The Economic Aspect of Russia’s War in Ukraine: Sanctions, Implications, Complications (Part Two)

*To read Part One, please click here.

After Russia’s President Vladimir Putin launched a full-scale invasion of Ukraine on February 24 (Kremlin.ru, February 24), the Western economies introduce several rounds of increasingly harsh economic sanctions against the Russian Federation (Meduza, March 8). So far, Russia’s non-renewable energy sector, which fuels the Kremlin’s war against Ukraine, has been spared the worst of those coercive financial measures; but progressively, the negative impact on this segment of the Russian economy continues to grow (see Part One in EDM, April 11). Though less significant revenue wise, another crucial pillar of the Russian economy—and thus also vulnerable to sanctions pressure—is fertilizer production and agriculture. Their importance boils down to two prime reasons. First, these non–raw material sectors represent among the fastest growing areas of the Russian economy: chemical industry products (mainly fertilizers) and agriculture, cumulatively, made up 15 percent of Russia’s overall exports in 2021 (Journal.open-broker.ru, March 10). Second, with Russia deliberately blocking Ukrainian seaports and destroying the latter country’s agricultural potential, global food security could be further jeopardized by the collapse of Russian agro-industry output, prospectively resulting in major socio-economic earthquakes in the Greater Middle East and parts of Africa.

In terms of fertilizers, Russia is among the world’s top three suppliers; key buyers of its products are Brazil (around 20 percent of Russia’s total fertilizer exports), the European Union, China, India, the United States and the Philippines. Overall, in 2021, Russia`s exports of plant nutrient additives stood at $12.5 billion (Bcs-express.ru, April 6). Confident of the world’s dependence on Russian fertilizer products, President Vladimir Putin recently said that the “West will continue buying them… No one wants to die of starvation” (Kommersant.ru, April 5). Indeed, the imposition of economic sanctions on this sector has had an ambiguous and yet to be fully understood effect. While the EU introduced a year-long import quota on Russian fertilizers (to become effective on July 10), the US classified them as “essential goods,” which was construed in Russia as Washington de facto excluding fertilizer products from the sanction list (Kommersant, March 31).

That said, given the rapidly changing circumstances surrounding the war and multiplying evidence of Russian war crimes in Ukraine, it is unclear whether the US and the EU will not embrace a full embargo on Russian fertilizers by sometime in the fall. For the developed world, such a scenario would likely result in temporary difficulties and higher food prices; but for poorer countries, this could become a catastrophe. As was already underscored by the United Nations, problems with fertilizer supplies could generate severe food crises and catastrophic famines in states such as Afghanistan, Yemen and Syria (Rosbalt.ru, April 13). Incidentally, Iraq has already faced rising food prices and shortages, triggering protests in parts of the country (Islamnews.ru, March 10). Some experts argue that if the situation worsens, the Greater Middle East could experience events similar to the 2010–2011 “Arab Spring.”

When it comes to the impact of Western sanctions on Russian agriculture, the situation also remains unclear. On the one hand, this sector of Russia’s economy has arguably been the main beneficiary of Moscow’s post-2014 import substitution strategy. Currently, Russia’s share of global grain exports stands at 20 percent, with African (Egypt, Morocco, Senegal, the South African Republic) and Middle Eastern (Turkey, Iran, the United Arab Emirates, Israel, Qatar, Lebanon, Syria) countries being its top customers (Rossiyskaya Gazeta, April 12). As a result, and in large part thanks to foreign sales of foodstuff, the overall share of Russia’s non-energy exports grew by 36 percent (exceeding $191 billion) in 2021, breaking a historical record (News.ru, January 24).

While the majority of Russian experts do not envisage any long-term existential threats to the domestic agricultural sector as a result of economic sanctions, they do agree that the agro-industry will still face some serious challenges in the short-to-medium term. According to Dmitry Rylko, the director of the Institute for Agricultural Market Studies, the Russian agricultural sector will likely face difficulties in the following two areas: seed production and machinery, where import substitution has not achieved any substantial progress; the elimination of these issues could take years (Rosbalt, March 20). It is interesting to note that, despite repeatedly declared goals to decrease dependency on foreign supplies of farm equipment, the share of domestically produced end-products only decreased from 58 to 51 percent in 2021, year-on-year (Rossiyskaya Gazeta, April 7). Speaking about the problems that Russia’s agricultural sector is likely to face, Evgeniya Serova, from HSE University, underscored the logistical aspect. Namely, she noted that economic sanctions have left Russia practically without shipping containers. That, coupled with sanctions-induced money transaction problems, could result in tough consequences for Russia’s entire agricultural industry (Fedpress.ru, March 31).

In its hopes to head off the impact of economic sanctions on its fertilizer and foodstuff industries, Russia is betting on being able to exploit three interdependent scenarios:

First, as mentioned above, Russia hopes that sanctions against this sector of its economy will result in a global food crisis, “mass starvation” and socio-economic upheavals across the less developed world (Rossiyskaya Gazeta, April 4), thus compelling the developed countries to take a more cooperative approach toward Russia.

Second, Russian experts believe that the EU—which, Moscow believes, is highly dependent on Russian food and fertilizer production—has already exhausted its own agricultural potential (partly because of the EU’s strict environmental and consumer protection measures). Russia, on the other hand, ostensibly has enough capacity to not only increase its agricultural output but also offer the surplus to the Europeans within the next 10–15 years (Vetandlife.ru, March 16). Thus, experts in Russia contend that the associated sanctions will either be lifted or lose their effectiveness by 2023 or 2024.

Finally, Russia is strongly counting on Asian markets, where eating habits are becoming more “Western,” marked by a decreasing consumption of rice and increasing consumption of grain as well as growing consumption of meat. Indonesia, Vietnam and the Philippines are seen as Russia’s key future customers in the Asia-Pacific region (Rossiyskaya Gazeta, March 29).

Analysis of the health of Russia’s fertilizer and agricultural industries, the impact of economic sanctions on these sectors, as well as the reaction of Russian experts, policymakers and officials together lead to a clear conclusion. Although Russians recognize the potential looming challenges, they do not believe that these key domestic industries will fall prey to economic sanctions or that their export potential will be irreparably damaged. But should those punitive sanctions nevertheless come to encompass Russian farms and fertilizer plants, Moscow is prepared to merge business with geopolitics and use food and fertilizer exports as a tool of counter-pressure against the international community.

*To read Part Three, please click here.