Cost of Disconnecting From Russia

As evidence of atrocities by Russian forces in Ukraine mounts it is leading to more and more sanctions. As nations and individual companies go forward, they need to consider the cost of disconnecting from Russia and the various ways in which they can ease the pain. As Russia continues its attempts to win in Ukraine by wholesale slaughter of civilians and destruction of infrastructure it will be more and more difficult for countries and businesses to want to deal with Russia, we can expect a wholesale reshuffling of trade relationships. But, before that reshuffling takes place there will be a cost of disconnecting from Russia for everyone, including individual investors.

Russia As a Supplier of Commodities

Senator John McCain was the one who first said that Russia was a large gas station pretending to be a country. Not only is Russia a major exporter of fossil fuels they are also of critical importance in exporting fertilizers, wheat, corn, strategic minerals, nuclear reactors, iron, steel, and more. Statista lists Russian exports by value in US dollars.

Mineral fuels and oils: $141.92 billion
Precious metals, stones, pearls: $30.36 billion
Iron and steel: $16 billion
Cereals: $9.34 billion
Nuclear reactors, boilers, machinery: $8.3 billion
Wood and wood products: $8.2 billion
Fertilizers: $6.99 billion
Copper and copper products: $5.65 billion
Aluminum and aluminum products: $5.46 billion

The biggest source of revenue for Russia is in the realm of oil, natural gas, and coal. This is where the EU finds itself in a bind as they have allowed themselves to become so dependent of Russia for the sources of energy to run their societies and economies. However, just as important, or more so to some, are the cereals and fertilizers that Russia exports. Many nations in the Middle East, Asia, and Africa rely on Russia (and Ukraine) for their corn and wheat as well as their fertilizers. We wrote about the crisis that will arise if Ukraine has no harvest or is unable to ship its grains. The pain and civil chaos from food shortages will be greatly compounded as Russia threatens to cut off food and fertilizer supplies to nations that do not support its war in Ukraine.

Wheat Export Pain and Profit

Russia counts for 24% of world wheat exports followed by Canada and the USA contributing 25% together. France counts for 10%, Ukraine for 9%, Australia for 6.7% and Argentina at 6.4%. To the extent that Ukraine cannot harvest this year’s winter wheat crop or cannot bring it to market that will drive the price up. Stored wheat could act as a buffer, but the two largest stockpiles are in India and China and are kept as emergency food reserves. Outside of these two nations the US has the largest wheat reserves at 27 million tons, the EU has 13 million tons, and Russia has 8 million tons according to Agrifuture Magazine. Canadian and US wheat farmers have their winter wheat crops in the ground and, baring awful weather, can expect historic wheat prices at harvest.

Cost of Disconnecting From Russia - Wheat Prices
Twenty Years of Wheat Prices

Food As a Weapon and Food Riots

As the war in Ukraine shifts to the East and South, it could turn into more set piece battles instead of Ukraine beating the Russians with small unit, hit and run tactics. It could drag on for months if not years. As the prospect of a prolonged war emerges Putin is seen meeting with leaders from the Middle East making the point that allies of Russia will get food and enemies will starve. The cost of disconnecting from Russia will include whatever chaos Putin is able to cause to advance his goal of reinventing the Soviet Union. The fallout from this situation goes far beyond US companies pulling out of franchise agreements in Russia to providing opportunities for Wyoming coal producers like Peabody Energy and wheat farmers in North Dakota and Manitoba.

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