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Russian sanctions ramping up leaves eurozone farmers in hot water

The immensely damaging trade war between Russia and the west is escalating and threatens to go way beyond just food sanctions. President Vladimir Putin yesterday slapped on food sanctions, banning imports of dairy, fruit, vegetables, meat and fish products from the EU, US, Norway, Canada and Australia. If this continues and indeed escalates the EU will in no uncertain terms suffer hugely, currently Russia accounts for almost 10% of EU agricultural exports, valued at €11.8bn.

Russia somewhat is in a position where it can afford to be reckless on this front, with Ukraine as Russia’s breadbasket right on its’ doorstep there will certainly be no repeats of 1932-33. The sucker punch will come in the form of cancellation and sanctions on aerospace, shipbuilding and auto sectors. Leaving the French with a rather sizeable ship worth €2bn with all the markings in Russian, unless Georgia want it, calls are being made currently.

The broader effects these sanctions will have on the Eurozone are impossible to quantify, however we can have a pretty good guess that it will not be beneficial for the bloc. The main concern is the impact the sanctions will have on inflation, currently sitting at 0.4%, economists believe the impact may push the single currency into a deflationary spiral. Threatening any hopes of a recovery. The principle being food prices will rise as farmers have an excess of produce that they cannot shift, deflation. Mario Draghi choose not to remark on the events of yesterday accept for stating the zone was in a climate of “heightened geo-political risk” typically understated.

Mario Draghi added more fuel to the possible QE fire yesterday, but hasn’t yet put a match to it. The head of the ECB spoke about the governing council doing more groundwork on asset purchases and gave a generally more downbeat assessment of Europe’s prospects. Geo-political events, specifically those closes to home – Russia and Ukraine – are the biggest potential drag factors on the European economy and the recovery as it stands is “weak, fragile and uneven” – and this is before the Russian effect even kicks in fully.

Commerzbank yesterday warned that the German economy may even have contracted in the second quarter, which is fairly worrying, given that they really are the only Europe economy that has been able to stand on its own two feet for the last few years. For Mr Draghi though, deflation and not growth is going to be the trigger for asset purchases and with European inflation still keeping its head just above zero for the time being, we’re not likely to see any action before September at the earliest.

Unsurprisingly the BoE headline Interest Rate did not move from 0.5%, however pressure is mounting. We have not been issued with the minutes and perhaps more importantly the voting numbers which will be released in two weeks’ time. A recent poll, suggested the split in votes would take place in the August meeting. With Britain’s economy set to grow by more than 3% this year, markets are expecting a raise to come as early as the end of the year. However the nay sayers are still in force, with the British Chambers of Commerce stating that given continued wage growth pressures, calls for a higher rate are unjustified.

Trying to steal back some of the limelight from the shock news that Boris will be running for a seat as an MP, and we venture to guess as PM too. Ed Miliband has taken aim at Alex Salmond, his main gripe that the issue of whether Scotland will be allowed to keep the pound of have to move to the euro, or indeed the Scottish point. This indeed is an area that we have seen no clarity on, Westminster have issued threats, which have all sounded extremely hollow, as does this latest sounding of the bugle. “If you care about social justice.. you can’t leave the economics to guesswork.

Today we have already seen the release of German Imports and Exports data both coming out better than expected, particularly imports 4.5 times expectations. Relatively quiet day on the data front, with UK trade balance and construction data, rather worryingly for me certainly the highlight comes in the form of Canadian unemployment this afternoon.