Monday

26th Sep 2022

EU sanctions hamstrung by threat to food security

  • High oil prices could increase the price of grain, maize and other foods such as soybeans for years by boosting the use of biofuels (Photo: thesetides.com)
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The EU has lifted some restrictions on the trade and financing of Russian coal, and some chemicals, to avoid an energy and food security crisis in poorer countries.

Coal "should be allowed to combat food and energy insecurity around the world," the EU Commission wrote in guidance shared with EU member states on Monday (19 September).

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Animal feed and some chemicals used in fertilisers and fuels are also allowed to be financed and shipped by EU operators to third countries.

A group of EU countries, including Poland and the Baltic nations, have criticised the partial loosening of sanctions, fearing it will further support Russian war efforts.

But EU efforts to quit Russian fossil fuels are hamstrung by the inherent risk it poses to global energy and food security.

The resurgent coal demand, driven by Europe's energy and gas crunch, has pushed prices to $441 per tonne, a near all-time high, threatening energy security all over the globe.

And new research by the Bank of International Settlements, the Basel-based supervisor of central banks, suggests the effects of the EU embargo on Russian oil, which will come into force on 5 December, may even be more profound.

"We argue that a substitution of Russian oil exports would be difficult, implying that restrictions on these exports may result in large and persistent price increases for oil-related products," the study's authors, Fernando Avalos and Wenqian Huang, wrote on Sunday (18 September).

This could increase the price of grain, maize and other foods such as soybeans for years by boosting the use of biofuels, such as ethanol and biodiesel.

"Higher oil prices create incentives for gasoline blenders to increase the ethanol content in their product," the authors write.

Although this can moderate the surge in oil prices, it would also increase the demand for corn, sugarcane, wheat, barley and sorghum and products used to produce biodiesel, such as palm oil, which is also used in a wide range of processed foods.

Corn is especially important, with 40 percent of the US harvest, the world's biggest corn producer, going to ethanol production.

With less corn available as foodstuff for cows, pigs and chickens, higher prices will spill over to replacements like soybeans, pushing up the price of meat.

EU sanctions do not directly target agricultural goods, but the embargo on Russian fossil fuels is likely to keep prices elevated, Avalos and Huang write.

"Understanding the complex interlinkages across commodity sectors is essential for policymakers if they are to ward off debilitating effects on energy and agricultural output," they conclude.

"The EU is fully committed to avoiding that its sanctions unduly impact trade in critical items to third countries around the globe," commission spokesman Daniel Ferrie said in a statement.

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