Geopolitical risks are surging further as Russia hits back at sanction-imposing countries, limiting agricultural products and food imports from them.
Yesterday, on 6 August 2014, Russia’s Prime Minister Dmitry Medvedev signed a decree banning completely imports of meat (beef, pork, poultry) and meat products, fish, milk and dairy products, vegetables and fruits from Australia, Canada, the EU, Norway and the United States. The ban is to last for one year but can be abolished earlier. In the decree, the government urges Russian authorities not to let ‘prices on agricultural products, raw materials and foods to increase’. The decree comes into force today 7 August. At the same time, the Russian government is considering banning the EU and the US airlines from transiting through Russian territory to Asia. The government has already banned transit of Ukrainian airlines over Russian airspace.
Russia’s food imports from the EU account for approximately USD15bn per year but the value of the trade sanctions will be less than this, because alcohol and some processed food, such as coffee and bakery items can still be imported. However, at a country level, the effect of Russian sanctions could be more dramatic for the Baltic countries, Finland and Poland, which export large amounts of fruit, vegetables and dairy products to Russia. For example, Finnish food exports to Russia account for 25% of all food exports. This is around EUR450m annually.
Geopolitical risks in focus again
The Russian stock market and the rouble continued to come under geopolitical pressure today as recent events and statements have fuelled conventional and trade war fears. In a TV interview, this week Polish Foreign Minister Radoslaw Sikorski warned Russia about the impact of a conventional war in Europe. According to Poland’s Prime Minister Donald Tusk, Poland has reason to believe that the risk of an incursion is greater than a few days ago, Bloomberg reported, and NATO stated that it sees a risk that Russian troops will enter Ukraine under the ‘pretext’ of a humanitarian or peacekeeping mission.
The rouble has weakened against the dual currency basket this week, losing 1.9% of its value from its high on Monday 4 August, as Moscow announced its reply to the western sanctions.
Russian government bonds OFZs have been under significant pressure this week. The OFZ rouble bond expiring on February 2027 has posted a 5.1% yield rise touching 9.83 since 4 August 2014. We view the situation in Ukraine as far from de-escalating as fighting continues in Donetsk and Lugansk, where more than 1,000 people have been killed since April 2014, according to the UN. The UN refugee agency UNHCR stated that according to the Russian authorities more than 168,000 displaced people applied to Russia’s federal migration service in the first seven months of this year. The UNHCR estimates that the amount of people displaced in eastern Ukraine is 117,000.
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