Thursday, March 27, 2014

Ukraine: Divvying Up The Breadbasket Of Europe

Amidst escalating U.S.-E.U. sanctions against Russia for its illegal seizure of Crimea, experts and commentators alike have speculated on the financial fallout such measures and continuing political instability will elicit for Russia, Ukraine, and the international community, particularly in the energy sectors of oil and gas. One economic dynamic that has received lesser media coverage is the impact of the current dispute on agricultural production and distribution in Ukraine. Significantly, this issue provides further insight into the strategic import of Crimea and partially clarifies why China remains reluctant to enter the fray.
Endowed with particularly fertile steppes of rich black soil, Ukraine became known as the “Breadbasket of Europe” during centuries of foreign occupation. According to the CIA World Factbook, the country produced more than 25% of total agricultural output – grains, meat, milk, and vegetables – for the Soviet Union. Today, roughly one out of four workers in Ukraine subsist on cultivating the land, consistently generating net food surpluses. Russia and the European Union purchase nearly 40% of these agricultural exports, which contribute to more than 5% of Ukraine’s annual GDP.
In 2011, Frank Holmes, CEO and chief investment officer of U.S. Global Investors, offered an encouraging investment prognosis for the agricultural sector in Ukraine,claiming “its agribusiness is booming” even in the wake of the global financial crisis. As seen throughout history, states around the world continue to pursue the great economic potential in the “Breadbasket of Europe.”

Even with status as one of the world’s largest grain exporters, Ukraine is still beholden to its top trading partner, Russia, for agribusiness. Russia already utilized this leverage in a tactical move against the newly installed government in Kiev. On 24 February, Sergei Dankvert, head of the Russian veterinary and phytosanitary oversight service Rosselkhoznadsor, hinted at temporarily limiting certain food imports from Ukraine, explaining, “Cooperation between veterinary and phytosanitary experts is largely based on trust. If the conditions in which the Ukrainian service is working do not improve, moreover, if its leadership is replaced, the business contacts, built over the past few years, may be affected.”
More notably, the recent annexation of Crimea means Russia controls key ports along the Black Sea through which Ukraine distributes its agricultural products to international markets. Ongoing geopolitical tensions will likely further increase the risk attached to Ukrainian commodities, hindering the flow of goods, hiking global grain prices, and creating more demand for U.S. output. By so hastily acquiring new territory, Russia singularly faces even bigger economic challenges including feeding a Crimean populace that received more than 70% of their food directly from Ukraine.
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