President Vladimir Putin is playing Russian roulette with the country’s economy in his cat-and-mouse game over sanctions, claim investment experts.
Putin has barred food and agricultural imports from the US and European Union following rounds of sanctions imposed by Western states over the Russian backing of the militant uprising in the Ukraine and annexation of The Crimea.
The president is trying to flex his muscles in a show of power, but has seemingly recognised he can never win an economic war with the West because Russia needs the imports more than his opponents need Russia.
The key to the economic chess battle is oil and gas, say Azad Zangana, European economist, and Craig Botham, emerging markets economist at investment firm Schroders.
Putin’s aim, they argue, is to reduce Russia’s economic reliance on the European Union.
However, less than 7% of Europe’s exports find a destination in Russia – and of that 0.5% are food and agricultural products representing a nominal 0.1% of the European Union’s GDP.
So the embargo is more of a statement of principle than a financial threat.
“Some producers may find they have an excess of supply,” said Zangana and Botham. “In the end all this is likely to do is push down prices until there is a supply line adjustment.
“This will have one of two effects. People will have more to spend, so output in other areas of the economy will improve or falling food prices will pull down inflation even more.”
The problem lies in Russia. Russia does not grow enough food to feed the population, so will have to buy in from elsewhere or go short. Exporting countries will realise this, so prices are likely to go up because Russia will have to ramp up supply over a period of time to fill the gap.
“This will push up inflation in Russia, which won’t be welcome as Western banks are refusing to underwrite finance for Putin,” said the pair.
The big unknown is oil and gas supplies from Russia to Europe.
Russia could turn off the tap, which would have a massive economic effect in Europe with soaring prices for energy.
Tossing that coin has a downside for Russia as well, because Putin would lose huge payments of foreign currency, with an equally disastrous effect on his own nation’s economy.
“Logic says the sanctions won’t go that far, but then politicians are not always known for making the right decisions even when they stare them in the face,” said Zangana and Botham.