Grains Have to Float, Gas Has to Flow: Russia Peruses Its Commodity-Disruption Bingo Card

'Helter Skelter' Doesn't Mix Well With Statecraft, but Russia May Yet Give It a Shot

The Black Sea Grain Initiative (BSGI) that allows Ukrainian grain exports to pass through the aforementioned sea unmolested by Russian forces is set to expire next week. It would come as no surprise to this Eurasianologist if they let the deal expire with no extension or replacement – an outcome to which global markets might not be assigning enough probability. We’ll break down Russia’s calculus for extending or walking away from the deal, which isn’t an easy task considering how all-over-the-map (literally and figuratively) Russia’s actions have been since June. Notice that the headline also references natural gas flows – that’s because a transit deal for Russian gas-export volumes via Ukraine will expire next year. The gas deal is a beast of a different genus and species versus the grain deal, but it doesn’t hurt to start thinking about it now using clues from this summer’s clash and consensus (or lack thereof). Let’s use this red-hot summer to discuss the future for some red winter (wheat).
The Kremlinites were pretty loud in late spring about how Russia would not be extending the grain deal past its July 18 expiry – even though they had just extended the BSGI in March 2023, and would again in May of this year. Western counterparties have been taking the threat fairly seriously it seems. When there was a U.S. push to ban essentially all G-7 exports to Russia, that plan was laid to the wayside, with some pro-sanctions heads of state and key bureaucrats no doubt feeling the heat of potential food inflation toasting their heels.
Let’s talk about that food inflation for a moment. Globally, the PriceStats Global Food Inflation Index (bottom chart) is almost at a 15-month low. Aggressive interest-rate hikes around the world have likely done most of the work in bringing that line down – but as one can see from the steep gain from February to July 2022 (first BSGI implemented), the deal was key in pitching that slope downwards. Taking away the large exogenous shock to the grain market caused by the Russian-executed blockade allowed the central banks to do their job, throttling demand for things as frivolous as food. And that has been reflected in the market. I watch the Teucrium Wheat Fund ETF (ticker = WEAT), which is near a two-year low ($6.5XX/share) at a little more than half of its wartime peak reached in May 2022. It barely jumped after the Kakhovka Dam was blown up, but since then… bupkis. It should be noted that mid-summer is seasonally a weak time for grain prices and hence this ETF, but that price does look a little low considering that Russia could employ its recent modus operandi of “helter skelter” and walk away from the BSGI.
Russia’s all-over-the-mental-hospital policy that would make Charles Manson proud is characterized by the lack of a plan. Whether embodied by Prigozhin’s recent “Playskool Putsch,” or blowing up the Kakhovka Dam, or renewing attacks on civilians in Lviv – which has minuscule strategic value begin so far from the front and hasn’t been the target of heavy attacks since the start of this war – one gets the sense that there’s no Kremlinite desire to even pretend there’s a plan for victory. If “helter skelter” is the actual policy, then theoretically Zaporizhzhia NPP may be in play for sabotage or attack, and the BSGI initiative should be left to expire just because it can cause outward-rippling damage and discomfort. With plenty of unknowns ping-ponging around over the next few days/weeks regarding the BSGI, grains indices overall and WEAT specifically will gauge how much fear of deal dissolution or discontinued talks seeps into markets. If many war-watchers and capital markets actors are convinced that Russian leadership will be back at the table this month, playing nice with, among others, one of the BSGI architects (Turkey) that says Ukraine deserves NATO membership and finally lifted its veto on Sweden joining the alliance, then maybe there is a chance that the Kremlinites can be reasonable.
Which brings us to the 2024 Ukraine-Russia negotiations on further gas transit to Europe. It bears mentioning right off the bat that I think Ukraine is bluffing – and it’s a great hand to play now, when European gas storage is healthy and the financiers and weapons suppliers among Kyiv’s EU and NATO neighbors don’t have an acute concern. From the other side, Russia may actually be a relatively tractable partner on the gas front, considering they could really use the money next year and beyond if they expect to fund a discombobulated war and prop up an economy at home. The Kremlin may be trying to play it cool that this is to be expected, but I can assure you that they want transit rights to continue. Badly. Ukraine will likely try to play hardball by pitching an exorbitant gas-transit fee, Russia will grandstand that flows will stop – and then there will be a deal, because it’s too beneficial for all parties to keep it in place. Much different than the BSGI. Russia has its own grain, and can sow a bit of chaos and reap little but the smug satisfaction – fine with them, since the Party of Putin has been practicing this kind of zero-sum nihilism for years now. The big question now is if the Kremlin will show some sanity on the food market before it likely starts doing so on the gas market.