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A series of high-level talks between Russia, the US and the military bloc NATO concluded with the resumption of strong rhetoric from both sides amid seemingly dire warnings of impending military action in the Black Sea.
Reports of a major military build-up along the Russian border with Ukraine through late 2021 and widely circulated and excruciatingly detailed invasion plans have ramped up tensions and added fresh support to global wheat prices.
The pressure was enough to force this week’s meetings between the US and Russia, which bypassed both the Ukrainian and European Union governments, hinting that Moscow’s ultimate aim goes beyond military conquest.
While it may be hard to see through the smoke and mirrors, at the heart are some of the most productive agricultural regions along with key logistics connecting the fields of the black earth region to the global market.
A significant portion of world agricultural productive capacity is at risk of being caught up in any conflict, with geopolitical fears already filtering into firmer wheat prices.
According to USDA data, 30% of the world’s wheat exports come from either Russia or Ukraine, alongside just short of 31% of world barley exports.
Ukraine in the 2021-2022 marketing year is expected to produce 40 million tonnes of corn – a figure which local government data suggests had already been surpassed before the harvest was complete – and will contribute 16% of the world’s corn export supply, some of which is bound for China.
For sunflowers, that figure rises with the two countries collectively accounting for 58% of total global production and 33% of exports – and in processed sunoils and sunmeals, that portion rises to 78% and 81% of world exports respectively.
What happens next will be key for anyone that looks to the Black Sea for direction or critical supply, with news circulating on Friday that Ukraine’s government websites had suffered a major cyberattack coming just hours after US-Russian talks wrapped up with seemingly little progress.
The worst-case scenario, and one that has been widely touted across international media, is a full-scale invasion of Ukraine – a catastrophic outcome that would likely have wide-reaching consequences on both sides.
Despite apparent precedent in the use of recent Russian military force in Crimea and Georgia, strategic analysts hold the view that conflict of any form would be a last resort.
“A conflict is unlikely to happen; I assess this as a medium-low risk with high certainty,” one security analyst told Agricensus, but the deployment of a large number of military personnel and hardware fulfils a number of objectives.
“In particular, Putin wants to ensure that Ukraine doesn’t join NATO – a step that is highly unlikely due to the ongoing conflict and NATO’s desire to avoid getting pulled into a conflict via Article Five,” the analyst said, referring to the military organization’s mutual defense clause.
Alongside that blunt aim, the reported presence of large-scale military units continues to intimidate Ukraine while also forcing the country to continually turn to the international community for support.
“It makes Ukraine seem to ‘cry wolf’ every time they feel threatened,” the analyst said, adding that “this weakens their legitimacy making international allies less likely to come to their aid until too late.”
Commentators have also pointed to Georgia, another Black Sea country bordering Russia, which was the subject of a significant military incursion by Russian forces back in August of 2008.
“It was controversial in Russia itself, but they did what they wanted to do and they left,” Dr Eleanor Bindman, senior lecturer in politics and public administration at Manchester Metropolitan University and an expert in Russian politics told Agricensus.
But the Georgian experience cannot be compared to full-scale invasion plans.
“Ukraine is wildly different. It’s a much bigger country; people in Russia don’t want this to happen and the Ukrainians would absolutely fight back. The idea they could just walk in is completely wrong,” Bindman said.
Any full-scale invasion would represent a major drain on Russian finances and resources, and could potentially add further fuel to an increasingly fractious domestic situation – where high energy and food prices have already forced the government into imposing a stringent export tax on key food staples.
Furthermore, Russia’s neighbours show only limited signs of stability themselves – a major incursion into Ukraine could lead to a commitment of troops that would draw away the Russian muscle that has propped up regimes in Belarus and Kazakhstan in recent months.
Talk of deploying Russian troops to Cuba and Venezuela would further stretch resources and supply lines.
All of this comes against a backdrop of mounting energy and food prices across the Eurasian Economic Union and a handling of the global Covid pandemic within Russia that international observers have labeled as “catastrophic”.
Despite pioneering the first vaccine, dubbed Sputnik with a firm nod to Russia’s past scientific achievements, take-up has been low, and the country’s death toll is set at over 310,000 according to Johns Hopkins University, surpassed only by India and the US.
Moreover, the economy – hit hard by sanctions after the annexation of Crimea – has shown signs of stabilizing and recovering more recently, despite the run-up in food and fuel prices and the onset of Covid.
