Rus­sia’s trade bar­ri­ers lead to high costs, more food spend­ing

The Morning Call - - BUSINESS CYCLE - By Aine Quinn

To see how a pro­tec­tion­ist trade war might backfire, look to Rus­sia.

Five years into Vladimir Putin’s ef­fort to pro­tect Rus­sian farm­ers from for­eign com­pe­ti­tion and pe­nal­ize the U.S. and Europe for sanc­tions im­posed af­ter his 2014 an­nex­a­tion of Crimea, the re­sults are in: a sharp rise in prices, an ex­tra $6.9 bil­lion a year spent on food, and lim­ited ben­e­fit in terms of in­creased pro­duc­tion.

“The les­son from this sanc­tions and iso­la­tion ex­pe­ri­ence for oth­ers is don’t do it,” said Elina Ribakova, deputy chief econ­o­mist at the In­sti­tute of In­ter­na­tional Eco­nomics. “A large, com­plex emerg­ing econ­omy like Rus­sia can still ben­e­fit from a lot of pro­duc­tiv­ity spillovers and is bet­ter off be­ing in­te­grated in global mar­kets.”

Putin’s strat­egy has be­come a text­book case of how trade bar­ri­ers can ul­ti­mately backfire as de­bates in­ten­sify else­where about whether tar­iffs are a good tool to fix eco­nomic im­bal­ances.

“Rus­sia seems to be ahead of the curve with all the pro­tec­tion­ist mea­sures,” Ribakova said.

In the U.S., Trump promised to cor­rect what he con­sid­ered decades of failed poli­cies that en­abled China’s eco­nomic rise and al­lowed trade deficits with na­tions in­clud­ing Ger­many to bal­loon — both to the detri­ment of Amer­i­can man­u­fac­tur­ers.

Last year, he started putting tar­iffs on Chi­nese imports, spurring cy­cles of re­tal­i­a­tion and threats of higher levies. The re­sult­ing un­cer­tainty has in­hib­ited in­vest­ment, forc­ing the Fed­eral Re­serve to cut in­ter­est rates to cush­ion against a sharper slow­down.

In Rus­sia, while farm pro­duc­tion has grown since the Krem­lin im­posed the lim­its, some of the big­gest win­ners were sec­tors not sig­nif­i­cantly af­fected by the re­stric­tions, while oth­ers ben­e­fited from in­vest­ments that pre­dated them. In the hard­est-hit ar­eas, the lim­its boosted growth by only a tenth of a per­cent­age point, ac­cord­ing to ACRA, Rus­sia’s lo­cal credit-rat­ing agency. That wasn’t enough to off­set the neg­a­tive im­pact from the higher costs to con­sumers.

Rus­sia’s goal in im­pos­ing the so-called an­ti­sanc­tions wasn’t overt pro­tec­tion­ism, but geopol­i­tics. State tele­vi­sion reg­u­larly showed of­fi­cials bull­doz­ing con­tra­band pro­duce from the U.S. and Europe.

But of­fi­cials later ad­mit­ted that pro­tect­ing the do­mes­tic agri­cul­tural sec­tor was a key goal of the mea­sures. The Krem­lin had for years been hop­ing to re­build agri­cul­tural pro­duc­tion that had col­lapsed along with the Soviet Union in the 1990s. The re­stric­tions have been a boon to some pro­duc­ers in Rus­sia.

“Our cheese sec­tor was re­born thanks to the em­bargo,” said cheese­maker Oleg Sirota, adding that cheap gov­ern­ment loans and sub­si­dies also were a big help. “It’s like the gold rush in the wild West.”

But for now, fall­ing liv­ing stan­dards are off­set­ting the mod­est gains in do­mes­tic pro­duc­tion — ACRA es­ti­mates that the em­bargo knocked off 0.2 per­cent­age points of GDP from 2014 to 2018.

“We switched to im­ported goods from other coun­tries. This is ex­actly why we ob­serve the price in­crease,” said Natalya Volchkova, pro­fes­sor at Moscow’s New Eco­nomic School. “It’s like con­sumers are pay­ing more to in­crease pro­duc­tion in sec­tors that have low pro­duc­tiv­ity.”

Prices for goods im­pacted by the em­bargo like cheese and meat in­creased more than the av­er­age price in­crease for con­sumer goods, Volchkova said. That adds up to an ex­tra $46 a year per per­son, the equiv­a­lent of a 5% in­crease in food ex­pen­di­ture for those on low in­comes. Her cal­cu­la­tions ex­clude the ef­fect of the sharp drop in the ru­ble in 2014, which fur­ther fu­eled in­fla­tion.

To­tal farm pro­duc­tion has in­creased over the five years, but in some sanc­tioned ar­eas, growth rates were ac­tu­ally higher be­fore the re­stric­tions were im­posed, ac­cord­ing to KPMG.

Among the ben­e­fi­cia­ries of the mea­sures have been Rus­sian trad­ing part­ners not cov­ered by the re­stric­tions who’ve seen ex­ports boom.

ALEXEI DRUZHININ/GETTY-AFP

Rus­sian Pres­i­dent Vladimir Putin’s trade strat­egy was an ex­er­cise in geopol­i­tics as well as pro­tect­ing agri­cul­ture.

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