Could The War In Ukraine Break The Global Food Supply Chain?

One month into the war in Ukraine and some of the second and third order effects are starting to become evident. The disruption to Russian energy supplies are already being felt in the oil and gas markets. However, while these attract our attention, there are also little noticed changes that could have a much deeper impact. We have yet to tease out fully the impact of the war - or special operation, as some like to call it - upon other markets and other regions of the world. One such market is that of foodstuffs, and one such region is North Africa and the Middle East.

The combined output of Russia and Ukraine represents just under a third of the global supply of wheat. The war is likely to disrupt this supply both in the short term and the long term. In the short term, the amount of acreage under cultivation in Ukraine is likely to fall owing to the war. Even if, a 2022 harvest is gathered, the disruption of the Black Sea ports - Odessa, Kherson, and Mariupol - is likely to interrupt significantly the flow of wheat. If Russia increases its acreage by a compensating amount, this is unlikely to have an impact on global wheat markets because of difficulties in accessing letters of credit and counter-party trade to actually deal in Russian wheat. There is also the possibility of a Russian export ban for wheat, except to favoured customers.

All of this suggests a bit of a hole in the supply of wheat in the short term. It could be offset by drawing from reserves, but these are about a third below what would be considered normal. It is not only the wheat market that has come under pressure. Other grains, such as barley, and sources of vegetable oil, such as sunflower, are dominated by Russia and Ukraine. Prices of these 'soft' commodities are already rising by very large amounts (30% between the invasion of February 24th and mid-March).

There are further concerns about the long term consequences of the war upon the acreage under cultivation. In recent days, there has been some discussion about the possible use of NBC (Nuclear, Biological, and Chemical) weapons in the context of the war. The long term consequences of using such weapons is at present unknown. The fear is that their use would poison the soil for some time to come - possibly decades, possibly generations. If that were to happen, then we would be thinking of a permanent reduction in the acreage under cultivation rather than a temporary one. This would lead us into a much different world than the one we are accustomed to.

In addition to issues around the acreage under cultivation, there are also more general issues around global arable yields. Russia and Belarus - both suffering from international sanctions - are leading suppliers of potash, a key ingredient in modern fertiliser manufacture. Modern agriculture is heavily reliant upon mechanisation - which faces increases in the cost of fuel - and fertilisation - which relies on products which originate in Russia. Arable products are then, in turn, used as animal feedstuffs. It is not difficult to see that the cost of all foodstuffs are set to rise in the very near future.

It is possibly even more disturbing when we consider where these impacts might be felt. Much of the Russian and Ukrainian grain harvest is transported across the Black Sea to Turkey, where it is processed from the raw grains into a state where it can be sold to the consumer. The processed grains are, in turn, shipped on largely to the Middle East, North Africa, and parts of Asia. Something in the region of 800 million people rely upon this source of grains. These are rather volatile parts of the world. It is not beyond our imagination to envisage a Second Arab Spring. It was the rise in food prices that fuelled the original Arab Spring of 2011.

The western response to this is likely to be - as it was a decade ago - inadequate. It does, however, create an opportunity for Russia, which has a footprint in the region, and China, which has ambitions in the region, to extend their influence even further than they already have. Europe and North America could counter this, but one wonders if they are prepared to devote levels of financial resources that are commensurate with those of, say, the BRI? 

Whether this possibility constitutes a break in the global food supply chain is a matter of conjecture. It does suggest a different future from the past which we are accustomed to. There is the possibility of an increasingly hungry world, which creates the potential to use food aid as a source of soft power. In that case, politics would replace commerce in deciding who gets to eat and who goes hungry. 

Stephen Aguilar-Millan

© The European Futures Observatory 2022

Ought Taiwan To Be Concerned By Events In Ukraine?

Taipei recently suffered a power outage. Such is the uncertain nature of the world at the moment that our first thoughts were around the possibility of a Chinese cyber-attack on Taiwanese critical infrastructure. Was this the prelude to an invasion? No, it was simply an outage in power supply. However, it does underline how events in Ukraine can have a knock on effect elsewhere in the world. What exactly are the repercussions for Taiwan after the Russian invasion of Ukraine? Why are we nervous at this particular time? And what are the prospects for a Chinese invasion of Taiwan?

