Russian citizens are dealing with some major food safety scares and possible widespread illness… at least, that’s what Putin says.
The government is claiming that the risks associated with food imports are so serious that officials announced on December 26 that the country would aggressively intensify its inspections of imports, including tougher quality monitoring.
These changes will lead to a major slowdown in port traffic and an inevitable trade flow gridlock, limiting competitive imports and keeping domestic goods intended as exports, such as grains, at home.
All in the name of “food safety”… But I call Russian bullsh@#!
These new regulations are just another way for Putin to lash out at the economic sanctions imposed by the United States and other countries unhappy with Russia’s military actions.
From Russia With Love
Manipulating trade sanctions is really nothing new for Russia. The country has often been accused of using food safety inspections as a weapon, typically to block imports. But now it’s using this tactic to damage all trade flow.
You see, Russia is hoping to partially repair its damaged economy by lowering the price of grain domestically.
Russia is the fourth-largest exporter of grain globally, and now has a desperate need to cool domestic prices, which have been rising as a result of the ruble losing a whopping 40% of its value against the U.S. dollar last year. (This is on top of Russia’s overall economic mess caused by international sanctions and the low price of oil.)
And despite an impressive 2014 grain harvest of 105 million tonnes, prices on the Russian market have been rising as growers prefer to export wheat to places where prices, linked to foreign currencies, are considerably higher.
So let’s say you’re a Russian wheat farmer. You can either sell to the domestic market and make 160 euros ($195) per tonne, or export your wheat for around 225 euros ($275) per tonne. Clearly a no-brainer.
According to government data, Russia has already exported 21 million tonnes out of a potential annual total of 28 million tonnes since the export season began in July.
On top of tougher surveillance, the government also increased railway tariffs by 13.4%.
With heightened safety regulations and higher tariffs, Russia is purposefully making it harder to export grain by clogging ports and rails. If it becomes too hard to export, Russian grain producers will sell domestically and the price of grain will fall for citizens.
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According to Arkady Zlochevsky, the head of Russia’s Grain Union, food safety inspections will remain “strict” as Russia “can’t afford any longer to close its eyes to violations.” Of course, Zlochevsky then adds that the duty should help to lower domestic wheat prices by 15%.
But that’s not all…
Food Safety Tsar or Price Manipulator?
On the same date the government announced the new stringent inspections and higher railway tariffs, it also announced that it would be putting a duty on exports, making it more expensive for nations that import Russian grain.
This duty, set to be implemented in February 2015, will also serve to force Russian grain producers to sell domestically.
The duty is just another addition to Russia’s laundry list of trade restrictions against its global trade partners, imposed as retaliation against the global sanctions.
The international market was anticipating that Russia would make some changes (many predicted a Russian embargo), thus wheat futures on the international market have risen in the last weeks.
Despite no embargo, futures prices remained robust when the specifics of the duty were announced. The government announced that the duty will be set at 15% of the customs price (plus an added 7.5 euros), and will have a minimum of 35 euros ($43 per tonne), lasting until the end of June.
Russia’s actions are a definite concern for the wheat markets.
Riding the Waves of Grain
The Grain Farmers Union warned the duty could lead to a possible “loss of confidence in Russia as a reliable supplier of grain to the international market, in particular by key importers such as Turkey, Egypt, or Iran.”
The winners in this current situation will be European wheat exporters, ranked third-largest.
But it’s still unknown as to whether or not Russia will maintain the artificial administrative barriers currently in place. The government could lift them in February.
And while the market has already rallied in a “buy the rumor” fashion, Russia’s moves mean there’s still room on the upside for wheat.