Russians face rising food prices as Moscow acts to ease sanctions

Video transcript:

What is the impact on Russia of the West’s sanctions?

Professor Stefan Hedlund:

Well, the sanctions were designed to impact on the central actors who are claimed to be responsible for the crisis in Ukraine, and that is people close to President Putin and companies and banks close to the Kremlin. And it’s quite obvious that they are suffering, and they are taking a severe beating by the sanctions.

However, Russia does have substantial fiscal defences, substantial forex reserves so they will be able to sustain this punishment for some time. So we are not achieving the political objectives of making them bend, but the sanctions are impacting heavily on Russia. And the medium to long-term impact if this is going on is going to be very, very substantial.

Russia has imposed a ban on European food exports. How could this backfire on the Russian economy?

Professor Stefan Hedlund:

Well, the decision to hit European farmers was very clever from the Kremlin because it is obvious that the European Union has more to fear from angry farmers than from angry industrialists. And we have already seen some countries breaking ranks over sanctions.

But the impact on Russia itself is also going to be significant. The first thing, obviously, is that the choice in up-market stores in Moscow and St Petersburg will be limited which will effect the elites in those cities – you can’t get nice foods to the extent that you did before.

The second is that food prices will go up. I mean, these imports will be substituted by imports from Brazil, Turkey, New Zealand and other places at higher cost. And that means when food prices go up, so will inflation. And inflation today is the number one concern to the Russian government. So it will have an impact on Russians as well, both in the stores and in the pocket when inflation starts rising even further.

How will Russia make up the short-fall once imports cease?

Professor Stefan Hedlund:

The market will make up part of the short-fall, in the sense that there will be ‘sanctions busting’ as is always the case.

We are going to see imports from Spain relabeled as imports from Brazil or Argentina. We have already seen herring from Belarus appearing in Moscow, and Belarus does not have a fishery. There is Parmesan cheese from Belarus available in Moscow now, and they don’t make Parmesan cheese. So country like Belarus is a big winner here because they’re cutting a big margin on parallel imports.

So Russia will make up partly, and partly they will make up in the sense that they have rolled back some of the sanctions on inputs to their own food industry. They realise that they can’t do without seeds or hatchlings for the fisheries, so those sanctions have been removed and those imports will continue.

But it will be felt and it will be noticeable, in Moscow and St Petersburg mainly.

Who are the sanctions likely to hit most?

Professor Stefan Hedlund:

Well, if this war of sanctions continues, or, God forbid, is escalated further, the real losers, as always, will be the Russian population. The Russian economy will be pushed into recession, or even worse, if there is a full scale attack on the Russian financial system we will see the Russian economy go into serious tailspin. And the Russian economy was in bad shape even before this happened.

So we are looking at the structural crisis where there will be substantial job losses in the sectors that were well functioning. Services are being pummeled now. We will see long-term damage from the inability to kick some life into extraction of oil and gas, suggesting that we will see long-term decline.

So there will be substantial damage from this. The question is, to what extent does the Kremlin factor in long-term damage in its short term political risk assessment. And that is obviously something that is happening in Putin’s head, and nobody is in there to look.

(Photo credit:dpa)