DATACRUNCH: Sanctions by numbers – grain

DATACRUNCH: Sanctions by numbers – grain
Russia is the world's largest exporter of grain but now it is threatening to restrict its exports to "friendly" countries, which is already playing havoc on the global markets. / bne IntelliNews
By Ben Aris in Berlin April 14, 2022

ED: This article is part of the series DATACRUNCH: Sanctions by the numbers that dives into the numbers and trends of UN voting, coal, oil, gas, grain.


Grain has not been included in the West’s sanctions imposed on Russia and is very unlikely to be, given that so many countries rely on Russian and Ukrainian grain. But Russia is threatening to restrict exports of grain and fertiliser for exactly this reason. Halting Russian grain exports could cause a global food crisis.  

Prices for wheat in the global grain market have already soared to decade-long highs as the war in Ukraine shuts down ports and threatens to disrupt this year’s grain harvest. Between them Russia and Ukraine account for a quarter of global wheat exports and an estimated 7mn tonnes of Ukrainian wheat will be taken out of circulation this year as a result of the war.  

The European Union warned that Russia's war against Ukraine is putting the world on the brink of a food crisis due to the collapse of Ukraine’s economy, the bombing of wheat fields and the blockage of ports.  

"[The Russians] are causing scarcity. They are bombing Ukrainian cities and provoking hunger in the world. They are provoking hunger in our world," Josep Borrell told reporters after a meeting of EU foreign ministers in Luxembourg on April 11, which had met to discuss more sanctions on Russia.  

The ballooning prices of agricultural prices have thrown the spotlight on Europe’s dependency on Russian agricultural production, a sharp about-face from Russia’s dependence on Europe in the 1990s.  

Prices of wheat, coarse grains and vegetable oils have all soared, with shortages already appearing in some EU supermarkets. The disruptions have contributed to the rise in the UN’s food price index in March to its highest level since 1990.

“The FAO Food Price Index averaged 159.3 points in March, up 12.6% from February, when it had already reached its highest level since its inception in 1990. The index tracks monthly changes in the international prices of a basket of commonly traded food commodities. The latest level of the index was 33.6% higher than in March 2021,” the Food and Agricultural Organisation (FAO) of the United Nations said in a report.  


But actual food shortages will be a regional affair. “Most EMs are not heavily dependent on Russia or Ukraine for their domestic food supplies, but there are key pockets of vulnerability due to large wheat, corn and vegetable seed/oil exports to Turkey, most of the Middle East and North Africa and parts of Asia,” Liam Peach, an emerging market economist with Capital Economics, said in a note. “And even if supplies are not disrupted, higher global food prices will push up food inflation in many EMs to multi-year highs and could exacerbate external imbalances in some countries in North Africa.”

Weaponising food  

Russian President Vladimir Putin explicitly threatened to weaponise agriculture on April 5, saying that Russia would start restricting its exports of fertilisers and grain to any country included in its “unfriendly countries” list released at the start of March.  

Russia's external trade turnover with "unfriendly countries” that have either sanctioned or protested against the military invasion of Ukraine accounted for 54.2% of the total in 2021, according to a study by Finekspertisa. Friendly countries account for 32.4%. The EU is Russia’s biggest trade partner, accounting for 36% of turnover in 2021, followed by China with 18% and the CIS with 12.2%.  

Notably, friendly or neutral countries account for 73% of Russia’s grain exports, making agricultural restrictions a powerful Russian sanction the Kremlin can use to strike back at its detractors and as leverage over those countries that are still sitting on the fence.  

"They will inevitably exacerbate food shortages in the poorest regions of the world, spur new waves of migration and in general drive food prices even higher," Putin told the meeting.

"In these current conditions, a shortage of fertilisers on the global market is inevitable," Putin said. "We will have to be more careful about food supplies abroad, especially carefully monitor the exports to countries which are hostile to us.”  

