Russia sanctions’ unintended consequences: More cheese, less bread

By Rob Cox
June 9, 2015
A woman chooses cheese at a hypermarket of French grocery retailer Auchan in Moscow

A woman chooses cheese at a hypermarket of French grocery retailer Auchan in Moscow, January 15, 2015. REUTERS/Maxim Zmeyev

Here’s a pronouncement to rekindle nostalgia for the Soviet Union’s once-formidable propaganda machine: the 180,000 tons of cheese produced in Russia in the first four months of 2014 was 30 percent more than in the same period last year.

The increase, reported by state statistics service Rosstat, is one of the few appetizing unintended consequences to emerge from the West’s sanctions against Russia. The penalties followed last year’s annexation of Crimea and President Vladimir Putin’s ongoing support of pro-Russian rebels in eastern Ukraine.

The cheese business is surging because Russia, in retaliation for restrictions imposed by the United States and European Union, banned a wide swath of food and agricultural imports last August. While there were enough holes in the prohibition to allow Swiss Emmental into Russia, domestic producers were called upon to patriotically curdle their own variations of Italian parmesan and Cypriot halloumi.

A cheese boom in Russia is hardly what the international community was planning when it announced measures designed to target Putin’s inner circle of power. But it’s the least worrisome of many other unexpected developments. Certainly it is of less concern to London, Washington and Berlin than, say, Putin’s heightened popularity or Russia’s economic pivot to China.

Economic sanctions, blockades and their ilk are among the least perfect tools wielded by Western governments. Just ask Fidel Castro or the mullahs still ruling Iran. In part, that’s because assessing their efficacy often requires proving a counter-factual. For instance, it might be argued that UK Prime Minister David Cameron’s threat earlier this year of “materially different” sanctions kept pro-Russian forces from overrunning the Ukrainian city of Mariupol, the last barrier to building a land bridge between Russia and Crimea. Maybe – or maybe not.

What’s irrefutable is that the sanctions have added to a host of problems – chiefly the decline in the price of oil over the past year – that have conspired to send the Russian economy into a dramatic slowdown, accompanied by high inflation and a severe capital drought.

Cameron, U.S. President Barack Obama and others who championed the sanctions in March 2014 promised they were aiming at Putin and such cronies as Gennady Timchenko, the founder of commodities trader Gunvor and Yuri Kovalchuk, the largest owner of Bank Rossiya, rather than ordinary Russians.

While travel and other prohibitions have certainly inconvenienced Putin’s network of loyal oligarchs, the average Russian continues to bear the brunt of the bruising.

“Achievements in shared prosperity are being threatened,” the World Bank warned just last week, predicting that real GDP this year will contract by 2.7 percent and rebound by just 0.7 percent in 2016.

Reduced access to capital has hurt the entrepreneurial lifeblood of the Russian economy, or any other: small and medium-sized businesses. While big state enterprises like Rosneft or Gazprom have also been shut out of international capital markets, they still have access to the balance sheets of Russian banks, particularly the two state-owned giants, Sberbank and VTB.

Not so the little guys. Credit extended to small and medium-sized entities was down 9 percent to 4.78 billion rubles in May from the same month a year earlier, according to Central Bank of Russia figures. Bankers in Moscow admit that they have little incentive to lend to these borrowers, as they are riskier credits than, say, a steel mill backed by the Kremlin.

The longer this continues, the more control the state will ultimately exert on the Russian economy. Again, it’s hard to imagine that was the objective of the West’s sanctions.

Despite the economic hardship, Putin’s approval ratings have soared, hitting 86 percent last month, according to Moscow pollster the Levada Center. With his extraordinary popularity, Putin is under little immediate pressure to make the tough structural changes that would help Russia’s economy, and which were plainly needed well before the annexation of Crimea.

A more prosperous Russia cannot be built without big investments in infrastructure, public works, education and technology to help wean the country off its dependence on energy prices. There is also a need for internal sources of risk capital. Pension funds, which have been raided to help public accounts, could be a good source. And the aging country needs higher legal retirement ages.

The economic ostracism has also encouraged a Russian pivot toward China. Not only is trade between the nations up, but Chinese state banks are helping capitalize Russian businesses. They were, for instance, involved in the secondary offering in March of Lenta, a hypermarket chain originally backed by U.S. private equity fund TPG. The $225 million deal was led by the Russian Direct Investment Fund, which was established to make equity co-investments alongside strategic investors, including China Investment Corp.

Sure, some of the pain being inflicted on the Russian middle class was expected. As Obama said in a speech in Brussels after unveiling sanctions: “The Russian people will recognize that they cannot achieve the security, prosperity and the status that they seek through brute force.”

But that message hasn’t yet fully sunk in. Putin looks stronger than ever. And the variety of Russian cheeses in the dairy case keeps expanding by the day.

5 comments

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I congratulate the author for his courage. It is obvious – the Western reader is waiting for such articles that would cause only one feeling: Kill the Russian!

Posted by VVS | Report as abusive

Kill the Russian? No, while after murdering their neighbors they probably deserve such a fate, I’d be happy with them simply buying a clue. As for the ‘average’ Russian, well the ‘average’ Russian put Putin in office so perhaps they should bear the brunt of the pain.

Posted by pyradius | Report as abusive

Kill the Russian? No, while after murdering their neighbors they probably deserve such a fate, I’d be happy with them simply buying a clue. As for the ‘average’ Russian, well the ‘average’ Russian put Putin in office so perhaps they should bear the brunt of the pain

Posted by pyradius | Report as abusive

Cheese from Russian armpits.

Posted by Solidar | Report as abusive

One of the worst consequences is the invisible crack in relations between EU and US!

Posted by gentalman | Report as abusive