Russia still enjoys control over global food and fertilizer supplies

Economists and policymakers say Russia still enjoys hidden leverage on Ukraine and the global food supply. They worry that self-imposed export restrictions on fertilizer by Russia, the top global provider of the product, could further drive up the cost of food and damage global harvests in 2023 and beyond.

Russia’s invasion of Ukraine has been a factor in the 30% surge in international food prices and 10% rise in the US food prices over the last year, as supply chains continue to sputter in the wake of the coronavirus pandemic.

The price pressures exerted on agricultural markets by Ukrainian exports like wheat and sunflower oil have been so far mostly caused by issues with their transportation, with cargo ships stuck in blockaded ports that Russian authorities say need to be cleared of mines.

A shift in Russian fertilizer policy could go a step further, leading to problems with food production in addition to distribution.

“If the fertilizers don’t flow, then the world will produce less,” United Nations Food and Agriculture Organization (FAO) Chief Economist Máximo Torero said in an interview. “That’s why we’re saying that next year we could have a problem of food availability, and also of food access like what we have today.” Lower use of fertilizer results in lower crop yields regardless of supply chain issues, Torero said.   

“That’s what will create the problem of food availability, in addition to food access. That’s what worries us, that’s for us the most dramatic scenario. And that’s what we need to avoid,” he added.

Even without an export restriction, international companies have been hesitant to purchase fertilizers from heavily sanctioned Russia, which is the world’s top exporter of soil additives containing nitrogen, as well as those with phosphorus and potassium — all byproducts of the vast Russian energy industry.  

In 2019, Russia exported 5.5 billion kilograms of these fertilizers, more than double the amount of the second biggest exporter, the European Union, and nearly four times as much as third biggest exporter, Belgium, according to figures from the World Bank.

This commercial hesitancy caused the US to offer “comfort letters” last week to companies considering purchasing Russian grain and fertilizer. These notices assure buyers that they won’t face penalties for using unsanctioned products.

“Fertilizer has, as you know, has become a huge problem, and Russia is a large fertilizer exporter. They just need to open up their own markets and end this war, end the blockade that they are responsible for and allow food to flow,” US Ambassador to the UN Linda Thomas-Greenfield told the BBC last month.  

At a meeting of the UN Security Council in May on food security, Secretary of State Anthony Blinken stressed that “the sanctions imposed by the United States and many other countries deliberately include carveouts for food, for fertilizer, and seeds from Russia, and we’re working with countries every day to ensure that they understand that sanctions do not prevent the flow of these items.”  

Countries most reliant on nitrogen-based fertilizer exports from Russia and Russian-allied Belarus include Singapore, Mongolia and Panama, with the US receiving more than 20% of its imported fertilizers from the two countries, according to German market research firm Statista.  

Russia, for its part, sees a contradiction in the Western position of levying aggressive sanctions against the country while at the same time demanding commercial access to its agricultural commodities and energy byproducts.  

“The EU openly declared an all-out economic and trade war against our country — in full oblivion to Russia’s standing as a key global supplier of basic agricultural products (wheat, barley, sunflowers, mineral fertilizers and fodder crops), including to low-income countries, that are subject to risks of food shortages,” the Russian Foreign Ministry said in a statement. “Instead of making groundless allegations European leaders should rather turn their attention to redressing the systemic miscalculations in their own macroeconomic, monetary, trade, energy and agro-industrial policies.”  

“We are deeply concerned about a possible food crisis and are well aware of the importance of supplies of socially important commodities,” the foreign ministry added. “Russia expects to have a good wheat harvest this year, which will allow our country to offer 25 million tons of grain for export from August 01, 2022. Our capacity for exporting fertilizers from June to December 2022 will amount to at least 22 million tons (20% of global consumption over this period).”  

US lawmakers are less than keen to rely on Russian reassurances.  

Rep. Josh Harder  introduced legislation last month that would extend a government relief program for farmers dealing with rising input costs. 

