for the sake of patriotic propaganda.

Thirdly, as opined by some analysts, there were reports of burning of 1.5 tonnes of food imported for a BMW racing team which was to take part in Moscow on August 27. This is highly irrational and crazy and hence might have adverse consequences for the international event in which many foreign sportspersons were to take part.

Fourthly, initially Russia imposed a ban on imports from the USA and European Union countries. Subsequently, the number of countries has been increased to cover Australia, New Zealand etc. For instance, in the third week of August, the Russian Prime Minister, Dmitry Medvedev, added four more countries, namely, Albania, Montenegro, Iceland, and Lichtenstein banning import of food products. This reiterates the decision of Russia to hit back at the West for their economic sanctions on Russia. Similarly, Russia has imposed visa restrictions on select US officials in retaliation of restrictions imposed on Russian bureaucrats, officials and industria-lists.

Fifthly, Russia seems to be bent on imposing import restrictions not only on food products but on non-food products as well from the West. Thus the network of embargo products has widened and the process has become pervasive; this is evident from the fact that on August 25, Russian authorities ordered stores across the country to remove Western brands of popular washing detergents and soaps from the shelves. But this might become counter-productive and adversely affect the popularity of the government. What was highly contro-versial was preventing access to Wikipedia on August 24, and this did create panic in the country and became hot news all over the world against Russia. But good sense prevailed as it was lifted by Roskomnadzor a few hours later.

Sixthly, Russian authorities seem to be on the warpath on the issue of embargo. The Russian Consumer Protection Agency claimed on August 25 that recent inspections of selected goods of top foreign brands such as Colgate-Palmolive and Procter and Gamble have high levels of toxic ingredients and hence have begun removing household products from stores, claiming health risks.

The Western critics are amazed by the fact that Russia is finding fault with the quality of Western imported products such as soap, detergents and cosmetic items which have become household products of Russian women and been used for decades.

It may be stated that in general Russia does not enjoy high reputation of producing high-quality consumer products and hence has been a major importer of these consumer goods even during the Soviet era. Thus some Western critics call this as craziness and even question the timing of such actions considering the fact that these are well-known brands in the global market. What could be a contentious issue is the fact that the Russian embargo also includes items produced by the Russian company Nevskaya Kosmetika established in Russia; it is a joint venture with a Western firm.

Impact and Consequences

The question arises as to whether there is justifi-cation for such strong policy-decisions being adopted by Putin’s Russia. There is no doubt that this will be a very contentious policy-issue among the critics and analysts of Russia and about the likely impact and consequences.

Firstly, a Moscow priest and commentators, including Yevgenia Nazarets, Aleksandr Gostev, were highly critical of destroying food and urged that it should have been used for feeding the poor and elderly people in Russia. Moreover, thousands of Russians signed online petitions urging Putin to cancel his latest decree and warning of potential consequences of playing with food issues amid economic crisis in the country. Russian analyst Savelyeva has opined that by August 6 about 280,000 persons signed a petition against the banning of food, but Kremlin spokesperson Dmitry Peskov questioned the validity of the signatures.

Secondly, while during the last couple of decades the objective of the Russian Government has been to integrate with the global economy and attract Western firms to produce and invest in Russia, there seems to a U-turn now by the Russian authorities on this issue which may have long-term adverse effect on the investment climate of the Russian economy and technology transfer from the West.

 Thirdly, in fact in 2015 the Russian economic growth has been declining and has been facing recession due to the sharp global decline in oil prices (Russia being largely dependent on petrodollars by exporting oil and gas to the West European countries). The Russian economy shrunk by 2.2 per cent in the first quarter of 2015 and the value of the ruble collapsed, causing inflation to rise to an annual rate of 16 per cent.

Fourthly, Russia has been facing an acute shortage of food products including vegetables and meat etc. Prices have skyrocketed and a large section of people are unable to buy food products. Russia has been a major importer of meat and milk products as was the case during the Soviet era. In 2014 imports constituted about 30 per cent of the total demand of milk products.

