As You Sow, So Shall You Reap

Russia’s grain harvest is looking fine this year, in contrast to last year’s drought ravaged one, so the country is canceling its export ban as of 1 July.  So line right up buyers!  Russia is open for grain business.  15 million tons–maybe 20 million tons–available!  Step right up.

Uhm, not so fast.  Customers are taking a once burned, twice shy attitude:

“Russia will return once again but it will be dealt with cautiously,” Nomani Nomani, the vice chairman of Egypt’s General Authority for Supply Commodities, told Reuters in an interview.

“We do not want to fall into the same problem we fell into last year,” he said.

Egypt was forced to scramble to replace more than 500,000 tonnes of Russian wheat purchases when Moscow imposed the ban.


The government could yet clamp down if domestic supplies start looking short or inflation accelerates in a crucial political year when parliamentary elections are due in December and a presidential poll in March.

“If issues of price increases arise, we will use means of customs and tariff regulation,” Deputy Prime Minister Viktor Zubkov, who recommended Putin end the ban, told the prime minister on Saturday.

Russia’s farm lobbies, traders and analysts had proposed a more conservative three month export window from July 1 to relieve a stock buildup in the south and help domestic prices off of lows to encourage investment in next year’s crop.

Many senior industry figures had also expected a system of quotas or protective export tariffs to be imposed in order to control the outflows.

“They will track the pace of export growth, the international market dynamics, the pace of retail price growth, and eventually they may still impose export duties,” Andrei Sizov, managing director of the SovEcon think tank, said.

Russia’s central bank, which left key lending rates on hold on Monday in its struggle to restrain inflation without killing off growth, said the decision over the weekend to lift the grain export ban posed the single biggest threat to prices.

Russian inflation is running at an annual 9.7 percent.

“This is the only significant risk factor,” central bank chief Sergei Ignatyev said after the bank raised its key deposit rate, referring to the decision to lift the ban.

With the political odds stacked against unfettered exports, traders said they did not fully believe that free shipments could continue for long.

“Will Russia really open its gates in a lasting way and without any export restrictions? I want a clear and precise confirmation,” a European grain trader said.

I especially like the part about how if prices do spike, Russia won’t ban exports–it will just make them uneconomical using customs and tariff regulations.  That makes it so much better!

Note well, newly nominated US ambassador to Russia, Michael McFaul, who claims to have been the “sherpa” for Russia joining the the WTO.  This is what you are so anxious to help?  Do you think anything will really change?

Russia did its already not too stellar reputation serious damage with the grain export ban.  Just as it did damage with the various gas shenanigans over the past years.  It talks the WTO talk, but walks the protectionist walk.  That’s unlikely to change soon, and indeed is likely to get worse as Medvedev fades to black and Putin the Protectionist and natural state balancer reasserts even greater control.  That grain trader will wait a long time for a “clear and precise confirmation” of anything different.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

Visit: Streetwise Professor

1 Comment on As You Sow, So Shall You Reap

  1. Yeah excuse me, but how do you expect a nation to keep exporting grains when it has suffered its worst drought in decades?? Russia was bound to take those steps so as to protect its domestic prices from rising any further, and this it will do so in the future too if and when such a major crisis occurs. As for the “gas shenanigans” that you are refering to, those were precipitated more due to the attitude of the then Ukrainian administration that refused to pay market prices for gas. Ukraine was at that time playing a double game, seeking preferential treatment from Russia but trying to get into the EU and foul-mouthing Russia all the time.

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