Finland fears sanctions crisis as Putin curbs food imports

Wed Aug 6, 2014 1:04pm EDT

* Putin orders food import curbs in muted retaliation

* Central bank warns bans will hurt inflation fight

* Finland says EU must share burden of retaliation

* Western bank still expects robust Russia profits

* Coca-Cola cuts TV commercials in Russia

By Sakari Suoninen and Dmitry Zhdannikov

ESPOO, Finland/MOSCOW, Aug 6 (Reuters) - Finland warned on Wednesday that Russian retaliation against EU sanctions could push its economy into crisis, while President Vladimir Putin ordered curbs on food imports from countries that join the Western action over Ukraine.

Despite the deepening crisis, Putin held back from imposing any broad ban or restrictions that might cause food shortages or risk stoking inflation.

East-West relations, already at their worst since the Cold War, soured yet further on Wednesday as NATO said Russia might use the pretext of a humanitarian mission to invade eastern Ukraine.

Although rhetoric levels are rising, Putin's response to EU sanctions targeting Russia's banking, energy and defence industry remains relatively muted. On Wednesday, he signed a decree banning or limiting imports of agricultural products from countries that have imposed the sanctions.

Putin ordered his government to come up with a list of goods to be banned for one year, the Kremlin said. However, with the central bank warning that import restrictions could push up food prices and general inflation, Putin said the list should not hurt Russian consumers - who are fond of U.S. chicken pieces known as "George Bush's leg".

Nevertheless, the prospect of tit-for-tat economic restrictions has raised concern among smaller European Union nations that have close trading ties to Russia. Finland, which shares a long border with Russia, said it feared a repeat of the turmoil suffered by most Western economies in 2008-09.

"This has the potential - and I stress potential - to become Economic Crisis 2.0," Prime Minister Alexander Stubb told reporters in the Finnish city of Espoo.

Neutral Finland traded heavily with its huge neighbour even during the Cold War, and suffered badly when the Soviet Union collapsed almost a quarter of a century ago. Today, Russia is Finland's third largest export market, while Russian tourists spend roughly 2 billion euros ($2.7 billion) a year in Finland.

Stubb said he expected Moscow to retaliate but defended the sanctions, imposed after Russia annexed Crimea from Ukraine in March and tightened after a Malaysian airliner was shot down over territory in eastern Ukraine held by pro-Moscow rebels.

However, he made clear the burden of retaliation had to be shared among EU members: "If sanctions hit Finland disproportionately, we will seek aid from our EU partners."

SET UP WELL

So far, smaller or poorer countries have featured prominently among those targeted by the Russian response.

Veterinary watchdog Rosselkhoznadzor said it was suspending beef and cattle imports from Romania, citing an outbreak of mad cow disease. Moscow has already imposed bans on Ukrainian juice and dairy produce, Polish vegetables and Australian beef, saying it might target Greek fruit and U.S. poultry.

The central bank warned that bans on importing such cheap products could make it harder to control inflation, which fell to an annual 7.5 percent in July, but remains well above the 6.5 percent increase seen in 2013.

Rosselkhoznadzor said Russia would look to other suppliers to compensate for the bans. "We are talking about a significant increase of meat and dairy imports from Brazil," said Alexei Alekseenko, spokesman for the watchdog.

The sanctions have effectively frozen Russian banks out of EU financial markets, and yet one Western bank active in Russia said it expected to keep making solid profits there despite losing some business.

Bank Austria, the central and eastern European arm of Italian bank UniCredit, said its pretax profit in Russia rose 3 percent to 247 million euros in the first half of this year.

That was more than a quarter of its total pretax profit, making Russia its most profitable market.

Bank Austria said it would be able to keep raising money locally. "Given what we know now about sanctions, we assume that in Russia we will continue to have a very significant profit contributor. We feel we are set up well," Chief Executive Willibald Cernko said.

Federico Ghizzoni, UniCredit's chief executive, also expressed confidence. "The bank seems strong enough to go through this storm," he said in Milan. "This is not to say that we are not looking at the situation with concern, but there is no systemic problem," he said, adding the bank estimated a hit of up to 10-15 million euros in lost revenues.

In a research note, Berenberg analysts said UniCredit was among the European banks most exposed to Russia - whose economy is already teetering on the verge of recession.

While the direct effect of sanctions would be limited, it said the indirect fallout could include weaker demand for Russian debt, and funding restrictions and deteriorating asset quality - meaning more Russian borrowers are likely to default on their loans.

In a sign of the economic slowdown, soft drinks giant Coca-Cola Co said it had taken advertisements off four television channels there as a fall in second-quarter sales prompted a rethink of its marketing plans.

Two of the channels named by the Russian business daily Kommersant are owned by St Petersburg-based Bank Rossiya, which is owned in turn by Yuri Kovalchuk, a close ally of Putin.

Kovalchuk was hit by U.S. sanctions in March and blacklisted by the EU last month. However, a Coca-Cola spokeswoman said by email that "there is no political motive in this decision". (1 US dollar = 0.7487 euro) (writing by David Stamp; additional reporting by Michael Shields, Angelika Gruber, Maria Kiselyova, Silvia Aloisi and Gianluca Semeraro; Editing by Kevin Liffey)

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