For several days in late July and early August, thousands of farmers across North East France used tractors to obstruct roads from Germany. The aim was to prevent trucks carrying agricultural goods from crossing the Rhine. In South West France, too, more Gallic protesters, similarly mounted on tractors, blocked farm produce coming from Spain.
In Russia, meanwhile, customs authorities invited TV cameras to film the destruction of 20 tons of French and Spanish cheese using a bulldozer, while crushing a range of other foods – including bacon, tomatoes and nectarines.
These two bizarre events – French tractors stopping food imports from within the EU, and televised “fromagicide” – are not unrelated. Both stem from Moscow’s decision a year ago to ban farm produce from America, Canada, Norway, Australia and, most significantly, members of the EU.
In March 2014, the US and EU imposed travel bans and asset freezes on various Russian lawmakers and other prominent individuals – the most wide-ranging commercial restrictions since the Soviet era. Four months later, as tensions over Ukraine mounted, further limits were imposed on Russian state-owned banks’ access to international capital markets.
Last August, Moscow hit back, banning a range of EU agricultural exports. With Russian inflation already high and a food import embargo likely to stoke prices further, this seemed like a strange move. Russia’s counter-sanctions, though, have been extremely effective, causing a serious food glut in Western Europe and sparking sharp wholesale price falls for fruit, vegetables, meat and dairy products. EU farmers have become properly angry, as the Kremlin hoped they would. For there are few interest groups that European politicians fear more than the dreaded farm lobby, not least in its Gallic form.
In early September, hundreds of tractor-mounted French farmers, protesting low wholesale prices, brought the centre of Paris to a standstill. President Francois Hollande capitulated within a few hours, announcing a package of “support measures” including €500mn in direct financial support for farmers and another €100mn in deferred or cancelled taxes. A week later, encouraged by their French brethren, thousands of farmers from across the EU used extreme traffic-blocking measures in downtown Brussels, including burning hay bales. It wasn’t long before EU agriculture ministers unveiled a $557mn package of farm-supporting “special measures”.
The potency of Russia’s food import ban has taken many Western commentators by surprise. That’s because the extent to which EU now trades with its vast eastern neighbour is often underplayed. During the ten years to 2013, EU-Russia trade surged from €90bn to €325bn, a 360% rise. Sanctions, and the related economic slowdown in both Russia and Western Europe, saw that figure drop in 2014 to €285bn.
Given the extent of trade restrictions, though, and the ferocity of the sanctions-related rhetoric, this 12% fall was actually rather small. And while EU-Russia trade was down last year compared with 2013, it was still 15% higher than in 2011, showing a strong upward trajectory. Totaling three-fifths of the trade between the EU and US, and two-thirds of EU-China flows, trade between the EU and Russia is by no means a marginal activity.
The scale of such EU-Russia trade, and the ongoing shift away from the traditional energy-for-machine-tools swap, is shown by the extent to which EU farm produce was heading for Russia prior to the Kremlin’s ban. In 2013, the last full year before sanctions, no less than a third of EU fresh fruit and vegetable exports were sold in Russia and a quarter of exported EU beef. Some 75% of EU cabbage exports went to Russia in 2013, together with 63% of tomatoes, 57% of pears, 54% of peaches and 52% of all EU apples sold abroad.
That’s why Moscow’s ban on a range of imported food has hit European agriculture hard. In 2014, the value of EU farm products sold in Russia fell 24%, from €11.8bn to €9.1bn. The latest figures show an even steeper 43% drop during the first eight months of 2015. EU farmers have been affected by both lower export volumes and lower prices at home, given the food glut that Moscow’s counter-sanctions have caused.
While impacting today’s bottom line, this ban has also incentivized Russia’s domestic food producers and rival foreign exporters too. Russia’s fast-growing food market has long been extremely attractive to EU farmers. Since mid-2014, though, Brazil has become one of Russia’s major suppliers of agricultural and food products, with over 60% of Brazil’s meat exports now sold in Russia. That’s a direct result of the ban on imported EU and American meat.
