50 Shades Of Grain

With agricultural commodity prices rising as drought reduces crops in the United States and Eastern Europe, the grain market is eyeing the possibility of Russian export restrictions. Michael Swangard, partner at Clyde & Co, considers the potential implications for grain exporters.

Despite a drought that has reduced the estimated size of its grain harvest by a fifth, Russia currently says it has no plans to repeat 2010's ban on grain exports. However, there is an increasing expectation in the market that by the end of the year Russia will use administrative and logistical measures to slow down the flow of grain exports in order to protect the domestic market. However, as a comparison with Ukraine's 2010 experience shows, the precise form any restrictions take is vital in determining their impact on the grain export trade.

At the start of the year, the Russian agriculture ministry expected this season's grain crop to match last year's 94m tonnes, but recently reduced its estimate to between 70m and 75m tonnes. Despite the sharp drop in the estimated crop, First Deputy Prime Minister Arkady Dvorkovich was quoted by RIA Novosti at the end of August as saying: "As long as I still continue to oversee this field, I will fight any limits on grain exports." However, while Nikolai Fyodorov, the Russian agriculture minister, supported Dvorkovich's statement on an outright ban, he was quoted in the Financial Times as saying: "We will use only civilised and effective mechanisms to protect the domestic market."

When brutal is best

These comments have led to speculation that Russia might instead emulate Ukraine's introduction of a grain export quota system in 2010 or use other more opaque means of restricting export flows such as making export logistics and administrative processes more difficult. Russia's 2010 ban has been described as "brutal", meaning the prospect of subtler restrictions has been welcomed by some, but the experience of the majority of Ukrainian grain traders during the 2010 grain crisis suggests that Russia got it right with an outright prohibition.

While it might appear brutal, an absolute ban has the advantage of affecting all market participants equally and, importantly, triggering contractual protection for sellers unable to fulfil their contracts because of the ban. Most grain from the region is sold on a standard GAFTA grain contract, which contains a "prohibition clause" that states that a seller is excused from performance of...