March 13, 2015

EU—Russian Trade Relations in Light of Sanctions and Russia’s Import Measures

In analysing the trade relationship between the European Union and Russia, the range is extremely wide, and both economic and political aspects must be considered.

Russia is an Important EU Trade Partner

From an economic viewpoint, it is clear that Russia has been an important trade partner for the EU, as it is a neighbouring country with a large and expanding market that has been a traditional destination for exports from many EU member states, including Estonia. Russia has also been an important source of imports to the EU, above all as a supplier of mineral raw materials and fuel.
Russia is the EU’s third-largest trading partner after the US and China, and the EU, in turn, is Russia’s largest.
Trade between the EU and Russia grew rapidly until 2008 (see Figure 1), when mutual trade decreased substantially as a result of the economic crisis and many protectionist measures imposed by Russia.
In August 2012, Russia joined the World Trade Organization (WTO). The EU supported this accession process significantly, assuming that Russia’s trade policies would become more open by adopting WTO contracts and by following WTO principles in practice.
As a result of joining the WTO, Russia did indeed reduce import duty, both on industrial and agricultural goods, and export duty on raw materials, including in the sector that EU manufacturers are primarily interested in—petroleum products, timber and metals, including precious metals, etc. Russia was also forced to reduce subsidies in agriculture, open up its services market, and more.
As a result, EU exporters had improved opportunities for access to the Russian market. In 2010–11, when external trade began to grow again, trade in goods with Russia also developed, peaking in 2012.

Russia’s Extremely Protectionist Trade

Unfortunately, despite joining the WTO, Russia’s trade policy is still protectionist. Russia has not honoured many responsibilities it accepted upon joining the WTO and has thereby significantly damaged the EU economy. As a result, the EU has already initiated four trade disputes against Russia in the WTO.
The situation has been further complicated by the fact that, in 2010, Russia entered into a customs union with Kazakhstan and Belarus (the Eurasian Customs Union), and then extended it to include Armenia and Kyrgyzstan at the beginning of this year. The purpose of the union is to bring the economic and trade policies of its member states closer to each other; however, until now, its other members have followed a considerably more open trade policy than Russia, and have not joined the measures restricting Russian trade.
The European Commission’s report on protectionism from June 2013 to June 2014 placed Russia at the forefront of countries that have applied the most restrictive measures (without taking into account the counter-restrictions against the EU’s sanctions).
Some of these measures include raising import duties on certain products above the norms that Russia committed to putting into practice when it joined the WTO, prohibition on the importation of livestock and pork (imposed in 2014, and seriously harming Estonian producers among others), unjustified export restrictions on raw materials and various technical restrictions on products. All in all, Russia imposed 31 trade restrictions during the period.
The extensive prohibition on imported agricultural products enforced by Russia in August 2014 can therefore be seen as a continuation of an already familiar trend, although on a bigger scale.

Impact of Sanctions on Trade Relations between the EU and Russia

When analysing the impact of EU sanctions, it must be first understood that the purpose of sanctions is always political and that they are imposed only when all other political and diplomatic measures have been to no avail.
The EU resolution adopted in July 2014 to impose sanctions, including trade sanctions, against Russia was directly tied to Russia’s actions in Ukraine—annexing the Crimea and destabilising the situation in eastern Ukraine.
Countries adopt trade sanctions fully aware that they may backfire on their own economies, but do so in order to achieve important political goals. In the current situation, EU sanctions have been well directed—they are planned to have a maximal impact on Russia and a minimal negative impact on EU member states.
The measures have been enforced in a balanced manner in four sectors: energy, finance, the defence industry and sensitive technologies.
Today, we can say that the sanctions have definitely started to have an impact, although they need to be considered along with other factors that influence the Russian economy. The most important of these have perhaps been the decrease in oil prices on the world market and the drastic fall in the value of the rouble. The latter has been further exacerbated by sanctions in the finance sector, which have drastically restricted Russia’s access to financial markets. At the same time, it must be recognised that Russia’s economic growth was already slowing before the imposition of sanctions, an essential reason for which is the failure to perform structural reforms.
Whether the sanctions become harsher or lighter in the future depends directly on the political steps taken by Russia.

