Tuesday, August 17, 2010

Politicians Never Learn (Russian Edition)

By Simon Black

I opened up the papers a few days ago, and the top story really surprised me. The Russian government announced that it was banning grain and flour exports through the rest of the year. Belarus and Kazakhstan may do the same.


Russia is dealing with record drought and heat; crop production is down, and this has caused a recent surge in domestic prices. In an attempt to curtail this inflation, the government has decided to impose an export ban, effectively preventing Russian farmers from generating the highest profits for their produce.

This sort of thing has been tried time and time again, most notably with Argentina's recent beef export ban. It always ends badly-- producers go bankrupt as a result, people lose their jobs, the economy suffers, and long-term food production actually falls... but the politicians never learn.

At a minimum, Russia will suffer signloificant damage to its reputation as a place to do business. You see, the export ban even applies to existing contracts... so if a Russian farmer already has a deal to export X tons of grain overseas in October, that contract has now been forcibly canceled by the government.

Ironically, Russian President Dmitry Medvedev has been practically begging foreign business leaders to invest in Russia, recently. He is particularly focusing on investment in his country's version of Silicon Valley.

While the government may consider allowing some contracts to be fulfilled, the message that Russia is sending to the world with this ban is that contracts mean nothing. This is not exactly good for business confidence.

Wheat futures in Chicago jumped on the news of the ban, flirting with their 2008 highs. I find it coincidental, perhaps, that we just recently had a discussion about the benefits of farmland.

I'm not in the least a doom and gloom survivalist who thinks that the end of the world is coming; frankly, I'm quite optimistic and see progress and opportunity everywhere.

To me, though, a small investment in arable land outside of your home country makes a lot of sense, both as a speculation as well as a hedge against risk.
 
Read the rest here.

2 comments:

  1. We're gonna get comments from that crazy guy who argued with me last time, about how Putin is a strong man who will do what's right for his country, even if that isn't what the market wants.

    This whole export banning business is just one step away, logical principle speaking, from Rick Newbold's proposal of the Feds stockpiling food for the US as part of a "food security" program within the national security umbrella.

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  2. The export ban actually allowed exporters to invoke the force majeure clause in their supply contracts, as regardless of the ban the harvest is about 1/3 less than was estimated.

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