Is Russia Shooting Itself in the Foot as It Fights Sanctions With Sanctions?

Russia is fighting back against sanctions with sanctions of its own, the U.S. won't feel much of a pinch but others, notably Russian citizens, will.

Aug 18, 2014 at 4:22PM

The recent round of sanctions against Russia has taken aim at the country's energy industry. Although they are soft sanctions at best, the current state of political theater leaves Russia with no choice but to hit back with sanctions of its own: It's banning food imports from the United States, the European Union, and others in direct retaliation against the sanctions that have been placed on it because of the Ukraine mess.  

Over the last couple of weeks the jabs have been coming from both sides. The United States and Europe have put limits on new energy contracts with Russia. Eventually this could be an issue, however the sanctions left the country's natural gas industry alone and allowed oil deals signed before August to continue unabated. In other words, business as usual, for the most part.

(Source: Francinegirvan, via Wikimedia Commons)

However, the move was a public slap in the face, and Russia couldn't simply allow it to go unanswered. So Russia slapped back with a ban on food imports -- poultry, fish, fruit, and vegetables, to be specific.

David Cohen, a U.S. Treasury official, noted on a conference call with reporters that in Russia "40% of the food source on an annual basis comes from imports." In fact, in larger cities like Moscow, more than 60% of the food sold in grocery stores is imported, according to the BBC. So, in the end, the biggest losers here are most likely going to be the Russian people.

At least that's true in the near term. Longer term, Russia is looking to become more self sufficient, but you can't ramp up the agriculture industry overnight to replace up to 40% of your food supply. Price inflation and supply constraints are sure to show up rather quickly.

Europe takes a hit
The next big hit will be in Europe. The European Commission reported that Russia accounted for 28% of European Union fruit exports and nearly 22% of vegetable exports in 2011. Those are big numbers. While the EU can clearly sell that produce to other countries around the world, that's a shift that won't happen overnight. And since food spoils, farmers and distributors left holding the grocery bag, so to speak, will likely be hit hard.

The biggest food exporters to Russia last year were Belarus, Brazil, Ukraine (ironically), Germany, and Turkey. That's a mixed bag, with larger countries likely better able to handle the blow than smaller ones. For example, Lithuania, not in the top five, is reliant on food exports to Russia for roughly 2.5% of its gross domestic product.

What about the United States?
Russia isn't a major export location for U.S. produce, it is, however, a notable end point for U.S. chickens. The United States exported around $300 million worth of poultry to Russia last year. That's the largest U.S. export but it wouldn't even break the top 10 list of European exports (number 10 rang in at over $600 million).

(Source: micsten, via Wikimedia Commons)

Still, Russia's food ban has to worry investors in companies like Tyson Foods (NYSE:TSN), which exports to over 130 countries around the world and generated nearly a third of its sales from chicken last year. And it has operations in Russia, too, which is a further complication. That said, Tyson's foreign operations and exports only accounted for 17% of sales last year, and Russia wasn't among the ten key foreign markets listed in the company's annual report. So even though Tyson is huge in the U.S. market, with an industry leading market share of 21%, Russia isn't exactly a big risk factor. 

So, really, the U.S. isn't going to feel much of a sting from Russia's food ban. In fact, the U.S. poultry industry put out a statement saying as much: "Russia is the second-leading market for US chicken, in terms of volume." But, "As its domestic poultry industry has expanded, Russia has in recent years become less important as an export market."

Summing it all up: "As a result, we do not expect that a Russian ban on US poultry imports will have a great impact on our industry." That's good news for the U.S., but that doesn't mean Russia's attempts to press back won't be felt here. It's just that the impact will likely be political as our allies feel the economic pinch.

No one wins
Russia imports roughly $43 billion of food a year. Although this ban only impacts around 10% of those imports, the move will hit far and wide. Luckily the U.S. will feel little impact financially, however, others won't be so lucky and we, as a country, are sure to hear about it. Sadly, the biggest losers are likely to be Russia's very own citizens.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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