 Moscow’s embargo of Western food imports contributed to soaring food prices that rose by more than 20 per cent by July, according to official statistics. The price of some staple goods, such as cabbage, rose more than 60 per cent in early 2015. Hence Russian analyst Savelyeva is candid in stating that in Russia “people can’t even afford the most basic food”. That is why she says Putin’s order to destroy food has been most unwise in Russian history. Hence under these circumstances, banning imports might aggravate social discontent and badly affect Putin’s popularity

Counter-arguments Favouring the Decision

While there could be arguments against this policy of embargo on imports from the Western countries and on the issue of destruction of banned food products, as per the survey by the Levada Center and by the All-Russian Center for Public Opinion Research (VTsIOM), public opinion polls conducted in August seem to be more or less equally divided. This could be a consolation to the policy-makers.

Commenting on and implicitly justifying the policy-decision of the Russian Government, Russian economist Vladislav Inozemtsev, Director of the Moscow-based Center for Post-Industrial Studies, has contended that Russia is heading towards an era of austerity and autarky at a time when thousands of domestic private and state sector enterprises are expanding.

Russia has the right to increase its domestic production and be self-reliant in food production and it claims to have already made some progress in this area. Russia has adopted the policy of ‘Doctrine of Vegetable Independence’ under which by 2030 about 86 per cent of vegetables should be produced in Russia itself. As opined by Elena Turrina, Director of the Institute of Agrarian Marketing, there is some positive impact of embargo on investment activities to produce vegetables etc. in Russia itself and it may take about three years to feel the impact of the same. Hence while this could be a long-term perspective, there are differences in the estimates about the quantity and quality of domestic production. While, as per some analysts, during the year 2014-15 domestic production of milk has increased by only about seven per cent, official sources claim that there was an increase of 24 per cent. In 2013 import of meat constituted about 25 per cent of the total market of Russia and that has gone down to 18 per cent in 2014. Hence to a great extent domestic production has picked up.

Political Strategy

It is important to note that Russia seems to evolve a deliberate policy of changing suppliers of food and other products. Traditionally the USA accounted for about 60 per cent of the total import of meat and the EU countries about 25-30 per cent. As a result of contra-sanctions, import from these countries has been totally stopped. In their place Brazil and Argentina have emerged as suppliers of these products.

BRICS countries seem to get preference in the Russian market. For instance, Brazil is replacing the USA and Western countries for importing meat and poultry products. In fact, Belarus has overtaken Brazil as supplier of meat and poultry products to Russia. India has emerged as one of the new suppliers of meat products to Russia and at relatively cheaper rate as compared to, say, the European countries. While Egypt and Azerbaijan take the lead in exporting vegetables to Russia, Turkey has become another source of supply of vegetables and fruits to Russia.

Russia-Ukraine relations are on test. It is important to note that Ukraine has traditionally been a major source of import of pork for Russia. Now Russia has threatened to review its policy if relations do not improve in 2016. In the first half of 2015 Ukraine supplied 13,000 tonnes of meat to Russia, second to Brazil. It is important to note that there is a strong indication that in 2016 Ukraine would be added in the list of banned countries unless Kyiv reaches a settlement with Moscow that circumvents the economic regulations in Ukraine’s trade accord with the EU.

In conclusion, it may be stated that Putin’s policy of embargo has been controversial and is likely to have major consequences in Russia’s relations with the West. Russian policy-makers assume their decision of banning imports will economically hurt these countries. While this seems to be highly optimistic, there are likely to be adverse impacts on Russia itself in the short term. Considering the fact that the whole issue of embargo is closely linked to Ukraine in which both Russia and the West have high stakes, and the crisis persists with no sign of an acceptable political solution emerging, a New Cold War may not be ruled out.

Dr Gidadhubli is a Professor and the former Director, Centre for Central Eurasian Studies University of Mumbai, Mumbai.