Mental readiness and gravity model

Interview with major Estonian entrepreneur and expert Raivo vare and head of the Latvian analytical center Certus Vyacheslav Dombrovsky about the effects of the “sanctions war” in Estonia and Latvia.

Raivo vare: such howling and moaning that life was over — no

Delfi: what are Your feelings and observations did the Estonian economy to adapt to the conditions of sanctions against Russia and the retaliatory embargo?

Raivo vare: let’s Start with the fact that the contractee is a sick head on healthy. The Russian retaliatory embargo — sanctions imposed unilaterally. Point. In the areas that are absolutely not in contact with those who were the object of sanctions from the other side. In addition, it was not so much a political gesture as an attempt to use the time to raise these same sectors of the Russian economy. Yes, people certainly is inconvenienced, but for farmers, for example, it was useful.

As for Estonia, it is in General almost any way the sanctions imposed by the international community, are not affected. No investment, no technology Estonia to Russia is not invested. In financial Affairs, too, were not lit. And in General, the share of Estonia in foreign trade turnover of Russia is very small. So important for Estonia, it became the counter. Because of the Estonian exports of agricultural products to about a fifth part went to Russia. And after the embargo, this thread has gone almost to zero. All the manufacturers who exported to Russia, lost this market. And were forced to adapt. Which they did.

But you must consider one more thing. Since 1992, Russia has consistently used a restrictive mechanism from the dual duties and restrictions on exports of different commodities, e.g. agricultural products, fish and milk. That is, in fact, adaptation started long before all these sanctions cases. And the reorientation of Estonian agriculture, which previously exported to Russia 80 percent of products that already happened. By the time the embargo in 2014 remained less than 20 per cent of the total SEL. And so the impact was not as painful as for some of our neighbors. But some losses were still, of course.

— How exactly shifted Estonian producers? Where did export flows? And as kompensiruet loss?

— Well, I’ll say that Russia and earlier in unilateral protectionist fine imposed various restrictions, and not once. Therefore, the reorientation goes a long way. In 1992, the total foreign trade turnover then only vossozdanie States Estonia 78 percent — was purely Russian. After 8 years it was less than 20 per cent. And today ranges between 7 and 8 percent. Here is the answer. But the current embargo only spurs that position. Estonian businesses no longer believe that it is possible to avoid such assaults from the Russian side. Protectionism was, is and will be in the policy of Russia, this can not be avoided.

Here we have one producer of milk, which was taken to Russia dairy products. Manufacturer of large and well known, and when we were driving there almost 100 percent of products. Long ago, the share of this market fell on its sales to 40 percent. And when sanctions are imposed — all of their cheeses and dairy products are completely transferred to other markets.

— Where? The main question is where?

— Oddly enough, managed to break into the Scandinavian market, though not in very large quantities. Started to look for distant markets, even in China began to supply. In short, had to give, of course, but sdyuzhil, and, moreover, now began to build a new dairy plant. I mean, not just sdyuzhil, and develop. Yes, they receive support from the EU, but nevertheless.

I’ll give you another example. Lithuania. That is Lithuania — known supplier in Russia of cheeses. They went there almost all. Estonia has supplied milk Lithuania, Lithuania did this milk cheese and sold to Russia. After the imposition of sanctions Lithuanian cheese began to be sold around the world. That is why it was not for us this unexpected one-time shock, when time — and all has collapsed. There was nothing there. Was mental readiness. We have 25 years passed something similar.

— In this context — what is the mood today in business? Not if they say that we should certainly return a huge and unsaturated Russian market? If they do not convince the government that will certainly have to cooperate?

— Of course, such conversations have, too. Because the market is really big and interesting, and to sell all want. But such howling and moaning that our life without this over — and there can not be. That’s the same milkman. In fact, the majority of Estonian dairy exports was blocked even before the embargo. Little is known about it. In 2013, even before the Crimea and all events, Russia has decided to revive their agriculture and began to introduce restrictive measures. In this connection, the inspectors began to visit frontier production and find reasons not to issue permits. Without a certificate you could not trade in Russia. It all started before 2014.

Same with fish production. Remember sprats. From 40 to 60 per cent went to the Russian side. And here Latvians have estimated that from 1997 to 2012, even before all the sanctions have been 5 “spotovyh wars”! Five times Russia has restricted the import of Latvian sprats. And that’s without any crisis and sanctions. Just limited to technical methods. Therefore, the Latvians by the time the embargo was partially reoriented. And the main thing was the mental readiness.

