The Economist - USA (2022-03-12)

60 Finance&economics TheEconomistMarch12th 2022

merchants  at  bay.  While  Ukraine  is  “un­

reachable”,  Russia  is  “untouchable”,  says

Michael Magdovitz of Rabobank. 

Most alarming will be the conflict’s im­

pact on agriculture worldwide. The region

is a big supplier of critical fertiliser compo­

nents,  including  natural  gas  and  potash.

Fertiliser prices had already doubled or tri­

pled,  depending  on  the  type,  even  before

the war, owing to rising energy and trans­

port  costs  and  sanctions  imposed  in  2021

on  Belarus,  which  produces  18%  of  the

world’s potash, as it cracked down on dissi­

dents.  As  Russia,  which  accounts  for  20%

of  global  output,  finds  it  harder  to  export

its own potash, prices are sure to rise fur­

ther. Since four­fifths of the world’s potash

is  traded  internationally,  the  impact  of

price spikes will be felt in every agricultur­

al  region  in  the  world,  warns  Humphrey

Knight of cru, a consultancy. 

As  a  result  of  all  this,  a  much  greater

share  of  incomes  will  soon  be  spent  on

food  (see  chart).  This  will  be  felt  most

acutely in the Middle East, Africa and parts

of Asia, where some 800m people depend

heavily  on  Black  Sea  wheat.  That  includes

Turkey, which supplies much of the south­

ern Mediterranean with flour. Egypt usual­

ly  buys  70%  of  its  wheat  from  Russia  and

Ukraine. The latter alone accounts for half

of  Lebanon’s  wheat  imports.  Many  others

can  hardly  do  without  Ukraine’s  corn,

soyabeans and vegetable oil. 

Meanwhile higher fertiliser and energy

costs  will  crimp  farmers’  margins  every­

where. Brazil, a huge producer of meat and

agricultural  products,  imports  46%  of  its

potash from either Russia or Belarus, says

Cristiano  Veloso  of  Verde  AgriTech,  a  Bra­

zilian startup. Eventually some of the costs

will be passed on to the consumer.

Protectionism  may  pour  more  fuel  on

the  fire.  National  restrictions  on  fertiliser

exports increased last year and could accel­

erate.  Limits  on  food  exports,  or  panic­

buying  by  importers,  could  trigger  a  price

spike of the kind that sparked riots in doz­

ens of countries in 2007­08. On March 8th

and  9th,  respectively,  Russia  and  Ukraine

bannedwheatexports.Argentina,Hunga­

ry,IndonesiaandTurkeyhaveannounced

food­exportrestrictionsinrecentdays.

Thereisnoeasyfix.Someofthe160m

tonnesofwheatusedasanimalfeedevery

year could be diverted for human con­

sumption,butsubstitutionmayexportin­

flationtootherstaples.Increasingproduc­

tioninEuropeandAmericaanddrawing

on India’s vast strategic stockpile may

yield10­15mtonnes—asubstantialquanti­

ty,butlessthana thirdofUkraine’sand

Russia’scombinedannualexports.Some

couldcomefromfartherafieldbutthere

arebottlenecks:effortstoexportmoreof

Australia’s bumper winter­wheat crop

havecloggedthesupplychainsbetweenits

farmsandports.Withcorn,governments

mayresortto appropriatingsomeofthe

148mtonnesusedasbioethanol feedto

helpplugthisyear’slikelyshortfallof35m

tonnes.Fertilisershortagesareevenhard­

er tocover:newpotashmines take5­10

yearstobuild.

ThewarinUkraineisalreadya tragedy.

Asitravagestheworld’sbreadbasket,a ca­

lamitylooms.n

Steeper staples

Food spend as % of individual income

Sources:Rabobank;World Bank

NorthAmerica

Europe&

CentralAsia

EastAsia& Pacific

MiddleEast&

northAfrica

LatinAmerica

SouthAsia

Sub-SaharanAfrica

403020100

201 2023 forecast

Russia,Chinaandsanctions

Pipe dream

N

ationalist bloggersin China have a

new  fascination:  global  payment  sys­

tems.  Vladimir  Putin’s  attack  on  Ukraine,

followed  by  Western  sanctions  on  Russia,

have  prompted  internet  pundits  to  extol

the  virtues  of  the  Cross­Border  Interbank

Payment System (cips), the rails on which

Chinese banks transfer and clear yuan­de­

nominated  payments  around  the  world.

Some have also taken to bashing swift, the

Belgium­based  financial  messaging  sys­

tem  that  has  started  excluding  Russian

banks from international payments. 

cips and  swift are  far  from  being

household names in China. But the sweep­

ing  sanctions  against  Russia—on  the  use

of  swiftby  some  of  its  banks  and  on  its

central  bank—have  shone  a  spotlight  on

China’s  homegrown  financial  networks,

and the extent to which it can use them to

help Russia. Three primary Chinese finan­

cial channels are in place to assist—two le­

gitimate, one not. None is a remotely ade­

quate substitute for the links to the West­

ern financial system that Russia has lost.

First,  consider  the  direct  connections

between the two countries’ central banks,

which  do  not  require  swiftmessaging  to

make  transactions.  Russia  has  about

$90bn­worth  of  mainly  yuan­denominat­

ed  deposits  held  with  the  Chinese  central

bank.  It  also  has  a  150bn­yuan  swap­line

agreement  with  China.  It  can  use  these

funds to finance imports from China in the

event  that  other  trade­finance  routes  in

dollars are blocked, note analysts at Natix­

is, an investment bank.

But  this  trade  will  largely  remain  in

yuan,  limiting  what  Russia  can  purchase.

China’s  regulators  are  still  keen  to  avoid

American  “secondary”  sanctions.  Primary

sanctions  target  Russian  institutions  and

American  firms  that  deal  with  them.  The

secondary  sort  have  yet  to  be  used,  but

would target third parties outside America

that  interact  with  Russian  firms,  even  if

those  transactions  are  permitted  by  local

law. Allowing Russia to sell yuan­denomi­

nated assets in order to raise dollars could

attract  scrutiny  and  go  beyond  what  Chi­

nese  officials  are  willing  to  do  for  their

friends in Moscow.

Next, there are the several complex and

widespread  financial  networks  China  has

spent decades building. Take, for example,

the  web  of  state­owned  banks  that  have

cropped  up  in  commercial  hubs  around

the  world.  China’s  banking  regulator  may

have stated on March 2nd that the country

would  not  join  Western  sanctions,  but

most of its big banks will adhere to them,

particularly  those  that  interact  most  with

the Western financial system and have le­

gal entities that are domiciled in America.

These  large  institutions,  which  conduct

the bulk of trade finance between the two

countries,  are  unlikely  to  risk  getting

blocked  from  dollar  clearing  in  order  to

continue  doing  dollar­denominated  busi­

ness  with  Russia.  Maintaining  full  access

to  global  financial  markets  is  “more  valu­

able  than  anything  Russia  can  offer”,  ac­

cording  to  Neil  Shearing  of  Capital  Eco­

nomics, a consultancy.

UnionPay,  China’s  state­owned  bank­

Chinese financial plumbing is not the

answer to Russia’s problems

Don’t tell me your pipes are blocked too