From a Chinese perspective, the Russian invasion of Ukraine offers a number of points to consider. They fall along two lines - the prosecution of the military campaign by Russia and the reaction of the US and other western allies, especially of NATO. The military campaign has appeared to have stalled in the first two weeks. This could be deliberate on the part of the Russian forces - they may be waiting for better ground over which to advance their motorised vehicles. It could possibly be the result of limited Russian war aims, although this seems unlikely. Or it could be the result of poor military planning and issues around logistics and re-supply. In the weeks to come, we shall find out which is which. For now, the war has assumed a character of the medieval - slow paced, siege operations, and a high degree of brutality inflicted upon the civilian population.

What have been effective in Ukraine are portable, hand held, anti-armoured vehicle and anti-aircraft missiles. This is not too surprising. These weapons were effective in Afghanistan against first Russian and then against NATO and American targets. The nature of potential Chinese operations in Taiwan - sea-borne and air-borne assault - does suggest what is known as a 'target rich environment'. It is true that China would be able to access overwhelming force, but the ability to deploy it is entirely a different matter. The lesson in Ukraine suggests, so far, that the balance has shifted to the defence and away from the attack. This increases the potential price of initial military action and the costs of occupation.

One factor that must weigh heavily in Beijing is the political cost of failure. If China were to attack Taiwan and fail to achieve the military aims, would the current regime survive? Would the present leadership be replaced by a different set of leaders? Or would this be a signal to replace the Communist Party of China altogether? These are very high stakes indeed. Reflecting this point onto the war in Ukraine, could we be seeing the endgame for President Putin?

The response of the US and European allies has been to detach Russia from the global economy. We have yet to see how successful that will be. Russia has not been abandoned by its Asian allies - China, Iran, and India - but the sanctions have started to have an impact. Since 2014, President Putin has focussed on building a siege economy that is disconnected from the global economy to a larger extent. We shall now see how successful that policy will be. The freezing and seizure of Russian assets in Europe and America has changed the game somewhat. It is inconceivable the China isn't taking note here.

For decades China has recycled its trade surpluses into US Treasury bonds. If these can be frozen and seized at short notice, that suggests that America is an unreliable partner to financial counter-parties. For the last five years, we have seen China re-cycling the US Treasury holdings into US Dollar loans to emerging nations. That process is likely to accelerate in order for China to diversify the overseas portfolio away from the US. It will lessen Chinese vulnerability to the US seizure of Chinese financial assets in the US. However, it has a knock on effect that might ultimately act to the detriment of America. If the US gains a reputation for being an unreliable banker - limiting convertibility, refusing repayment, seizing assets in custody - then the US will lose it's appeal as an international financial safe haven. This will hasten the decline of the US Dollar as the global reserve currency.

China has seen this and has acted in two ways. The first is a policy of increasing self-reliance. Whilst not a fully fledged siege economy in the style of Russia, China has followed a policy of dual circulation, which draws a distinction between the economy at home and the economy abroad. The former has been developed, whilst the latter has taken on a more strategic dimension in recent years. Allied to this is the second core policy, that of restricting the convertibility of the Renminbi. China's financial system is not sufficiently robust for the Renminbi to develop into a fully fledged reserve currency. Whether it ever will is an interesting question. For now, China is content to allow the US Dollar to retain that status.

America, by following a policy of containment and disengagement, is supporting the process of dual circulation. By distancing itself from China, the US is facilitating the process whereby China - and the inner core of nations over which it has influence - become largely self-sufficient and only has contact with the world outside of its sphere of influence for trade. That trade is normally on its own terms. This is where Russia has aspired to be prior to the war in Ukraine. The downstream effectiveness of this policy is now unfolding before us. I would imagine that Beijing is watching very closely.

Turning back to Taiwan, if we have a China that is largely disengaged from the process of globalisation, either as the result of Chinese policy or American diplomacy, then Taipei ought to be concerned by events in Ukraine. However, there are two factors working against this. First, the policy of dual circulation may not be effective. It may be impossible for China to completely disentangle itself from the global economy. To that extent, there will remain sensitive points where sanctions against China could have some impact. Second, a military campaign against Taiwan might not be successful. Indeed, the failure of that campaign might herald more radical changes on the mainland.

In the past, the Chinese leadership have been aware of the risks involved over Taiwan. This has led them to be cautious, even in the face of a perceived weak and ineffective US President. Even if Ukraine proves to be an absolute disaster for the US and NATO, that still may not encourage China to become adventurous in Taiwan. When given the choice, China prefer to stick rather than twist.

Stephen Aguilar-Millan

© The European Futures Observatory 2022