The Russian invasion of Ukraine is causing unexpected geopolitical shockwaves around the world.
The Russian invasion of Ukraine is causing well-documented shockwaves to markets around the globe. Mostly resulting from sanctions against Russia and pro-Russian organisations, high-profile examples include the current boom in hydrocarbons prices.
Whilst the cost-of-living debate rages in western economies, impacts could be more significant in less developed regions of the world.
Commodities price rises have historically been a source of conflict and instability in the Middle East and north Africa. Ethiopia’s 1974 revolution came following an oil price shock, brought on by OPEC. Large-scale protests in Jordan and Tunisia in 2011, leading to the evacuation of the Tunisian president, were targeted at rising food prices. Many analysts have even linked the Arab Spring to rising food costs in 2008-09, and protests resulting in regime change in Sudan in 2019.
Egypt is set to be affected badly by rising wheat costs. Egypt is the world’s largest importer of wheat, buying around 11 million tonnes a year. Russia and Ukraine, the world’s largest and fifth largest exporters, make up 86% of this. However, analysts suggest this is not likely to be a key factor in spiralling costs. Instead, it is expected that a poor harvest in the USA is what may shock markets the most. With production of hard red winter wheat, the most common wheat crop in the USA, expected to be down 21% compared to 2021 – fears may be realised.
Aysh, a local pitta-style loaf, is a key staple food for Egypt’s 102m people. Since 1989 state subsidised bakeries have sold 20 aysh loaves for one Egyptian pound, a measure to reduce malnutrition. In 1989 this was equivalent to almost $1, but today is worth c. six cents, less than a 10% of the costs to produce it. The Egyptian state spends around $2.9b each year to cover the difference.
This year however, rising costs are set to significantly increase this figure. The state’s wheat budget for the year factored for costs of $255 per tonne. Looking at futures markets, the actual figure could be more like $400, resulting in over $1.5bn (0.4% of GDP) of extra costs. In the context of a global economy suffering seemingly uncontrollable inflation in the first half of 2022, this paints a bleak picture for the fiscal outlook for the rest of the year.
Egypt has around 5 months of wheat stocks in reserve, and the cash to cover the difference. Other countries like Lebanon are not in such a strong position. Major grain silos were destroyed in the 2020 blast in Beirut, meaning the country cannot store more than a month’s worth of wheat, and is essentially bankrupt following a financial crisis in 2019. Here, the cost of flatbreads has already gone up more than 400% before the invasion.
Egypt’s authoritarian president Abdel-Fattah al-Sisi has publicly announced his dislike for the bread subsidy – saying last year “It’s unreasonable to sell 20 loaves of bread for the price of one cigarette”. Price rises may motivate him to act on his feelings. No other government has ever reformed the arrangement. One third of Egypt’s population lives below the poverty line, and are already strained by raising costs, particularly in Cairo.
Food price rises affect urban populations most intensely, as many rural African communities in poverty produce their own food. In fact, many rural populations could theoretically benefit from rising food prices, as producers of cash crops. This is key to political stability, due to the denser urban populations proximate to government centres. It is riots here which can force regime change.
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