Understand, this is a very important element in business. The businessman starts to whine if he’s not mentally ready for any situation. And then he begins to bear the loss. And when he is ready mentally — well, that’s the 6th time Szprotawa war — then he might lose at first, even some money, but whining sure makes no sense. He understands that this is just another round, and must quickly refocus. This does not mean that we should completely abandon the Russian market, the business continues in this direction to watch — but not expects and does not expect to drive to all exports. No reason in this is long gone. That this is the Russians miscalculated.

Because of the constant pressure since 1992, the Baltic countries were in a situation where the business is forced to shift. Someone more, someone less, but the mental readiness of local businesses to the fact that Russia is once again something will come up very large. When in 2014 was introduced counter-sanctions, there is some confusion, if you remember. Part of agricultural products, which Russia imposed the sanctions, it was not evaluated. For example, a special milk formula. In an interview with the head of the Rosselkhoznadzor Sergey Dankvert said that he was given in the Kremlin for preparation of only two days. And he pulled out — and said so! — pulled from his Desk a list of potentially sanctionable imported products. It turns out that his table was such a list! But there was no time. And if you had taken out selectively some items, and began to produce to their quality claims, to delay the issuance of certificates and technically for some time to limit their access to the Russian market, then took just the entire list.

And began — that we do not produce and that we are not… And slowly starting to return. But the history shows that originally there was a position: to maintain its manufacturer, simply by removing competitors from the market. Administrative methods.

In this case, I would say that it is not very clever — to remove competitors from the market. That you its manufacturer did not push for development, you give him complete freedom and make it a monopoly.

— I’ll tell you more. In the economic field, very often the restrictive measures are closely interwoven with commercial interests close to the government. Who are now the largest owner of farmland in Russia?

— The Minister of agriculture. One of the largest. (In 2017, founded by the father of the current Minister of agriculture of Russia Alexander Tkachev and controlled by members of his family “Agrokompleks them. N. I. Tkachev,” the fourth in the country by the owner of agricultural land. In the possession of the company are 640 thousand ha (the largest owner of agricultural land in Russia remains the group “prodimeks” Igor Khudokormov, under the control of which 790 thousand ha). In January 2016 Alexander Tkachev has proposed to the government to inspect the agribusiness of his family subject to a conflict of interest. In April of the same year, the government reported that conflict of interest was found. — approx. ed.).

— Absolutely right! So actually this spur these interests. And it is in any case not macroeconomic logic. It’s a group logic. So your argument about the competition for them is not a bit interesting. They have a different logic. And everyone can see it and sense to rely on such partners no. Besides, no one wants to work in the Russian jurisdiction. Everybody understands how this could end. Therefore, the many declarations of the Kremlin simply do not work. They say one thing and mean quite another.

In connection with all the above I ask you a question not directly concerning the topic of our conversation. One of the most common myths — that of the Baltic States, particularly Estonia, terribly sorry about accession to the EU. Because it dealt a terrible blow to their economy. And now all want out and to stay close to the big Eastern neighbor. Is this true?

— It is possible, I will answer as directly as you asked?

— Sure, that is what I expect.

— Bullshit (laughs). You know, despite all the vicissitudes, among all the countries in the European Union, one of the highest levels of support — in Estonia.

— Yes?!

Yes. Until now! He slightly dropped. It was 70 percent, now a little bit fell around 10 points, but still very high. 2/3 of the population of Estonia in the European Union. Russian propaganda, the truth is somehow manage to ignore. And, by the way, the decline in support has occurred not because Russia and the sanctions, and because of the EU’s migration policy. When did the redistribution of migrants across countries, and our situation was not addressed — we are few, we live on farms, we have no large Metropolitan areas — and then a bit of decline in support, but small. And Russia is completely innocent.

Vyacheslav Dombrovsky: wall with Russia pounds Latvia in the corner

Delfi: interviews with experts from different European countries, I realized that in the whole of the EU economy quickly adapted to the conditions of sanctions against Russia. When speaking of those on whom restrictions are still affected, some called it the Baltic States. Is it so in reality?