The Department of Agriculture funding arrangement, known as the environmental quality incentives program, “provides agricultural producers and non-industrial forest managers with financial resources and one-on-one help to plan and implement improvements” that can lead to “healthier soil and better wildlife habitat, all while improving agricultural operations.”  

Harder’s bill would institute a temporary cost-sharing agreement of up to 100 percent between farmers who take up the program and the Agriculture Department.  

Farmers in the program who work “to develop and implement a nutrient management plan for their operation will be getting access to these payments,” Harder told the House Agriculture Committee in May.   

 “This is more critical than ever as we’ve seen the cost of everything go up around us, and we know how much it’s hurt our producers, especially when they’re trying to buy input like fertilizer,” he said. “So as fertilizer prices surge, folks need alternatives, and this is going to help address this. It’s also going to further conservation practices. It’s going to reduce fertilizer use, lower costs.”  

While Russia has denied that its invasion has contributed to a food crisis, the FAO blames the conflict in no uncertain terms.   

“It is clear that the war has resulted in a massive, and deteriorating, food security challenge,” the agency said in a March assessment. “It has already significantly disrupted livelihoods during the agricultural growing season, through physical access constraints and damage to homes, productive assets, agricultural land, roads and other civilian infrastructure.”

Israel upgrades Air Force to attack Iran

Taking refuge behind Iran’s continued development of nuclear capabilities; Israeli Air Force (IAF) has upgraded its F-35 stealth fighter jets to fly from Israel to the Islamic Republic without requiring mid-air refueling. 

The development is a boost to IAF capabilities and comes as the Israeli military has upped its preparations for a future strike against Iran’s nuclear capabilities. 

In addition, the IAF recently integrated a new one-ton bomb into the arsenal of weapons used by the F-35 (known in the IAF as the Adir) that can be carried inside the plane’s internal weapons compartment without jeopardizing its stealth radar signature.

The bomb – made by Rafael Advanced Weapons Systems - is said to be autonomous and protected against jamming and electronic warfare systems. The bomb was recently used in a series of IAF tests, the results of which were presented to Defense Minister Benny Gantz.

The IAF has held four large-scale drills simulating attacks against Iran over the last month. The first drill included confronting Iranian radar and detection systems, like those which protect its nuclear installations.

The second included simulating long-range combat flights – in this case to destinations in Europe. The other drills included defensive measures against cyber weapons and electronic warfare systems, means that could be used by Iran to undermine an Israeli military operation. 

News of the progress in military preparedness came just a day after Prime Minister Naftali Bennett told the Knesset Foreign Affairs and Defense Committee that Israel’s Iran strategy has changed in the last year, and it is acting against the head... and not just its arms, as we had in recent years.

During the recent military maneuvers, the IAF also drilled cooperation between fifth-generation fighter jets like the F-35 and fourth-generation jets like Israel’s older model F15 and F-16. The planes practiced sharing intelligence, missions and more.

“Iran’s surface-to-air missile systems and radars are crowded and they are not the only challenge,” a defense official said. “We need to be able to attack targets that are significant and the attack needs to be able to cause extensive damage. There are multiple targets in Iran at different ranges.”

 

 

Pakistan: Likely facets of Federal Budget FY23

Government of Pakistan (GoP) is scheduled to announce Federal Budget FY23 on June 10, 2022. Relations between International Monetary Fund (IMF) and Pakistan have not normalized despite change of Prime Minister. 

While it is anricipated that the upcoming budget will have measures that can ensure austerity and economic stability, the incumbent government is likely to opt for policies which can help the coalition remain in power over the next 18 months.

Budget outlay for FY23 is estimated at around Rs9.5 trillion as against budget of Rs8.5 trillion for FY22.

GoP is anticipated to set tax revenue collection target at Rs7.25 trillion for FY23, which will be 19% higher from the revised target of Rs6.1 trillion for FY22. It is likely to impose new taxation measures of about half a trillion in FY23 budget.

Current expenditure target is likely to be set at 12% of GDP for FY23 or Rs8 trillion which is around 11% YoY higher than what was budgeted for FY22.

