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Grain exports likely disrupted in a Russian, Ukraine conflict, analyst says

Trade transactions mostly are conducted in U.S. dollars.

Putin hasn’t amassed over 100,000 troops and an arsenal of weaponry along its own border with Ukraine, and another arsenal along Belarus’ border with Ukraine for nothing.

It’s possible that he is bluffing, going through the motions to see how far he can push the West, or how much he can extract in concessions without firing a shot. But most observers are assuming an attack is imminent – despite Putin’s insistence he doesn’t want war. He is going through a huge amount of resources for a bluff.

Putin says he wants security from Western ‘aggression’ in Eastern Europe, and for Ukraine to never be allowed into NATO. Perhaps he should let Ukraine decide what it wants – which is to join NATO and become more aligned with Western Europe. What Putin really wants is to bring Ukraine back into Russian alignment – and he want the world’s respect. So far, he has neither. 

But does he plan to gain both with an invasion and coup of the Ukraine government? The West has pledged support to Ukraine and supplies are arriving, showing signs of commitment to this eastern flank of Europe. I think it goes without saying that if Russian troops invade and Ukraine falls because of a lack of support, those Russian troops will just keep marching until the former Soviet bloc is reunited, whether the other countries want it or not. Putin may not gain respect, but he’ll have his Soviet Union back.

The thought of that spurs lots of support for Ukraine and the attempt to end the invasion before it starts. But what becomes of economic activity while military activity creeps nearby? Russia is a major supplier of energy to Western Europe, and Ukraine and Russia both are major exporters of wheat, corn, and sunflower. 

Energy sales to western Europe are a very important revenue source for Russia. So far, those energy flows are intact, but that is the huge club Putin has over some European members of NATO, primarily Germany. It is no coincidence he is doing this during winter.

Grain exports are also a huge source of revenue for both Russian and Ukraine, with about 30% of the world’s wheat exports and 20% of the world’s corn exports flowing through their ports. Both countries also export significant amounts of feed grain and sunflower oil. 

Most traders fear that major disruptions of port activity would happen if war broke out, but for now cash trade appears to be normal. Indeed, just today Egypt purchased a large chunk of wheat all from Black Sea origins, Ukraine, Russia, and Romania, at prices cheaper than a month ago. The Romania purchase is likely to make sure they get something delivered, just in case.

But cash traders are nervous about holding large positions and there is chatter about the potential effect of a lingering stand-off as buyers become increasingly nervous about delivery disruptions. Banks could become more cautious in offering credit; insurance companies could push rates higher with the threats to supply and as force majeure becomes a higher possibility.

The U.S. and the West have threatened another round of sanctions against Russia if it invades Ukraine. Some of these include potentially banning Russia from using the U.S. dollar, the euro, or SWIFT (Society for Worldwide Interbank Financial Telecommunications), the global communication system linking financial institutions.

Most of the world’s transactions are conducted using the U.S. dollar, followed by the euro. Shutting off access to either would make if far more difficult for Russia to buy or sell anything in the world marketplace.

“If you are cut off from SWIFT, you are largely cut off from the global financial system because banks in all major Western economies use SWIFT to facilitate transfers,” said Howard Shatz, a senior economist at the RAND corporation. “Not using SWIFT introduces risk and would draw negative attention from national regulators. This action would be particularly harmful to the Russian economy, but it wouldn’t necessarily cut off Russian trade.”

“The majority of trade is conducted in U.S. dollars; at some point, it would be very hard for Russian businesses to transact in dollars if the U.S. takes certain steps,” Shatz said. “The United States could make it impossible for Russia to use the U.S. banking system.

“The U.S. could put in place secondary sanctions against those who do business with Russia. That’s what the U.S. has done with the Caesar Syria Civilian Protection Act, and it’s been highly effective at blocking investment into Syria.”

“Some trade partners might set up companies just to trade with Russia,” Shatz continued. “China might continue to trade, but Russia would have to accept payment in renminbi. Others might make purchases from Russia and put payment in an escrow account like Iraq does with its gas and electricity imports from Iran. The customers might put the payment in an escrow account that Russia can access when the sanctions are lifted.”

The potential for any of these things to happen is already pressuring currency values in both Ukraine and Russia. Ukraine’s currency, the hryvnia, has fallen 4% and the Russian ruble is down 5% since January 1. This has pushed domestic prices higher and decreased exporter profits.

For now, grain importers are continuing to do business with both Ukraine and Russia, cautiously. Most have import needs covered through April, so they feel they have time before deciding on shifting to other origins. In the meantime, wheat and corn prices continue to see volatile price action. Last week started with a sharp rally for wheat and corn on flailing peace negotiations from last weekend, only to see the rally completely disappear by midweek. 

With corn production decreasing in South America this season due to drought, it makes supply disruptions from the Black Sea yet more impactful to the market. Traders are bracing for more volatility and will move quickly to secure other sources if fighting breaks out in that very important grain production and exporting region.


Louise Gartner
Spectrum Commodities

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