Why the Russian wheat tax is a disaster

At the end of 2020, there were rumors that the Russian government was going to tax wheat for the current export season. Those rumors quickly became truth. It concerns a fixed levy of €25 that will be levied on wheat from 15 February. From 1 March, this amount will be increased to €50 per tonne. The levies for barley and maize are €10 and €25 per tonne.

Record Revenue
The policy follows after food prices for bread and pasta rose by 20% in the country. Many Russians are struggling financially, which makes price increases undesirable. President Putin thinks so, too, who is trying to boost his popularity. Therefore, he began to interfere with the Russian export engine, which at that time was still running at full throttle. The country had an excellent grain production of 2020 million tons in 133. The second largest harvest ever. Wheat comprises 1 million tons, according to the United States Department of Agriculture (USDA), which is a record.

Huge exports are good for the country's economy. Russian wheat is also competitively priced due to the low exchange rate of the ruble against the dollar and euro. But if the population has to pay more for a loaf of bread or spaghetti, that is negative. Food prices in the country have reached their highest level in 6 years.

Deadline
The export tax soon proved ineffective. Russian arable farmers are in a comfortable position. During the harvest they took advantage of the high price level and sold a lot of wheat and other grains. This puts them in a good financial position for the new growing season. Exporters had to dig deeper into their pockets to buy wheat. Spot prices in the country continued to rise, to $300 per tonne. The highest level since 2014. The deadline is February 15, because every exporter wants to avoid the first levy of €25.

The Russian Ministry of Agriculture and the Ministry of Economy quickly realized that their plan was not going to work. That is why a variable tax system was devised (floating tax or formula-based tax). After much speculation, February 5 finally became clear what this system will look like. More importantly, the levy is permanent and will come into effect on June 2, 2020. Wheat may also be taxed next season. President Putin said this himself, according to sources.

Variable load
The amount of the levy depends on the spot price (physical price level). When it reaches $200 per tonne of FOB (free on board), or €166, the scheme comes into effect. 70% tax is levied on the difference between the base price and spot price. In concrete terms, this means that – when the price is $300 – a tax of $70 per tonne follows (70% of the price difference = $100). According to Maxim Reshetnikov, economy minister, this will bring the necessary stability to the market. From April 1, grain exporters will have to register all their purchases in Moscow and then the above formula will be applied to the prices. The levy is adjusted weekly and applies to all wheat exports from the third working day after publication. A similar formula will also be introduced for barley and maize, but it will come into effect as soon as the price reaches a level of $185 or €153,60.

For exporters, the variable tax is a disaster. After all, with a 'fixed fee' they can calculate by how much dollars the price will rise and thus determine their selling price. This is not possible with the new method, because it is not known in advance what the average national price will do. Exporters therefore do not want to risk buying wheat from farmers that are too expensive and only buy grain just before shipment. In any case, the sector is doing everything it can to ship as much grain as possible before the deadline.

Smaller area
Not only exporters, but also arable farmers and, of course, buyers of Russian wheat are affected by this. This is reflected in the fact that, for example, GASC – the Egyptian state agency for the purchase of grains – is hesitant to issue tenders. Arable farmers in Russia are already seeing the downpour and are considering not sowing spring wheat but other crops that are not subject to an export tax. This could have major consequences for the wheat acreage, which in the country is roughly divided into equal halves between winter and spring wheat.

What impact does this have on Russia's export level? The USDA still forecasts record wheat exports of 39 million tons, but is expected to scale back this level. Most analyst firms now estimate exports of 37,5 to 38 million tons. The Russian Ministry of Agriculture itself calculates with 37,5 million tons.

Falling price
Despite the announced measures, the Russian wheat price remains stable for the time being. That is not surprising, given the purchasing behavior of the exporters. FOB prices remained stable in January but are now falling to an average of $226 per tonne (converted €187,50). This keeps it a price advantage. In addition, the quality (12,5% ​​protein) is better than wheat from the US, Australia or Europe, which has 11,5% protein.

Ultimately, the question is: does the Russian consumer benefit? The answer is most likely: no. Apart from the effectiveness of such a measure, Russia has considerable grain stocks, so there are no shortages at all. However, it can hit the economy hard. Argentina has had a similar tax system on grain exports for years. The country has been in recession since 2018. Last year inflation was 36%.

world grain stock
Russia's past has also shown that – when grain exports were restricted – prices continued to rise and food prices did not fall. It did, however, contribute to the start of the Arab Spring. A big difference between then and now is that the world wheat stock and the expected closing stock in 2008 were considerably lower than they are now. The Arab countries also had more purchasing power due to high oil prices and tourism revenues.