By Razi Iqbal
Edited by Shambhavi Singh ,Senior editor, The Indian Economist
Providing a peek into the soviet days of the past, Russia has banned food imports from the European Union and the West in retaliation to the continuous sanctions imposed upon it since Kremlin’s annexation of Crimea in March. The sanctions reached their peak after the downing of Malaysian airlines flight MH 17 over separatist held territory in eastern Ukraine. Though Mr. Putin has forgotten one thing, that is the ban on food imports might not really serve the purpose he had in his mind in the first place, and might actually backfire in the short run.
Russia has imposed a ban on food imports in the hope that it is going to cause financial chaos and mass bankruptcies of farmers and money-lenders, thus crippling their economies. That, sadly for Kremlin, is a very far-fetched dream.
For the United States of America, the import ban from Russia will be insignificant, owing to the fact that it represents a very small fraction of their total exports. Further, their domestic market is big enough to absorb any additional build up of food stocks over a small period of time. When it comes to the European Union, the size of the European economy is approximately six times larger than that of Russia. The trade loss caused by the ban would be around 16 billion dollars which is only 0.1% of the entire European economy. This amount of trade disruption does not contribute in any significant manner to the larger scheme of things. The countries to be hit the most by the ban would be Russia’s neighbours like Lithuania, Denmark and Finland, countries whose exports are largely dependent upon Moscow. Anyone inside Kremlin will certify that the ban was not meant for these countries in the first place but instead for bigger economies like Germany, France, U.S and other major European economies.
As far as Russia’s economy is concerned, the policy makers failed to understand that the supply of essential commodities for food is inelastic. The country imports 40 percent of its food, and with the new sanctions it has effectively cut off more than half of its imported meat and fish and 30 percent of its vegetables. Forcing people to get those food items from the domestic market is sure to send prices soaring. Pictures of empty shelves in Russian supermarkets have already started surfacing. The constraint in the supply will result in a sharp rise in prices in the short run, and with the country already struggling with a falling rouble and double-digit inflation, this would be a hard hit. Neither can the domestic supply cannot be increased in a short period of time, nor can the production capacity in the “non-banned” countries be increased overnight.
Another propaganda of Mr Putin behind these bans might have been to give boost to the domestic Russian economy which has been sluggish in recent years. The foreign exchange reserves have been continuously dwindling, and the sanctions would have given the government a way out to achieve both its objectives also strengthening its vote bank through appeasement of domestic producers.
Russia has acted like an angry child refusing to eat, not knowing that this will harm himself more than anyone else. This step has done nothing but degraded the image of Russian policymakers in the eyes of other countries. Maybe there is not much dissimilarity between Mr Putin and that teary eyed kid crying at his worst in the supermarket. Probability is high that the supermarket is somewhere in Moscow!!
Razi is a second year economics student at Shri Ram college of commerce, Delhi university. A cricket fanatic and an avid reader, Razi believes that ‘the big bang theory’ and his passion for biking provide him the necessary fuel in his life. His interests in economics lie in psychology based subjects like game theory and behavioral economics. His focus in life right now is on the subject ‘how to best enjoy college life’. You can email him at [email protected]