Sunday 23 November 2014

A new Cold War as Russia threatens food and flights

Laura MillsMoscow

Published 08/08/2014 | 02:30

Medvedev said on Moscow was considering banning transit flights by airlines from the European Union and the United States to the Asia-Pacific region
Medvedev said on Moscow was considering banning transit flights by airlines from the European Union and the United States to the Asia-Pacific region
Russian Prime Minister Dmitry Medvedev said on Moscow was considering banning transit flights by airlines from the European Union and the United States to the Asia-Pacific region

Russia banned most food imports from the West yesterday in retaliation for sanctions over Ukraine, an unexpectedly sweeping move that will cost farmers in Europe, North America and Australia billions of euro but could also mean empty shelves in Russian cities.

The announcement shows that while President Vladimir Putin doesn't appear ready to heed Russian nationalists' calls to send troops into Ukraine, he is prepared to inflict significant damage on his own nation in an economic war with the West.

In a further escalation of tensions, Russian Prime Minister Dmitry Medvedev said yesterday that Moscow was considering banning transit flights by airlines from the European Union and the United States to the Asia-Pacific region.

Medvedev said a final decision on whether to ban the flights by EU and US airlines had not been taken but said Russia had decided to ban transit flights for Ukrainian airlines via its territory.

Low-cost Russian airline Dobrolyot stopped flying recently after being sanctioned by the EU.

The EU and US have accused Russia, which annexed Ukraine's Crimean Peninsula in March, of supplying arms and expertise to a pro-Moscow insurgency in eastern Ukraine, and have sanctioned individuals and companies in Russia in retaliation. Moscow denies supporting the rebels and accuses the West of blocking attempts at a political settlement by encouraging Kiev to use brutal force to crush the insurgency.

The ban, announced by a somber Prime Minister Dmitry Medvedev at a televised Cabinet meeting, covers all imports of meat, fish, fruit, vegetables, milk and milk products from the US, the European Union, Australia, Canada and Norway. It will last for one year.

"Until the last moment, we hoped that our foreign colleagues would understand that sanctions lead to a deadlock and no one needs them," Mr Medvedev said. "But they didn't, and the situation now requires us to take retaliatory measures."

That retaliation, however, could hurt Russia as much as the West. Russia depends heavily on imported foodstuffs, most of it from Europe, particularly in Moscow and other large, prosperous cities.

In 2013, the EU exported €11.8bn in agricultural goods to Russia, while the US sent almost €1bn in food and agricultural goods.

Chris Weafer, an analyst at Macro Advisory in Moscow, said the ban will likely speed up inflation and further cloud an already grim economic outlook.

"Along with higher interest rates, higher food costs will mean that households have less money to spend and that will depress the economy," he said.

The Netherlands, one of the world's largest agricultural exporters, sends €1.5bn worth of agricultural products to Russia annually and stands among the countries with the most to lose.

Albert Jan Maat, chairman of the Dutch Federation of Agriculture and Horticulture, warned that the Russian ban will cause prices to drop across Europe because of oversupply, and called on the Dutch government and the EU to help farmers. Exports to Russia account for about a tenth of EU agricultural exports.

"We're thinking of either removing products from the market or temporarily storing them," he said.

EU Commission spokesman Frederic Vincent voiced regret about the ban. He said the Commission still has to assess the potential impact, and reserves "the right to take action as appropriate".

Medvedev argued that the ban would give Russian farmers, who have struggled to compete with Western products, a good chance to increase their market share.

But experts said local producers will find it hard to fill the gap left by the ban, as the nation's agricultural sector suffers from inefficiency and a shortage of funds.

While the government claimed it will move quickly to replace Western imports with food from Latin America, Turkey and ex-Soviet neighbours, analysts predicted shortages and price hikes.

The damage to consumers will be particularly great in big cities like Moscow, where imported food fills an estimated 60-70pc of the market.

Market watchers said consumers in the expensive food segment will suffer the most, losing access to goods like French cheeses and Parma ham, but others will also eventually feel the brunt as food variety will shrink and inflationary pressures increase.

Irish Independent

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