Lifting wheat ban yields fresh trouble for Russia
2011-06-15 10:52:19
Moscow faces a dilemma. How does it balance the interests of its big grain producers, which want unrestricted sales to foreign markets – a move that would drive domestic prices higher – against those of millions of Russians worried about food inflation?
The outcome of this debate will resonate well beyond Russia’s borders and is likely to shape global grain markets in coming months.
Last month Moscow lifted a grain export ban, signalling the return of one of the world’s largest wheat exporters just in time to offset drought-hit crops in western Europe and the southern US. But, even as traders rush to move grain from the Russian interior to Black Sea ports, officials are calling for punitive export duties.
The calls to slap duties on grain sales reflect the public concern about rising domestic food prices. The surge in food inflation has become a political headache for Russia’s leaders as they prepare for parliamentary elections this year and a critical presidential poll in 2012.
Moscow imposed a blanket ban on grain exports in August after a record-breaking heatwave and a drought that ravaged more than a third of its crop. The disastrous harvest and subsequent ban caused wheat prices to soar to €280 a tonne in Paris, the highest for two years, and drew international condemnation.
The current crop is in much better shape after timely rains this year, hence the decision in May to lift the export ban. Wheat prices for delivery later this year have fallen to about €240 per tonne on hopes for a larger crop and sustained exports from Russia.
But some officials believe the country is taking a gamble in removing the restrictions before farmers have harvested the crop.
Sergei Ignatiev, head of the Russian central bank, has called for export taxes to limit overseas sales. He has described the removal of the ban as the “single biggest threat” to the government’s target of bringing inflation, which is running at an annual rate of nearly 10 per cent, down to 7 per cent this year.
Dmitry Medvedev, Russian president, welcomed the lifting of the ban as an opportunity to return to lucrative export markets such as Egypt, but warned that domestic markets should take precedence over foreign trade.
“It’s not worth getting too carried away by [grain] exports,” he said. “I can’t think of a better measure than customs and tariff regulations.”
The threat of fresh restrictions on foreign sales, coming so soon after the ban and only a few years after export taxes were imposed during the 2007-08 global food crisis, is reinforcing doubts about Russia’s reliability as a grain supplier at a time when markets are precariously balanced.
Mr Ignatiev has proposed a duty once benchmark Russian wheat prices surpass Rbs6,500 (about $234.50) per tonne, according to local media.
SovEcon, a Moscow-based agricultural consultant, estimates that prices rose last year to Rbs6,350 per tonne, approaching the central bank’s threshold.
The Russian Grain Union, a farmers’ lobby group, has proposed export duties if prices breach the Rbs7,000-per-tonne level.
“This price will satisfy farmers and also be fully acceptable for consumers,” says Arkady Zlochevsky, the union’s president.
Yet the pressure from the farming lobby and the central bank has not triggered a policy change. Analysts believe that Moscow may wait another two or three months, by which time the bulk of the harvest will be completed, to decide whether to impose limits or allow free trade.
Officials say the country’s grain production is likely to rebound to 85m-90m tonnes this year, up from just 61m tonnes in 2010.
A harvest of this magnitude would allow for exports of 15m tonnes of grain in the 2011-12 crop year, triple the level of the last season. Others are less optimistic.
Dmitry Rylko, managing director of the Moscow-based Institute for Agricultural Studies, says exports will be “above 10m tonnes, but 20m tonnes was far too much” to hope for. Mr Rylko’s view is widely shared in the grain trading industry.
Indeed, as farmers gear up to begin the harvest, there is still time for the weather to play havoc. A hot dry spell forecast for the coming weeks could damage vulnerable crops planted in parched soil. If that happens, traders should be prepared for a repeat of last year’s price volatility.