Russian restrictions on grain exports underscore concern about stability

While markets have been fixated on precipitously collapsing energy prices and the corresponding whiplash movements of the Russian ruble, the Kremlin has taken demonstrative (yet relatively unnoticed) steps to restrict its grain exports. These restrictions, which began with soft impediments but eventually were ratcheted up to export tariffs taking effect on Feb. 1, offer insight into the government’s concerns about political and social stability amidst the backdrop of the current recession. However, these export impediments are unlikely to contain food prices nor maintain the government’s current sky-high popularity ratings.

{mosads}Russia ranks as the world’s fourth-largest grain exporter due to significant investment in the agricultural sector over the past decade, and as such has become a critical player on international grain markets. Due to favorable weather conditions, Russia is currently enjoying a bumper grain harvest exceeding 105 million tons — the second-best post-Soviet crop. The bumper crop and the collapsing ruble significantly boosted grain exports in the fourth quarter of 2014 as traders attempted to take advantage of arbitrage opportunities due to the spread between ruble-dominated domestic prices and dollar-denominated export prices. Given concerns about rapidly increasing inflation and the surge in grain exports, the government stepped in to curtail exports.

Bread is an iconic part of the Russian diet, and its price is closely monitored by government agencies due to its status as an unofficial indicator of the Russian economy. While bread prices are less important to the urban sushi-and-sake imbibing middle class, they are of primary importance to the working class and the elderly, two critical constituencies of the current administration. By increasing grain supply on the domestic market, the Kremlin is seeking to offer some economic cushion to two loyal voting blocs — notably at the expense of grain traders and not the federal budget. Bread consumption among the aged and working class is likely to increase as some food items will be priced out of reach due to decreased purchasing power; therefore, bread prices will be especially hard felt by these groups.

The recent run on buckwheat is illustrative of the genuine concerns that the Kremlin has about food prices and social stability. Buckwheat is another product rich in Russian lore, but whose consumption is relatively moderate. Nevertheless, rumors in November of a poor buckwheat harvest sparked hoarding, with the grain disappearing from shelves in major urban centers while prices increased twofold. Even though officials pointed to adequate supplies and a harvest projected to exceed domestic demand significantly, consumer panic prevailed. Such panic is indicative of the current mood of the population, in light of fears about spiking inflation and currency devaluation.

Non-market interventions to contain grain prices will likely have little effect on the price of bread. Beyond flour, bread production requires various components, many of which are imported or are increasing in price due to the ruble’s devaluation. Similar to oil, world wheat prices are quoted in dollars and will continue to serve as a gauge for domestic prices. Moreover, it is far from certain that traders will sell on the domestic market. They may well maintain stocks in warehouses in a cat-and-mouse game with the government as they try to wait out the export duties, which are due to end July 1, 2015.

Since the December announcement of imposing export tariffs of no less than 35 euros per ton, the domestic grain industry maintains that the government has stepped up efforts to impede exports by citing sanitary concerns, failing to issue export licenses and frustrating transportation efforts. The Kremlin is actively choosing to sacrifice hard currency earnings opportunities (grain exports in 2013 exceeded $4 billion) as well as inflect reputation risk as a reliable grain exporter in an attempt to contain domestic prices and support.

Governments have a legitimate responsibility to ensure the food security of its population, but the near-record Russian harvest demonstrates that food security is not a concern. Rather, the Kremlin is attempting to control grain prices as the economy enters what will likely be a brutal and lengthy recession. As the full effects of the recession begin to play out in 2015, there is widespread concern that popular support for the Kremlin may shift in light of anticipated economic hardships.

Colley is managing director of Highgate Consulting.

Tags Agriculture Economy of Russia Grain trade Kremlin ruble Russia Wheat
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