20191014 The Russian Food Embargo FREE Network Policy Brief Image 01

The Russian Food Embargo: Five Years Later

In this brief, we report the results of a quantitative assessment of the consequences of counter-sanctions introduced by the Russian government in 2014. We consider several affected commodity groups: meat, fish, dairy products, fruit and vegetables. Applying a partial equilibrium analysis to the data from several sources, including Rosstat, Euromonitor, UN Comtrade, industry reviews etc. as of 2018, we obtain that consumers’ total loss amounts to 445 bn Rub, or 3000 Rub per year for each Russian citizen, which is equivalent to a 4.8% increase in food expenditure for those who are close to the poverty line. Out of this amount, 84% is distributed towards producer gains, 3% to importers, while the deadweight loss amounts to 13%. Based on industry dynamics, we identify industries where import substitution policies led to positive developments, industries where these policies failed and group of industries where partial success of import substitution was very costly for consumers.

The full text of the underlying paper is forthcoming in the Journal of the New Economic Association in October 2019.

In August 2014, in response to sectoral sanctions against Russia, the national government issued resolution No. 778, which prohibited import of processed and raw agricultural products from the United States, the EU, Ukraine and a number of other countries (Norway, Canada, Australia, etc.).  The goal was to limit market access for countries, which supported sectoral sanctions. The other rhetoric of the counter-sanctions was to support domestic producers via trade restrictions, or by other words – import substitution.

This brief provides an update of welfare analysis of counter-sanctions based on partial equilibrium  model of domestic market. The initial estimations based on 2016 data can be found in another FREE Policy Brief here. This time we compare the consumption, outputs and prices of the counter sanctioned goods as of 2018 relative to 2013. The estimated consumer surplus changes, producer gains and prices are reported in Table 1.

Table 1. Welfare effects of counter-sanctions in 2018 relative to 2013.

Data sources: Rosstat, Euromonitor, UN COMTRADE
* Negative losses correspond to gains
** Negative gains correspond to losses
Green color was used to mark the commodity groups with a noticeable consumption growth in 2013-2018 and red color those with consumption decrease.

Effect on production

From the point of view of price dynamics, on the one hand, and consumption and output, on the other, the studied products can be divided into three groups.

The first group which we call “Success of import substitution”  includes goods for which real prices (in 2013 level) increased by 2016 but afterwards, the growing domestic production ensured that by 2018 prices fell below the level of 2013 with a corresponding increase in consumption. This group includes tomatoes, pork, poultry and, with some reservation, beef. For beef, growing domestic production pushed prices down after 2016, but the level of consumption and prices have not yet reached the pre-sanction level.

For the second group, import substitution has not resulted in a price decrease, we call this group “Failure of import substitution”. For products in this group, the initial increase in prices by 2016 was not reverted afterwards. Their consumption decreased significantly compared to 2013, and domestic production either continued to fall after 2016, or its growth turned out to be fragile. This group includes apples, cheese, fish, as well as condensed milk and processed meat.

We call the third group “Very expensive import substitution”. It includes fromage, sour milk, milk and (to a lesser extent) butter. This group is characterized by increase in consumption and output in the period 2016–2018, but real prices over this period still remain very high.

Effect on consumers

By comparing the losses and gains of consumers in different categories of goods due to changes in real prices and real consumption, our analysis provides the following monetary equivalents. For all considered counter-sanctioned product groups, with the exception of poultry, pork and tomatoes, consumer losses are around 520 billion rubles per year (in 2013 prices). In three product groups (poultry, pork, tomatoes), in which there was a decrease in prices and a significant increase in consumption, the consumer gains are equivalent to 75 billion rubles per year. Thus, the total negative effect from counter-sanctions for the consumers amounted to 445 billion rubles a year, or about 3000 rubles for a person per year.

Given the cost of the minimum food basket, defined in Russia as 50% of the subsistence level, the impact of counter-sanctions on the budgets of Russian consumers can be estimated as follows. 3000 rubles account for approximately 4.8% of the annual cost of the minimum food basket. The minimum food basket is a set of food products necessary to maintain human health and ensure its vital functions that is established by law. In other words, one can say that 3000 rubles a year are equivalent to a 4.8% increase in food expenditure for those who are close to the poverty line.

Consumer surplus losses were significantly redistributed in favor of domestic production, totaling 374 billion, or 2500 rubles per year per person. Another 56 billion rubles (or 390 rubles per person) correspond to the deadweight loss, i.e., reflect the inefficiency increase of the Russian economy, and 16 billion rubles (110 rubles per person) is the equivalent of redistribution in favor of foreign producers, who get access to Russian market with higher priced products than before counter-sanctions.

Effect on foreign partners

As a result of the selective embargo, the geography of Russian imports of the affected goods has changed. Traditional suppliers of these goods, primarily from Europe, were replaced by suppliers from other countries due to trade diversion. Given the changes in the composition of importers after the imposition of sanctions, we single out countries that have lost and countries that have gained access to the Russian market. We use the change in trade volumes from the respective countries as indicators of growth and decrease in share of these importers in the Russian market. Below we consider in detail the three groups of goods with the largest gains for importers in 2018 compared with 2013: cheese, apples, butter.

Cheese imports decreased significantly after the imposition of counter-sanctions, in 2018 accounting for only 42% of their dollar value in 2013. The total gain of importers due to the growth of domestic prices in 2013-2018 amounted to 17.3 billion rubles (Table 1) and was distributed among following importing countries: Belarus (78%), Argentina (6%), Switzerland (4%), Uruguay (3%), Chile (3%), other countries (6%). Countries that lost their shares of the Russian cheese market included Ukraine, Holland, Germany, Finland, Poland, Lithuania, France, Denmark, Italy and Estonia. As mentioned earlier, domestic production and Belarusian imports were not able to fully compensate for imports from countries on the counter-sanctions list, and in 2016-2018 cheese consumption in Russia decreased significantly.

Apple imports after the initial drop in 2016 partially recovered in 2018, amounting to 66% of their dollar volume in 2013. The total gain of importers in 2018 compared to 2013 amounted to 15.0 billion rubles (Table 1); it was distributed between Serbia (22%), Moldova (19%), China (13%), Turkey (10%), Iran (10%), Azerbaijan (7%), South Africa (4%), Chile (3%), Brazil (3%) and other countries (9%). Poland suffered the most from the ban on apple imports; it accounted for about 80% of all losses. Other losers from counter-sanctions include Italy, Belgium and France. The reorientation of trade flows did not completely replace Polish imports, so apple consumption in 2016-2018 was significantly lower than in 2013.

Imports of butter in 2018 was also below the level of 2013 (67% of dollar value). The gain of importers in 2018 compared to 2013 amounted to 11.2 billion rubles and was distributed among the following  trading partners: Belarus (90%), Kazakhstan (4%), Kyrgyzstan (3%) and other countries (3%). Among the countries bearing most of the negative burden of the diversion of trade, one should mention Finland and Australia.

Conclusions

Five year after counter-sanctions were put in place Russian consumers continue paying for them out of their pockets. While few industries have demonstrated a positive effect of import substitution policies, most are not effective enough to revert the price dynamics.

References

  • Kuznetsova, Polina; and Natalya Volchkova, 2019. “How Much Do Counter-Sanctions Cost: Welfare Analysis”, Journal of New Economic Association, N3(43), pp 173-183. (in Russian)