Diego
Benning Wang
The
somewhat unanticipated ban
on the import of agricultural products from EU and NATO countries announced
by the Russian Government in a tit-for-tat retaliation to sanctions placed on
Russia by EU and NATO countries is hailed by many countries in Russia’s
immediate surroundings. Shortly after the embargo came into effect, the Russian
government started seeking alternative sources of import of grocery product
that was previously supplied by EU countries. A number of Latin American and
Middle Eastern Countries have responded to Russia’s trading interests with
enthusiasm. China
has started constructing a duty-free trading hub on its border with Russia.
On Aug 11, the head of Russia’s Ministry of Agriculture announced
that the prospective countries to supply fruits and vegetables to Russia would
include Azerbaijan, Uzbekistan, Armenia, Tajikistan, and Kyrgyzstan. In
response to such announcement, Azerbaijan’s Minister of the Committee for
Economic Policy Ali Masimli remarked: “The conflict
between Russia and the West has opened a huge market for Azerbaijan’s fruit and
vegetable market. Azerbaijan needs to achieve the maximum from this situation”.
However,
Armenia may not be in a position to let such optimism prevail. In the fiscal
year of 2012, Armenian export to the country’s largest trading partner Russia
grossed 314 million USD, which
accounted for one fifth of Armenia’s total export; whereas import from Russia
toppled slightly short of 1 billion USD (907 million USD), making up nearly one
quarter of Armenia’s import, and suggests that Armenia’s trading deficit
against Russia is almost 300%.
There
are several reasons why Armenia might not yet be set to substitute the import
gap of Russia’s grocery market:
1. Lack of substitutability: Some of the
banned EU-manufactured agricultural products that are most in demand in Russia
include dairy products, meat products, apples, mushrooms, seafood, etc. Armenia
is yet to have the capacity to supply any such products on a significant scale
to the much larger Russian market. As in the time of writing, Kazakhstan, a
member of the Customs Union, has by far backed off from complying with request
of implementing the embargo by fellow members Russia and Belarus, which adds to
the speculation that the trading embargo might fail to hurt the economy of some
EU states due to the eventual acquisition of their products by the Russian
market. Even if this scenario is prevented from taking place, the high cost of
transportation will set obstacles for Armenia to assume the role of such
transit zone tacitly vied by Kazakhstan, particularly prior to Armenia’s
official entry into the Russian-led Customs Union predicted to be brokered this
fall.
2.
Lack of competitiveness. The main EU
food imports to Russia prior to the sanction can be placed into two categories
based on their utility: high-quality luxury grocery products catered to
Russia’s upper-class consumers, and cheap agricultural products with a
significant edge over their Russian-made counterparts in terms of both price
and quality. Despite the potential abolition of tariffs on Armenian imports to
Russia that is to ensue following Armenia’s official entry to the Customs
Union, the relatively high price levels of Armenian-made foodstuffs would still
deter the Russian market. The cost of transportation would also add to the
disadvantage of imports from Armenia—a landlocked country that neither shares
borders with Russia nor has indirect trading links by land to Russia due to the
blockade by Azerbaijan and the standoff between Russia and Georgia. As of the
time of writing, the only land corridor connecting Armenia and Russia—the
Georgian Military Highway—is closed due to a landslide in the Daryal Valley
near the Russian-Georgian border. The export of Armenian fruits to Russia that
had very recently been augmented was brought to a sudden halt due to the road
closure. Such unforeseeable externalities also pose potential threats to the
Russia-bound outflow of Armenian export.
3.
The Russian customers’ anticipation of
the lift of the ban. Unlike the previous Russian bans on the import of
Georgian and Moldovan wine, Ukrainian chocolates, Georgian mineral water, and
Moldovan fruits that were issued under the pretense of health concerns, the ban
on food imports from the EU, US, Canada, Australia, and Norway is
unpretentiously politically motivated. With the Russian leader Putin enjoying
unprecedentedly high approval ratings over much the first half of the year,
patriotism is pumped high in Russia’s anti-Western standoff over the crisis in
Ukraine. In other words, the ban is likely to be supported by Russian consumers
despite a price hike in foodstuffs that is soon to follow suit. The ban on food
import is also likely to further contribute to the competitiveness of
Russian-made food products, and give an impetus to Russia’s long-deserved
intensification of import substitution industrialization in the food sector.
According to the official announcement by the Russian government, the ban is
set to be effective for one year. Nevertheless, some high-level Russian
officials including Putin himself have projected that the ban’s shelf life
would not exceed a handful of months. It is likely, therefore, that the import
of foodstuffs from alternative countries including Armenia will be kept at a
low or moderate scale based on such projection.
4.
Possible repercussions on expatriate
remittances. With a sizable number of Armenian emigrants working in Russia,
Armenia is still somewhat vulnerable to impacts on remittances from Russia. In
other words, any potential downturn in the Russian economy resulted from the
food ban could deal a blow to the Armenian economy.
5.
Warnings from the West. Shortly after
the expression of euphemism by some major Armenian companies regarding the
prospect of trading with Russia, the US Embassy in Armenia published
a list of companies whose commercial ties with the US and the EU might be
alienated should they forge closer links to the Russian economy. Although
state-level sanctions are not likely to be levered on Armenia by the EU, the
country’s economy is doomed to be marred by the West’s retaliation to the
Armenian government and businesses’ pro-Kremlin orientation.
Many European food products currently sold
in the Armenian market are imported indirectly via Russia. The severing of the
transit route through Russia will possibly result in notable price hikes on
EU-made foodstuffs in the Armenian market. Besides, Yerevan’s gourmet-savvy
upper class might also encounter similar difficulty as their Russian
counterpart in obtaining EU-made luxury grocery items. Should new trade routes
not be put in place in time, Armenia’s upper-class consumers might also be
deprived of access to some of these products. Moreover, an outflow of Armenian
food products to Russia will undoubtedly give rise to an increase in foodstuffs
in Armenia, which will subsequently inflict financial difficulties upon the
average Armenian consumer.
Overall
speaking, Russia’s food ban is yet another sounding of alarming calls on
Yerevan’s economic reliance on Moscow. As the dependency theory
suggests, unless Armenia achieves a balanced trading sheet with both Russia and
the EU, the country’s economy is prone to suffer from Russia’s unpredictable
political weather.
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