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Russian embargo

Irina FilatovaAugust 29, 2014

An embargo on food imports from the West has sent grocery prices in Russia soaring and greatly worsened inflation. The move is seen as a severe blow to the country's stagnating economy.

Symbolic Pictures Shows butcher cutting meat
Image: picture-alliance/dpa

The cost of banned foodstuffs started to rise days after the embargo took effect in early August. According to figures released by Russia's State Statistics Service on Wednesday, consumer prices rose by 0.1 percent last week, following a similar increase a week earlier. This trend indicates that already by the end of 2015 Russia's annual inflation rate might hit the five-year maximum of 8 percent, far above the official target set by the Russian authorities, analysts warned.

The weekly price increase was especially sharp for foodstuffs like chicken (+1.4 percent), pork (+0.9 percent), frozen fish (+0.5 percent) and cheese (+0.4 percent), the State Statistics Service said. The retail price for apples rose by 0.5 percent from the previous week. This is the most glaring example of the market's reaction to the imports ban, analysts at Raiffeisen Bank said in a research note. Apple prices tend not to increase in summer, when new crops are harvested, they added.

Chris Weafer, a senior partner at Moscow-based research firm Macro-Advisory, echoed those findings. As a result of the embargo, "we didn't get the usual deflation in fruit and vegetable prices that we normally see in August with this plenty of local supply, as well as the imports. That usually brings prices down through August," he said in a telephone interview.

Symbolic Picture Shows apple harvest in the Netherlands
Apple prices have risen since the banImage: picture-alliance/dpa

Russia curbed imports of foodstuffs from the European Union, the United States, Australia, Canada and Norway as a countermeasure to Western sanctions. Among the products on the blacklist are fresh and processed meat, fish, fruit, vegetables, nuts and dairy products.

More price growth expected

As a result of the embargo, the cost of food in some of Russia's regions has been rising at a record pace. Wholesale prices for chicken legs on Sakhalin Island in Russia's Far East skyrocketed by 60 percent, Russian daily newspaper Kommersant reported in mid-August, citing the region's agriculture minister, Nikolai Borisov. The cost of meat in the nearby Primorsky region rose by 26 percent, while fish prices went up by 40 percent, the report said.

These figures come as no surprise, explained Macro-Advisory's Weafer, adding that remote regions like Sakhalin are completely dependent on imports due to the lack of local suppliers and harsh weather conditions which make growing their own crops impossible.

Analysts estimate the share of groceries in the consumer basket used to track inflation at about 37 percent. The ban on food imports is expected to fuel annual inflation by the end of the year in what will be a serious blow to Russia's economy, which is already balancing on the edge of recession.

Weafer said consumer prices would continue rising over the next few months. "There is a possibility we could see 8-percent annual inflation between now and the end of the year," he added.

Analysts expect that by the end of 2014 the annual inflation rate will still not exceed 7.8 percent, up from 6.5 percent in 2013. But it might hit the 8-percent mark in annualized terms by late 2015, fueled by a possible increase in taxes and utility tariffs, according to Alfa-Bank chief economist Natalia Orlova as cited by Russian business daily Vedomosti. This is well above the inflation target of 4.5 percent set by Russia's Central Bank for next year.

A chance for local suppliers?

In an effort to downplay the negative effect of the embargo, the Russian authorities vowed to stem price increases. At the same time, they largely see the ban on food imports as a chance for local suppliers to develop. The countermeasures to western sanctions should "clear the store shelves for the goods of domestic producers," Prime Minister Dmitry Medvedev said when they took affect.

But analysts doubt that will be the result in the near future. "The experience of previous import bans suggests that this tends not to happen. Instead prices tend to rise, as supply is squeezed," Capital Economics experts warned in a research note. Alexei Portansky, a professor at Moscow's Higher School of Economics, pointed out that the complete substitution of imported goods by locally made ones would take a long time. Some foodstuffs, like meat, would be hard to substitute, he added.

Ukraine conflict - Russian tanks rolls across the steppe near Krasnodarovka, Russia
Russia's embargo on food imports from the EU and the US follows sanctions over UkraineImage: Reuters

Russia remains heavily dependent on agriculture and food from abroad, the third-largest import sector, accounting for about 14.5 percent of all Russian imports,according to estimates by Citi Russia and CIS. In 2013, Russia imported goods worth $43 billion (33 billion euros), according to the Federal Customs Service. Imports of the products that have been blacklisted were worth $25 billion, Capital Economics estimated.

Russia might try to find alternative suppliers in countries whose goods were not placed under embargo, Portansky suggested. But new suppliers are unlikely to be found immediately, and they will apparently offer the same goods at higher prices, he added.