MOSCOW, RUSSIA – Russia’s invasion of Ukraine promises to change the grain industry landscape in the post-Soviet space, and possibly in the entire world, especially if Russian forces would prevail.

In addition to severe economic sanctions, Russia now faces an unprecedented exodus of foreign businesses. As of late March, more than 400 companies have decided to voluntarily suspend operations in Russia. Foreign customers have abandoned Russian goods such as oil, natural gas, food and vodka. Never in modern history has an economy of Russia’s scale been subjected to such extraordinary ostracism.

There are already signs that Russian grain exports may be in trouble this year.

The demand for Russian grain this season is not expected to be huge, Eduard Zernin, head of the Russian Union of Grain Exporters, said.

Taking the geopolitical risks into account, traditional importers of Russian grain are diversifying their supply base. No deals have been canceled so far, but the number of new export contracts is very small, Zernin said.

The pre-war wheat forecast envisaged Russia collecting 85 million tonnes of wheat on an estimated 29.5 million hectares, yielding 2.88 tonnes per hectare, Michael Lee, director of United Kingdom-based Green Square Agro Consulting, said.

It was expected that nearly half that amount would end up in the global market. Currently, this forecast looks questionable, just like the prospects for domestic demand, which also is hampered by the freefall of the Russian economy, inflicted by the Western sanctions.

The Russian consultancy IKAR said there have been almost no sales of Russian wheat to foreign customers since the conflict commenced. Another consultancy, SovEcon, said that no demand for Russian wheat among non-Russian customers had been seen since Feb. 24, the first day of the invasion. To some extent, this might be associated with the problems in the Azov Sea, where shipping was stopped on the first day of the war, SovEcon added.

“The physical supply of commodities is not the only concern for Black Sea trade, as ports remain closed and logistical infrastructure in Ukraine is expected to be severely damaged,” commented James Bolesworth, managing director, CRM AgriCommodities. “Furthermore, the sanctions placed on Russia by many countries and indeed businesses will have long-lasting consequences for global commodity trade, with a number of global banks withdrawing trade finance from deals involving Russian commodities.”

However, Elena Turina, director of the analytical department of the Russian Grain Union, countered that Russian grain exports should not be significantly impacted by Western sanctions. She said the main importers of Russian grain are located in Southeast Asia, Africa, and Middle East countries — regions where most countries have not introduced sanctions against Russia.

“If we face sanctions (on grain exports) to the United States and Europe, we can redistribute exports to other needy countries,” Turina said.  

But not all market participants are confident this will be the case. A spokesperson for a Russian grain company, under the condition of anonymity, told World Grain that government officials are trying to reassure the companies that once the conflict ends, everything will return to normal.

“They say that the world market would not survive without Russian wheat,” the source said. “But what we see is an absence of demand. Whether it is temporary, nobody can tell. There is a lot of uncertainty on the table.” 

There are major concerns about how the Ukraine grain industry will perform this year, given that many farmers fled the country, while some reportedly joined the militia. Long-term prospects are every bit as murky.

Ukraine’s wheat crop was nearly all planted in the autumn and currently stands at 6.5 million hectares.   Spring wheat was planted through March and was forecast to be around 175,000 hectares, bringing the total wheat area to 6.7 million hectares, Lee estimated.

“If the situation on the ground escalated to a position that farmers could not apply fertilizers or pesticides and assuming they could harvest it in July, there would still be a wheat crop, probably something like 16 million to 17 million tonnes,” Lee said.

“This compares with 26 million to 27 million tonnes we currently forecast if farmers are unencumbered to manage their crops,” he said.

Ukraine requires 9 million to 10 million tonnes of wheat for domestic consumption. Depending on the scenario, that will leave between 6 million and 7 million tonnes or 16 million to 17 million tonnes available for export through the 2022-23 marketing year, Lee said. 

As for corn, the current unencumbered forecast is 37 million tonnes from 5.5 million hectares, with domestic consumption about 7 million tonnes, leaving 30 million for export through the 2022-23 marketing year. This could drop to zero if farmers cannot plant the crop, Lee added. 

“We will be able to sow only where there are territories controlled by Ukraine,” said Roman Slaston, director general of the Association Ukrainian Agribusiness Club. “Sowing work is not expected on the combat line, and we cannot carry out work in the occupied territories. As soon as the Russians are driven out of Ukraine, we can try to resume work in these territories.”

