September 21, 2022
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Russia Hits Europe in the Bread Basket
When it comes to fertilizers, Europe has no good alternatives.
By: Ekaterina Zolotova
It’s autumn in Europe, which for European farmers means it’s time to start placing orders for fertilizer for the spring. Of course, prices have been much higher recently. World nitrogen prices are up significantly since the start of 2021, driven by elevated demand for agricultural produce and pandemic-related supply disruptions. European prices of natural gas – a factor in nitrogen-based fertilizer production – since the second half of 2021 have shot up by even more. And the elevated price of nitrogen fertilizers has already pushed purchasers toward phosphorus or potash fertilizers, bringing their prices to multiyear highs as well. Then, in February 2022, Russia’s invasion of Ukraine was added to the mix.
Higher energy and fertilizer prices means higher food prices, without a fanciful surge in output or state intervention. This will increase the risk of social unrest in Europe, a major concern for European governments and the European Union. It’s clear that Europe must do something, but the most important factors in the soaring costs are the war in Ukraine and – indirectly, in the case of fertilizers – Western sanctions against Russia. For Moscow, one of the world’s largest producers of natural gas and nitrogen fertilizers, this is crucial leverage, which it will use to try to extract significant concessions on sanctions. Europe’s next best alternative — finding supplies somewhere else in the next few months – is unlikely to pan out, and it may eventually have to give the Kremlin some of what it wants.
Disruptions, Real and Imagined
Put a large market with lots of manufacturing capacity next to a treasure trove of natural resources, and you get interdependence. Over the years, infrastructure and commercial linkages, made possible by proximity and circumstance, have tied the European and Russian markets together. In addition to being a massive natural gas exporter, Russia supplies approximately 45 percent of the world’s ammonia nitrate fertilizers, 20 percent of potash fertilizers and just under 15 percent of phosphate fertilizers. Most of this production goes to Europe. Russia receives a constant influx of foreign currency, reinforcing the regime’s stability. Europe, most of the time, receives a cheap, steady flow of critical inputs: About 40 percent of its gas imports and, for example, about a third of its ammonium for the production of fertilizers. Roughly a quarter of Europe’s fertilizers are imported from Russia, and together with Belarus, a Russian ally, provides more than half of Europe’s potash fertilizers.
Fertilizer Nutrients and Imports' Share in EU Consumption
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EU Fertilizer Production by Nutrient, 2019
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Since December 2021, the Kremlin has had quotas in effect on exports of nitrogen and compound nitrogen fertilizers to states outside the Eurasian Economic Union, but those quotas have been gradually relaxed without spurring a significant increase in Russian fertilizer exports to Europe. Western sanctions do contribute, but not directly. There are sanctions in effect that target individuals who run Russian fertilizer companies, but no measures target the fertilizers themselves. The European Union did adopt a quota on the import of Russian potassium fertilizers for one year, but the quota limit is very close to typical trade volumes. Instead, the effect of Western sanctions is mostly transmitted through logistics and finance.
In terms of logistics, Baltic ports that usually receive shipments have become less accessible to Russian producers. Buyers have encountered difficulties chartering large bulk carriers, forcing them to rely on smaller vessels and raising transport costs and delivery times. Financially, some Russian banks are blocked from using SWIFT, the dominant messaging system for interbank transactions. As a result, payments are more complicated, and some potential buyers are avoiding Russia entirely for fear of blowback. In total, nearly 300,000 tons of fertilizers are reportedly blocked from European ports and can’t reach the buyers.
Toliatti-Gorlovka-Odessa Ammonia Pipeline
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With respect to ammonia specifically, the war in Ukraine is a direct obstacle to the delivery of supplies. The 2,500-kilometer (1,550-mile) Togliatti-Gorlovka-Odesa pipeline is capable of transporting 2.5 million tons of ammonia per year from Russia’s Volga region to the Ukrainian Black Sea port of Yuzhny, near Odesa. But it also happens to traverse the parts of Ukraine witnessing the most intense fighting, including Kharkiv. And since ammonia is highly toxic and corrosive, the war is a problem.
Europe’s Options
An additional problem for Europe is the lack of alternative suppliers. Domestically, the nearly 30 percent increase in natural gas prices put a damper on Europe’s own fertilizer production. As much as 15 million tons of European ammonia capacity has been shuttered or is at risk of it, equivalent to almost a third of Europe’s annual output. Producers of nitrogen fertilizers face significant competition for scarce natural gas from other industries as well as households. And Europe lacks the capacity to significantly raise production of other types of fertilizers. Ideally, Europe would try to develop homegrown resources –preferably not nitrogen, whose processing for fertilizers requires lots of natural gas. Mines in east Germany have started test-drilling for potassium, but again, it would take time to spin those up to meaningful production levels.
European buyers have reached out to other gas and fertilizer producers in the Middle East, North Africa and Canada. The bloc is discussing natural gas with Algeria and fertilizer with Morocco, which already provides 40 percent of Europe’s phosphate imports and contains more than 75 percent of proven world reserves of phosphorite. But Europe faces obstacles here as well. Gas-producing countries are already taking advantage of their access to cheaper gas and running fertilizer plants producing nitrogen at near full capacity. Quickly raising production of other fertilizers is even more difficult. Lastly, importing more fertilizers does nothing to help domestic fertilizer firms stay afloat.
European Fertilizer Consumption by Crop
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Then there are the long lead times. Although fertilizer is usually applied a couple of months before planting season (February-March), farmers usually order fertilizer between September and November. The European Union is working on a strategy to increase domestic fertilizer production, protect and create jobs, and diversify supplies, but such a reform will take more time than Europe has – and possibly more unity too.
This leaves Europe with two options: muddle through, or compromise with Russia. Already, there are indications that Europe is investigating the latter. According to U.N. Secretary-General Antonio Guterres, the West is discussing increasing ammonia nitrate supplies through the pipeline in Ukraine. Ukrainian President Volodymyr Zelenskyy has already given his support to the idea. And the United Nations proposed that gaseous ammonia owned by Russian fertilizer maker Uralchem be piped to the border with Ukraine, where U.S.-based trader Trammo would buy it.
Compromised
But Russia is aware that Europe does not have many options, so Moscow is in no hurry to respond to appeals to make better use of the Togliatti-Gorlovka-Odesa pipeline. The Kremlin intends to squeeze Europe to, for instance, ease restrictions on logistics or payment for Russian goods. Russian President Vladimir Putin recently called on Europe to ease restrictions on port access for fertilizer shipments bound not just for Europe but for non-European markets as well. Several ports, including Rotterdam and Finland’s Kotka, have responded positively to proposals to make exceptions for Russian fertilizers. However, Brussels is nervous that simplifying logistics or otherwise easing up the pressure will restore maritime or rail connections and give Russia more access to foreign currency and trade.
Given the likely shortages of fertilizers for the spring, the prospects for Europe’s 2023 harvest are murky but downbeat. Moscow can use the situation to promote its interests and seek favorable contract terms. It will delay restoration of pipeline supplies for as long as possible under various pretexts, from unexpected repairs to retribution for refusal to pay in rubles. Therefore, food prices are unlikely to stabilize by next summer, and prices in the EU as a whole will remain elevated, heaping more pressure on the bloc.