Similarly, government is likely to set aside nearly Rs4 trillion for markup payment and Rs1.6 trillion for Defense expenditure.

Federal Public Sector Development (PSDP) is estimated at Rs800bn, as against Rs466 billion disbursed in 10MFY22 and revised budgeted of Rs603 billion for FY22.

Consolidated PSDP (Federal and Provincial) is anticipated at Rs1.4 trillion (1.8% of GDP) for FY23, as against Rs1.2 trillion for FY22.

A few taxation measures that are under consideration include: 1) increase in super tax for Banking sector and re-imposition of super tax on highly profitable companies, 2) increase in tax rate for individuals earning high salaries, 3) reduction in tax concessions and exemptions for various sectors, 4) increase in regulatory duties on luxury items, 5) luxury tax on immovable properties and vehicles,  and 6) increase in taxes for non-filers.

With the economic slowdown, tax revenue target of Rs7.25 trillion will be difficult to achieve for FY23. However, it will depend on the types and amounts of new taxes to be imposed in Budget FY23.

Upcoming budget is likely to be Neutral for Stock Market as we do not anticipate any change in Capital Gain Tax (CGT) rate of 12.5% and tax rate of 15% on dividend income. The budget is likely to be Neutral to Positive for sectors including Technology & Communication, Fertilizer, Insurance and Chemical Sectors. On other hand, it is likely to be Neutral to Negative for sectors including IPPs, Autos, Banks, Oil & Gas Exploration, Cement, Textile, OMCs, Tobacco, Steel and Pharmaceuticals.

Analysts believe that negatives relating to imposition of new taxes on listed companies are already priced in as valuations remain attractive. Market participants are keen to see the overall balance of payment situation and focus to remain on IMF and other foreign exchange inflows along with trend of international commodity prices. 

Pakistan market is currently trading at a discount. Analysts prefer sectors that offer high dividend yield, beneficiary of rising interest rates and currency depreciation.

 

Growing cooperation between Iran and Qatar

Iranian Energy Minister Ali Akbar Mehrabian arrived in the Qatari capital Doha on Sunday to hold talks with senior Qatari officials and attend the two country’s eighth Joint Economic Committee meeting.

A high-ranking delegation of Iranian government officials, including Sports Minister Hamid Sajjadi and head of Iran’s Trade Promotion Organization (TPO) Alireza Peyman-Pak accompanied Mehrabian during his visit.

As part of the scheduled meetings with Qatari officials, Mehrabian met with Qatari Minister of Energy Saad Sherida al-Kaabi on Monday to discuss areas of interest for cooperation.

In this meeting, the energy minister expressed Iran’s interest in further expansion of economic relations between the two countries. He noted that the cooperation capacities of the two countries are very appropriate and emphasized removing the existing obstacles.

Referring to the good relations between the two countries in various fields, Mehrabian said, “The Iranian government has emphasized the development of relations with neighboring countries, and accordingly, these relations are increasing every day.”

The Qatari side also emphasized the need for increased efforts to develop relations between the two countries and to pave the way for trade exchanges.

On the same day, the Iranian delegation also met with the country’s businessmen and traders residing in Qatar and discussed various issues.

Speaking in this meeting, Mehrabian announced the signing of a document for supporting the private sectors of Iran and Qatar with the aim of developing trade cooperation between the two countries.

“The level of relations with neighboring countries has grown significantly since the current government has taken office in Iran,” he said, stressing that the Qatari market is a green market ready for the presence of Iranian businessmen and traders.

“Iran’s trade relations with the neighboring countries have increased by over 450% in the past nine months, and the figure is 900% for the past three months,” the minister said.

Iranian business center launched in Qatar

Peyman-Pak for his part, announced the establishment of an Iranian business center in Qatar to support the country’s traders.

Peyman-Pak said that transportation and banking relations are of special importance for the development of trade between the two countries.

Also, the head of the Iran-Qatar Joint Chamber of Commerce referred to the role of the private sectors of the two countries in trade development and said, "In Iran-Qatar Joint Chamber of Commerce, we seek to provide a special model of public-private partnership in Qatar."

