The quite hilarious Russian propaganda about the ban on EU food imports

[Gordon Styer]

This is very amusing, very amusing indeed. One of the Russian propaganda outlets is insisting that Russia’s ban on food imports from the European Union is an event of such magnitude that it’s going to cause financial chaos and mass bankruptcies of farmers and those who lend to them. They’ve entirely failed to understand two very important points. The first being the size of the European economy itself and the second being that food is in fact fungible.

Here’s the report itself from RIANovosti:

The problem is that although the European leaders have repeatedly mentioned the principle of European solidarity, there is no legal mechanism to compensate the countries suffering from Russian retaliatory measures. It is also safe to assume that finding additional funds in order to pay the compensations will be a difficult task, given the dire state of the European economy.

Certainly, those issues will not prevent political leaders from countries affected by the Russian embargo from demanding financial aid because for them it is the only viable political strategy.

According to the EU ambassador to Russia, the European Union may lose up to 12 billion euro ($16 billion) because of Russia’s ban on food imports. However, this estimate is unlikely to be accurate because it only takes into account the direct damage inflicted by the ban. Farmers who are unable to sell their crops to Russia, won’t be able to pay their bank credit, their suppliers and employees. Affected countries, trade groups and agricultural unions will seek compensations from the European Union, rightly blaming Brussels for their woes.

Well, no, no one is going to blame Brussels for their woes. And there aren’t going to be all that many people claiming such woes either. These Russians seem to not realise quite how large the European Union economy is. Which is, in annual GDP, around and about $15 trillion. Meaning that $16 billion is some 00.1% of that entire economy. It’s not just that that’s a trivial portion of the economy it’s actually smaller than the error bars we use when we measure the economy. Quite literally we would not be able to see the effect of Russia’s ban on EU food imports in the general economic figures for the entire continent. The EU economy is between 6 and 7 times the size of Russia’s own economy. This sort of amount of trade disruption just isn’t important in the larger scheme of things.

The second error is that they don’t seem to realise that the supply of food is highly inelastic in the short term and food is also largely fungible. The first piece of jargon there means that China, or Brazil, or Krasnoyarsk, wherever Russia is going to try and get the food they’re not going to get from the EU, cannot increase the supply of food in the short term. It all simply takes time to produce. The second piece of jargon means that if, say, Brazil sends apples to Russia then that leaves room in the global marketplace for Poland to send apples to, to wherever it was those Brazilian ones were originally going to go. The ban on imports of EU food into Russia doesn’t mean that the food will simply rot. Instead it means that there will be a shake up of trade patterns but largely the same amount of food will still be produced and also eaten, just specific types and production from specific areas will be consumed by different people.


This will of course reduce the damages to EU farmers from the Russian sanctions. True, there will be some people harder hit than others. I hear that Norwegian fish farmers (Norway not even being in the EU) aren’t very happy but there will be supermarket buyers sounding them out about special deals on fresh salmon for the British market I have absolutely no doubt. The total damages from this ban on imports will thus be very much less than the total amount of trade displaced. Precisely because it will largely be trade that is displaced, not trade that simply never happens.

The ruined farmers, the banks, the farmers’ suppliers and employees will demand a swift end to the standoff between the European Union and Russia. Despite all the rhetoric, it is unlikely that Europeans are ready to sacrifice their profits in order to help the US advance its geopolitical ambitions in Ukraine.
…
Hopefully, it won’t take long for the decision makers in Brussels to reach the same conclusion, ditch the sanctions, tell Washington to stop meddling in Europe and finally create a meaningful continental security framework involving Russia.

That’s simply laughable. After we account for trade diversion rather than trade destruction it would be astonishing if the net effect on the EU economy was more than 0.01%, or something that we cannot actually measure. And no, that’s not going to be a large enough number to make even Brussels start to rethink geo-political alliances.

The thing that really worries though is, well, what if the Russians actually believe all of this nonsense?

