Russia Is Tightening its Grip on the World’s Wheat Supply

Áine Quinn
·5 min read
8

(Bloomberg) -- Russia has tightened its hold on the world’s wheat supplies following its invasion of Ukraine, bolstering the Kremlin’s role in global food supply to secure political support and hard currency.

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With Russia’s internal politics in disarray after an aborted armed mutiny and its international standing damaged by the war, grain remains a major source of influence, and Moscow has been expanding its sway over the market at home and abroad.

With another bumper harvest starting in fertile farmlands like the North Caucasus region, Russia will be the source of one in five cargoes of exported wheat in the season that starts July 1, according to the US Department of Agriculture. By contrast, Ukraine will see its share halve from levels before the invasion to about 5% as production suffers long-term damage from mined fields and broken logistics chains.

Russia’s growing market power is part of a broader effort. International traders such as Cargill Inc. left after facing pressure to clear the way for domestic companies. The changes put more control in domestic hands and could potentially make it easier for local companies to ship grains grown in occupied Ukrainian territory — and for Moscow to influence prices.

“Grain is not just important for feeding Russians, but also it’s a primary export that enhances Russia’s soft power,” said Scott Reynolds Nelson, a history professor at the University of Georgia. “Being the world’s number one wheat exporter is an accomplishment that’s well understood in Moscow.”

Russia exported about $10 billion in grains a year before the war, according to UN data. While that’s small compared with the massive revenues from energy, its importance goes beyond mere income. Key buyers are countries in the Middle East and North Africa, which have refrained from joining sanctions and directly opposing Russia in the UN.

“Russia’s entire orientation is keeping the Global South on their side,” said Christopher Granville, managing director at research firm TS Lombard and a former diplomat.

Russia’s wheat strategy has followed a familiar path: gain market share and then use that leverage for influence. Ukraine’s safe-corridor deal to ship grain — which Russia agreed to after massive international pressure following the invasion — is again under threat.

Putin said earlier this month that he’s considering leaving the pact that allows Ukraine to ship grain exports from Black Sea ports, saying that Russia has been “deceived once again.”

“We are now thinking about how we can get out of this so-called grain deal,” he said, adding that Russia had endorsed the pact “to support developing countries — our friends — and in order to achieve the lifting of sanctions from our agricultural sector.” Russia’s agricultural products aren’t directly sanctioned, but penalties on banks caused finance and logistics issues for grain exporters.

With another large wheat harvest beginning, Russia is expected to ship record volumes for the second year in a row. Its bumper crop and massive inventories sent wheat prices tumbling, especially since the country charges less than other major producers. But Moscow has been maneuvering to limit those discounts and gain greater control over its agriculture sector.

Governors of Russia’s major grain-producing regions — as well as powerful figures in finance and the fertilizer industry — last year urged the Kremlin to impose limits on the role played by foreign companies in grain exports.

Cargill and Viterra Ltd. — the two biggest western shippers of Russian grain — decided in March to end operations developed in the aftermath of the downfall of the Soviet Union. Louis Dreyfus Co. also joined the exodus, which becomes effective in July. The departure of western companies is an opportunity for local traders to grab more control of the market.

The situation though is rife with risk for buyers. Moscow’s annexation of Ukrainian territory means some volumes from the occupied regions are getting mixed in with Russian grain — about 3 million tons in 2023, according to a report from the Tass news agency, citing Russian Agriculture Minister Dmitry Patrushev.

While many traders have ruled out handling volumes from the occupied regions, it may become harder to track as those areas become more integrated into Russian supply lines. Ukraine has called on importers to seize suspicious grain.

Price Setting

Russia has become bolder in flexing its muscles and is trying to implement a price floor for exports, according to people familiar with the matter. This month it was seeking a lower limit of $240 a ton, said the people, who asked not to be identified because the discussions are private.

The floor is intended to help farmers, who were struggling to maintain tractors and find labor amid widespread mobilization for the war. But wheat is a volatile commodity with many suppliers, and Russia had to lower its unofficial price floor from $275 a ton in March after European prices dropped.

“Russia had no choice” but to give in to market pressure, said Hélène Duflot, a grain-market analyst at Strategie Grains.

Efforts to influence the market though have continued. One trader offered Russian grain to Egypt this month at too low of a price. Official dissatisfaction was made clear, when the agriculture ministry didn’t approve the sale, the people said. The trader is planning to offer Romanian wheat instead.

The winner of that tender “did not represent the interests” of the country’s wheat producers, said Eduard Zernin, head of Russia’s Union of Grain Exporters. The country does not plan to sell at “economically unreasonable prices,” he warned.

--With assistance from Megan Durisin and Volodymyr Verbyany.

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