The production problems in Ukraine could spark a food supply crisis in the countries that traditionally rely on the Ukrainian grain.

Food and agricultural experts have warned of increasing food insecurity in poorer countries, many of which already are suffering from high hunger levels because of the COVID-19 pandemic.

The Middle East and North Africa already have started looking for alternative grain suppliers, said Anna Bodrova, an analyst at Alpari, a Russian consultancy. This year’s sowing campaign in Ukraine could end up a complete disaster.

“Preparatory work is starting now but with a high probability that many agricultural producers will face problems and the export season will most likely be a failure,” Bodrova said.

The current situation is likely to push the largest wheat suppliers to expand production, especially if the global prices would keep setting new records. Farmers in neighboring countries also are likely to ramp up wheat production to replace the withdrawn quantities.

“I presume other countries will be thinking about this and will look to fill the gap,” Lee said. “Most Kazakhstani wheat is spring planted. I expect they will plant more. I’m not sure of the winter wheat spring wheat split in Poland, but there is no agronomic reason why they couldn’t increase spring wheat hectares. I expect they will also increase corn hectares.”

Slaston noted that “diesel fuel is critically needed since it is sorely lacking. Most of the previous supplies were from Belarus and the Russian Federation, and only a part was from European countries. We are now completely cut off from the sea, so supplies can only be brought in by land from the EU countries, and these supplies are limited. Now, all imported volumes of diesel fuel go to the needs of the army.”

A big question is what will the long-term consequences of the conflict look like? Ukraine and Russia account for about 30% of the world’s traded wheat, and no scenario is looking good for the world market.

As for the long-term consequences, everything will depend on the scale of the destruction.

“We now see that the Russian troops are becoming more and more aggressive,” Slaston said. “They start shooting directly at civil buildings, even in ordinary villages where there are no resistance or military forces of Ukraine, they shoot at buildings, start robbing households, taking away chickens, milk, food.

“Today we received information that a shell hit the building with fertilizers. This is also a loss in terms of infrastructure and opportunities for Ukraine. Therefore, everything will depend on the final destruction that Russia will inflict on Ukraine.”

A lot will depend on which side prevails in the conflict. A Russian victory in Ukraine could complicate things even further.

“I would say it is too early to comment on a Russian victory or under whose jurisdiction and export policies the grain would be traded under,” Bolesworth said. “This uncertainty is adding a considerable risk premium to prices.”

Lee added: “I’m not sure what ‘victory’ would look like but to be able to sell grain you need a buyer, and I can see a ‘victory’ whereby sanctions restrict trade from the Black Sea — Russia and Ukraine. Clearly, there isn’t the capacity to just replace 30% of global wheat exports from other sources, hence, why I say sanctions would restrict trade, as in it would be limited and with caveats attached. This would be a tectonic shift in the grain trade, but I don’t think the global community would tolerate a world where (Russian President Vladimir) Putin is in control of a third of the world’s wheat exports.”

Some analysts believe that by taking over Ukraine, Russia can start using grain as a weapon more extensively. A group of experts recently told Politico that Russia already has cut off critical grain supplies to countries that have hitherto relied on Ukrainian exports.

“With one of its well-documented false narrative campaigns, Russia will likely focus on selling to those states the notion that this increase in hardship is the fault of the West,” the experts told the publication. “In exchange for recognition of Russian claims to Ukraine and potentially elsewhere, the Kremlin would be willing to relieve that tension by providing the necessary grain.”

The experts added Russia may soon be in a position to decide not only who receives critical food supplies, but who does not. The resulting strategic gains for Russia could also mean deliberately creating targeted food security crises in some of the world’s most fragile states and regions. With countries such as Yemen, Libya, Lebanon, Sri Lanka, and Sudan — among others — heavily reliant on Ukrainian grain, even a short-term delay in supply may have drastic consequences.

Slaston said it is difficult to identify Putin’s primary goal, but in his opinion the Russian invasion of Ukraine stems from mainly military and geopolitical motives — “the desire to resurrect the Russian empire.”

“It seems that Putin will be satisfied if there is an absolute void on the territory of Ukraine,” Slaston said. “Even the shelling of nuclear power plants also speaks of the Russian dictator’s not quite sane mind.”