Many associate Russia’s economic power with oil and gas. Most might not realize that Russia is currently the top wheat exporter in the world and its trade relations contribute to global food security (or lack thereof), especially import-dependent regions within MENA. Many MENA countries depend on Russian wheat and are therefore vulnerable to price and supply fluctuations that occur in the country.
We leveraged the Global Value Chain (GVC) framework — a tool often used to show ways to improve participation in global trade — to understand ways that global grain markets are shifting and their implications on people’s access to their daily bread.
Russia's rise in wheat power
Russia entered the wheat GVC in the late 1990s as it started economic liberalization. The country became a major player in the wheat GVC and by 2015-16 was the world’s largest producer with about 25 million tonnes in exports, according to the U.S. Department of Agriculture. The Middle East absorbs about 80% of Russian wheat exports with Egypt, Turkey and Iran as the leading import markets. The Wheat GVC in Russia involves numerous actors across the following:
- Inputs: research and development, seeds, fertilizers, agrochemicals and machinery.
- Production: agroholdings (48% of production Agroholding are commercial farms controlled by entities whose core business is outside primary agriculture. An example would be Kuban Agro); independent private farming (42%) and household farming (10%).
- Processing: Elevators, mills, feed milling and biofuel.
- Marketing: Food retailers, food manufacturers and wholesalers.
The Russian government controls the value chain through policy instruments such as input subsidies, trade restrictions and taxes. Governmental interventions include promoting domestic wheat output and managing food inflation to ensure food security and stability in the country. At the same time, international commodity trading companies such as Glencore and Cargill are invested in Russian agricultural markets and have been instrumental in developing Russia’s export markets.
Russia’s emergence introduced new uncertainties for import-dependent countries such as Egypt. Access to cheap wheat is important for such countries maintaining social and political accord. As part of our research, we developed a framework to determine catalysts that disrupt grain supply, putting the food security of importing countries at risk. These catalysts are environmental; geopolitical dynamics; economic dynamics from market conditions and trade shifts; and public policy.
On the environmental side, droughts in 2010 reduced Russia’s output, leading to an export ban, skyrocketing prices and fueling unrest that contributed to the Arab spring. Russian geopolitical and economic interests are intertwined, which can also be destabilizing to grain markets. Geopolitically, the Crimea crisis resulted in international sanctions. This caused a surge in domestic food prices and the devaluation of the ruble. Russia responded by imposing a high tax on wheat exports, essentially ending all shipments. These trade disruptions have significant implications for importing countries that are reliant on Russian wheat and often push these nations to purchase more expensive wheat from alternative partners. In 2014, in the wake of the Crimea crisis and Russian economic problems, the country introduced new grain export tariffs, renewing fears of another round of global price increases. In 2017, Russian involvement in Syria continued to fuel disagreements with Turkey, resulting in disrupting wheat trade between the two countries.
Russia has a long history of using trade policies to protect domestic wheat supplies and to combat internal food inflation. Policy interventions distort the market, discourage foreign investments and disrupt trade. Companies involved in agricultural trading seek to mitigate these policy risks and perhaps influence exports to protect their investments and consolidate their market position in an increasingly competitive market. This leaves countries dependent on Russian wheat (such as Egypt) vulnerable to trade volatilities as it continues to subsidize bread to feed its people. As Russia increases its share of the wheat market, it must improve the policy environment and remove these bottlenecks along its wheat value chain.
Russia will have to improve its policy environment to continue to capture export markets while attracting investments in agriculture. Importing countries need to promote their agricultural sector by encouraging private sector investment. At the same time, such countries must improve grain storage capacity and diversify their sources of wheat.Improving trade governance structures to develop better policies and transparency of chain actors will be a must to increase food security and reduce social instability. For more information on this study, visit www.cggc.duke.edu.