Decoding Russia’s Food Ban and Its Impacts on Armenia

Decoding Russia’s Food Ban and Its Impacts on Armenia

Date: August 23, 2014
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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