Counter to common perceptions that Bulgaria is a net loser from Russia’s counter-sanctions, the overall effect is mixed and possibly has a net positive end value.
Bulgarian exports to Russia have never recovered after their dramatic fall in the mid 90’s and early 00’s, with peak levels being registered in 2013 – almost $ 700 million. Although it is true that after the sanctions were announced in August 2013, there has been a sharp dip in the value of Bulgarian exports to Russia, in order to understand the causal relationship, more factors need to be accommodated.
During the years of transition, the Bulgarian-Russian trade has been extremely difficult to grasp as trends and drivers of a substantial chunk of it have gone through third countries. This has been true both for imports to Bulgaria – with the largest contributor Lukoil selling crude via its Swiss based trading arm, Litasco, as well as for Bulgarian exporters, which have long use third countries – mostly Serbia, Belarus or Ukraine — to enter Russian market.
Bulgarian companies control shrinking segments of the value added chain from producer to Russian consumers. In most trading and financial terms they lag behind their EU competitors – cost of credit, access to end users in Russia, distribution channels, etc.
While it is true that overall exports dynamics in bilateral trade reflect a significant downward trend, there are important caveats.
The most significant decline in Bulgarian exports to Russia is registered in sectors that are not subject to counter sanctions, i.e. food and agricultural products – meat, fish, fruits, vegetables.
The ‘victims’ are the top items in the export list – machines and pharma product exports that have marked a drop of more than 50% when comparing National Statistical Institute of Bulgaria data January to September 2015, the first full year of Russian sanctions, with 2014, the last year without sanctions.
Quite surprisingly and counter to perceptions that Bulgaria has suffered from the Russian countersanctions is the data covering exports of food products in the same period. Although at a very modest level — the three food groups total no more $ 20 million – they have registered a striking growth of over 300% after the sanctions were imposed!
If one tries to juxtapose Russian and Bulgarian customs data, it will differ significantly, but the fact of the matter is that Bulgarian exports have dealt with the effect of sanctions.
One possible explanation is that as the larger parts in the value added chain have shifted to domination of Russian companies, i.e. Moscow effectively sanctions its own companies, the difference between the Bulgarian producer prices of fruits, for example, and the end price to Russian consumers, measures in 3-4 folds. Bulgarian producers and exporters are essentially cut off access to end consumers in the Russian market, and few invest in distribution and marketing in promoting their products.
Most of the administrative hurdles at the border or within Russia are meant to dissuade exporters into expanding control over the value added in the Russian market. Henceforth, the imposed sanctions offered insiders in the Russian political system fresh opportunities to filter and block non-Russian control over inward supply chains, including generating subtle and creative ways of bypassing Russian sanctions.
In 2015 and 2016, trade dynamics in bilateral trade point to the sanctioned goods list continuing to represent less than 4-5 % of the total value of Bulgarian exports, which confirms their marginal status versus the ‘heavy weights’ – machinery and pharma products.
The sharp devaluation of the ruble, immediately after the announcement of the counter sanctions in August of 2014 – from 37 rubles to the dollar to more than 80 rubles in mid-January of 2016, has played a far more significant impact on exports than sanctions. This has triggered a chain reaction and a sharp drop in Russian customers’ purchasing power and demand across the board of imported goods, well beyond the counter-sanctions list. In the Bulgarian exports case – pharma and machinery dropped by almost $ 200 million, despite not being on the sanctions list.
The Russian currency devaluation is driven by oil price moves – where sanctions matter less if at all. If one tries to identify the relationship between sanctions and oil prices – it has more to do with the Russian government using sanctions for internal purpose as a protective measure against the inflationary spill over impact of imported goods. The devaluation of the Russian ruble, provided imports remained at pre-sanctions levels, could have resulted in a spike of trade deficits and foreign debt, leading to a quicker depletion of the reserve funds against shrinking energy export revenues. This in turn would have contributed to a more dramatic decline in living standards, threatening social unrest.