Later on Monday, Head of Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA) Gholam-Hossein Shafeie met with Chairman of Qatar Chamber of Commerce and Industry Sheikh Khalifa bin Jassim Al Thani and explored avenues of mutual cooperation.

In this meeting, Al Thani expressed satisfaction with the presence of the Iranian trade delegation in Qatar and noted that Qatar’s private sector is eager to cooperate with its Iranian counterparts.

“In the field of trade, we will act on the basis of the political relations between the two countries which are very good,” he said, stressing his country's readiness to solve the problems that Iranian businessmen may face in trade with Qatar.

Shafeie also described the political relations between the two countries as very positive and added, “We should try to develop trade relations between the two countries in line with the political relations. The development of economic relations will also lead to the stability of political ties, and Iran is very enthusiastic in this regard.”

The eighth meeting of the Iran-Qatar Joint Economic Committee is scheduled to be held on Tuesday in Doha.

Mehrabian and Qatar’s Minister of Commerce and Industry Sheikh Mohammed Bin Hamad Bin Qassim Al-Thani will co-chair the intergovernmental committee meeting.

Meetings between officials of the two countries have increased in recent months as Qatar prepares to host the World Cup 2022 in November and December. Iran has offered its full logistical support to help Qatar successfully organize the tournament.

Should Iran accept US offer to export crude oil?

According to a Bloomberg report United States is considering allowing Iran to export limited quantity of crude oil. This would be the second temporary suspension of sanction, after allowing Venezuela to export oil. This could be termed ‘the most selfish decision of the US administration’.

It is anticipated that this decision is being made to bring down global oil prices. However, some critics say it is only to avoid defeat in the upcoming elections. The US administration has millions of barrels of strategic reserves and prices could be brought down within hours of the announcement of release of oil from these reserve.

In all sincerity, Iran must not accept this offer until the US removes all the sanctions. If Iran could endure sanctions for more than four decades, even during COVID pandemic the US should also pay high price for initiating proxy war in Ukraine.

United States and European Union were perfectly aware of the consequences of imposing sanctions on Russia and stopping purchase of oil and gas. Still they kept on dumping lethal arms in Ukraine rather than facilitating ceasefire.

It is the most appropriate time to teach a lesson to United States that its atrocities can’t be continued for indefinite period. The US was successful in stopping oil supplies from Iran, Iraq, Libya and Venezuela, but stopping sale of Russian oil and gas was not just possible.

To conclude it may be said that United States has lost war in Ukraine despite sending tons of lethal arms and injecting trillions of dollars.

OPEC must also not increase output in July and August and let United States get a taste how sanctions bites a country, which has imposed sanctions on dozens of countries.

Getting food out of Ukraine a daunting task

European leaders are desperately trying to figure out how to get food grain out of Ukraine. Russia last week said it would open maritime corridors to unblock ports such as Odesa on the Black Sea if sanctions against the country were lifted.

Politicians are looking at everything from naval escorts to shifting whatever’s possible overland to the Baltic. Officials at ports, logistics companies and in the agriculture industry interviewed across the region say they are scouring maps for solutions like diverting road transport and reviving rail links such as the one connecting Galati.

The task is complicated by a dearth of truck drivers and the fact that the Soviets used a wider track gauge than the European standard. That has caused up to 30 days of delays at borders for existing routes, the EU said, as cargo needs to be transferred onto compatible rolling stock and customs infrastructure gets overwhelmed.

Ports in Romania and Poland, meanwhile, are backed up with traffic or already at capacity while there are shortages of specialized personnel to handle the surge in demand. Even with Ukrainian exports at a fraction of what they were, trade officials warn that bottlenecks will get worse as the rest of Europe starts harvesting its wheat next month.

“The scale of the problem is enormous,” Taras Kachka, Ukraine’s Deputy Minister of Economic Development, told a conference. “In the last 15 years, we developed our infrastructure in a way that it cannot be simply replaced by another destination, another port.”