Fertiliser prices are at their highest since the global commodity bubble in 2008, with the cost of nitrogen fertilisers rising by 253% in Europe in 2021. The Russian government announced in December 2021 that it would restrict nitrogen fertiliser exports for a period of six months to ensure supplies at home. The situation on the global fertiliser market is so tight that the US Treasury Department (USTD) has labelled Russian fertilisers as the “first necessity” for the US and their export has been specifically exempted from the sanctions regime. In the US, supplies from Russia accounted for 6% of total potash, 20% of phosphate and 13% of urea fertiliser imports.

Former president and prime minister Dmitry Medvedev was even more explicit in comments a week earlier.

"We will only be supplying food and agriculture products to our friends," Medvedev said on social media. "Fortunately we have plenty of them, and they are not in Europe or North America at all,” adding that the payment for these products will have to be made in rubles as well as the national currencies of Russia’s “friends.”

Russia already has experience of using agriculture in its confrontations with the West. In a tit-for-tat move after Europe hit Russia with the first round of sanctions following its annexation of Crimea in 2014, Moscow hit back by banning all imports of European agro-products, a ban that cost the EU some €100bn a year of exports. Famously, cheese practically disappeared from the Russian market overnight, with a domestic cheese-making industry taking about two years to set up. Since then Russia has been investing very heavily in agriculture and is now a net exporter in most products (tomatoes being one of the exceptions) and has become a major player on the international grain markets as a result.  

Food vulnerability

The issue with food is not how much a country imports from Russia and Ukraine per se, but how big a role imports play versus domestic production.  

Latin American countries are among the world’s most food self-sufficient, but Turkey and most of the Middle East and North Africa are dependent on imports of many foods from Russia and Ukraine – especially for cereals and vegetable seeds/oils. Asia, Africa and Central Europe sit somewhere in between, according to Capital Economics.

“We estimate that imports from Russia and Ukraine account for 20-30% of domestic wheat supplies in Turkey, Indonesia and parts of Africa and 40-50% in Egypt, the UAE and Tunisia. Imports of sunflower seeds/oil account for 30% of domestic supplies in Turkey, Poland, China and Korea, 60% in MENA and more than 70% in Tunisia, India and Malaysia. Other vulnerabilities include soybeans (Turkey and Poland), corn (Tunisia) and cocoa products (the UAE),” says Peach.  

Egypt is a good example, as although it is a famously big producer of grain since the days of Cleopatra, it is also very big importer, sourcing 15% of its needs as imports, but in very large volumes. It has been desperately looking new suppliers in the last month, but without luck, and the authorities say it now only has three months of reserves left.  

Analysts fear that potential shortages caused by Russia could spark a new Arab Spring in the Middle East and North Africa (MENA). The 2011 protests were born of soaring sugar and bread prices and today’s prices are already back at 2011 levels and beyond. Libya, Yemen and Lebanon are all heavily dependent on Ukrainian wheat imports but are not stable economies and several of the countries in that region were already having food security problems before the war in Ukraine began.  

More generally, a Russian grain ban would stoke global inflation that was already high thanks to the effects of the coronavirus (COVID-19) pandemic in 2020. Central banks around the world are already prophylactically hiking growth-killing interest rates. Even the US is indirectly exposed as it is already suffering from uncomfortably high levels of inflation. US inflation soared over the past year at its fastest pace in more than 40 years to 8.5% in March, with costs for food, gasoline, housing and other necessities squeezing American consumers and wiping out the pay raises that many people have received.

As bne IntelliNews reported, while Russia and Ukraine together account for about a quarter of global exports of wheat, the 7mn tonnes of grain that is expected to disappear from the global markets this year as a result of the war is only 0.9% of the total global production and farmers have sown more wheat than usual this season, which will compensate for the shortfall to some extent.  

For many countries importing Russian wheat, staying off the Russian “unfriendly country” list has become important. Several MENA countries that voted “for” the condemnation of the invasion chose to abstain in the Human Rights Council vote. Many of these countries also have political reasons for staying on the fence as bne IntelliNews reported in a survey of MENA country’s attitude to the conflict shortly after the fighting started. They view the war as a European problem and worry about the spill-over in the form of higher global inflation, lower global growth and the disruption to global supply chains. Moreover, many countries have been on the receiving end of military intervention by the Western powers and so are more sympathetic to Moscow’s effort to face down the US in particular.

