Streetwise Professor

August 7, 2014

The Great Patriotic Diet

Filed under: History,Military,Politics,Russia — The Professor @ 7:49 pm

In retaliation for US and EU sanctions, Russia is banning the importation of large categories of food products from each: food imports from the US are pretty much banned altogether.

These sanctions are aimed at an industry that is politically powerful far beyond its numbers. Chicken farmers in the US will squawk at the loss of about 1 percent of their revenues, and European dairy producers will bellow in anger. But the economic impact on the affected countries will be trivial. The US exports about $300 million in chicken to Russia (down substantially from a few years ago), which is essentially rounding error in US GDP. European net food exports to Russia are about 12 billion euros, or less than .1 percent of the EU’s 13 trillion Euro economy.

The impact on Russia’s people will be substantially greater. Russia imports about 35 percent of its food, about half of that from Europe and the US. Higher value, non-staples are disproportionately affected. This will lead to an appreciable increase in the cost of food, which represents a very large fraction of Russian household budgets. Whereas US consumers spend about 6.5 percent of their total expenditures on food, in Russia the figure is about 32 percent. A rise in food prices hits hard. A 10 percent increase, which is not unrealistic, cuts Russian living standards about 3 percent.

Putin ordered the government to find ways to increase food production, because, you know, that ukases always work as the Tsar intends. Russian food output will no doubt rise in response to higher prices, but in the short run the elasticity of supply is likely to be very low, especially for vegetables and dairy. Anyways, this increased output will only mitigate the price increases. If Russian firms/farms could produce more at current prices, they’d be doing so.

I predict that since increased Russian domestic production will have little effect on prices, Putin will soon resort to the tried-and-false nostrum of price controls, just like Russia did when food price inflation spiked in 2007. This will lead to lines and empty shelves, so Russians can party like it’s 1989: to those nostalgic for the USSR, be careful what you ask for. I note that Russia also adopted price controls, to disastrous effect, in WWI. Putin is idealizing Russia’s role in that war of late, and employs WWI reenactors to lead subversion campaigns in Ukraine, so maybe he’ll think it’s a great idea to reenact the price controls too.

Some have suggested that the higher food prices (or shortages that result from attempts to control prices) will dent Putin’s popularity. However, it is sufficiently high (approaching 90 percent) that it can take a few dents. Moreover, you know that there will be a propaganda campaign to stymie any discontent. No doubt this campaign will blame the west, and the US in particular, proclaiming that the import ban is necessary to show that Russia cannot be dictated to by its enemies: Russian attitudes towards the west have hardened substantially post-Crimea, and such a message will resonate.

The campaign is likely to idealize Russian capacity for sacrifice, particularly for the Motherland. There will be allusions to the Great Patriotic War, when Russians sacrificed to battle evil invaders from the west who were intent on subjugating Russia.

Putin will call for the Great Patriotic Diet, in other words. And sad to say, this will probably work.

No matter how successful the propaganda campaign is, the import ban will be just another burden on the already sputtering Russian economy. It was sputtering before Crimea and sanctions, but the post-Crimea sanctions have made it wheeze all that much more.

One symptom of this is the government’s announcement that it was diverting contributions to private pension plans in 2015 to plug holes in the state pension system: it had already done so for 2014. One state official took to Facebook to decry the move. He was promptly fired.

Oil prices have bailed out Putin before, but oil prices have weakened a bit lately, so that is putting additional pressure on Russia, and particularly on the budget. One of Putin’s old gambits is to stir up trouble in the ME to keep up oil prices. Maybe he’ll try that now, but it’s hard to imagine how much more trouble there can be there (the place is in chaos from Libya to Israel/Gaza to Syria to Iraq).

There is widespread speculation on what Putin will do next in Ukraine. The Ukrainian army is slowly but surely grinding down the Russian proxies in Donbas, pushing them into pockets in Donetsk and Lugansk, where they will be cut off from supplies and reinforcements if the circles are closed. Thus, the reasoning goes, Putin has a choice between humiliating defeat there, or going all in with an invasion.

I have my doubts that he will invade. The troops massed at the border, 20,000 or so, are probably sufficient to deal with the still shambolic Ukrainian forces in Donbas, but logistical difficulties would make a further penetration difficult, and an occupation would likely turn into the Donbas Ulcer. Further, an outright invasion would likely trigger truly punitive sanctions.

In short, although outright defeat of his proxies would be humiliating, an invasion of Ukraine, even if capped by a victory in Donbas, would be a disaster that could not be justified on any cost-benefit basis. Pace Pyrrhus: “One more such victory, and we shall be undone.” Or pace Dryden: “Even victors by victories are undone.”

