A version of this story appeared in CNN’s What Matters newsletter. To get it in your inbox, sign up for free here.
No Netflix. No Disney. No HBO Max. No Big Macs.
McDonald’s, Starbucks, Coca-Cola and Pepsi, the global brands that scream mass consumption, are the latest to pull out of Russia, which is swiftly being canceled by corporate culture in moves that range from symbolic to strict.
Economic proxy war
This conflict of economies may also turn into a test of who breaks first – Americans and Europeans over high gas prices or Russians over losing access to the West, worldwide banking and the perks of modern life.
It will also be important to see how other countries ultimately react.
‘Putin’s price hike’
That’s the term President Joe Biden used when he announced a ban on Russian oil imports into the US. He acknowledged that the move could bring even higher oil prices. Europe, which relies on Russian oil, has not yet turned off its spigot.
Oil prices actually fell Wednesday after the United Arab Emirates, perhaps sensing opportunity to seize the European market from Russia, suggested it will encourage other countries in the OPEC cartel to raise production.
Betting on Russia
Chinese retail investors, according to CNN Business, “are snapping up stocks with even the slightest link to trade with Russia, as they bet on closer economic ties between the two countries following unprecedented Western sanctions on Moscow.”
Oil is but one plot point. Ukraine and Russia are both major players in the world’s supply of wheat, and combined they provide almost 30% of global wheat exports, according to one estimate.
Export ban on agricultural goods
Ukraine will now ban exports of key agricultural goods including wheat, corn, grains, salt and meat, according to a Cabinet resolution that passed Tuesday.
Who does one ask about the price of wheat?
I talked to Berna Karali – a professor of agricultural and applied economics at the University of Georgia – after Google led me to her paper, “Supply Fundamentals and Grain Futures Price Movements,” which was written with two other academics, Scott H. Irwin from the University of Illinois at Urbana-Champaign and Olga Isengildina Massa from Virginia Tech.
My conversation with Karali, conducted by email and lightly edited, is below.
What does the wheat supply in Ukraine have to do with the US?
WHAT MATTERS: The US Department of Agriculture says Ukraine will export less wheat and corn as a result of the war. Ukraine has put a stop to all wheat exports. Why should its wheat exports affect the US?
KARALI: The decrease in Ukraine’s wheat exports affects the global availability of wheat, which puts an upward pressure on the global price of wheat. As financial markets do not like uncertainty over supply, they priced that risk premium in the futures markets already, making wheat futures contract prices increase over 40% in a week. This is a massive increase.
What about sanctions on Russia?
WHAT MATTERS: The US and other countries have imposed sanctions on Russia, another big supplier of wheat. Will the sanctions also affect world food markets?
KARALI: Yes, the sanctions will have effects on world food markets. Since Russia is not able to export wheat (either due to sanctions imposed by countries or unwillingness of financial institutions to finance the trade of Russian commodities) this will limit the global availability of the commodity, putting an upward pressure on the global wheat price.
In addition, since Russia is also imposing self-sanctions (limiting its exports to certain other countries), the supply of other commodities, such as corn and sunflower oil, will also be limited, causing a price increase in the world food markets.
How might this war affect the food supply?
WHAT MATTERS: How big of a disruption to the world food market and supply could this turn out to be?
KARALI: While it is hard to predict the magnitude and the duration of the disruption, it is safe to argue that if the conflict continues even just to midsummer, this will impact agricultural crop production for the next marketing year.
For example, all planted winter wheat (which is still in the ground) might not be harvested in Ukraine due to the conflict, which would tighten next year’s wheat supply. This would impact global wheat prices for another year.
If the ban on Russian oil expands and has teeth, this will limit the oil supply globally and particularly in Europe, putting upward pressure on production costs, and as a result, on food markets.
How will Americans feel this disruption?
WHAT MATTERS: Will all of this touch everyday Americans in a way other than higher prices for a loaf of bread?
KARALI: Price will be the most tangible impact felt by American consumers, farmers and businesses. While a commodity shortage is not expected in the US, prices of most commodities, not just bread, will most likely rise at the restaurants and grocery stores where Americans dine and shop.
This will be due to the combined effect of increased global uncertainty leading to volatile food prices and increased oil prices leading to higher production costs.
What else might happen?
WHAT MATTERS: If this war drags on, are there different longer-term effects that could come into play?
KARALI: For American farmers, there is an incentive to increase their wheat and corn production, at least for the next marketing year, to take advantage of higher grain prices.
However, these planting decisions will be affected by increased fertilizer and fuel costs, and therefore it is hard to predict for how long the incentive to increase grain production will last for American farmers.
Another impact is on oil production. As already promised by some European countries, countries might devise plans to decrease their dependency on commodities from high-risk geopolitical areas.
This is somewhat against the philosophy of trade where comparative advantage should be the factor determining self-sufficiency versus global trade. However, after witnessing prolonged supply chain disruptions since the beginning of the Covid-19 pandemic combined with the Ukraine-Russia conflict, there might be more incentives to reconsider the way we do things.
Separately, don’t freak out about high oil and gas prices
Gas prices, more so than bread, are probably giving American consumers more sticker shock at the moment, but CNN’s chief business correspondent Christine Romans gives three reasons not to panic:
- No. 1: US household savings are robust. Take a deep breath, she writes. US gas prices are technically at record highs, but adjusted for inflation they are not there yet. Many families may be able to ride out the higher prices thanks to savings.
- No. 2: The US relies less on Russian oil and natural gas than Europe does and has more diverse supplies. Capital Economics says Europe faces its third recession in two years because of its huge reliance on Russia. But Russia accounted for just 8% of US energy imports last year.
- No. 3: This is not the 1970s. The US consumes energy more efficiently today. And the US is now the world’s largest oil producer.
War may not affect US rate hikes
US banks, meanwhile, appear to have relatively little exposure in Russia, which means this massive worldwide hiccup might not affect Federal Reserve plans to hike interest rates, according to CNN’s Paul R. La Monica.
The great fear, he writes, is still for the economy to slow and inflation to get out of control. That’s the definition of “stagflation,” which, along with an oil embargo, caused malaise in the 1970s.