Russia’s Ban of Agricultural Imports

Russia’s extensive ban on the importation of agricultural products at the beginning of August last year was its reaction to the sanctions imposed by the EU and its allies. However, according to some estimates, this has had a more negative impact on Russia itself, especially on Russian consumers. The EU’s sanctions themselves have not had a direct negative impact on Russian consumers.
Russia’s import ban extends to a large variety of agricultural products, including beef, pork, fowl, fruit and vegetables, milk and dairy products, fish and other seafood. The impact of the ban on EU commerce as a whole is quite small, affecting a mere 4.2% of the EU’s agricultural exports. At the same time, there are sectors where the impact is greater (see Table 1)—for example, Russia’s share of the export of dairy products, meat and fruit constituted approximately a quarter of the total for these groups. Similarly, the impact is uneven between member states. The countries for whom Russia has been a traditional destination for agricultural products (the Baltic States, Poland and Finland) have felt this negative impact the most. At the same time, since there is a common internal market in the EU, all the producers in a certain sector feel the pressure on prices, the consequence of products not being exported, whether or not they have ever been exported to Russia, e.g. meat and dairy products.
The European Commission reacted to Russia’s block on imports very quickly and created a large-scale package of aid measures, starting with subsidies for seasonal perishable fruit and vegetables—the Russian market for which disappeared overnight—as well as the dairy industry, where Russia was especially important in the export sector. Since the negative impact was especially strong in the dairy industry in the Baltic States (where the buying-in price decreased the most), at the end of November the European Commission decided to support Estonian, Latvian and Lithuanian milk producers with €28 million, €6.9 million of which went to Estonian farmers.
In addition, the Commission has also helped those who exported to Russia with finding new markets. It has supported export-promotion programmes for agricultural products to the tune of €60 million a year, and an additional €30 million has been added to this. This supports taking part in trade fairs and the costs of business delegations. The European Commission has also increased its efforts to eliminate restrictions connected to food safety imposed by various countries
Thus, Belgian pears and Polish apples have entered the Canadian market, Irish beef has found a market in the US, and Turkey has opened up as a market for the export of live cattle. At the end of last year and as a result of the Commission’s persistent work, Japan—which has also become a target for Estonian dairy producers—removed the restriction that had previously been an obstacle for the export to Japan of meat and cheese produced in the EU.1
All in all, Russia’s import ban has had a minor impact on the EU’s agricultural sector. Even though the export of agricultural products to Russia from the EU as a whole and Estonia in particular decreased last year compared to 2013 (see Figures 3 and 4), it has been offset by the growing exports to alternative markets, where trade has been successfully redirected. Exports to markets in the US, Switzerland and Asia—including Hong Kong, China and South Korea—as well as to Turkey, Nigeria, Brazil, South Africa, Australia and the United Arab Emirates have seen the largest growth. The dairy sector, where Estonian export interests are strongest, should be the most interested in Asian markets, as well as the countries of North Africa and the Middle East.
The European Commission will continue monitoring the market, expanding aid measures as necessary, and will actively engage in eliminating barriers in alternative markets.
Estonian agricultural producers should also take into account that, even though the Russian market has been convenient and profitable due to its proximity, it is politically sensitive and thus insecure. The long-term strategy of entrepreneurs should rely more on diversifying risk. Processors should, in turn, concentrate first and foremost on products with higher added value, since it is easier to find other markets for these and it is also possible to ask a better price for such products.
This article represents the author’s personal views, which are not necessarily the official viewpoints of the European Commission.
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1 Japan changed its previous standard for Listeria monocytagenes, a widely spread bacteria in the natural environment, which differed from the internationally acknowledged official standard of the EU.

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