Russian sanctions create unexpected winners

Russian sanctions create unexpected winners
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No losers without a winner. Producers across several countries rush to fill the gaps caused by Russia’s sanctions against Western food products. 

The tit-for-tat exchange of sanctions between Western powers and Russia over the Ukraine conflict has left some damage on both sides. Sanctions introduced by the US and its European allies in mid-July target Russia’s banking, energy and defense sectors and have caused a high level of capital flight from the country, as well as lower economic growth projections. In retaliation, Russia then announced a ban on food and agricultural products from the US, the EU, Australia, Canada and Norway.

Though the effect on the US market will most likely be negligible, the EU may suffer 7 billion euros (around $9 billion) in direct losses as a result of the embargo. In addition, Russia’s sanctions have had a domestic effect, with fears of inflation and goods shortages running high. Further evidence of the instability and uncertainty caused by sanctions is the fact that tourism to Russia has decreased by half.

A number of third party countries, however, have been able to seize on this opportunity to their own benefit and may prove to be the ultimate winners from the political wrangling between Russia and the West. Close to home in Russia’s neighborhood, Central Asian authorities initially feared the repercussions of Russia’s dispute with the West because of the interdependence of their economies with that of their northern neighbor, as well as the effect that the performance of the ruble has on national currencies in the region.

Nevertheless, Central Asian countries are now poised to supply the Russian market with food and agricultural products to help close the gap created by Russia’s embargo. Kazakhstan is preparing to increase beef, lamb, pork, vegetable and melon exports to Russia. Russia has also lifted a ban on the import of fruit from Kyrgyzstan and has cleared the way for this produce to enter Russia, going as far as committing itself to providing financial support to support the development of these industries in the region.

It is not all good news for Central Asian countries, however. A sudden increase in exports will make products scarcer back at home, causing prices to rise and fueling inflation.

A bit further afield, Brazil has taken advantage of the sanctions to promote its domestic meat industry. Russia very quickly raised the number of Brazilian meat packing facilities whose products are approved for import from 30 to 90, and Brazil is also working on increasing exports of soybeans and corn to Russia. According to Reuters, in 2013 Brazilian exports to Russia were worth $2.72 billion. This figure is expected to rise considerably over 2014, mirroring the increased demand from Russia.

Other countries are keen to hop on the bandwagon. Over the last few months there has been a flurry of interest in forming relationships with Russia and the Customs Union of which it is a member along with Kazakhstan and Belarus (The Customs Union is a precursor to the Eurasian Economic Union [EEU] that is due to be launched in 2015.)

Turkey, whose second largest trade partner is Russia, has expressed interest in forming a free trade zone with the EEU and, more immediately, is expecting to double its exports of fruit and vegetables to Moscow to cover shortages. Likewise, both Egypt and India have also expressed interest in creating free trade agreements with the Customs Union and are intent on strengthening trade relations between the countries.

This surge of interest in Russia and its closest trading partners is a boost for Russia in its efforts to promote the fledgling EEU. Western countries have long been critical and suspicious of Russia’s regional ambitions, and this skepticism may have previously been enough to dissuade their allies (including Turkey, perennial EU integration aspirant) from rocking the boat with overtures to the economic bloc.

However, the economic opportunities that have recently arisen as a result of the volley of sanctions may just be too good to pass up, and the increased interest in trade cooperation with members of the EEU may work to increase the global legitimacy of the organization.

Categories: Economics, International

About Author

Leroy Terrelonge III

Leroy is a political risk analyst who focuses on Iran and Russia/former Soviet Union countries. He worked for nearly a decade as an Iran analyst at the National Security Agency and holds a Masters in International Business from the Fletcher School of Law and Diplomacy. He is proficient in Persian (Farsi, Dari, Tajik), Russian, Spanish, French, Kazakh, and Arabic.