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Russia Risks Food Crisis, Stagflation If It Ends Ukraine Grain Deal

By:Ilya Spivak

Markets may shudder amid fears of a global food crisis and stagflation if Russia ends a grain export deal with Ukraine, lifting the price of wheat and other key commodities.

  • Moscow hints it may not renew the Black Sea Grain Initiative enabling exports from Ukraine
  • Wheat prices may surge if the scheme unravels, risking a massive food crisis and stagflation
  • The Kremlin’s overall military strategy seems to suggest that BSGI is likely to endure for now

Food crisis and stagflation menace markets if Russia blocks Ukrainian grain exports

Russia’s invasion of Ukraine may reclaim the spotlight for investors ahead of a looming deadline to renew the Black Sea Grain Initiative (BSGI). The UN- and Turkey-sponsored scheme is meant to allow safe passage for Ukrainian grain exports to global markets in wartime without Russian molestation. It is up for renewal on May 18. Moscow has variously signaled that it may not re-up its commitment.

The global price of wheat is a particular pain point. Ukraine is the world’s fifth-largest exporter, with 9.5 percent of the market as of 2021. Russia comes in first at 14.4 percent. The steady flow of cheap wheat through the Black Sea region despite the conflict has been essential to securing food supplies for highly dependent markets, such as China and the Middle East. It has also helped with central banks’ inflation-fighting efforts, enabling prices to fall alongside a broader decline in commodities as interest rate hikes cool economic activity.

Data Source: Bloomberg

A food crisis might ensue if Russia abandons the arrangement and wheat prices move up sharply. Besides the humanitarian disaster inherent in such a scenario, the negative consequences for worldwide economic activity would be multifaceted and vast. They would also strike at a most inconvenient time, when the global economy is already being squeezed by dramatic monetary tightening and set the stage for still more pain by inflaming price growth anew.

Russian economic and military strategy probably favors BGSI renewal

Thankfully, it seems this version of the future is unlikely, at least for now. The Kremlin’s saber-rattling may reflect a desire for a short-term price pop, but it seems likely to renew its BSGI commitment. In fact, keeping commodities where Russia is a dominant exporter trading cheap on global markets seems to be a part of Moscow’s overall strategy. Prices for the top three – wheat, crude oil and natural gas – are down significantly more year-on-year than the Bloomberg average of global raw materials costs.

Data Source: Bloomberg

This may reflect Russia’s desire to protect its market share even as its access to the global commercial order is disrupted by Western sanctions. It has but a few outlets left to raise money, including for its war effort. It would be doubly damaging to give up ground since the leading competition in all three markets comes from countries backing Ukraine in the war, most notably the United States.

Keeping its customers probably speaks to Russia’s broader military strategy as well. Its vast superiority in numbers – a gap of nearly 631,000 of active military personnel and over 47 million in potentially available manpower – appear to give it an edge in a prolonged engagement. In fact, the military triumphs standing tallest in Russia’s collective memory – the victories against Napoleon and Adolf Hitler – were won attrition terms.

Ilya Spivak is the Head of Global Macro at tastylive, where he hosts Macro Money every week, Monday-Thursday.

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