Miller Magazine Issue: 134 February 2021

53 INTERVIEW MILLER / february 2021 implementation of those restrictive export measures and tries to understand what is going to happen next. We asked uncertainties around Russian wheat export policy to one of the most reliable experts on the Black Sea grain market: Andrey Sizov, the Managing Director of SovEcon, a leading agricultural markets consultancy focused on the Black Sea. Sizov describes these measures taken by the Russian gov- ernment as a big mistake. “Russian government did a lot to help the world prices to grow but beneficiaries from those prices would be not Russian farmers, but their direct com- petitors all over the world,” he says. Sizov predicts such moves will negatively affect the Russian farmer's desire to grow wheat. Predicting that the wheat area in Russia will decrease in the next season, “Russia will likely lose its num- ber one spot in the world wheat export market in the medi- um term,” he added. Andrey Sizov answered our questions on the Russian grain export tax and sheds light on what's happening in the Black Sea. Before talking about the implications of Russian wheat taxes for the global market, could you tell us why Russia took these restrictive measures? And do you think will the measures serve this goal? It started a few months ago when Russian domestic wheat market prices in ruble terms hit an all-time high. Ob- viously, they're very far from the highest in dollar terms. In 2007/08, it was $450/ton like that. Now it's around $300/ ton. But ruble has been weakened fast in 2020. And as pric- es rose partly, ruble devalued substantially. It led to the fact that ruble prices hit all-time high in the domestic market. So domestic consumers began to become annoyed because of those prices, began to write letters to the Minister of Ag- riculture and Prime Minister asking to regulate the market. And at the end of the day, in December, President Putin held a meeting with the government and criticized the gov- ernment heavily because of rising food inflation. After that, the government made many decisions in just two months, which are actually have almost ruined the crop-producing sector here in Russia. So what has been done? First, earlier it was approved grain quota. There is a grain quota of 17.5 million tons of wheat, barley, corn and rye combined. There are no individ- ual quotas, just combined volume. Then they implemented the first export tax of 25 euros per ton for wheat. And then that tax was doubled from 25 euros to 50 euros per ton. So from February 15, we will have 25 euros/t tax and from March 1, we will have 50 euros/t tax till June 30. On top of that government also introduced export taxes for barley and corn, 10 euros for barley, 25 euros for corn. And to make things even worse right now, the leak of the official draft about a new tax, which could become ef- fective close to the end of the current season, or starting from the next season. And this so-called floating tax will be permanent contrary to those taxes, which were introduced till June 30, till the end of the current grain season. And it's very, very restrictive. It implies there is a threshold price. In this case, it's being proposed around $200/ton. And every- thing above that price is being taxed at 70%. For example, if the export price $300/ton, as it is now roughly, the tax will be $70. All those factors have been driving the wheat market substantially higher, it's obviously not the only reason. I would say even bigger reason was the Chinese buying of corn, but still, Russia is big news. So why the Russian gov- ernment acted that way? The goverment wants to drive the inflation lower ahead of parlament election this year. Two things: grain prices have negligible impact on food CPI, and in reality it’s histrorically low. In 2020, it was 5.4%,ex- cluding fruit and vegetables. So if we talk about 5.4, that's historically low inflation. For example, in 2014 and 2015, annual inflation was reaching in some months around 20%. Now it's 6.7% if we take everything into the account. So it's low and that's a very big mistake of the government with gloomy implications for the crop growing sector. Do you think will these measures lower the inflation? I think the inflation will be lower but not because of their actions. Their actions will have very limited effect on infla- tion because we know quite well and we have research that topic in the past that the correlation between food inflation and raw materials prices, like oilseeds, grain is very low. It's almost non-existent. The more important factor is, for ex- ample, disposable income, which has been fallen in Russia for many years, and that limits potential inflation… Cen- tral bank’s interest rate, which is also historical low, around 5%. Actually, food inflation is close to all other types of inflation here and a very important driver is the ruble/dollar exchange rate. As I mentioned, Ruble was devalued fast in 2020. And that was the biggest factor which drove the inflation higher. It also explains why food and vegetables were so high. Actually fruit and vegetable inflation were up 17% and they also badly reflect that issue. After the restrictive measures, Russian wheat export prices have increased to historical levels. Can you tell us the short and long-term implications of new restrictions in terms of Russia and global markets? I think the short-term effect is going to be bullish. I am talking about global prices because today February 1 and we will see many headlines about Russian restrictions and that will drive the market higher. And also we had a portion of bullish grain news last week. I'm not talking about Russia, this time talking about China and huge Chinese purchas- es of the US corn, just almost 6 million tons in four days. So that set up is pretty bullish and those news from Russia could be considered bullish in the short term. And I mean short term, it would be probably a few days, maybe a little more. But fundamentally, I don't think it's really big news for 2020/21 global S&D. Because of the high possibility of floating tax, it implies that Russian farmers will be forced to sell their wheat during