“You may like Putin or not, but he is not a fool at all,” one Russia-based trader told Fastmarkets Agricensus.
“In our country, the situation is starting to normalize, the economy is recovering, wages, pensions, etc. are growing. To take and destroy all this – why?” the trader said.
Despite the improvement in economic terms, rising food prices coming so soon on the back of the Covid outbreak could be bringing a domestic issue.
President Putin’s popularity has slumped to sub-50% approval rating, according to some sources, compared with 80% in the immediate aftermath of the Crimea invasion.
“Public opinion matters a lot and criticising [both] NATO and the build-up of troops is popular,” Bindman told Agricensus.
“It works, it’s a distraction. His personal approval ratings had already been on the slide for a while – he’s been seen as very distant, hidden away in a bunker… Things are changing, and they can change very quickly in Russia,” Bindman said.
The financial side of this is another significant factor, and Putin from his earlier days in authority recognised the vulnerabilities that a leader faced if they couldn’t feed their own people.
Russia’s rise as the world’s biggest wheat exporter is a huge turnaround from the days when it regularly relied on the US for food – USDA data still lists USSR as the seventh biggest buyer of wheat, and the first and third biggest corn buyer in flash one-day sales announcements.
Wheat today has become big business.
According to UN trade data, wheat exports brought in $7.9 billion to the Russian exchequer in 2020, up 23% on 2019 and meaning its contribution surpassed petroleum gas – at $7.8 billion.
At the end of 2021, wheat prices were some 50% firmer than the average of 2020, with the average of the Fastmarkets Agricensus 12.5% FOB Russian wheat assessment standing at $225 per tonne through 2020.
By 2021, that average had risen to $286 per tonne – a near 30% increase, but much of the price support has come through the second part of the year.
Buoyed by renewed weather fears and Russia’s export tax policy, wheat prices were already firm before escalating tensions across the region hit the headlines and sent the 12.5% price racing to $345 per tonne by the end of November – an even more striking 53% increase versus 2020.
While the impact of that price rise is mitigated by a decline in exports – exactly what the new export tax regime was intended to deliver – the slide in the value of the ruble against the US dollar since the escalation in tensions is likely to have delivered bigger returns domestically.
Currently, export data suggests that on a calendar year basis the country’s exports are lagging behind 2020’s pace to the tune of 5.3 million tonnes when comparing the January-October 2020 period with its 2021 counterpart.
On a ruble basis, the end-of-2021 FOB price of $338 per tonne equates to nearly RUB25,000 per tonne, up from the RUB22,0000 per tonne at the end of October when the market was assessed at $318 per tonne, and markedly up from the $254 per tonne at the end of October 2020, which equated to RUB19,485 per tonne.
Any military engagement would only drive the prices higher again, but with potential infrastructural damage guaranteed in any land-based invasion, and with draconian international sanctions threatened, would the Russian economy benefit from any further spike in wheat prices?
Another consideration is China – no other nation on earth is as acutely aware of the need to feed its people as China.
Recent trade spats have put the supply of food into the Asian giant into sharp focus and China has been forced to shuffle its supply options around virtually all oilseeds and grains.
Ukraine has benefited from that, as a stable supplier into a discerning customer, the Black sea country has long been a reliable trade partner for corn and increasingly a supplier of barley through 2021 amid trade issues with Canada and Australia.
Line-up data suggests China has already secured significant volume from Ukraine’s record-breaking new crop and any interruption to that supply is likely to cause inconvenience.
However, with rumours also surrounding China’s intentions around Taiwan, the US and EU response to any military action is also likely to be closely watched.
Through the early stages of the developing stand-off, traders in conversation with Agricensus highlighted some initial impacts as the military build-up got underway with reports of silos close to the border being emptied and supply shuffled elsewhere.
But as harvest has continued, and with big crops landing again, trade has got back to business with seemingly minimal disruption.
On the ground, life shows every indication of carrying on while the various threats and counterthreats play out on the international stage, but among Russian trade sources, there’s little apparent appetite for the rhetoric.
“I have two granddaughters. I have a son that’s draft age… I have a lot of military men among my acquaintances. Everyone just circles their fingers around their temples,” the Russia-based source said.
For those active in the front line, one Ukraine-based source pointed out, the sharpness of the rhetoric is blunted by the fact that the threat does not feel new.
“They have been hardened for seven years already,” the source said.
“You can get used to everything.”
This article was originally published to Fastmarkets Agricensus on Friday January 14.
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