Ukraine is a major wheat, corn and barley supplier and tops global sunflower-oil sales. Future crops will undoubtedly shrink due to the war, but it still has 20 million tons of backlogged grain from last year. 

Ukraine is expanding export capacity at its western border and simplifying trade arrangements with the EU. European Commission President Ursula von der Leyen said on May 24 the EU was working to get what’s stuck in Ukraine to global markets by opening “solidarity lanes” to European ports as well as financing different modes of transportation. Ukraine’s ambassador to Warsaw expects Poland to be the conduit for 80% of Ukrainian grain.

But people on the ground say that’s easier said than done when you look at the map, particularly the rail network.

In Slovakia, the main traffic operator transported 18,000 tons of corn from Ukraine last month across 12 trains, and private freight companies are also involved. The issue is that cargoes from Ukraine’s broad-gauge wagons need to be reloaded onto standard Europe size ones or the container section transferred onto different wheels. 

Poland has a 400-kilometer broad-gauge railway linking Ukraine with its industrial southwest region of Silesia. It’s been used mainly for steel products, and in recent weeks to carry refugees. State railway network operator PLK SA has started investing in boosting capacity, reversing its earlier focus on connections as far as China via Belarus.

In April, Poland and Ukraine also agreed to create a joint cargo company and simplify border rules. But with routes to Poland’s Baltic ports already busy and a shortage of wagons, there are doubts over whether Poland can boost volumes of Ukrainian grain much above 2 million tons a month anytime soon. That compares with the 5 to 6 million tons typically dispatched monthly via its Black Sea ports, said Roman Slaston, Director General of the Ukrainian Agribusiness Club industry group.

Romania is keen to upgrade Galati to ease congestion at Constanta on the Black Sea. Galati is connected by the broad-gauge railway that’s compatible with the Ukrainian system and may facilitate the quicker rerouting of grains. The government wants to fast-track the construction of the missing section of 4.6 kilometers and the work will take three months, Prime Minister Nicolae Ciuca said last month.

Yet it’s still unclear who will do it, according to TTS, which has spent two months testing logistic options via railway or trucks. The route involves three countries and three different railway operators. Romania’s transport minister said he hopes to find a company to build the missing portion of track this week and may visit Galati with his Ukrainian counterpart.

“Ukraine was exporting 20 million tons of metals per year and even more grains only on water, so to think that it would be possible to completely replace these capacities is a dream,” said Petru Stefanut, TTS’s CEO. “What we’re all trying to do, is to help them as much as we can. But we can’t compare what they had and what they’ve lost.”

TTS has managed to transport about 200,000 tons of grains and metals from Ukraine in the past two months, though Stefanut is confident more will come as routing via the Danube becomes more efficient.

Any increase in supplies is critical after the war in Ukraine sparked growing fears of a food crisis. At the World Economic Forum in Davos, Von der Leyen accused President Vladimir Putin of using “hunger and grain to wield power” as she decried Russia’s bombing of grain warehouses and blockading of Ukrainian ships filled with wheat in the Black Sea. About three-quarters of Ukrainian harvests are typically sold abroad, and it’s a key exporter to Africa, Asia and the Middle East as well as Europe.

Ukraine’s Agriculture Minister expects another 30 to 40 million tons of grain will need to be exported after harvests this summer and fall. While grain can be stored, farmers need to sell it to get funds for planting 2023 supplies, with winter-crops like wheat sown in just a few months.

Kees Huizinga, a Dutch farmer who lives in Ukraine and employs 400 people, used to be able to get a 25-ton truckload of his grain to Odesa terminals on the Black Sea and back within a day. Drivers are now spending a week in travel, queues and border checks — at triple the cost — to take deliveries on a new route, unloading just over the border in Romania. From there, it still needs to weave to its final destination. 

The EU has exempted grain imports from requiring veterinary or phytosanitary certificates to ease the transit. But in the three weeks to mid-May, Huizinga had only shipped out 150 tons. Normally, that would load in just a few hours. He worries that once Romania begins its own harvest soon, the logjams could worsen.

