The Kremlin is spinning domestic protectionism and anti-West food sanctions as a way to help Russia's farmer. But it's really just a recipe of pure politics - and bad economics.
MOSCOW — People usually associate Russian conservatism with its citizens' political tastes, but marketing professionals have long ago seen another connection — literally, in consumer tastes.
There's the ice cream wrapped in paper — "tastes just like you remember!" And there's sausage with a label saying it was "made according to the standards of the Soviet Union."
Soviet culinary artifacts have been flying off the shelves for years. Valeri Fedorov, director of the All-Russian Public Opinion Research Center, says it's no surprise that Russians support sanctions on Western food products as evidenced by the abundance of Soviet symbols in stores.
According to a survey by the Levada Center, a Moscow-based think tank, 72% of Russians support the sanctions on foreign food products. We want food like we had as children, as if we'd forgotten the lines and shortages.
"Our great country doesn't have the same mission as Europe," Motherland party leader Aleksei Zhuravlev said in February. "We don't exist in order to ensure everyone is OK and has sausage and yogurt. No, we have a greater mission."
Now that "greater mission" has set its sights on trade in food products, and it could still restrict trade in automobiles or consumer goods. For Russian consumers, the future is completely unpredictable.
Getting rich at home
"There's this move in chess, a strategy, where you allow several figures to be captured in the pursuit of a goal," says Valerii Mironov, vice director of the Center of Development at the Higher School of Economics. "I really hope that our government is employing that strategy right now, not just committing blunders. The first victim was the banking system, which is suffering as a result of the sanctions from the West. The second victim is the grocery industry, which is suffering as a result of our own sanctions. The only winners, it seems, should be domestic farmers."
Of course, all economists agree that protectionism is a bad, even dangerous, long-term strategy, but for "undeveloped" sectors of the economy, short-term protectionist policy can be beneficial. Our agricultural industry is still considered "underdeveloped," even though the value of Russian agricultural exports is greater than the value of weapons exports.
But Russia will have to use non-financial instruments to help farmers, because the Russian Agricultural Bank lost "long-term money" in the third wave of sanctions from the West and won't be able to finance projects that would increase the competitiveness of Russian farmers.
The problem is, it's not clear how exactly to use the non-financial instruments that remain. It's the end of the agricultural season, and it's useless to try to change the 2014 harvests now. The agricultural sanctions are scheduled to expire next August. If farmers plant more now to replace the Western products, what will happen once the sanctions expire in a year? From a farmer’s perspective, increasing production just because of these sanctions is extremely risky.
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Summer produce — Photo: g_firkser
Increasing agricultural production will require more support from the government than is currently planned, explains Natalya Shagaida, director of the Center for Agricultural Policy at the Russian Presidential Academy of National Economy and Public Administration.
Last year, for example, milk production only increased among small farmers — and only by 5%. "Government policy focused on increasing production among large producers through subsidies will certainly lead to increased production in the short-term, but at what cost to consumers?," Shagaida asks. "Chicken and eggs cost about the same in Russia as in Europe, and while grains are less expensive, pork is even more expensive than in Europe. Large producers say they can't sell meat for less."
Difficult to control
It's also difficult to figure out how much food comes from Russian "enemies." The Development Center Institute at the Higher School of Economics has already blamed the Ministry of Agriculture for manipulating data about food imports. It seems someone substantially lowered the numbers on the eve of the sanctions announcement.
"For beef, our numbers show that 41.6% is imported and 3.7% is imported from sanctioned countries, compared to 28% and 2.5%, which are the numbers the Ministry of Agriculture is showing," one expert says. "In terms of milk production, we have 23% and 9% versus the Ministry of Agriculture's 3.8% and 1.3%. In half of the cases, the numbers are very different."
Shagaida says that it's not even clear who owns much of the agricultural land in Russia. "International companies control a lot of land, and there's no register," she says. "In our research, we found that five out of the 10 largest Russian agricultural organizations are owned by international companies that are incorporated offshore. If the political interests of these owners don't align with their economic interests, no one knows how they will react. An unexpected liquidation of a large producer could blow a hole in Russia's grocery market."
Even if Russia does manage to control international agricultural investors, some of whom might be from "sanctioned" countries, it's unclear what will happen to Russia's Customs Union partners. For the past several years, there have been no customs inspections on the border between Belarus and Kazakhstan, Russia's partners in the Customs Union. Both partners have refused to support the sanctions, and have also noted that it is totally legal for them to re-export products from sanctioned countries to Russia.
"In theory, that sort of re-export is only possible if the product has been substantially transformed," explains Aleksandr Knobel, an international trade expert. "For example, if Belarus buys frozen ground meat from Europe and makes it into sausages and then sells us the sausages, the sausage is Belorussian."
Nevertheless, Andrei Cizov, director of the SocEcon Center, notes, that there are ways around the law. "In reality, an American good could be just washed up and given a new label, and it's considered Belorussian, or Kazakh."
Belarus has already provided Russia with millions of dollars worth of lemons, mussels and octopus this year, and we can be sure none of those agricultural products originated from the chilly landlocked country.
A first look
All we can be sure about is that food is becoming more expensive. In fact, Russia's patriotic relationship with food costs consumers between 1 and 2 extra percentage points of inflation.
"Right now, instead of developing a constructive plan, there is a propaganda campaign that is actively promoting the myth that the food that falls under the sanction are all expensive, elite products," explains Natalya Shagaida. "But anyone can verify that's not true just by looking at the origin of products for sale in a discount section of the grocery store."
Last week large supermarket chains were already beginning to complain to the Ministry of Trade and Industry that some suppliers were asking up to 30% more for fish, vegetables and meat. The government promised a solution, vowing to strictly monitor the situation.
Don't expect the people to simply take officials at their word, they will be watching the prices themselves.