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Sanctions - Effective But Costly Price
Price of the Question
Harsh invectives of the Russian Foreign Ministry which says that the ongoing political conflict may hit hard Estonia’s economy are supposed to sound menacing for the Baltic country. Russia was the country’s fifth-largest importer in 2006 and biggest exporter, second only to Finland, according to Estonian official statistics. In the first quarter of the year, Russian goods were first in volume of exports to the country. Russia is earning a lot in Estonia in terms of trade balance. In 2006, the difference between Estonian exports to Russia and Russia’s exports to Estonia stood at 12.234 billion Estonian kronas, slightly less than $1 billion. The only problem is that the Russian government will have to make a choice familiar to other protectionism-minded countries. Moscow can “punish the Ansip regime” in two ways. It may restrict imports to its neighbor, which will hit Russian exporters. Alternatively, Moscow may decide to restrict imports from Estonia.
The first way is the most efficient one, according to Estonia’s trade statistics. The growth of Russian exports to Estonia – up from 9 percent in 2005 to 13 percent in 2006 – was largely triggered by oil prices. Gasoline and black oil account for 75 percent of Russian exports to the country. It is through Estonia’s ports that Russia is transporting 66 percent of its total gasoline exports to the EU (3.9 million tons annually), 53 percent of black oil (18.5 million) and 5 percent of total diesel fuel shipments (2 million tons annually). Both Russia and Estonia are significantly less dependent on export of metals through Baltic ports. Still, a potential decision of Transgroup AS and Severstaltrans to stop shipping fuel and metals through Estonia would clearly deal a heavy blow on the country’s economy. The two companies as well as Russian oil producers will have to look for ways to make up for $1 billion they will lose on fuel sales. Estonia and Russia alike will have to share this burden as sales will be cut on the both sides of the border.
Plans of curbing Estonian imports to Russia may bring even more damage. Obviously, Estonia will pay dear for the loss of its 9-percent share in Russia’s export market. But the problem is that Estonia is mainly importing goods and services rather than exporting. Russia’s boycott of Estonian products (worth dozens of million dollars a year) will cut prices on them in Estonian stores. It will mean that Russia will be actually financing a “Buy the Estonian!” campaign in the Baltic country. Restrictions on Estonia’s machinery exports will hit railroad cisterns. Their production is tailored for the Russian market. Moscow will not be able to punish Estonia without punishing a Russian firm, Russian Railways.
The sanction dilemma does not come to calculating how much Estonia will lose. It is about how much Russia is ready to pay for the boycott. Curbs on exports to Estonia are effective but costly. No wonder that Russia is choosing the second option as supermarket chains are busy looking for scarce Estonian products on their shelves. It is probably not effective, but at least it’s not costly.
Dmitry Butrin, head of Kommersant’s Economic Policy Department
All the Article in Russian as of May 02, 2007
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