24/7 Wall St.

Russia’s worst heat wave on record is going to complicate its recovery from the worst recession in 15 years.  It also may wreak havoc on many of its trading partners.

Though the human toll is dreadful, the economic one will reverberate around the world for months if not years.  Russia is a huge exporter of oil and wheat, two commodities the world always seems to need.   Supplies will catch up with demand in the event of a shortage but markets are not perfect.  Moreover, many of Russia’s economic rivals are hobbled by their own economic problems which would prevent them from benefiting from Moscow’s distress.

For instance, the recent decision by Russia to halt grain exports because a third of the crop has been ravaged by flood or drought may not be the bonanza for  Russia’s competitors that it may seem.  They have problems of their own.  In the U.S., less wheat is being planted as farmers switch to more profitable crops or sell their land to developers.  U.S. wheat exports are projected at 875 million bushels, down 140 million bushels from 2008/09 and down 388 million bushels from the record levels of 2007/08,  according to the U.S. Department of Agriculture. Farmers in Canada are facing floods and those in Australia have a locust problem.  One potential benefactor to Russia’s wheat woes may be Argentina, which reportedly is having a bumper crop.  Russian officials say they may reconsider the ban in October.

The Russian  heat wave, which may have killed 15,000,  may have cost the economy $15 billion, according to Bloomberg News,  “The heat wave may slice 1 percent of off  Russia’s $1.5 trillion economy this year because of lower agricultural output and reduced activity in other areas such as industry, ” the news service says.

Should Russia’s economy seriously falter, the European Union would have the most to lose.   Russia is the third-largest trade partner of the EU behind China and the United States.  According to the EU’s Web site,  the confederation is Russia’s most important trade partner,  accounting for 52.3% of its overall trade turnover in 2008, and is the most important investor in Russia.

The relationship between the two sides is occasionally rocky.  Last year,  natural gas supplies dwindled in Europe after a dispute between Russia and the neighboring Ukraine.  Russia’s gas monopoly, Gazprom, supplies one-quarter of Europe’s gas.  Some EU members such as the Netherlands are dependent on Russian wheat exports to feed their populations. Dirk Jan Kennes, the director of commodities for the market research firm Rabobank, Utrecht, The Netherlands, was recently quoted as saying that wheat prices will remain high for the next 10 years.

Israel also would suffer.  The Jewish State exported $777 million worth of goods from Russia and imported $1.05 billion in 2008, according to the Israeli government. Russia is a major supplier of wheat to Israel, which means it was hurt by the recent export ban, along with diamonds.  Israel, which has a large Russian-speaking population, also supplies defense equipment to Russia.

Egypt, the most populous Arab country, is a major customer for Russian wheat. Officials there have said that Egypt, also the largest wheat importer, has adequate supplies to meet demand, which is especially important during the Muslim holy month of Ramadan when bread consumption rises.   Some contracts will be affected, according to Bloomberg News.  Russia supplies about half of the grain imported by Egypt.  It also is a major supplier to Turkey.

Even if there were no heat wave, Russia’s economy would still have problems. Last year, the economy contracted a record 7.9 percent to 5.9 percent of GDP, the highest level since the collapse of the Soviet Union in 1991. Inflation is a whopping 5.8 percent.

Jonathan Berr