The Italian economy is flailing without one of its most important customers.
Russians are living with less Ferragamo and no parmesan cheese as Italy has lost over $1.5 billion due to European Union sanctions aimed at punishing President Vladimir Putin.
“We are worried and we are afraid,'” Italian Industry Minister Federica Guidi, said in an interview in her office on Rome’s Via Veneto, the street known for its cafes and elegant shops where Russians can still occasionally be seen stocking up on designer brands before heading home.
For decades, the two countries enjoyed cozy trade relations, buoyed by the friendship between former Prime Minister Silvio Berlusconi and Putin. Russia’s rich donned high fashion straight out of Milan’s catwalks and craved delicacies such as Parma ham. Italy grew to rely on that steady and growing stream of imports.
All that came to a crashing halt last year as the conflict in the Ukraine drove a wedge between Europe and Russia. The U.S. and the EU slapped on sanctions. Putin retaliated by banning a range of foods, from meat to dairy products.
Italy, whose exports are the biggest economic driver, was hit hard. Even if sanctions were lifted down the line, there’s a risk Europe’s fourth-biggest economy has lost its Russian customers permanently to rivals, such as Switzerland, which is not part of the EU and not beholden to its laws.
“I’ve diversified the variety of my cheeses by adding some from Switzerland, Tunisia, Morocco and a bit from Russia but nothing can replace Italian cheeses,'” Alexander Krupetskov, the owner of a specialty cheese store in Moscow said by phone adding that his store continues to do well anyway.
“We may not have the same market share in Russia after sanctions are removed,” said 46-year-old Guidi. “That’s a very big concern.”
Italy’s exports to Russia dropped by 1.25 billion euros ($1.4 billion), or 12 percent, in 2014, according to statistics office Istat. This year may be even grimmer with sales of goods and services down 29.4 percent in the first four months.
Italian clothing, textile and leather exports to Russia fell 16.5 percent in 2014, food and tobacco sales declined 9.6 percent, while machinery and equipment-makers, which are the biggest exporters to Russia, lost 4.1 percent, according to Istat. Should sanctions continue throughout 2015, the decline in these exported goods will increase to 26.4 percent, 47.1 percent and 28.8 percent, according to data compiled by Bloomberg.
Guidi understands what’s at stake on a personal level too. Before becoming minister she was chief executive officer of her family business, Ducati Energia, which makes electronic components. She is also a native of the Emilia Romagna region, which produces the Parmigiano Reggiano grated on countless pasta dishes and now missing from Russian stores.
As Europe’s second-biggest manufacturer after Germany, Italy is affected by the sanctions more than many of its European peers since its economy is just emerging from a three-and-half year long recession, its longest on record.
“We’re trying to support as much as possible our industry in order to try to find some alternatives, some possible different markets in order to compensate,” Guidi said.
Piquadro SpA, a maker of leather bags based in Gaggio Montano, Italy, and luxury-goods company Salvatore Ferragamo SpA, based in Florence, are just some of the listed companies suffering from a drop in orders. Ferragamo CEO Michele Norsa said in a May 13 earnings conference call that Russian sanctions had an impact and contributed to a negative number for its fragrances business.
Guidi said Italy’s government is working behind the scenes, politically, to try and speed along a lasting truce in Ukraine that will permit the sanctions to be lifted. There might not be much Italy can do.
It is German Chancellor Angela Merkel, a Russian speaker, who is Putin’s main European interlocutor. She hosted the Group of Seven leaders June 6-7 in Bavaria and the message was clear.
The G-7 agree they’re “ready to intensify sanctions” against Russia “if the situation will require it,'” she said.
Putin dropped by Italy last week as part of a tour of Western Europe, a rare occurrence given the diplomatic tensions. His words might be of little comfort to Italian exporters.
“I expect that sooner or later we will come out of those restrictions that we are facing today,” he said, standing alongside Italian Prime Minister Matteo Renzi in Milan.
On Wednesday European governments reached a preliminary agreement to extend sanctions against Russia by six months to the end of January. Representatives of the 28 governments agreed to prolong the trade and investment curbs.
That’s bad news for Yulia Dzeban, who runs a gourmet food and wine store in Moscow.
“How can you replace parmesan that’s supposed to sit for 12 to 36 months?”she said by e-mail. “Have you tried Russian parmesan? It tastes like clay!”
By Lorenzo Totaro & Matthew Winkler