Egypt abstained from the Human Rights Council vote. China is the world’s second-biggest grain importer and threw its grain markets open to Russia one the same day the war in Ukraine started. A large number of African countries are likewise big importers of wheat and were notable for abstaining in both votes.

Redirecting grain  

As previously discussed in the other bne IntelliNews DATACRUNCH articles in this series, “sanctions by the numbers” (UN voting, coal, oil, gas, grain), one of the main problems with Russia’s oil and gas exports is that it is very hard to redirect them to new markets. With grain the task is much simpler, as grain is a much more mobile product and much more easily stored.  

Anticipating a spike in global grain prices, China, a top global importer of grain, threw open its grain market to Russia and lifted of all restrictions on Russian wheat and barley on the day that Moscow sent its troops into Ukraine. Previously Beijing had only allowed seven Russian regions, excluding the largest growing areas, to export to China. Shipments had been limited because of China’s concerns about the dwarf bunt fungus in parts of Russia. Russia has long wanted to boost agricultural exports to China. During his trip to Beijing to watch the Olympics, Russian President Vladimir Putin signed deals with China’s President Xi Jinping to export poultry and vegetables, starting with peas this year, as well as providing high-speed trains to deliver the produce.  

The announcement by China’s General Administration of Customs (GAC) was made public on February 24, only hours after Russian troops crossed the border into Ukraine. However, the agreement was part of a package of deals made during Putin’s visit to Beijing for the Olympics earlier the same month.

Countries that had been leading wheat exporters to China, such as France, Canada and Australia, likely will see their share of the Chinese market reduced. Russia also has expanded in several other markets in recent months, gaining a bigger share in Saudi Arabia and Algeria.

The deal is a win-win for both countries. It helps Beijing secure food supplies at a time when global food prices are already near decade-long highs. Wheat futures jumped by about 5% on the Chicago Board of Trade on February 24 after Russia attacked Ukraine.

Over the past 20 years, China’s wheat consumption has grown from around 110mn tonnes per year to a record 150mn tpy last year as the country’s feed and residual wheat demand surged by around 22mn tpy. Much of the grain is used to feed livestock as the demand for meat is driven up by the emerging middle class’ newfound prosperity. Grain for feed accounted for some 40mn tonnes in 2020-21.  

China has been an important destination for French wheat over the past two years, and the significance of the market to French farmers escalated in 2021 as the European Union’s biggest wheat exporter lost market share into Algeria, where Russia has also made inroads with wheat exports.  

While Algeria remains the biggest destination for European Union wheat in the 2021-22 marketing year, China has climbed to third place, just behind Egypt, the biggest importer of grain in the region and another Russian client, with which Russia enjoys good relations. At the first Russo-Africa Investment Summit in 2020, Putin co-hosted the event with Egyptian President Abdel Fattah el-Sisi that was attended by all but ten of Africa’s 54 countries. A second Africa summit is planned for November this year.  

The move is also a big blow to the United States, which has been vigorously trying to increase wheat sales to China as part of the Phase One trade deal struck between the two countries in January 2020.

Australia will also be hit, as it was the primary supplier of wheat to China in 2021, shipping 2.9mn tonnes, followed by the United States at around 2.7mn tonnes, and Canada just behind on 2.5mn tonnes. 

However, with the self-imposed wheat export restrictions currently in place in Russia to ensure food security during the war, the sales campaign to China is unlikely to start in earnest until the 2022-23 marketing year, which starts in July.  

According to the Russian Union of Grain Exporters, it will probably kick off with one or two test deliveries this season, but will very quickly move to volumes in excess of 1mn tpy, or just over a tenth of all Chinese wheat imports of 9.8mn in 2021.  

If anything, the barley exports are even more important. China’s barley imports for the 2021 calendar year jumped a whopping 54.5% year on year to 12.48mn tonnes on the back of increased feed demand as the state reserves ran low.