Tuesday, October 4, 2022
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From wheat to gas, Russia still has levers to pull on global economy



The global economic damage sparked by Russia’s war in Ukraine may get much worse.

Russia itself has seen foreign investment dry up, hundreds of Western companies pull out, and the domestic GDP set to shrink by 10% or more this year. But the pain hasn’t been all one-sided since President Vladimir Putin gave a green light for the invasion of his neighbor Feb. 24.

Economics specialists and foreign policy observers say the Kremlin still has “some cards” left to play in the global marketplace, particularly in the fuel and food sectors, and could soon decide to pull those levers in order to maximize its leverage in any future peace negotiations with Kyiv. Such Russian tactics, if employed, would likely drive gas, grain and wheat prices even higher than today’s record levels.

Recent days have brought fresh warning signs of just how much sway Moscow holds over key sectors, despite its relatively meager economy — Russia’s GDP is slightly smaller than that of Italy or South Korea — which boasts nowhere near the financial power and influence over global markets of the U.S. or China. Russian officials said Thursday that they were cutting natural gas supplies to Europe even further, bringing the current operating level of the major Nord Stream 1 pipeline down to just 40%, according to Reuters.

The Kremlin blamed the slowdown on delays in planned repairs to the pipeline and said that Western economic sanctions — instituted in direct response to Russia’s invasion of Ukraine earlier this year — have made it difficult to acquire the necessary parts and equipment. But European officials aren’t buying that rationale.

Germany’s chief power regulator, Klaus Mueller, called the explanation “unfounded” and said the decision by Russia’s state-owned energy giant Gazprom appears designed to drive fuel prices higher. The move comes at a crucial moment for Germany and for Europe as a whole, which is trying to quickly move away from dependence on Russian oil and gas but will still rely on that fuel for the coming winter months.

“We could perhaps get through the summer as the heating season is over. But it is imperative that we fill the storage facilities to get through the winter,” Mr. Mueller told the Germany news outlet Rheinische Post.

Shortly after Russia launched its invasion of Ukraine, Europe pledged to wind down its dependence on Russian oil and gas. But it’s likely to take years before Europe can fully free itself from Russian fuel, and in the interim Mr. Putin could further reduce supplies in a bid to crack Europe’s solidarity and perhaps even convince the West to ease economic sanctions on Moscow.

Amid rapidly rising food and fuel prices, there are already signs that public opinion in Europe is shifting away from a hard-line anti-Russia stance and toward peace, perhaps in the hopes that a cease-fire in Ukraine may bring economic relief.

A major study by the European Council on Foreign Relations published this week found that a plurality of Europeans, about 35%, favor “peace now even at the cost of Ukrainian concessions to Russia.” Researchers believe that number could rise further if the economic fallout from the Russia-Ukraine war grows and drives already out-of-control inflation even higher.

Frustration also is rising in the U.S., where average nationwide gas prices hit $5 per gallon this month for the first time in history.

And Mr. Putin, at least rhetorically, shows no signs of a course correction even given the economic blowback to his country from the Ukraine war.

In a speech to the St. Petersburg International Economic Forum Friday, Mr. Putin insisted that the West’s “economic blitzkrieg” of Russia “had no chance of success.”

“Dire forecasts about the Russian economy’s prospects, which were made in the spring, failed to pan out,” he said, noting Russia had suppressed inflation rates even though its financial system has been largely cut off from the West. Budget surpluses, he claimed, were at an all-time high.

“This is the price of decisions detached from reality and contradicting common sense,” Mr. Putin told the business forum, which attracted this year far fewer foreign leaders and major international business executives than had been the case in years past.

Russian leverage

Against that backdrop, analysts say that while Russia has relatively few tools in its toolbox to impact the global economy, the West needs to be prepared for things to get worse, at least in the short term.

“Russia does have some cards, some leverage, which we shouldn’t underestimate,” said Charles Litchfield, deputy director of geoeconomics at the Atlantic Council, a leading Washington think tank.

Mr. Litchfield cited Russia’s major role in global wheat and grain supplies. Russia and Ukraine produce nearly one-third of the world’s wheat, and the raging war in Ukraine — and a Russian Black Sea blockade — have made it increasingly difficult to move product out of the region and to markets in Europe and beyond.

“There’s one lever. And another is energy,” Mr. Litchfield said of Russia’s influence. “On gas, they can still play games and make things rather difficult for the Europeans. … I think that is one trump card Russia still has.”

“As long as [the Europeans] are importing gas from Russia, and unless and until there is enough capacity to import [liquefied natural gas] from the U.S., that gives Russia some leverage,” he said.

On food, the United Nations has pushed for a Black Sea corridor to allow for the export of Ukrainian grain, which has been at a virtual standstill since the beginning of the war in late February. Wheat and grain prices have skyrocketed around the world as a result. Wheat, for example, has risen more than 60% this year alone, and analysts predict it will likely climb higher if the Russia-Ukraine war drags on.

U.N. analysts have said that some 36 countries around the world, many poorer, more populous nations in the Middle East and Africa, depend on Ukraine and Russia for more than half of their wheat imports. In addition, Russia and ally Belarus — which hosted many of the troops that took part in the initial invasion of Ukraine together constitute 40% of the global trade in potash, a nutrient considered vital in modern farming and fertilizer markets.

Agricultural exporting giant Brazil, whose vast soybean export crops depend on potash, has largely been on the sidelines in the global debate on the Russia-Ukraine fight, and President Jair Bolsonaro has not been coy about why.

“What happens 10,000 kilometers away in Ukraine has reverberations in Brazil,” he told CNN Brazil before the war began. “We have special business with Russia. For us, the question of fertilizers is sacred.”

As with oil and gas in Europe, Russian shipments of potash and other scarce commodities have continued to dependent countries, undercutting the Biden administration’s hopes of choking off Russian revenues and starving the Russian military of needed funds. Shortages and supply issues also have sent potash global market prices up by nearly 50% since February, further enriching Russian suppliers.

The rising costs and limited supply with Ukraine and Russia both curtailed in global markets will have dramatic real-world consequences, international aid groups say. A recent International Rescue Committee report found that the current crisis means an additional 47 million people worldwide will experience “acute hunger” this year.

Russia blames rising food costs, low supply and an uptick in global hunger on Western economic sanctions. But the U.S. argues that the Kremlin is essentially holding food supplies hostage.

“The breadbasket of the world … has been Ukraine and Russia, creating more grain, producing more grain and corn than any countries in the world,” President Biden said at a June 11 Democratic Party reception. “And there’s 14 million tons of grain that is really stored now in the silos in Ukraine, but there’s no way to get it out. No way to get it out. The Russians will blow the ships up as they come out of the Black Sea, if they do. And we’re in a situation where we’re trying to figure out how to get it out through Poland and get it out through possibly even Belarus, believe it or not.”

Not surprisingly, Russia is publicly pushing the U.S. and NATO to pull back its economic sanctions in exchange for allowing wheat and grain supplies to flow out of Ukraine. Specialists say that so far there’s little indication the West will give in to those demands.

“The Russians are sort of blackmailing us into it, to an extent, talking about removing sanctions in exchange for getting wheat and grain out of Ukraine,” Mr. Litchfield said. ‘I don’t think the sanctions will be removed to achieve that. That’s not the logic of the sanctions.”





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