IHS Global Insight Perspective | |
Significance | Russian PM Vladimir Putin announced on 5 August a temporary ban on grain exports following reports that 20% of this year's harvest has been destroyed by continuing drought and wildfire. The raging wildfires continue, prompting the evacuation of weapons and ammunition from military bases, and threatening public health. |
Implications | The news has instantly pushed wheat prices up in world markets, although Putin has pledged just over US$1 billion in loans and subsidies to Russian grain producers to prevent domestic grain price increases. |
Outlook | Despite the government's efforts the heatwave and wildfires are likely to continue until the rain starts, further damaging the agriculture and possibly raising domestic food prices. This, coupled with increasing public criticism over the government's previous failure to prevent forest fires, will hurt the Russian leadership's popularity in the short term. |
Russia's western and southern regions are being plagued with continued drought and wildfires that have already claimed 50 lives, and left some 2,000 people homeless. With no rain forecast and temperatures at around 40 degrees Celsius—a 140-year high—Russian Grain Union president Arkady Zlochevsky confirmed that 20% of this year's harvest has so far been damaged, adding that the grain harvest may drop by 20-26% to 72-78 million tonnes in 2010 compared to 97 million tonnes in 2009. Some 20% of cultivated arable land or 10 million hectares has been damaged by heatwaves and raging fires that in some places have created cracks in the soil 20 centimetres deep, causing further damage to the country's agricultural and particularly crop production.
The natural disaster prompted Prime Minister Vladimir Putin to declare on 5 August a temporary ban on exports of grain and agricultural products made from grain. The export restrictions will apply from 15 August until 31 December. The government has already pledged to allocate 10 billion roubles (US$334.9 million) in subsidies and another 25 billion roubles in loans to the country's agricultural sector. Government sources have reported that thanks to the bumper harvest of 2008-2009, the state has some 24 million tonnes of grain in reserve, which will be distributed by the government intervention fund without auction, although this figure was later brought down to 9.5 million tonnes by Putin. This measure is to ease the pressure on agricultural producers and prevent any dramatic domestic food price increases. Putin has asked fellow Customs Union governments of Belarus and Kazakhstan to also decrease exports of grain.
The news has sent shockwaves across world food markets, where Russia in recent years has increased its presence by becoming the fourth largest grain exporter after the United States, the European Union (EU) and Australia. Last year Russia exported 21.4 million tonnes of grain. It needs some 77 million tonnes of grain for domestic use, which means that this year's harvest will barely break even and leave almost no grain for export. Putin's announcement immediately pushed world wheat prices up by 60% from US$4.25 a bushel to US$7.85—the highest figure since September 2008. The price rise has been further fuelled by news that Kazakhstan, another major grain exporter, also expects a drop in the grain harvest due to the drought.
Serious Security and Health Risks Unfold
Images from two U.S. NASA satellites identify at least 636 forest fires as of 3 August in western Russia. President Dmitry Medvedev cut his summer holiday short to return to Moscow and control the situation himself. He has declared a state of emergency in seven out of the 14 administrative regions—Mairi El, Mordovia, Vladimir, Voronezh, Moscow, Nizhny Novgorod and Ryazan—hit worst by unrelenting wildfires. According to the Ministry of Emergency Services, fires are currently covering 196,000 hectares. While some fires had been put out, 248 fires have appeared in the past 24 hours. Sarov, a closed nuclear research town in the Nizhny Novgorod and Moscow region, remains the worst affected. The authorities have relocated all radioactive and explosive materials, while the Defence Ministry is moving to secure the location of weapons, artillery and missiles at a munitions depot at Alabinsk, about 70 km south-west of Moscow. On 4 August a naval logistics base in Kolomna, south-east of Moscow, was completely destroyed, including its staff headquarters, financial department, 13 warehouses containing aeronautical equipment and 17 storage areas containing vehicles. Following the failure to protect the military property, Medvedev dismissed a number of officers for disciplinary failure, including the head of the Russian Navy's logistics division Sergei Sergeyev and the head of Navy aviation Nikolai Kuklev. In an unprecedented manner, he also accused the head of the Russian Navy, Admiral Vladimir Vysotsky and his deputy Alexander Tatarinov for "incomplete professional responsibility" while dealing with the fire last week.
There are increasing reports that the smog from the fire is posing a health hazard in the Russian capital Moscow where temperatures have soared to above 40 degrees in the past few days. Visibility has dropped sharply to 300 metres while air pollution risks affecting the health of the vulnerable, who have been advised not to leave their homes. Inhaling the polluted air is equivalent to smoking several packs of cigarettes a day. Most worryingly, the Emergencies Ministry has warned that the fire is encroaching on to the areas contaminated by the 1986 Chernobyl nuclear power plant disaster. The Russian authorities said that they are working around the clock to prevent the fires reaching these areas, as it may reactivate radioactive materials. The Kommersant daily reported on 5 August that the situation around Togliatti, a southern Russian city, is worsening as the fire quickly approaches the city boundaries.
Outlook and Implications
Judging by the meteorologists' forecasts of 42-degree-Celsius heat in most of western Russia, the wildfire and heatwave are set to cause havoc. The government has deployed at least 165,000 emergency workers, together with hundreds of thousands of soldiers and volunteers to combat the natural disaster, which shows very little signs of abating. The smog is likely to intensify the effect of heat as well as partially paralyse everyday life in number of the European Russian cities. Air-traffic to Domodedovo international airport remains partly suspended, and this is likely to continue for the next few days.
Given that most Russians are very sensitive to bread price fluctuations, the government is set to try to dampen the price increase through promised subsidies. However, the damage caused to wheat and barley fodder may push meat prices up. Government finances are already spread thinly and it will be difficult to see how they will be able to subsidise the whole agricultural industry. Meanwhile, grain supply contracts are likely to be reviewed by some Russian suppliers. The current natural disaster can invoke the force majeure clause of supply contracts, a clause that will be lucrative for Russian exporters. For some this will mean avoiding supplying grain now at an already agreed lower price, and instead a chance to benefit from a global price rise if the grain is sold later this year.
Food price rises seem increasingly likely and they will inevitably hit the government's popularity. Medvedev and Putin have already come under strong public criticism for misjudging the scale of the problem and letting the fires get out of control. The Russian government has yet to count the damage, both commercial and political.