COMMENT: Can Russia ban wheat exports under new Customs Union?

By bne IntelliNews September 14, 2010

Andrey Goltsblat of Goltsblat BLP -

Russia has just been through its worst drought for decades. As temperatures soared, more than 17 Russian regions declared a state of emergency and, not surprisingly, Prime Minister Vladimir Putin has taken firm action in the face of grain supply fears.

Wheat prices have risen more than 40% since June this year while the price of barley - used for feeding animals - has more than doubled.

Putin has come under criticism from many sides since he announced at the beginning of August that he has signed an order banning exports of major agricultural grain crops, including wheat and wheat-rye flour, from the August 15 to December 31. The World Bank wants countries such as Russia and the Ukraine to refrain from protectionist measures, lest they trigger a repeat of the 2007-2008 food crisis when countries from India to Argentina imposed trade restrictions. But Russia has, with its agreement "On the Procedure for Imposition and Application of Measures Affecting Foreign Trade in Goods within the Single Customs Territory in Respect of Third Countries," gone ahead with the export ban.

The problem is whether the Russian government can actually make this export ban work following the establishment of the Customs Union at the start of this year between Belarus, Kazakhstan and Russia. The Customs Union is considered a major step forward for economic integration between the three countries. It enables them to trade more easily with other countries, and it also means unrestricted circulation of most of the goods within the Customs Union. However, each of the countries has the right to apply some non-tariff regulation measures unilaterally.

Russia has, in effect, exercised its right, as a member state of the new Union, to impose a unilateral ban on exporting certain goods - in this case grain crops - in order either to prevent or reduce a marginal shortage of food products on the domestic market. But can it force Belarus and Kazakhstan to ban grain exports? Well, it did try.

All for one, and one...

After Putin announced the ban at the beginning of August, Russia notified its Customs Union partners officially about the decision and proposed that they take similar steps, banning exports of grains grown in Kazakhstan and Belarus. These proposals were considered within the framework of the Customs Union Commission (CUC), its supranational regulatory body, but the two countries did not support Russia's proposal of embargo on grain exports at the level of the Customs Union when they all met on August 17 for the 18th session of the Customs Union Commission in Moscow.

So if they aren't going along with a ban, what are Belarus and Kazakhstan doing about grain exports? The answer is two-fold. First, while Russia does not have the power to force its other Customs Union members to enforce a similar export ban of their own grain, Belarus and Kazakhstan customs authorities are required, by virtue of the Customs Union legislation, to prevent the export of any grain that originates in Russia to any other countries. So grain is not currently being exported from the Russian Federation and the Russian customs authorities are monitoring Russia's frontiers.

Second, the countries have made their own decisions about their grain crops. The Kazakhstan authorities declared their intention at the beginning of August not to ban exports of grain and have not changed their minds now that most of the harvest has been gathered in. Kazakhstan plans to export 8m tonnes of grain, 2m of which are destined for Russia. Russia's biggest region, the City of Moscow, is currently holding talks about purchasing from 100 to 300 tonnes of Kazakh grain.

As for Belarus, in the absence of a formal export ban the country has introduced strict administrative control over the sale of grain and a number of other agricultural crops. On August 16, the day before the CUC met, the Council of Ministers of the Republic of Belarus issued a resolution stipulating that grain and a number of other agricultural crops would be exported only with the permission of the Belarus Commission for regulation of the market for individual agricultural crops and their derivatives, consisting of, among others, the Republic's Deputy Prime Minister Ivan Bambiza and the Minister for Agriculture and Food Mikhail Rusiy.

There has been a lot of discussion about Ukraine's introduction of non-tariff restrictions on grain exports. Ukraine is of course not a member of the Customs Union, but it does belong to the Commonwealth of Independent States (CIS), which unites the majority of the former Soviet Republics, and is also a member of the WTO. The Ukraine's cabinet of ministers has drafted a resolution on introducing quotas for exports of wheat, wheat and rye mixes, and barley from September 1 through December 31 - and this is permitted by the WTO regulations. However, as of August 25, this resolution seems to have been put off indefinitely.

So how long will the Russian's export ban remain in place? The Russian authorities are hardly likely to abolish the export ban before January 2011. The harvest forecast for this year is 60m-65m tonnes, which is less than the amount consumed annually within Russia itself - 77m-78m tonnes. Russia has about 21m tonnes of grain stores from previous harvests, as well as 9m tonnes in the state intervention fund. These stocks will evidently meet the state's demand for grain this year but, according to Russian Prime Minister Vladimir Putin, the risk of a bad harvest next year cannot be excluded.

A debate over exemptions to the ban or alternative controls, like imposing extra taxes on grain exports, continues to rage. Whatever the outcome, the Customs Union has unexpectedly had to face real administrative challenges from its very first year of operation.

Andrey Goltsblat is managing partner at Goltsblat BLP

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