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Ukraine Update: High Risk of War

This week, the Ukrainian military forces resumed the anti-terrorist operation (ATO). The hottest spot at the moment is Slaviansk (Donetsk oblast). This city has strategic significance since it is equidistant from three big and very important centers: Donetsk, Dniepropetrovsk, and Kharkiv. At the moment, the Slaviansk is controlled by terrorists who keep as hostages several people, among whom is the American journalist Simon Ostrovsky who works for Vice online.

Discuss the Ukraine/Russia unrest in Marketing Talk.

To slow the ATO, terrorists began to use small children in day care centers as a “live shield,” a practice copied from the Palestinian terrorists’ tactic. At the same time, the Russian army is nearing the Russian-Ukrainian border threatening to invade if the ATO will not be stopped immediately. The situation is highly explosive. The full-scale war between Russia and Ukraine may start any moment.

IMPACT ON AGRICULTURE

How do all of these events impact the Ukrainian agriculture? The answer is: In no way in the short-term and significantly in the long run.

The seeding of corn and sunflowers has already begun.

The grain export in the 2013/14 marketing year is expected to be 30 mln tons (of the total grain crop of 57 mln tons), of which corn is 19 mln tons. The forecast for grains for the 2014/15 MY is practically the same: export 30 mln tons of the total crop of 57 mln tons. The corn export is forecasted at 19 mln tons and wheat at 9 mln tons.

The main corn importing countries are: the EU – 44%, Egypt – 14%, Korea – 11%, Japan – 9%, Iran – 6%, Israel – 3%, Syria – 2%, Tunisia – 2%.

The forecast for the oilseeds are as follows: rapeseed – 2.2 mln tons (of which 2 mln tons will be exported), soybeans – 3.2 mln tons (export 1.7 mln tons), sunflower – 11 mln tons.

The main destinations for the export of rapeseed are: the EU – 77%, Pakistan – 10%, UAE – 6%, Vietnam – 5%.

The main destinations for the export of soybeans are: the EU – 47%, Russia – 14%, Egypt – 14%, Turkey – 13%.

In the 2014/15 MY, China will begin the import of the oilseeds.

The annexation of Crimea by Russia forced the Ukrainian grain traders to redirect the grain flow to “Big Odessa” (Odessa, Illichivsk, and Yuzhniy), Kherson, and Mykolaiv ports.

The long-run impact of the possible military conflict is the sharp increase of the financial risks and the restriction and even freezing of a lot of the investment projects.

The annexation of Crimea has created problems for grain export from the Ukrainian Azov seaports (Berdyansk and Mariupol) since the pass through the Kerch strait is now under Russian control.

The export throughput of the Ukrainian grain terminals is about 35 mln tons a year, though in some months, grain export reached as much as 5 mln tons a month.

This is the short-term scene.

In the long run, the situation becomes opaque with the high risk of the war and the domestic Ukrainian economic situation and the military aspect I described earlier. Now, let’s look at the economy.

Since January, the Ukrainian currency devalued by 50%. The main inputs such as fuel, fertilizers, and pesticides had become more expensive by the same rate. Actually, it will not have a big effect on producers’ income since the internal prices on grain and oilseeds are tied to the global markets. But at the moment, it makes life difficult: Keep in mind that the interest rates are about 30% per annum.

Let us return to Crimea. The funniest thing about Crimea is that the corresponding statistics are already excluded from the Ukrainian one, but at the same time not included yet in the Russian one. So, Crimean ag statistics are now like a terra incognita.

At last, Ukraine has stopped the water supply to Crimea, which caused very big problems to the Crimean farmers who grow grain, corn, and vegetables, including potatoes. The damage may be 100% loss of the crop. The Crimeans began hurriedly drilling water wells, but this is highly expensive. Russia promises to build water ducts from Kuban River but this (even being implemented) requires huge investments and will take at least three years. The problem is that there is not enough water supply even for the Kuban region.

The possible military conflict between Russia and Ukraine is what started the trade war between them. Russia practically banned the import of almost all Ukrainian foodstuffs from confectionary to dairy products, meat and vegetables. The Ukrainian government threatens to counteract with the complaint to WTO. To me, it seems a quite weird response.

I first called this story, “The Feast While the Plague is Raging Around.” Now I want to explain why.

While the Ukrainian army is hungry for the necessary equipment, ammo, and other things to stop the Russian invasion, the General Staff rewarded itself with the bonuses of about 1.0  mln USD for the maneuvers it supervised in March-April.

This madness to some extent may be explained by the admission of the military experts that 30% of the top command of the Ukrainian army are Russian intelligence officers.

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