Fears over sanctions escalating into Russia-EU trade war

Video transcript

How will the Russian ban on European food exports impact on the EU economy?

Professor Dr Michael Wohlgemuth:

There are estimates of around 0.2 per cent of GDP that might be lost in the short-term, and of course there are a few sectors that are really hit hard by these sanctions, like apple producers in Poland and exporters of food and fish from Greece. But for the overall European economy this is not a big deal.

You can also see that the common agricultural fund has set aside 155 million euros for emergency support, probably this could be enough.

If you compare this to the Russia side, my idea is that Putin is sanctioning his own people much more than European farmers. The Russian government set aside the equivalent of one billion euros to keep the shelves in Russian supermarkets and markets stocked with substitutes with products from the EU that they no longer have. And that means that the equivalent of something like 12 billion euros of food imports would be missing. And they need a rather inelastic demand, which is always the case with foodstuff.

The consequence is a sharp increase in prices for many materials such as fish, beef, milk and cheese – and often there is no domestic substitute for these products. And this is also the reason, I think, why the Russian government cannot really sustain this kind of policy for a long time, and it has recently taken many of these products off its blacklist.

Will European food producers find new markets to make up for the lack of Russian trade?

Professor Dr Michael Wohlgemuth:

I think that most will, but at lower prices. It is not this 12 billion euros-worth of food products that are simply lost. The real loss for these farmers is in the value they would have got by exporting to Russia, and value they can still have by exporting to any other country in the world.

And this could be the equivalent of the 155 million euros that the European Union is ready to give to those farmers as compensation. So if you look at it, the damage to Russia is many times the damage that Russia wants to impose on European business and farmers.

And in the end it might be good for European consumers, because the over-supply is then put on the European market and lowers prices for consumers.

What impact will the sanctions have on Western business?

Professor Dr Michael Wohlgemuth:

As I said, so far not too much. But there’s the danger of this whole thing escalating into a true trade war which will hit and damage both sides of this campaign, but Russia much more than the European Union.

And Russia is already feeling the costs of this trade war that might be emerging. You can see that foreign investors are trying to repatriate their investments in Russia. And they have already this year withdrawn about 60 billion euros from Russia, only this year, and this hurts the Russian economy really quite a bit.

The big weapon that Putin’s crony economy still has is certainly energy and gas. But also here we can see that European governments and energy suppliers are now really working hard to find substitutes for Russian supply. So this, in the long-term, would also hurt the Russian economy.

But a trade war is something where always both sides tend to lose. And compared to real free trade agreements, this is bad news, or could be bad news for both sides. Obviously having a trade war is like shooting yourself in the foot.

And the other problem is that Russia, because of its weak democratic control and media criticism can afford to take more damages and more sacrifices than the European West. But if you look at the value of both side’s trade, and the losses of trade, where both sides would shoot themselves in the foot Russia would shoot itself in the knee as well.

(photo credit:dpa)