But humiliation and invasion are not the only two alternatives open to Putin. He could attempt to turn Donbas into a bleeding ulcer for Ukraine, by mounting a guerrilla campaign/low intensity insurgency, dressed up as a people’s revolt against the oppressive fascists. This will be sufficient to maintain a (frozen) conflict that would distract Ukraine, impede the formation of a stable state and government, make it unacceptable as a candidate for Nato, and cause the EU to treat it at arms length. Such a campaign would exploit Putin’s best military asset, spetsnaz units, that specialize at this kind of warfare. It would be less provocative to the west: if the US and EU can largely acquiesce to what Putin is doing in Donbas now, it would put up with a low intensity guerrilla campaign

Meaning that the standoff between the west and Russia is likely to persist for some time. Meaning further that Russians better get used to the Great Patriotic Diet, because they’ll be on it for a while.

Update. It’s rather amusing that Medvedev made the announcement of the food import ban. If it turns out to be unpopular despite the likely propaganda campaign, it will be blamed on sorry old Medvedev. That’s his job: scapegoat in waiting.

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  1. The food ban will serve as another enrichment vehicle for Putin cronies, Belorussia and Kazakhstan will serve as smuggler channels. What they lost in the stockmarket and assets in the West theyll try to make back through this racket. The continued plunder of their pension fund — and the new spending Putin is promising to Crimea and other regions — all through contracts to his close allies — is further evidence of this. But as long as the mindless zombies of Russia worship at the altar of nationalism it will stay the way it is. Milosevic lost 4 wars before the Serbs finally said no mas.

    Comment by d — August 8, 2014 @ 1:24 am

  2. Yes, Putin may be counting on agriculture lobbies in the US and EU to put pressure on their governments to ease their stance on Russia. He also wants to punish Poland and Lithuania, which are going to hurt more than most of the other EU countries. But I suspect the import ban is also seen by some on the Putin-Medvedev team as a means of improving the current account.

    If true, the ban has been applied incorrectly since – judging by just one affected segment – it covers not only to non-essential, expensive French and Italian cheese but also basic, staple foodstuffs like Dutch cheese, Danish butter and the whole array of Finnish dairy products, some of which Russian consumers were permitted to enjoy even under Brezhnev. (The absence of alcohol from the list is also puzzling.) If one of the motivations for the ban is indeed to cut down on non-essential imports, one should expect the list to be amended within weeks to exclude household names like Valio but include French wines.

    Otherwise, I would expect a price spike in dairy, meats and vegetables as Russia is headed into the winter; panicked attempts to cap the prices at all levels, shortages, food lines, and the whole gamut from the late 1980s and early 1990s. For obvious historical reasons, Russians react to rumors of food shortages (one again, Finnish butter is an essential, not a luxury) by queuing and stocking up on whatever is still on offer in groceries, a chain reaction similar to bank runs.

    Comment by Alex K. — August 8, 2014 @ 6:53 am

  3. Lol too funny. Like Russia will suffer by banning 15% of its food imported from the west. You do understand that there are other producers in the world, no?

    Comment by max — August 8, 2014 @ 9:56 am

  4. Thanks, Professor, as always, for your International Electronic Water Cooler for the exchange of ideas. Some sensible. Always varied. All welcome (to some extent).

    Thank you for the forum.

    Vlad has more work to do, making sure his puppet has a wonderful vacation in Mahthah’s Vineyahd. Heh heh heh.

    Vlad the Impaler

    Comment by Vlad — August 8, 2014 @ 2:17 pm

  5. Putin can easily make things much worse in the ME. Didn’t he recently announce some kind of deal with Iran? Bringing the nuclear issue back to life would be a great strategy for him, especially considering that Russia has an unfulfilled contract with Iran for building a nuclear reactor.

    Comment by aaa — August 9, 2014 @ 9:24 am

  6. Meanwhile, a major seafood distributor controlled by Timchenko has already doubled its prices. A nice little compensation for the Western sanctions, I suppose. Maybe grant me price controls, but not yet.

    Comment by Ivan — August 9, 2014 @ 10:26 am

  7. Paris is worth a Mass and Crimea is worth a dinner.

    Comment by LL — August 9, 2014 @ 5:15 pm

  8. @Ivan. Have to make money while the making is good.

    The ProfessorComment by The Professor — August 9, 2014 @ 6:17 pm

  9. @aaa-I am going to blog about the Iran deal. Typically Russian. It seems like vaporware, but who knows?

    The one curious thing. The original announcement suggested that Russia would take delivery of 500K bbl/day of Iranian oil. Then that was withdrawn, and the subsequent rumors were that the Russians would take delivery of only 50K bbl/day, which is a pittance.

    There’s also this mystery: why would Russia want to facilitate higher Iranian oil sales and output? This only reduces Russia’s revenues. 500K bpd is about .6 percent of world liquids output. An increase in output of that magnitude corresponds to about a 6 percent decline in price, or about $6/bbl in round numbers. This costs Russia $60 million per day. There is no way that the markup on the 500kbpd they are getting from the Iranians would offset that: the Iranians would have to be giving the Russians a margin $12/bbl. I can’t believe they would do that.

