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Russia retaliates against Western sanctions with food ban

Russia retaliated against tough new Western sanctions on Thursday (Aug 7), banning most food imports from the United States and the European Union and threatening to block flights over its airspace.

MOSCOW: Russia retaliated against tough new Western sanctions on Thursday (Aug 7), banning most food imports from the United States and the European Union and threatening to block flights over its airspace. But the 28-member European Union swiftly denounced the measures as "clearly politically motivated" and said it was ready to take action in response.

The tit-for-tat moves further heighten tensions between Russia and the West over the conflict in Ukraine, where heavy shelling was reported in the rebel-held eastern city of Donetsk on Thursday.

Russia's food embargo would affect "imports of beef, pork, fruit and vegetable produce, poultry, fish, cheese, milk and dairy products from the European Union, United States, Australia, Canada and Norway," Prime Minister Dmitry Medvedev told a government meeting in televised remarks.

The ban exempts only baby food and will last one year unless "our partners demonstrate a constructive approach" with regards to sanctioning Russia, he said. "I hope that economic pragmatism of our partners will win over lousy political motives," he said. People will still be able to buy the banned foods abroad if they want, Medvedev said, warning that those who try to profit from reselling them will be "harshly punished".

Russia imports 35 percent of all the food it consumes, taking 10 percent of food industry exports from the European Union worth 12 billion euros (S$20.1 billion) a year. The full list of banned products has been published on the government's website.

The EU's executive European Commission said in a statement that "following full assessment by the Commission of the Russian Federation's measures, we reserve the right to take action as appropriate".

In another potential strike against the West, Moscow is considering banning the use of Russian airspace for European airlines, the so-called overflight rights needed to take the shortest route between Europe and Asia.

"Russia is ready to review the rules of using Transsiberian routes," Medvedev said. "Of course this is a severe measure. Nevertheless, we need to mention it," he added.

US airlines have not been allowed to use Siberian airspace for years and have been pushing the Russian government to review its policy.

The overflight measure is being mulled in response to EU sanctions effectively grounding Dobrolet, a low-cost subsidiary of Russia's flagship Aeroflot, over its flights to Russia's annexed Crimean peninsula on US-made Boeing craft, which EU companies service and lease.

The ban could hurt European airlines such as Lufthansa, British Airways, Air France and Finnair that operate many long-haul routes to Asia, but also Aeroflot which receives the overflight fees. Bank of America Merrill Lynch estimates that using longer routes bypassing Siberia could add around US$30,000 (S$37,543) per flight in fuel and operating costs.

"NO MONEY'

Russian officials have billed the sanctions, as well as import restrictions, as good news for local producers that will trigger import substitution and boost domestic production.

Medvedev said the government will work to "prevent price increases" and use the embargo to "clear the store shelves for our producers". However economists have warned that the embargo will be detrimental and hurt the poorest Russians, who spend a large percent of their income on food.

"We could see a minimum of 20-30 percent growth on these products, especially produce," said Igor Nikolayev, who heads the FBK Strategic Analysis Institute. "Substituting import by domestic food is nothing but tall tales," he said, citing government policies of the last decade which have wiped out farmers with exorbitant taxes.

"To support farmers you need money, but there is no money," he said. Existing money has already been allotted to other needs and Russian state banks can no longer make long-term loans on Western financial markets, he said.

Analysts have warned that protectionist measures will escalate inflation. "The protectionist rhetoric from Russia has been gaining momentum," said analysts of VTB Capital in a research note, adding that restrictions had so far been "the primary reason behind elevated food inflation in Russia".