[I/O]

what if the Russians actually believe all of this

They often do, largely because, even now, Russians are generally ignorant regarding global economics.

Russias trade retaliation is all about internal grandstanding and has the potential to harm Russia more than the sanctions themselves - Russia has been a useful but very unreliable trading partner and the rural view here, although being impacted slightly in the short term, is ho-hum, we probably need to service and explore other markets anyway so if this forces us to do so for a poultry $400 million in exports, then so be it.

A mistake Russians often make, one easily sold to them on a nationalistic basis, is pride in the 'big country', which is actually of zero importance in an economic sense, if anything, a negative given the relatively small overall economy. 

[Shadow]

You may not believe it, however the distributors of food to the poor have already received more fruits and vegetables than they could process. There are several Dutch export companies that rely for 40% of their turnover from the Russian market, they are all fering the worst. Many Dutch companies have invested in Poland in order to have a short line of export to Russia, and the Polish are now seeking markets for their products.
Prices fo certain foods have already dropped by as much as 30%.
Several farmers have complained in the news that even if they are not hit directly, the indirect effects of the products intended for Russia entering the EU market will cause prices to drop below cost price, and unless there will be compensation they might not make it. Especially when gas prices will rise should that be the next field of sanctions.

As for the Dutch economy, the initial expected effect of Eur 500 million is already tripled to 1.5 billion.

In the end both Russia and the EU can survive without each other. But the short term effects are certainly severe.
I do hope that all those who feel the sanctions are unimporant will donate 30% of their income to a fund helping the people who lost theirs.

[Boethius]

I do hope that all those who feel the sanctions are unimporant will donate 30% of their income to a fund helping the people who lost theirs.

In the West, they already do.  They are known as "subsidies" and "taxes".

[GQBlues]

Of course there's going to be an impact, short or long term or both, by all countries affected by all these stupidity. Russians will be affected likely much *worst* than the western folks, but that doesn't mean the effect to the western countries will be benign either.

Agriculture is a subsidize industry in NA but the crops grow every year and a turnover needs to take place. Absence of a prolonged market trade for these crops is not a good idea.

Russia still has 146 million folks and that's a helluva lot of consumers. Will Russians feel the pinch? Hell yeah...Do the business of foreign intervention make a cent of a sense at all? Hell no..

http://in.reuters.com/article/2014/08/13/ukraine-crisis-companies-idINL6N0QE4MZ20140813

You folks now have a clear window into what's happening in Venezuela and Argentina today. Argentina already defaulted in their debt (IMF), Venezuela is teetering into bankruptcy despite its huge oil revenue, Ecuador done and gone. Pakistan is on the verge of one. Global defaults, and every country is carrying their own respective debts and deficits and the last thing anyone needs right now is to rattle the global economic cage. The only question that remains is, which population can ride out recessive times better or folks that can do without?

[Gator]

Gordon, good explanation.

The second piece of jargon means that if, say, Brazil sends apples to Russia then that leaves room in the global marketplace for Poland to send apples to, to wherever it was those Brazilian ones were originally going to go. The ban on imports of EU food into Russia doesn’t mean that the food will simply rot. Instead it means that there will be a shake up of trade patterns but largely the same amount of food will still be produced and also eaten, just specific types and production from specific areas will be consumed by different people.

Another possibility is that Russians curtail the eating of apples.  In that case, prices drop temporarily, free market producers get hurt, and producers everywhere produce less.   

Hopefully, it won’t take long for the decision makers in Brussels to reach the same conclusion, ditch the sanctions, tell Washington to stop meddling in Europe and finally create a meaningful continental security framework involving Russia.

Another who believes it is America's fault and that the core issue is not about Europe?   I recall that Europeans rejoiced when America elected Obama.  What happened?

A final question that perplexes me.  Is not Ukraine a large "breadbasket" for Europe and Russia?  What happens if and when the supply of Ukrainian farm products to Russia is reduced if not curtailed?