Tough talk but little to lose on Russian trade sanctions

Australia’s trade relationship with Russia looked better in 2007. Dean Lewins/AAP

Poke a Russian bear with a stick and he will retaliate. That’s the lesson facing Australian exporters today.

When Australia announced it would join the United States and Europe in placing trade sanctions on Russia in response to Malaysia Airlines MH17 being shot down in Ukraine, it could do so realising there wasn’t much trade to talk about.

Our trade relationship

Australian-Russia trade is only worth A$1.8 billion - Russia is our 28th largest export destination and 30th largest import source. In fact Russia’s main export destinations are – wait for it – the Netherlands, Turkey and the Ukraine. It imports mostly from China (like everyone else), Germany and the USA. Australia only accounts for 0.3% of Russian imports as Russia’s 44th largest import source and we are Russia’s 99th largest export destination (barely registering on the trade accounts).

But now Russia’s counter sanctions could hurt agricultural exports particularly in wheat, dairy, beef and kangaroo meat (Russia is our main export market for kangaroo meat). In most cases Australian exporters will be able to sell items like beef to Japan, Korea (thanks to the new FTAs) or Indonesia. In any case, Russia had already reduced beef imports from Australia (due to alleged concern over growth hormones). These would be the only sectors adversely affected assuming no further Russian retaliation over energy or financial sector sanctions placed on them by the west.

So how will the trade sanctions play out? Russia’s actions could hurt Russia most of all. A government putting on tariffs or other forms of trade protection is a like a government shooting its own people during peace time. Or as the legendary Cambridge economist Joan Robinson used to say, trade bans are like “putting rocks in your own harbour”.

Putin might well be bringing food shortages back to Russia like the bad old days of the Soviet Union and Tsarist regimes – something the poor Russian populace has been used to historically. For a democracy it would be unbearable, but at an 87% approval rating, Putin won’t worry about that. As he told me at the APEC meeting in Sydney in 2007 meeting when John Howard allowed then Opposition leader Kevin Rudd to speak: “How nice to allow your leader of the opposition to speak, I would do so also, except I don’t have one.”

Russia trade facts:

Aside from fuel and vodka, Australia imports little from Russia. Nico Nelson/Flickr, CC BY
  • Australian exports to Russia: $736 million

  • Australian imports from Russia: $1.05 billion

  • Main Australian exports: wheat, beef, butter, kangaroo meat

  • Main Australian imports: crude petroleum, fertiliser, vodka

  • Australian investment in Russia: $2.35 billion

  • Russian investment in Australia: $4.84 billion

  • Number of Australian companies exporting to Russia: 377

Source: DFAT Trade Statistics

Will trade sanctions work?

In economic history the record is patchy. The economic evidence is mixed when looking at trade sanctions against South Africa, Southern Rhodesia (now Zimbabwe), Cuba, Fiji and now recently Myanmar (Burma).

The evidence shows economic sanctions against South Africa were more “psychologically hurtful” to the apartheid regime than economically damaging, although there is evidence that disinvestment by major institutions like Chase and Barclays had more of an impact than trade sanctions. As in the case of Cuba and Southern Rhodesia, trade sanctions did not have as much impact as restrictions to foreign investment and in any case the economic distortions in the domestic economy (like South Africa’s apartheid labour market distortions) were as damaging as external sanctions.

In any case, ironically the collapse of the old Soviet Union was the key factor in enabling the white minority government to start negotiating with Nelson Mandela and the African National Congress, making South Africa a “special case” in terms of effectiveness of sanctions.

In a well-functioning economy sanctions can bite quickly, but as in South Africa (due to apartheid) and Myanmar (due to having a ludicrous sized army for a country of its size) they can have mixed effects.

Russia has an oligopolistic, or we could say “oligarch-listic”, anti-competitive economy so the oligarchs will choose to absorb the sanctions or distort the effects. The west has tried to target Russian funds abroad (in the UAE and Chelsea) as that’s where the Russian oligarchs keep their capital, but that’s going to be a difficult target.

The MH17 Russia–Ukraine crisis has a long way to go in terms of geopolitics, and trade is likely to be just one weapon of choice in the skirmish.