The EU's $167 Million Solution to Putin's Import Embargo

The EU is working to soften the blow of Russia's food ban, but it may not be enough to offset the damage.

Sep 2, 2014 at 12:04PM

Trade wars can have ugly consequences, and the first signs of that are showing up in Europe. In the tit for tat moves between the west and Russia over the Ukraine mess, European Union farmers have seen prices of some produce fall as much as 80%. The EU is stepping in to help, but will it be enough?

The guns are blazing
The guns on the ground in Ukraine are, publicly anyway, all Ukrainian. However there are more than subtle hints that Russia is helping the unrest along, which has the United States and Europe more than a little upset.

So far, sanctions against Russia for its involvement have been largely benign. For example, the "tough" energy-industry sanctions don't impact natural gas investments or any oil deal prior to August. That's not much of a sanction. In fact, the sanctions were so "tough" that Russia's Vladimir Putin was able to trot out ExxonMobil (NYSE:XOM) to announce a new drilling program in the arctic waters off of Russia (a deal signed before the sanctions)—and thumb a nose at the United States.

(Source: BrianZim, via Wikimedia Commons)

However, Russia's retaliatory action, banning key food imports, has some teeth, at least for Europe; U.S. food exports to Russia are relatively small. The ban impacts fruits, vegetables, fish, and meat from the United States, the European Union, and others. And it's already having a major impact on European farmers.

Now that hurts
Europe exports around 25% of its produce to Russia. European fruits accounted for roughly $1.4 billion of Russia's food imports last year, with vegetables coming in at a touch over $1 billion. Apples, pears, and quinces (a fruit similar to a pear) were all top-ten Russian imports from the EU in 2013.

The problem is that fruits and vegetables spoil. Even though the Russian ban is currently scheduled to last just a year, that leaves EU produce markets with a massive oversupply of perishable goods. How big an issue is this? Poland has some 700,000 tonnes of apples it would normally sell to Russia sitting around.

George Polychronakis from Incofruit-Hellas, a Greek fruit export association, provides a further, and more specific, example of the problem the EU faces. There were 250 truckloads of Greek peaches and nectarines turned away at the Russian border when the food ban took effect. According to Polychronakis: "They'll either have to sell [the fruit] at any price to countries along the way or be forced to bring it back to Greece where it will be destroyed."

Dutch fruit and vegetables have also been turned away at the boarder. And according to Inge Ribbens, the spokeswoman for Frugi Venta, a trade group that represents 420 Dutch companies, "Prices in some fruit and vegetables have fallen by as much as 75 to 80%..." because of the ban.

(Source: Kulmalukko, via Wikimedia Commons)

That's why the EU is stepping in to help, paying its farmers to give food away, let it rot, or outright destroy it. And while the sum being set aside to help farmers is huge, at $167 million, that's a far cry from the $2.7 billion in sales lost to Russia's embargo. That said, $2.7 billion is the top line, not the bottom line, so the two numbers aren't directly comparable. But there's a big divide separating them.

It's no wonder that EU farmers are happy for the help, but saying it probably isn't enough to offset the potential damage that Russia's food ban could inflict on their industry. The EU is taking bold steps, but that may not be enough to really help.

No one wins
The back and forth punitive actions between the west and Russia are heating up and the losers are starting to pile up. Although it looks like energy companies are being spared, Russia's food ban has put EU farmers in a bind. But the EU's efforts to help farmers looks like just a band-aid. If this fight escalates further before it's resolved, look for more people and industries to get hurt, but watch closely because so far it looks like the energy industry will be spared the rod. That could mean opportunity for aggressive investors. However, if Russia pushes too hard, even that opportunity may prove fleeting.

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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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