For now, the most realistic solution remains Romania, Constanta and the Sulina Canal that links the Black Sea with the Danube. The port’s customs agency has added staff to help handle the increase in shipments, with ships lining up to enter. The Romanian railway company has decluttered its port links and started improvement works, which may result in a 30% to 40% increase of transport capacity as soon as next year, port manager Florin Goidea said.

“We expect much larger quantities to arrive, this is only the beginning,” he said. “This summer will be very crowded. It won’t be easy for us, but we have to find the solutions.”

Spoils of Putin's war in Ukraine

I found reading the article titled “Spoils of Putin’s war” by Bloomberg on impacts of war in Ukraine on global economy interesting. While one may not necessarily endorse the content, there is a need to also explore the other side of the story.

Vladimir Putin may have failed to take Ukraine in a swift military strike, but his war has already been a success. The global economy is splintering, and the West’s conflicting imperatives—as well as those of the developing world—are slowly revealing themselves.

Putin has a long record of trying to sow discord, using misinformation to power sock puppets in the Brexit referendum and political campaigns of Donald Trump, among other examples. Though his latest gambit has backfired spectacularly in terms of weakening NATO, from the standpoint of economic division, the war on Ukraine may prove his crowning achievement. The fault lines are emerging.

There are at least four groups of diverging interests. In Ukraine and the Baltic states, defeating Russia is literally existential. But in Germany, France and Italy, the calculation is very different.

When it comes to imposing energy sanctions with teeth, Germany and Italy are dependent on Russia for roughly half of their natural gas imports and don’t have the infrastructure to implement a quick substitute. Berlin has even drawn up a three-phase plan if Russian gas is turned off, telling carmakers they may have to shut production lines to ensure families can heat their homes over winter. The Bundesbank has warned of recession if supplies are cut.

Italy has started rationing energy in public buildings. France is equally leery, knowing from the Gilet Jaunes (yellow vests) protests the kind of social unrest that can result from high fuel prices.

While Europe’s biggest powers say they plan to wean themselves off Russian imports, they need time. The renewed attempts to negotiate a ceasefire, even if it means asking Ukraine to cede even more territory to Russia, may be a solution, at least for the time being.

Across the English Channel and beyond the Atlantic, the economic consequences of the war (inflation notwithstanding) are looking less critical. The US is unwavering in its support for Ukraine’s resistance—not only to push Russia back to its borders but to send a clear message to China about its territorial ambitions in Taiwan.

But it helps that America’s economic considerations happen to align with its geopolitical goals. Supplying arms and munitions promises a bonanza for its powerful military industrial complex, while America’s relative self-sufficiency on energy and food insulates it from the worst repercussions of the war.

Moreover, there are longer-term financial benefits that may flow its way. As Republican Senator Pat Toomey of Pennsylvania said at the World Economic Forum in Davos last month, “Don’t take this the wrong way, but there is a huge economic opportunity. Europe is not going to be independent of natural gas. Why not burn American gas rather than Russian gas?”

In the UK, with little direct exposure to Russian gas and similarly aligned with President Joe Biden’s hard stance on Kremlin aggression, some business leaders think British industry can substitute for closed German factory lines. Not to mention that the UK is home to some of the biggest defense contractors in Europe.

While Europe wrings its hands and America and the UK see advantage, much of the rest of the world faces a grimmer prospect thanks to Putin’s war.

Russia is threatening a global food crisis by blockading the Black Sea, raising the prospect of a humanitarian catastrophe in the developing world and exposing the fragility of supply chains yet again after the initial protectionism of the pandemic. Export restrictions on food staples have been imposed by 19 countries.

Beata Javorcik, Chief Economist of the European Bank for Reconstruction and Development, estimates that 17% of the world’s traded calories are now landlocked. At Davos, she warned of riots and social upheaval as rocketing food prices bankrupt governments in the developing world.

Famines will indeed be blamed on Putin—but he is offering a simple way out: drop the sanctions. That’s arguably an impossible offer to an increasingly divided world.