Russia starts sowing seeds of ‘wheat diplomacy’

Food exports bring in welcome dollars to the sanctions-hit economy but could also extend Moscow’s global reach

“Vladimir Putin had just become president,” says a market consultant in Moscow, who asks to remain anonymous. “And he was told in a meeting that Russia imported more than 50 percent of its food.

His face went pale. “Putin has since made it his goal to ensure better food security in the country,” adds the person who attended the meeting in 2000.

“He dreads dependency. And now Russia is number one in wheat, and is having others depend on it.”

A hangover from the era of the Soviet Union, when it had been a net importer of grain, the sector was by 2000 neglected, with no subsidies to producers and heavily reliant on imports. Putin launched a state-led programme to develop agriculture through national projects aimed at stimulating investment and developing production in 2004. It included targets to ensure 80-95 per cent of self-sufficiency in key products, including grain.

A decade later a grain charter to boost transparency in the market was introduced. “Large players and the state agreed to make this market less shadowy for everyone’s benefit. The effect was very positive,” says Daria Snitko, analyst at Gazprombank.

“This has helped exports for sure.” So too did the sharp devaluation in the rouble — making exports cheaper — that followed the imposition of US and EU sanctions against Moscow after the 2014 annexation of Crimea and stand-off with neighbouring Ukraine.

Counter sanctions by the Kremlin, banning most food imports from the west, further boosted domestic producers. Shortly afterwards, the world’s biggest country by landmass became the world’s top wheat exporter, passing the US and Canada for the first time in 2017.

“We are number one,” Putin declared in a later press conference. “We beat the US and Canada.” Wheat, and especially grain, have become valuable sources of foreign capital in a sanctions-hit economy.

Now Russia is slowly making its way across Eurasia, Africa, and Latin America as an agricultural export powerhouse as it looks to reduce its reliance on oil, identify new markets and extend its global diplomatic reach. Some even anticipate Russian grain becoming the Kremlin’s new oil — a commodity through which to keep some countries dependent on its resources — or to at least open doors to others.

Russia’s deal to cut oil output in a joint effort with Opec in 2016 was a trade-off with Saudi Arabia, the de facto head of the oil cartel. Riyadh needed a higher oil price to balance its budget than Russia, says Madina Khrustaleva, analyst at TS Lombard investment research provider, so Moscow compromised, cutting output and raising oil prices more than it wanted to. “Russia [co-operated but] in return Saudi Arabia opened its huge market for chicken (and grain).”

Riyadh also recently eased its requirements for imported wheat quality, opening the door to Russian exports, which now account for 10 percent of Saudi Arabia’s grain imports, mostly barley, according to Rusagrotrans, Russia’s leader in railway grain transportation.

After successful lobbying for new markets, particularly in Asia, China and Vietnam have become big customers. Russia has tripled its 2020 beef exports, and doubled those of pork, both in tonnes and dollar revenue year on year. Half of the beef went to China, after it opened its market to Russian cattle producers last year.

Vietnam, which started importing Russian pork in late 2019, is now the second-largest importer of meat from the country in the world. Grain and meat exports have deepened Russia’s presence in developing countries, say industry experts, especially those that are neighbours or close enough for logistics not to be problem.

The UN calculates that the world will need to produce an extra 40 per cent more food by 2050 simply to keep pace with a world population that is expected to rise by 2bn people over the next 30 years. “We are destined for certain growth and success in the food industry,” says a confident Oleg Rogachev, board member at Rusagrotrans.

“It is profitable because of the geopolitical position. “Most of our consumers, which experience food shortages, are located practically in our underbelly,” he adds. “They are very close — it’s all of Africa, the Middle East, the Asia-Pacific countries, the Far East. The shortest and easiest way to satisfy their need is through supplies from Russia.”

Not just ‘oil and Kalashnikovs’ This was not always the case. Russia produces enough crude oil to satisfy 10 percent of the world’s demand, and in the 1990s — after the collapse of the Soviet Union — it used its oil money to import most of its food. Now, however, Russia is nearly self-sufficient in everything from grain to cheese. And, according to Rusagrotrans data compiled based on US Department of Agriculture statistics, accounts for a third of Middle Eastern and African wheat imports, 10 percent of those in Asia and supplies about a fifth of the planet’s total wheat demand.

Agricultural output in the country has grown by almost 50 percent since 1991. Exports have more than trebled in that time to over US$30 billion last year, having jumped by a fifth in money terms over 2019.

Of all the agricultural exports, it is grain that is the main source of foreign exchange, with Egypt and Turkey being the biggest single buyers.

Now Dmitry Patrushev, the agriculture minister and son of a close Putin ally, Nikolai Patrushev, secretary of Russia’s Security Council, has been tasked with adding another 50 percent to the value of agricultural exports by 2024. He is also under pressure to raise grain production to 140 million tonnes by 2025 to feed those export markets.

Temporary export quotas on grain — triggered by labour shortages and poor weather hitting crops — are expected to force output levels down to 127 million tonnes in 2021, highlighting how difficult it will be to reach the 2025 target. Food has been a diplomatic tool in Russian relations with its neighbours before. It banned some Turkish agricultural imports as part of a package of measures following the downing of a Russian fighter jet by Turkish forces in 2015.

The imports resumed two years later and Turkey became the top importer of Russian wheat in 2019 after it agreed to transit Russian gas to Europe after Bulgaria had refused. In return for wheat sales to Iran, Russia agreed to take and sell Iranian oil as part of its oil-for-goods swap prior to the reimposition of US sanctions on Tehran in late 2018.

What has changed since those one-offs is the scale and ambition of the industry, say analysts. China, where Moscow has pivoted since its relations with the West plunged and where it has launched a major gas pipeline, is seen by Russia as its big future food market, given the population, geographical proximity and the expansion of its infrastructure presence, including its eastbound railways. Yet, for now, Russia’s share of the Chinese market remains relatively small due to China’s grain standards and wheat imports actually fell in 2020.

“Of course, we always count on China. It is our main neighbour and the main trade partner as a whole, including in agriculture. It is the most interesting market we want to win over. All the major producers are competing against one another for it,” says Snitko at Gazprombank, adding that Australia and Ukraine are also fierce rivals for the Chinese market. – Financial Times

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