Keen to maintain pressure on Western Europe, Moscow has taken high-profile measures to make sure its counter-sanctions, to some degree, stick. Tons of EU-derived cheese smuggled in and given counterfeit labels has been ostentatiously destroyed, as have countless truckloads of soft fruit from Poland and Greece. Amid fierce criticism from domestic anti-poverty campaigners, in a country where fears about food security run deep, the Kremlin has presented such destruction as a health issue, claiming food supplied in contravention of sanctions is of dubious quality. There is, meanwhile, little chance of Moscow relenting on its food import ban until it sees reciprocal easing of Western sanctions.
Under the sauce
Measures to restrict trade with Russia, widely supported in America, have clearly provoked a more nuanced reaction across the EU. Europe, after all, has a lot more to lose. While trade between the US and Russia was €21bn in 2013, EU-Russia commerce was over 15-times bigger. Within that, EU farm exports are obviously highly sensitive, given that a protesting agricultural sector causes political havoc in France. Many German engineering firms, large and small, are also fiercely protective of their lucrative trade links to Russia – and have complained loudly to Chancellor Angela Merkel since sanctions began.
Yet the main reason Western European and American attitudes to Russia differ is, of course, hydrocarbons. Russia remains the world’s biggest energy exporter, selling over 600mn tonnes of oil equivalent in 2014, split between crude, coal and natural gas. Oil-focused Saudi Arabia, in second place, exported less than two-thirds of that last year.
The EU’s reliance on Russian energy is highly significant and rising. Russia supplied 30% of the oil used in Western Europe in 2014, 34% of the gas and 32% of the coal – plus a fifth of the enriched uranium. The EU’s oil and gas production has fallen by a third over the last five years, with coal production now 15% lower. As such, Western Europe’s energy import dependence is spiraling, with 75% of the EU’s gas needs now coming from imports, up from 57% in 2005.
For decades, even during Soviet times, Russia has been a reliable energy supplier to Western Europe. That won’t change, despite sanctions. With its vast energy sector still accounting for three-quarters of exports, and two-fifths of budget revenues, Russia’s commitment to fueling the EU, through thick and thin, is rooted in self-interest. But it works both ways, which is why, however bad the diplomatic squabbles, there is absolutely no question, nor will there ever be, of the EU imposing sanctions on Russia that go any further than the minimum level they can get away in the eyes of the US.
As summer turns to autumn, there are now signs of parts of the EU pushing back, taking steps to repair strained commercial relations with Russia whatever Washington may think. In September, a welter of European energy firms, including Germany’s E.ON and Anglo-Dutch giant Shell, signed a landmark agreement with Gazprom to build Nord Stream 2 – an expansion to the existing gas pipeline that, since 2011, has run under the Baltic Sea from Russia directly to Germany. Nord Stream’s capacity is now set to double, to over 30% of total EU gas demand.
While UK and US press coverage of Nord Stream 2 has been limited, leading German papers have hailed “Gazprom’s new European strategy” as a “major coup” for Berlin. Having supported the EU’s now abandoned Nabucco pipeline project, which would have brought Caspian gas to Western Europe, while avoiding Russia, America has opposed Nord Stream from the outset.
In 2011, two-thirds of EU-bound gas from Russia crossed Ukraine. That share has now fallen to a third and Nord Stream 2 will lower it further. The US has expressed concern that Ukraine and other Central and Eastern European countries such Poland now stand to lose considerable pipeline fees given increased flows through Nord Stream, the world’s longest undersea gas pipe.
Germany, though, is determined to press ahead with Nord Stream 2, as are France and Austria, seeing as both countries also rely heavily on Russian gas and have large energy companies involved in the deal. This ongoing East-West sanctions stand-off has provoked some high-profile outcomes this summer, including rioting EU farmers and the crushing of tons of smelly cheese. Yet, despite the political sabre rattling, the business of business goes on, not least the deepening of energy links between some of the EU’s largest economies and the hydrocarbon giant to their East.