    The ProfessorComment by The Professor — August 9, 2014 @ 6:23 pm

  10. Look! A corrupt, oligarch-ridden Ukrainian government is brutally attacking peaceful protestors on the Maidan! Where’s Viki Nuland and her cookies? Where’s John McCain?

    Comment by wanderer3768 — August 10, 2014 @ 12:13 am

  11. Its good to see that the Russian government is finally joining the international community and imposing economic sanctions on Russia! However, the economic illiteracy of the Russian government is incredible, they obviously do not understand the concept of trade diversion rather than trade embargo. By changing their sources of their supply, say Chilean apples in place of Polish apples, they only divert Chilean export apples to Russia at greater cost whilst the Polish export apples simply replace the Chilean apples in other markets, such as the EU. Meanwhile Russia pays a premium to Chile to import the apples and has to improvise a new logistical system (sea vs road delivery) all at additional cost to Russian consumers. In addition, as these measures are officially set to last only one year, and that Russian demand is likely to drop due to price rises, there is little incentive for either foreign or domestic Russian producers to put in any new investment to supply the temporary market created by the self imposed Russian sanctions. On a global basis, the apple market does not change and no producer is embargoed, only diverted into other markets, hence little or no economic losses to producers.

    This becomes exponentially more difficult in more complex market such as beef, chicken or pork were you need a global distribution system in order to efficiently supply the highest value added pieces (i.e chicken breast to USA, legs to Russia, claws to China) in order to be even marginally competive in pricing. Even if Russia were to build a chicken industry from scratch, it would have little real demand for the high value added parts of the chicken ( breast meat, lunch meats and wings) and would have to raise prices significantly on the Russian staple legs and thighs to compensate, which would effectively crush the local consumer market. Overall, a poorly thought out policy apparently fueled in equal parts by marxist theory and vodka inspired implementation.

    Comment by Ramblarou — August 10, 2014 @ 2:39 am

  12. A special-for-TV pro-Russian rally in occupied Crimea:
    Next stop – special-for-TV food in Russian supermarkets.

    Comment by Ivan — August 10, 2014 @ 3:14 am

  13. I think your analysis is a bit simplified, equalling 1 unit of exports to one unit of GDP. Looking at it this way you could also argue that the EU couldn’t care less about exports to US which accounts roughly to 1.5% of EU’s GDP, while exports to Russia are roughly half of that, making it the EU’s 3rd largest export destination.

    You don’t take into account the export multiplier, the export multiplier from my estimates is roughly between 5-7 in EU’s trade with Russia. Hence the effect on EU economy could be absolutely palpable if EU’s export to Russia go down 15-20% this year, if we take into account a general reduction of EU exports to Russia, not only food and vegetables, this is a realistic scenario. This could cause an up to 1% loss of GDP for the EU, with individual countries being hit much harder, this is without taking in consideration all the effects on business confidence which stem from geopolitical uncertainty, reduced tourists flow etc.

    In terms of trade diversion I’m not sure fruit and vegetables are truly freely fungible commodities with supply roughly matching demand like for oil and cereals. Dairy is certainly not, just think about EU butter mountains.

    Comment by TimJ — August 10, 2014 @ 10:37 am

  14. I imagine a lot of the banned food exports will be sold to Belarus and Kazakhstan where it will sold/smuggled in Russia anyway, but at higher costs to the Russian consumer. Most of the commentary I’ve heard is bewilderment at why Putin in effect expanded Western sanctions against Russia.

    Ukraine’s ATO continued to expand over the weekend, and seems to have won an important victory in taking Krasnyi Luch, and is now attempting to surround another area of rebels and cut it off from further resupply. Some reports seem to suggest rebel morale has begun to break. I think Ukraine intends to let the surrounded rebel areas wither on the vine while they move next to secure those parts of the Ukrainian-Russian border not secure.

    Comment by Chris — August 10, 2014 @ 2:41 pm

  15. @Chris-I agree. There will be substitutes, but they will be higher-priced, and Russians will end up spending more.

    I also agree that isolating the pockets of rebels and then securing the border is the right thing to do. My major concern right now is if the Ukrainian army gets too engaged with the rebels, especially attacking from the east, that they will be extremely vulnerable to a Russian attack from their rear, and they would be caught between the upper and nether grindstones. So cut off the rebels from resupply and reinforcement, and redeploy as much strength as possible facing towards the border.

    Here is where arms supplies could help. Providing the Ukrainians with loads of ATGMs would pose a major threat to the Russians, just like Russian supplies of Kornets to Hezbollah caused major problems for Israel in 2006.

    The ProfessorComment by The Professor — August 10, 2014 @ 6:20 pm

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