Therefore, the real motives behind the Russian government’s decision to limit the import of goods in a deliberate asymmetrical move – the sanctions – has more to do with the domestic political calculus rather than with a response to focused Western policies following the annexation of Crimea and the intrusion in Eastern Ukraine.
The problems facing Bulgarian exporters have mostly been confined to Russia’s unpredictable business climate, the exorbitant hidden costs of entry into the Russian market and the impossible to identify and mitigate political risk. The predatory and oligarchic business model in Russia reduces profit margins, making it impossible to plan long-term and optimize cost structure.
Bulgarian exporters have a long negative experience understanding the arbitrary nature of Russia’s “on and off” imports policies, evidenced by the punitive actions of infamous head of Rospotrebnadzor (RPN) Gennady Onishchenko, who at different times in the past has banned or threatened to ban (making contracts a guesswork) different exports items, including from Bulgaria, from meat to wine to baby food. Most of RPN’s actions echoed the Kremlin’s concurrent whips of displeasure – starting with Bulgaria’s entry into NATO, then into the EU and later in line with peaks of Russia’s anger over specific issues in the multilateral and bilateral agenda. In 2006 and 2007, Onishchenko banned with little-to-no advance notice the import of pork and other meat products from Bulgaria and Romania, to mark Russia’s anger over the two countries’ entry into the EU.
Far more often than through formal bans, Bulgarian exporters have been subject to maltreatment and arbitrary acts by Russian customs authorities, acting on orders from Moscow, often in freezing temperatures, forcing delays, loss of goods and compromising contracts.
The losses incurred due to this unpredictable and often hostile business environment in Russia could easily measure in the billions of dollars, but more importantly – Bulgarian exporters have learned the hard way a simple lesson that the often hyped margins and talk of the insatiable Russian market is a myth, and the risk-reward is negative.
Overreliance on perceptions, instead of ground facts, has forced many exporters into grave financial losses and often into earlier bankruptcies, due to delay or lack of payments and total absence of reliable legal recourse in trade disputes. Taking Russian partners in default to Russian court is a lifelong experience in itself.
There are two famous cases – the Russian ban on imports of Georgian and Moldovan wines – that are exemplary in understanding the fortuitous end effect of Russian sanctions. Instead of destroying the wine industries in those two countries, producers successfully diversified export markets.
For many CEE producers learning to live without the Soviet and later Russian market after decades of total dependence on it, has brought a tough learning curve. With time, they have understood that the cost of a “Russia first” export strategy has come back to haunt them.
Partially due to their labor in the Russian market, Bulgarian producers have shifted their focus to the EU, North America, Middle Eastern and even Far East markets – which offer far more predictable terms of trade. The Kremlin’s sanctions have forced earlier diversification of export routes, creating flexibility and predictability for Bulgarian producers.
Moreover, lowering the risk and dependence on Russia for trade has proved a favorable background for Bulgaria’s recent high economic growth rates.
Declining purchasing power of Russian consumers and high political risk of the Russian market are not going to walk away any time soon. Even without the Damocles’ sword of sanctions Bulgaria has learned in the last 20 years that the growth potential of the Russian market for Bulgarian goods and services is limited and breakthroughs are beyond reasonable expectation.
Thus Russian sanctions have ultimately played a positive role, forcing addicted Bulgarian producers to look into other opportunities. The experience has proven worthwhile and rewarding, with total exports, according to the National Statistical Institute, declining 0.7 % in 2014, yet returning to a healthy growth trajectory in 2016.
At this level of exports to Russia – between 500-600 million dollars — and with Russia stagnating for years and there being many untested niches in the EU and global markets, Bulgaria is practically invincible to new punitive Russian sanctions, as it could forgo the Russian market altogether at a limited cost if push comes to shove.
At the same time, Russia would find it far more difficult to identify alternative markets for its oil and gas exports to Bulgaria.