To Russia, with love.

Russia Sanctions' Big Winners Smell Like Fish

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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If you want to understand why economic sanctions are silly, look no further than the Faroe Islands, the unexpected beneficiary of Russia's ban on Western food imports.

Back in August, Russia responded to Western sanctions by banning a long list of food imports from the offending countries. The ban has created problems for all involved, causing prices to surgein Russia and creating gluts in the West that have exacerbated deflationary pressures.

The trade in fish has been among the most affected. Russia was the biggest export market for salmon producers in Norway, a non-European Union country that fell under the ban because it chose to participate in punishing Russia for its aggression in Ukraine. In August, its seafood exportsto Russia fell 82 percent from a year earlier. Crafty Norwegian fishermen appearto be redirecting some of the exports through Belarus, which has a customs union with Russia. Nonetheless, the constrained supply has affected fish prices. In Russia, they were up 14 percent in September from a year earlier. In Norway, salmon prices dropped sharply:

Meanwhile, those who chose not to play the sanctions game stand to gain. Consider the tiny Faroe Islands, an autonomous part of Denmark with a population of 50,000. Though they are part of EU member Denmark, which handles defense, policing, monetary policy and foreign affairs, they have kept out of the EU because the local government disagrees with the bloc's common fisheries policy. So the Faroes were not bound by Denmark's decision to join the Ukraine-related sanctions against Russia.

"I have a responsibility to my people and I don’t believe in boycotts,” Faroese Home Rule Prime Minister Kaj Leo Holm Johannesen told Bloomberg News. “They always end up hurting the wrong people.” He knows of what he speaks. Last year, the EU imposed a boycott on the Faroe islands because of a dispute over fishing quotas, banning Faroese fishing vessels from European ports. The ban was lifted in only August.

The Faroese, as well as Icelanders and the fish farmers of remote Chile, are now taking in more Russian orders than ever before because of the food embargo. The chief executive of one of the biggest Faroese producers, Bakkafrost, predicted last month that his firm's Russian business would triple because of the sanctions.

The new Cold War is taking place in a different, smaller world. Today, if politicians act to disrupt trade flows, it's like cutting off power to a home that has a reserve generator. It takes some time to get it going, and it may cost a bit more to run, but the damage is fleeting.

European food producers will change the geography of their exports. Russian importers will source most of the necessary products elsewhere. Once the new relationships are established, prices will settle, though probably not at previous levels. Financial flows are harder to change, but as Silvia Merler of the Bruegel think tank in Brussels pointed out recently, Russia was already reorienting itself toward China when Western financial sanctions made it impossible for Russian companies to borrow in Europe and the U.S. According to a Faroese proverb, "It's a poor mouse that doesn't have more than one hole."

Once the economic ties are rewired, the bite of sanctions, not unbearable for either side even now, will hardly be felt at all. Ukraine will make a deal with Russia that will enable both countries to move on. Only a climate of distrust and mutual bitterness will remain. Both Russia and the West will wonder if the economic disruption served any purpose.

The Faroese, for their part, will have no regrets. Bakkafrost stock, for example, is on a run:

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net