Russia makes an economic hole above its weight

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Russia makes an economic hole above its weight

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An employee holds a sample of crude oil at the Yarakta oil field, owned by Irkutsk Oil Co, in the Irkutsk region of Russia on March 11, 2019. REUTERS / Vasily Fedosenko /

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WASHINGTON, March 16 (Reuters Breakingviews) – Russia’s sudden disappearance to learn more from world trade leaves a large economic hole. After being isolated for most of the Cold War, the country has become a major commodity exporter. That’s why the loss of a smaller economy than the US state of Texas is driving up global energy, metal and grain prices.

The Soviet Union was not a major factor in international trade. In 1985 world trade, mainly with Eastern Europe, represented only 4% of its gross national product. Trade accounted for about 17% of US GDP in the same year. Poor management and poor harvests led the Soviet Union to import grain for much of the 1970s and 1980s.

The arrival of Mikhail Gorbachev as Soviet leader in 1985 opened the doors to international markets. After the union collapsed in 1991, Russia raided the world’s top 25 trading countries, accounting for about 1% of global exports, according to the United Nations Conference on Trade and Development. Its share peaked at nearly 3%, but took a hit after President Vladimir Putin annexed Crimea in 2014.

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In the beginning, Russia’s major export destinations were Germany, the United States and Italy, which efficiently purchased oil and gas. It wasn’t until 2002 that the country became a major supplier of wheat to overseas markets, accounting for nearly 6% of global exports, according to the Economic Complexity Observatory.

When agriculture became a smaller part of American economic output, Russia stepped in. In 1995, Uncle Sam was the first overseas fertilizer seller with nearly 17% of the market; Russia provided around 10%. Eight years later, Russia took the lead. It became the leading wheat exporter in 2016.

By 2020, foreign trade accounted for 46% of Russia’s GDP, according to World Bank data. Oil and gas continued to supply more than half of its exports, with metals accounting for 11%, chemicals about 8% and food products 7%.

Which is now rapidly drying up, partly due to sanctions; America and the UK have stopped buying Russian oil, for example. Meanwhile, buyers shun Russian goods due to fears of future restrictions and difficulties in making payments. Putin also stopped some outflows. Moscow on Thursday said it would ban some exports of agricultural, automotive and medical products until the end of the year.

Russia still has willing customers like China, already its main export destination, while India could buy the country’s oil and other goods at a discount, two officials told Reuters on Monday. Countries that accounted for at least 35% of Russia’s foreign markets have yet to impose sanctions or cut economic ties. However, some of these nations also find it difficult to transport goods across the Black Sea.

Russia’s sudden pariah status has therefore sparked a global rush for alternative supplies for everything from gas to nickel to fertilizers. For example, Russia is the second largest seller of sunflower oil. The increased demand for alternatives has prompted Indonesia to limit exports of palm oil, which is used in everything from margarine to chocolate.

Other commodity producers have stepped up, taking advantage of the surge in prices. According to a March report from the U.S. Department of Agriculture, higher grain exports from the European Union, coupled with record harvests in Australia and India, may help offset the loss to Russia and Ukraine. Others are taking matters into their own hands read more. Brazil’s agriculture minister, a major Russian fertilizer buyer, visited Canada, the world’s third largest exporter, this month to inquire about further supplies of potash.

More than a third of emerging markets have benefited from a 20% increase in export prices since the beginning of this year, according to a recent report from Oxford Economics. Colombia has seen a more than 40% increase in its terms of trade due to increased demand for coal exports, including from Europe. Countries like Japan and Vietnam, traditionally large importers of Russian coal, are likely to turn to Australia and Indonesia.

But commodity exporters must also take into account the higher cost of imports. The UN food price index rose more than 20% year-on-year in February, before the invasion of Russia. Colombia’s consumer price index already hit a record high in February. In the previous month, the country’s central bank raised its benchmark interest rate from 3% to 4%, the largest increase in nearly 20 years. It’s just one example of how consumers around the world will suffer a disproportionate blow when Russia pulls out of the international economy.

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(The author is a Reuters Breakingviews columnist. The views expressed are his own.)

BACKGROUND NEWS

– Russia said on March 10 that it will ban exports of certain goods until the end of 2022. The sectors involved include telecommunications, agriculture, technology, automotive, medical and forestry. The Ministry of Economy said it is a logical response to the international sanctions imposed on Russia.

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Editing by Peter Thal Larsen and Sharon Lam

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and on www.breakingviews.com. All opinions expressed are those of the authors.

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