Economy

Moscow Proposes Grain Exporters Cartel

Nikolay Lyapin Analysis 17 October 2019
Moscow Proposes Grain Exporters Cartel

On October 5, Russian Deputy Prime Minister Alexei Gordeev, who oversees the agricultural sector (and served as the minister for agriculture from 1999 to 2009), curiously proposed creating an organization of the world’s top grain-exporting countries (TASS, October 5), which immediately earned the nickname “Grain OPEC” (Izvestia, October 6).

The initiative was put forward at a derisive meeting with the German minister for food and agriculture. Russia has banned imports of German (and, more broadly, European Union) foodstuffs since 2014, “in response” to Western restrictions levied on Moscow for its invasion of Ukraine. The notion of a grain-exporters’ cartel has a long history of support in Rus­sia (Nakanune.ru, June 25, 2007), but Gordeev’s latest scheme engendered little reaction abroad (Agricensus.com, October 7, 2019). In fact, the proposal looks quite unrealistic for a number of reasons connected to current Russian policies.

In mid-2014, following Russia’s annexation of Crimea and as its armed incursion into eastern Ukraine was reaching its highpoint, President Vladimir Putin (seemingly dismissing the Moscow-led Collective Security Treaty Organization) pointedly told his Security Council, “…Russia is fortunately not a member of any alliance. That is also a guarantee of our sovereignty” (Kremlin.ru, July 22, 2014).

But at the same time, Moscow has grown increasingly more willing to participate in multilate­ral organizations designed to coordinate the economic policies of their members. Russia became a founding member of the Gas Exporting Countries Forum in December 2008; and by the end of 2016, the country joined the so-called OPEC+ deal with Organization of the Petroleum Exporting Countries leader Saudi Arabia. The latter arrangement helped raise oil prices by around 30 percent in just one year through production cuts.

Minister Gor­de­ev’s idea, therefore, arguably fits in with these previous policy efforts, reflecting Russia’s changing foreign strategy: there already is some feeling in Moscow that alliance-buil­ding may no longer be as unwanted as it was seen several years ago.

Russia currently ranks as the world’s top exporter of wheat, having sold $8.4 billion worth of this foodstuff abroad last year. Indeed, Russian exports in 2018 made up 20.5 percent of the global total, far ahead of Canada (13.8 percent), the United States (13.2), France (10) and Australia (7.5), which rounded out the top five (Worldstopexports.com, September 26, 2019).

However, when it comes to commodities (be it wheat, oil or any other strategic product), Russia never thought of itself as a “supplier of last resort”—i.e., a flexible seller able and willing to ship commodity exports to any point in the world at a current market price and on conditions independent of any political considerations. Instead, Moscow has traditionally tried to furnish decades-long government-backed supply contracts, and is only now guardedly attempting to accustom itself to spot markets.

This latest effort to consolidate global exporters—this time in the agricultural sector—in order to increase their combined influence over market prices, thus, highlights Moscow’s ongoing fears of international market competition for its producers.

Gordeev’s Grain OPEC proposal also reflects another element of contemporary Russia’s approach to global issues. The Kremlin believes that Russia, now firmly stan­ding on its own two feet, should have a bigger voice regarding issues where Russia’s own progress has been most obvious. Indeed, supportive domestic voices often mention the development of the Russian agricultural sector as proof of the country’s tremendous success under President Putin’s leadership.

Partially, at least, this has some truth to it: overall grain production in Russia skyrocketed from 65.4 million metric tons in 2000 to a height of 134.1 million in 2017, while exports shot up from 1.9 million tons to 50 million for the same period (Gks.ru, Newsruss.ru, accessed October 16, 2019; TASS, January 10, 11, 2018). Russia believes it should now be able to dictate the rules over this market.

But though Gordeev named several other leading grain producers as potential members of the grain cartel, he explicitly left out the sixth-largest wheat exporter—Ukraine (Expert.ru, October 7)—whose production rise in recent years has been even more spectacular than in Russia itself (Ubr.ua, October 8).

Overall, however, the grain exporters’ cartel is unlikely to go anywhere for at least two major systemic reasons. First of all, the food production market, even when it comes to globally traded goods like wheat or corn, is a marginal one in terms of monetary value. If one looks at the oil sector, for example, in 2018, 71.4 million barrels of crude oil were traded across state borders daily, bringing annual turnover to $1.9 trillion (based on the average annual weighted price for Brent crude at $71.30 per barrel and as calculated according to the BP Statistical Review of World Energy 2019).

Relying on the same data set, the 2018 figures for internationally traded natural gas (both shipped via pipelines and as liquefied natural gas, or LNG) reach around $270 billion. At the same time, worldwide wheat exports in 2018 stood at a mere $41.2 billion (Worldstopexports.com, September 26, 2019)—an amount oil exporters generate in a little over a week. The effect of the OPEC+ deal for the top five oil exporters can be estimated at around $120 billion in its first year. Nothing comparable is likely to result from whatever close co­ordination grain exporters may impose on the market.

Second, the composition of production and export of energy resources versus foodstuffs differ greatly. While (in 2018) 72.2 percent of the world’s oil (Statista.com, accessed October 16) and up to 63.1 percent of natural gas (Iea.org, accessed October 16) were generated by “developing” countries (or, more accurately, non-members of the Organization for Economic Cooperation and Development, OECD), wheat production is more evenly distributed across the world.

OECD members account for around 38.9 percent of wheat production (Fao.org, accessed October 16) and for 58.1 percent of exports. Under such circumstances, it would be much harder for Russia to pressure other leading exporters (particularly, those who imposed various economic sanctions on it) or those that are in a state of undeclared war with Moscow. Among the 15 largest exporters of wheat, only Ar­gentina and Kazakhstan (with a combined 8.2 percent of global exports) might be considered neutral or friendly toward Russia (Worldstopexports.com, September 26).

Considering the above-cited obstacles to the Grain OPEC idea, the rationale may boil down to the Russian agriculture ministry’s latest forecast that the country’s grain exports this year will only reach 46 million tons, or 16.4 percent less than in 2018 (Dairynews.ru, October 1), at the same time, wholesale wheat prices are holding steady at roughly 50 percent below their local 2012 highs (Macrotrends.net, accessed October 16).

Though the situation is not as alarming as it was in the oil market in 2016, it certainly calls for some action on Moscow’s part. Yet, the Kremlin is reaching for an economic tactic from 60 years ago.

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