Russia-Ukraine Conflict and its Impact on the Regional Edible Oil Market

“I saw that you could not separate the idea of commerce from the idea of war and peace.  You could not have a serious war anywhere in the world and expect commerce to go on as before.   And I saw that wars were often caused by economic rivalry.  I thereupon came to believe that if we could increase commercial exchanges among nations over lowered trade and tariff barriers and remove international obstacles to trade, we would go a long way toward eliminating war itself.”

Cordell Hull, former Secretary of State, in his memoirs after observing two world wars

Until recently, the Russian and Ukrainian markets had been growing steadily. With its highs and lows the import flow of palm oil never stopped to the markets. Even amid the pandemic, palm oil imports to both countries continued to rise. In 2021, Russia imported 1,098,832 tons of palm oil. Ukraine, after two years of decline, also noted an increase in palm oil imports – more than 200,000 tons in annual terms. As such, the combined volume of imports exceeded 1.3 million tons. Russia has quite successfully developed the export of fat and oil products containing palm oil, to neighboring countries with which trade agreements have been concluded giving preferences to Russian suppliers. Ukraine tried to focus its exports on India, China and the Netherlands, increasing its export of sunflower oil to these destinations. In particular, the export of sunflower oil from Ukraine to India in 2020 amounted to 1,924,804 tons, China – 1,254,625, the Netherlands – 672,794. Russia successfully mastered exports to Turkey – 912,870 tons (2021) and China – 289,162 (2021). Over the span of five years Russia has doubled sunflower oil export to Turkey. The same applied to Ukraine – over the past five years the country has doubled the export of sunflower oil to China.

Things seemed to be going pretty well. But the world changed – on the 24 of February. President Putin had given approval to the operation in the Donbas region of Ukraine, where Moscow earlier recognised rebel-held territories in Luhansk and Donetsk and said they had asked for its “help”. Immediately after Russia launched a full-scale military invasion into Ukraine.

The world reacted. President Joe Biden has condemned Russia for an “unprovoked and unjustified attack” on Ukraine while promising that his country and its allies “will hold Russia accountable”. NATO secretary general Jens Stoltenberg said Russia had “chosen the path of aggression against a sovereign and independent country.” The EU’s Executive Commission, Ursula von der Leyen twitted: “In these dark hours, our thoughts are with Ukraine and the innocent women, men and children as they face this unprovoked attack and fear for their lives”. UK Prime Minister Boris Johnson called “this unprovoked attack on Ukraine” a a path of bloodshed and destruction which was chosen by President Putin. Secretary-General Antonio Guterres condemned Russia’s actions, telling Putin to “bring your troops back to Russia” in the name of humanity. The Group of Seven industrialised nations promised to introduce coordinated economic and financial sanctions against Russia. But China urged all sides to exercise restraint. Beijing officials abstained from calling Moscow’s moves in Ukraine an invasion.

The invasion of Ukraine is an expansion of the earlier hybrid war that began after Ukraine’s Revolution of Dignity in 2013-14, when citizens’ protests led to the ouster of Russia’s backed then-president Viktor Yanukovych. Russia responded by illegally annexing Crimea and began to provide military support of pro-Russian separatists in the eastern cities of Donetsk and Luhansk. Since 2014 more than 14,000 Ukrainians have died in the fight to restore national integrity of Ukraine.

In the following days after the 24th of February the world community has announced a series of sanctions against Russia. The list is being updated almost on a daily basis. This has put the whole economy of Russia into a very difficult situation – the Ruble has lost almost a half of its value. Frightened depositors took 1.2 trillion rubles from banks in a few days at the end of February. The Central Bank key rate jumped up to a record 20%. Dollar assets of many Russian banks were frozen. Some banks were banned from SWIFT. Visa and Mastercard stopped all operations with cards issued in Russia. Both ApplePay and GooglePay joined the sanctions. Supply of many goods and technologies to Russia were banned. Large manufacturing enterprises with foreign roots shut doors. In the twinkling of an eye Russia topped the list of world’s most sanctioned nations, overtaking countries like Iran and North Korea

Commodities markets reacted immediately. All markets have exploded. A nightmare began in Chicago where Futures for wheat climbed to its highest level since 2008. Oil topped $115 a barrel, aluminum set a new record. In Europe, natural gas and coal prices hit record highs, exacerbating the energy crisis in the region.

The Black Sea became almost an empty place – all the sea ports of Ukraine are closed. The military operation has put all exports at risk. The Turkish Navy has issued a warning about mines drifting in the Black Sea, which were installed near the ports of Odessa, Ochakov, Chernomorsk and Yuzhny, but began to drift due to a broken cable.

