Sanctions On Russia Costing EU Businesses US$240 Billion And Increasing – Putin

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Op/Ed by Chris Devonshire-Ellis

Q: How Long Are Sanctions Effective Before Markets Adapt?
A: Three Years

Speaking at his annual televised Q&A session yesterday, Russian President Vladimir Putin stated that the imposition of sanctions imposed on Russia by the West have cost businesses in the European Union about US$240 billion in lost trade since 2014. Stating that Russia had lost out to the tune of about US$50 billion, and the United States, who imposed the main sanctions about US$17 billion, and that at the same time the EU in particular was in danger of “losing the Russia market”. These markets come as the EU has just announced it is extending sanctions on Russia for another year, until June 2020 when they will be again reviewed.

The loss in trade is a scenario that for the EU, rings depressingly true. Having acquired an apartment in St.Petersburg in 2013 and been instrumental in establishing Dezan Shira & Associates practice in the country, I have seen first hand the results of the EU’s position.

Among the first signs was indeed an impact on EU exports into Russia, visible in supermarkets as Russia imposed tit-for-tat sanctions on EU produce being imported into the country. Quality foods from EU nations were suddenly absent, to be replaced by inferior Russian equivalents. The prices of some stable vegetables such as onions, beetroot and potatoes initially rose about 15-20% as alternative supply chains had to be arranged. Then public transport vehicles began to change their badges – buses and taxis that used to be Scania or Volvo were replaced with King Long, Geely and Kia. Imported clothes from the EU and US suddenly became expensive, the Chinese filled supermarkets instead with Chinese made fashions. It should be noted that in the global fashion industry, a lot of work was already carried out in China. Those items, often finished in Italy or France to apply the final touches, simply had that last stage applied in China as well.

In total it has taken about two years for Russia to get over the initial consumer shock of sanctions, and a third year to have completed a complete recovery transition. That transition time – three years – is the amount of time I have observed it has taken for what were previously almost exclusively imported consumables to be replaced by quality versions made in Russia.

In fact, some of those products are never coming back to be imported from the EU, even as and when sanctions are lifted. We can take for example three consumables popular in the EU and in Russia.

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The sanctions hit for example Italian and French cheesemakers. Russia is the third largest cheese consuming nation in the world, after the EU itself and the United States, so losing such a market was a huge blow.

Unable to service that demand (cheese consumption in Russia is a growth market) those EU based producers established factories in Russia instead. There has, in essence, been a complete technology transfer – given to Russia’s dairy producers for free. Today, Russian made cheese is excellent, a far cry from the rubbery, tasteless standards of pre-sanctions Russia. More importantly, these cheeses are being made to full EU specifications and standards. When the sanctions are eventually dropped, Russia will export its cheeses back to the EU.

I wrote about this in the article “Before Sanctions, Russians Imported European Gourmet Foods. Now They’re Making Their Own”

It is a similar case with beer. Before sanctions, the dominant Russian domestic beer was brewed by Baltika, owned by Carlsberg. Other beers from markets such as Germany, Belgium and the UK were imported. These are now expensive, while Baltika face competition. Why? Because Russians now produce their own craft beers and have developed their own microbreweries to fill the gap. I wrote about this trend recently here “Cheers! How Western Sanctions Have Helped The Russians Develop Micro-Breweries & Craft Beers”

The same situation applies to the Russian wine industry, which is booming, again as a result of sanctions and the Russians rediscovering ancient vineyards on the Black Sea coast that are capable of creating some excellent vintages. Wines houses such as Abrau Durso Fanagoria and JV’s such as the Swiss-Russian Burnier have all invested in and applied EU standards to their wine-making in Russia and begun creating some excellent products.

The figures below give an indication of the size of the Russian market in just these three consumables and the estimated annual value.

Product Global Share Consumed By Russia * Estimated Annual Value (US$, Billions)**
Cheese 8% 5.12
Beer 4% 30
Wine 4% 8.98
*data from Statistica
**data from wmb

While these figures include the existing Russian consumer market, they also include the now local production that has relocated from the EU. The EU not surprisingly doesn’t keep records of these statistics, and Russia, while it monitors FDI into the country, doesn’t specify categories in this manner. What I can advise however is that in these three items, when conducting a spot check on supermarkets in Moscow (Yes, I buy a lot of cheese and beer and wine) about 50% of the cheese varieties are now Russian produced, about 35% of the beers, and about 25% of the wines. If that is correct, that would imply the EU has lost about US$15 billion per annum in trade to Russia in just these three consumer markets. What is worse is that these enterprises have now established facilities in Russia to meet the local demand. That money is never returning to the EU and its farmers.

That US$15 billion would also indicate that the US$240 billion figure that President Putin has suggested the EU has lost in trade with Russia is probably correct, based on my small sample of just three commodities taking up 3.6% of the total.

The five main issues that the EU hadn’t factored in its impositions of sanctions upon Russia are as follows:
  1. Russia would attract investors from the EU into Russia to continue their supplies and preserve their Russian market access as newly Russian enterprises;
  2. Russia would develop new supply chains with Africa and Asia to replace those from the EU;
  3. Russians would develop a patriotic stance towards consuming Russian made products
  4. The sanctions would hit ordinary EU businesses and producers en masse from auto-manufacturers to farmers
  5. Many of those EU trade relationships have now been destroyed and the Russia market will not return.

As I have demonstrated, it has taken Russia about three years to adapt to the sanctions. Its trade with the EU is increasing and it amounted to about US$300 billion last year. Without sanctions, that trade could easily and quickly double. With the EU about to lose one of its most important trade allies and financial partners in the UK, it makes economic sense for Brussels to stimulate a recovery by re-evaluating the damage caused to its trade by the imposition of sanctions. Losing one major countries trade to political arguments is pretty bad. Losing two is starting to look like a nasty habit. Meanwhile – Russian trade with China is up, and is on target to hit US$200 billion in the next three years at growth rates of 20% per annum. Part of that should have gone to the EU. And that’s not coming back either. The new regime in Brussels, when they take over in October, will have some serious thinking to do about Russia. The current impasse is unsustainable.

 

About Us

Russia Briefing is produced by Dezan Shira & Associates. The firm advises international businesses on investing, setting up businesses and administering them throughout the Eurasian region, including Russia, China, India & ASEAN, and maintains offices and partners in each of these countries and regions. For assistance with investing in Russia, or for Russian businesses wishing to invest in Asia, please contact Maria Kotova at maria.kotova@dezshira.com or visit us at www.dezshira.com.

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