Academic journal article Baltic Journal of Economics

No Milk for the Bear: The Impact on the Baltic States of Russia's Counter-Sanctions

Academic journal article Baltic Journal of Economics

No Milk for the Bear: The Impact on the Baltic States of Russia's Counter-Sanctions

Article excerpt

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1. Introduction

Since the beginning of the Russia-Ukraine crisis and the Russian annexation of Crimea, several countries have introduced economic sanctions against Russian firms and individuals. On 6 August 2014, Russian President Vladimir Putin signed Decree no. 560 to announce economic counter-sanctions against the EU, Australia, the USA, Norway, and Canada. These sanctions involved an embargo on several agricultural and food products, including meat, dairy products, fruit, and vegetables. The list of products affected by the sanctions and other details of the sanctions were made public by the Russian government on 7 August 2014 (Russian Government, 2014). The sanctions came into force at the time they were made public and were planned to remain in place for one year. Any extension of the sanctions will depend on the political decisions of the Russian government, and the expected duration of the sanctions remains uncertain.

The Baltic states are among the countries in the EU with the largest export to Russia relative to their GDP. This is due to their geographical location and the presence of transport infrastructure integrated with the Russian railway system. Despite their large exports, the Baltic states could be less exposed to Russia's economic problems and vulnerabilities by trade linkages than is often believed. The large exports to Russia can partly be attributed to re-exports, and the actual links between the Baltic economies and Russia are therefore more limited than the trade statistics suggest.

The announcement of Russia's counter-sanctions on countries that had imposed sanctions on Russia because of its involvement in the Ukraine crisis and the annexation of Crimea raised the question of whether and on what scale the sanctions would affect the Baltic economies. It could be tempting to associate all adverse developments that have happened in Estonia, Latvia, and Lithuania since the sanctions were introduced to the sanctions themselves, ignoring several other possible unfavourable developments like overall geopolitical tensions, the depreciation of the rouble, a general decline in Russian imports, the lifting of EU milk production quotas, and even the presence of macro-imbalances.

Earlier analyses have shown that the share of goods affected by the sanctions is modest, accounting for less than 0.5% of GDP in most EU countries, but the Baltic states are among those most affected (see Bond, Odendahl, & Rankin, 2015; EBRD, 2014; Josing, Hein, Nittim, & Viileberg, 2014; Kraatz, 2014; Latvijas Banka, 2014; Sovala, 2014). Despite the overall high contents of import in exports to Russia, the import intensity in food and agricultural products can be presumed to be lower than the average as these products are produced by primary producers themselves, and the intermediates used in the production are often bought from the local primary sector because of their short storage life. The relatively high value-added content of food and agricultural products compared to other exports from Estonia has been shown by Kaasik (2003) and Musting (2009), and so the impact of the counter-sanctions on the Baltic states could be significant. However, quarter-on-quarter GDP growth in all the Baltic states exceeded the average growth in the EU in the third and fourth quarters of 2014 (Eurostat, 2015b), indicating that despite the sanctions, the economic situation has been quite good in these countries in the quarters since the announcement of Russia's counter-sanctions.

Although the exposure of exports to counter-sanctions has been described by the earlier analysis discussed above, the general economic impact of counter-sanctions and possible effects on GDP have not been quantified. The value-added content of exports varies across countries and industries, so the link between exports and GDP might not be straightforward. Furthermore, the favourable geographical location of the three countries means that the trade volumes from the Baltic states to Russia are inflated by re-exports, meaning that part of exports from Estonia, Latvia, and Lithuania to Russia has very weak ties to the Baltic economies. …

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