Chaos ensued in the logistics of goods arriving and exported from Russia. The Danish Maersk, the world’s largest container shipping company, announced the suspension of new orders and the actual cessation of work in Russia. The European direction is paralyzed by sanctions and a complete lack of understanding of their application by everyone. The number of services and options for sending goods has significantly decreased due to stop-booking by the largest maritime operators CMA, Sealand/Maersk, HMM and MSC. ONE and MSC are switching to pre-paid, freight rates are growing significantly. New Chinese shipping lines have become active, but their services operate mainly from the center and north of China. Bookings in the Far East are accepted by Korean Sinokor, Chinese Huaxin, Jun An and SITC. The number of ships calling at Russian ports has decreased by almost 40%. The options for shipments to Kotka, Riga and Klaipeda have collapsed due to difficulties with subsequent trucking.

Shipowners consider the Black sea as a very dangerous destination. More than 60 ships anchored after the attack on the Panamanian ship. Baltic states – Lithuania, Latvia and Estonia – may also prohibit Russian ships from entering their ports. Russian ports remain open, but traders say international companies and shipowners are reluctant to use them because of sanctions. A boycott of the largest transport carriers put restrictions on exports.

It would be wrong to say that it’s not possible to trade with Russia. There are still ways to continue business, but the situation is changing and things are getting worse day by day. It is obvious that for Russia hard times are coming.

Despite the fact that Central Asia is far from Ukraine, the conflict in the Black sea may disrupt logistic supplies to Central Asia. Having no direct access to the sea, the bulk of shipments to Central Asia is at risk of full stop. We would like to draw your attention to an urgent situation which may pose a threat to all palm oil trade in Central Asia.

It should be noted that so far Central Asian buyers have used two ways to deliver palm oil. The first way is through the Black Sea basin. The second is in China. We already described the situation in the Black sea. Speaking about China we must say that, since last year, producers in Kazakhstan and Uzbekistan have been experiencing big problems with the transit of palm oil and its fractions through the territory of the People’s Republic of China, shipped in containers using flexi-bags by suppliers from Malaysia. Under various pretexts: epidemiological measures, state and other holidays, reconstruction of railway tracks, etc., the administration of the Chinese Railway prevents the shipment of goods from Qingdao Port, giving priority to transit and direct shipments of goods to Europe. In addition, a striking example of such discrimination was the introduction in 2021 of a ban on the transportation in the summer (and in fact from April to October) of “liquid cargo” in containers, including vegetable oils, palm oil and its fractions. For this reason many containers with palm oil and its fractions got stuck, in the port of Qingdao and at the Jiazhou station for long months from June to November 2021. According to the Chinese Railway, even refined deodorized bleached palm stearin the melting point of which is about 53 ° C falls under this ban.

In addition, palm oil and its fractions are transported in a flexible flexi-bag, certified by the Chinese Railways manufacturer, in compliance with all the norms and requirements of the Chinese Railways for such cargo in the usual manner and beyond it. Before the introduction of the ban last year, the Chinese side obliged all to install additional equipment , change the design of the flexi containers, and install an additional protective layer, which involves additional costs up to $ 500 per container. But Even meeting all the requirements does not guarantee successful transit through China. Such “banning” procedures were introduced for the first time in the history of the Chinese Railway. In addition, Chinese Railways prohibit the transportation of palm oil and its fractions, as well as special fats, shortenings, etc. in boxes in the summer.

In a difficult time of a pandemic, the military conflict in Ukraine, and sanctions against Russia, another transit country for palm oil and its fractions to Asia, Chinese transit is very important for the countries of the region. Its absence in the summer months may push buyers in Central Asia to reduce palm oil usage in all applications.

To summarize all above, it should be noted that the storm created by politicians completely disrupted financial and logistical stability in the whole region of Central Asia. The main question is WHO WILL WIN from this situation. The winner must answer the following questions:

  • How to avoid Sanctions?
  • How to supply oil palm products to Central Asia?

Russia’s disconnection from the SWIFT payment system may provoke a temporary influx of cheap oil and fat products from Russia to the countries of Central Asia. But a window of opportunity has opened. The difficulties of one competitor are always opportunities for the other who adapt better to new conditions. Сentral Asian countries are interested in palm oil which is highly needed for proper functioning of their own food industry.

Malaysian exporters may consider new trade practices such as direct payments in RUB-MYR using third financial institutions which do not join the sanctions against Russia or  even return to barter schemes of trading. Recall that in 2019, this has already been discussed, when Malaysian Defense Minister Mohamad Sabu said that Kuala Lumpur was considering bartering palm oil for advanced military equipment. Malaysia is also no stranger to swapping palm oil for military equipment. It bought Russian-built fighter jets using palm oil in the 1990s.

Prepared by Aleksey Udovenko

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