The cost of import prohibition for political reason: CGE analysis of the Russian ban on agri-food products

Abstract

In August 2014, Russia imposed a one year import ban on most agri-food products from countries enforcing Ukraine-related sanctions against Russia. A computable general equilibrium (CGE) model is used to simulate effects of this retaliatory policy shift across the European Union (EU), Russia and a selection of key trade partners. Sensitivity analysis of factor mobility is performed to better capture short term and long term implications of this import prohibition, while latest trade data are carefully prepared and exploited. In the short term, due to high factor immobility, production has very little leeway to adjust, provoking notable variations in prices which absorb most of the import ban shock. At EU level, price and production decrease by about 1.9% and 0.3% respectively, while in the longer term (if the ban is maintained beyond one year) these figures amount 1.4% and 1.2% respectively. Interestingly, results indicate that Russia is the region with the highest welfare loss (about 3.4 billion euros) while the EU can recover around 25% of the lost trade volume with Russia through expansion of exports to other markets.