Vyacheslav Dombrovsky: I Want to note that we (analytical center Cetrus) has not assessed the impact of sanctions. A lot of work, other attempts were, but they were still biased, either that, or the other way, because this issue certainly has a political component. One side wants to exaggerate the impact of sanctions, the other to diminish it.

In General, I can divide our industry into three groups: in the first the effect of the sanctions no doubt is, at least originally; the second is where the effect was not direct and not pronounced, it is difficult to isolate; and the third where the effect is virtually impossible to detect.

For structuring the conversation I these groups immediately called. The first is the food industry, primarily dairy. The second is the transportation, trucking, part of the transit industry. And third, the financial sector, the exchange rate.

Let’s start with the first. Immediately remove from the path of those sanctions which were imposed by the West against Russia. It is very difficult to imagine how could influence the anti-Russian sanctions on Baltic economies. If anyone has ideas, let me tell you. But really any effect, of course, was not there. So, we are talking only about the impact of the Russian embargo. In the food industry I would point out those groups of food, where the effect of the Russian restrictions are undeniable.

This is the dairy industry. Fresh milk spoils quickly. The radius of the export of dairy products is limited. The dairy industry took a major hit. For example, the Latvian dairy industry is focused on milk production as such. For example, if there was a highly developed dairies, say, cheese, the export radius would be much wider. But Latvia were mainly the growing potential of milk production as such. Latvia, Estonia, Poland after the introduction of the Russian embargo could no longer export there milk. Have a surplus of milk, which led to a drop in its prices as such.

— Well, let’s say, for consumers today you the price of milk has changed in 2014?

— I think the view through the lens of consumer will give you very clear picture of what is happening. Fuzzy. The first blow is taken by the manufacturer. For him, it was very hard. They accept the losses that reached 20, 30 percent of the price. In recent years, the procurement price of milk all increased. But as far as the producers were able to recapture their positions — it is still another question.

— It is also interesting, due to which these positions are repulsed. If demand fell, the market fell, then you need to look for new markets and to increase domestic demand.

— Of course, people do not sit in place and are looking for new markets. In addition, increased levels of milk processing. Increasing export radius. You always have the ability to process milk into powder and send it even to China. Of course we will never know what growth would have been had the industry not shut up Russia. But here it is..

Is a loss of profit, a slightly different issue.

Yes. But, at least, we often heard from milk producers in Latvia that they need subsidies and assistance. But the last year or two these conversations less. The loss of the dairy industry undoubtedly was, but now, the past two years, manufacturers have adapted and adapted and almost reached the previous, pre-crisis position. If we take other groups of food products, for example, the famous Latvian sprats, the refocusing is somewhat more complicated. We still have to explain to the new consumer what it is.

— Nevertheless, I found them in the Czech Republic in large chain stores. Although not rule out that buy they are our former compatriots living abroad.

— Apparently, Yes. Now let’s talk about another economic group, the second. Which is not so clearly suffered. I would pick the first road. It is clear that if there is no routes to Russia, you no work the carriers. In addition, if the goods are carried in one direction only, then the cost of the transportation increases, and this affects all related industries.

Well, and the third group of financial sector. I think that certainly the introduction of sanctions impact on ruble exchange rate. Undoubtedly, the effect was.

— I think the ruble is still more affected by the drop in oil prices. Just coincided.

— Yes, I agree. But I think that the sanctions also affected to some extent. And, of course, the fall of the ruble exchange rate affected the exports of Latvia. The trading turnover decreased significantly between Latvia and Russia.

In this regard, what is the mood today in the environment of Latvian entrepreneurs? They advocate that to return to the Russian market or go forward without looking back?

— You know I’m right now looking at the latest issue of our newspaper. And on the title page — drawing of the road intersection with pointers: Russia, USA, Latvia. And the caption: “whatever the political background, economic cooperation must be maintained”.

In the economy there are few empirical observations, which can certainly believe. Among them the so-called gravity model of international trade. She suggests that the volume of trade between countries will always be directly proportional to the relative weight of the produced product of the two countries and inversely proportional to the distance between them.

It works so far. Latvia build a wall with Russia cornered. She becomes the periphery. With clear economic consequences.

If you’re in the corner, your economic opportunities are extremely limited. And the business community is, of course, understands. And although it is right to restore relations with Russia, we do not call, but in the stagnation nobody wants. Yes, we have different life values, but trade — it is necessary.