Food inflation

Europe suffered while Russia benefited

Harsh US and European economic sanctions against Russia backfired. The biggest loser is Europe. Ironically, Russia has benefited the most. After Russia’s invasion of Ukraine, America and Europe waged separate wars against Russia.

Remember that after Russia invaded Ukraine last February, the United States and Europe joined forces to impose harsh economic sanctions aimed at paralyzing the Russian economy. With its economy deteriorating, Russia was expected to withdraw from the Ukrainian crusade and accept defeat.

In rapid succession, Russian exports from NATO countries were banned. Multinationals such as Zara, Puma, Starbucks and McDonald’s have pulled out of the Russian market, leading to capital flight and unemployment. Vodka in Russia was subject to high tariffs of up to 35%. The import of gold from Russia was banned.

About $300 billion worth of Russian foreign exchange reserves have been frozen. Russia has been shut out of her global SWIFT network and cut off from the global financial system. America and Europe have dealt a heavy financial blow to Russia. But Russia fought back with food and fuel.

Related article: Meat inflation’s breaking records

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Largest suppliers of wheat, corn and sunflower oil

Russia and Ukraine produce 29% of the world’s wheat, 20% of corn and 80% of sunflower oil. When Russia stopped supplying these commodities, food prices rose, especially in Europe. Last May, EU food inflation reached its highest level in 20 years. Raw food inflation was 11.1% and processed food inflation was 7.5%. Even her wealthy EU countries felt the pinch.

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Russian gas supply

While the EU is still dealing with food inflation, it cannot live without Russia’s gas. Fuel is Russia’s strongest leverage against Europe. 42% of Europe’s natural gas comes from Russia. It is transported to the continent via the Nord Stream 1 pipeline, a 1,224-kilometer underwater pipeline that runs from Vyborg in Russia to Germany via the Baltic Sea. From Germany, the gas is transported across the European continent through secondary pipelines.

Most European countries depend on Russian gas to sustain themselves. Finland is 94% dependent on Russian gas, Bulgaria 77%, Slovakia 70%, Germany 49%, Italy 46%, and Poland 40%.

Europe’s dependence on Russian gas is due to the fact that multiple terminal facilities are required to convert LNG gas from gas to liquid and vice versa. It also requires a network of pipelines to transport gas from the terminals to various silos across the continent.

Europe has many terminals for processing LNG gas, but not enough pipelines to transport it to hundreds of silos in 28 countries. This is because the European system is built around Russian gas supplies. Its infrastructure was not designed to accept gas from alternative gas suppliers such as Qatar or the United States. So even if the US and Qatar supplied 100% of Europe’s fuel needs, Europe would not be able to meet it.

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Putins response to the sanctions

President Putin took two strategic steps after imposing economic sanctions. First, he cut gas supplies to Europe by 60% of his. This sent prices skyrocketing, and Russia hit a windfall with lower fuel sales. This caused fuel prices to rise by 37% in the US and 144% in the EU, further impacting these economies. Second, Putin has decreed that gas purchases from Russia can only be made in Russian rubles. This has made the ruble the world’s best performing currency. This made Russian imports cheaper.

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China and India continue to trade with Russia

Contrary to popular belief, Russia has never been cut off from world trade. China and India are the world’s second and fifth largest economies, respectively. Trade between these countries did not stop, and Russia was able to provide a steady supply of basic necessities such as food and medicine. Conversely, the Chinese and Indians continued to purchase Russian agricultural and industrial products, providing Russia with a steady source of income.

Things look worse in Europe as winter approaches. Without enough gas to heat the continent, Europe faces the prospect of worsening inflation. Unfortunately, fuel silos across Europe can only hold 90 days of her supply, so stockpiling during harsh winters can only provide partial relief.

Europe is now at Russia’s mercy, despite all sanctions aimed at paralyzing the Russian economy. It will be interesting to see how Europe reacts as winter approaches.

Related article: UK consumers are buying 9.4% less meat

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Source: bworldonline

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