A lot of people are asking, if Russia doesn’t have hostile intentions against Ukraine, why the troop build up?
This is an absolutely fair question. Not least because the troop build-up has been happening for many months.
One under-appreciated factor in the whole story, however, is the role being played by natgas and fertiliser markets.
We all know there’s been a natgas squeeze in continental markets since at least the fourth quarter of 2021. Fewer people are aware of the grave impact this is already having on fertiliser markets, planting and food costs. Many are also under informed about Ukraine’s historic role as the bread-basket of Europe.
One man who does know what he’s talking about on the topic is the FT’s John Dizard (who if you haven’t already been reading, you really should be, he’s brilliant).
As Dizard notes, EU farmers have already been suffering from a 549 per cent rise in natgas prices, which has translated to a 263 per cent rise in fertiliser costs.
This means many farmers have delayed purchasing necessary supplies, hoping for better times (which don’t now appear to be coming). Concerns are rife as a result that European crop yields could be reduced by up to 10 per cent.
Russia is a natgas exporter, but it’s also been a grain exporter in recent years. While it’s tempting to think a natgas squeeze won’t impact Russia, or that Russia is just pretending it can’t easily ramp up production, if it too has been impacted by the global shortage (a shortage that is arguably entirely self-engineered because of the net zero agenda), then the power balance in Europe suddenly gets very different. It’s not entirely clear to my mind that Russia is bluffing on this, and many commodity traders corroborate this fact.
A clue to Russia’s own supply issues is that it has recently moved from exporting grain to restricting exports altogether — which could have been motivated by concerns about it being able to manage its own food supply.
This is not really surprising given the current commodity context.
“This is a molecule crisis. We’re out of everything, I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it,” said Jeff Currie, the head of commodities research at Goldman Sachs, in a recent note.
If commodity shortfalls are coming, pre-hoarding or storing makes sense. We’re in Joseph and the Pharaoh future supply management planning territory.
Fears beget fears, which encourage hoarding, which exacerbate shortages, which beget more fears, which encourage hoarding…. and on and on. It’s a self-destructive cycle which leads to, well, toilet paper shortages and petrol queues but a national or sovereign level.
It also means farming news is suddenly very relevant.
The bigger issue for markets is if Europe can’t farm its way out of the shortage, it will be forced to import its way out of the crisis. The nearest and cheapest import source is Ukraine. And this is why the power that can influence where Ukrainian surpluses go, suddenly becomes a European kingmaker.
As Dizard concludes:
Europe has great technology strengths, but gas and fertiliser do not come from a virtual reality headset. Russians had a strategy, and they have executed it.
He’s got a point. And that means it’s time to start watching grain prices.
Relatedly, if you’ve not seen Agnieszka Holland’s Ukrainian masterpiece Mr Jones, all about the collateral damage and genocide that was afflicted on the Ukrainian nation when Stalin decided to take control of the nation’s grain supplies (dubbed Stalin’s gold), I really recommend it. The subplot is about how the press, Pulitzer winner Walter Duranty of the New York Times no less, became so captured by the system, the story was de facto blocked from further communication to the West. Millions of Ukrainians died as a result in the associated man-made Holodomor famine.
(Feature image credit: Creative Commons Bluemoose.)