Russian Invasion Roils Tea Trade
By Dan Bolton
Tea traders are contending with an economic barricade and formidable logistics hurdles as governments worldwide seek to prevent Russia from transacting regular business.?
Allied nations sanctioning Russia currently represent more than 50% of the world's economy. Eight of 10 of Russia's most important trade partners are participating in sanctions. The breadth and severity of the economic response to Russia's unprovoked invasion of Ukraine are unprecedented. ?
Brokers say that tea shipments from traditional supply origins have already stopped since there is little chance containers will make it to Russian or Ukrainian ports.?
Ocean carriers representing more than half the world's container shipping capacity announced this week that they would no longer accept container bookings to or from Russian and Ukrainian ports except for food and humanitarian goods delivery. ?
Tea and coffee are considered food, but few ships will be available, insurance will be extremely expensive and all cargo will be subject to lengthy inspection for contraband.?
Immediate impacts include:?
Add to the above bottlenecks caused by hundreds of ships delayed or idled at ports, a shortage of truckers to deliver thousands of containers of goods that are piling up in warehouses, elevated freight rates, the suspension of DHL, UPS, and FedEx services to Russia, the closing of US and European airspace and extreme weather conditions.?
Russia's unprovoked invasion of Ukraine and ongoing deadly assault on its citizens is creating a global rift in the tea lands as some producing countries consider workarounds.?
On March 2, India, Vietnam, and Sri Lanka abstained from a UN resolution deploring the invasion and destruction of Ukraine by the Russian Federation. The resolution demands that Russia "immediately, completely and unconditionally" withdraw from Ukraine. ?
Bangladesh, Mozambique, and Zimbabwe also abstained along with China, Russia's most important trading partner. China supplied Russia with about 20% of its imported goods in 2019 and bought 13% of Russia's exports that year.?
Kenya voted in favor, as did Rwanda, and Malawi, joining Argentina, Japan, South Korea, Malaysia, Thailand, and 141 other countries. Five nations, including Belarus, Syria, and North Korea, joined Russia to vote against the UN resolution.?
India's tea auction in Coonoor is a favorite of Russian buyers, but 32% of the tea has remained unsold in recent weeks. Demand is evident, but sellers are concerned about receiving payments as Western nations along with Japan, Singapore, and South Korea individually excluded Russian banks from making SWIFT system transfers within their jurisdictions. The US and EU and allied countries also limit Russia's Central Bank from accessing reserves.?
India, which exported $3.3 billion in goods to Russia in 2021, is straddling the fence politically, committed to a peaceful resolution while seeking to retain $6.9 billion in Russian imports. In December, the two countries signed a 10-year military operation agreement. India buys everything from small arms to MIG-29s and Russia's sophisticated S-400 air defense system. It also leases three nuclear-powered submarines from Russia, as reported by Al Jazeera. ?
Russia owes Indian exporters about $500 million for shipments in transit, funds jeopardized by sanctions. India is considering low-cost loans in rupees and letters of credit to guarantee settlement. India's state-owned banks may lend funds up to the amount owed from payments pending from Russia and Ukraine.?
India is also considering rupee-based tea sales, which frustrated the US after imposing sanctions on Iran. Like Russia, Iran is a major tea buyer.?
Reuters quoted anonymous sources who described past mechanisms employed by India to shield tea suppliers from sanctions. The Iran workaround began in 2012 and lasted several years as state-run banks accepted funds guaranteeing payment for trade between the two countries. The program enabled individual parties to barter commodities to offset the sum. Withdrawals are in rupees. ?
While tea is a necessary commodity, fertilizer is far more critical. India imports 7.5 million metric tons of fertilizer annually, much of it from Russia after China restricted fertilizer shipments. It seems that a mechanism enabling direct payments in rupees will find favor. Last year India began talks with Iran to import 1.5 million metric tons of urea annually despite US sanctions.??
India can easily sell more tea once bound for Russia in its fast-growing domestic market. Sri Lanka also refrained from condemning Russia. Experts predict a decline in production in 2022 due partly to the limited availability of fertilizer. Sri Lanka is confident buyers will emerge.?
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Anil Cooke, managing director and CEO of Asia Siyaka Commodities writes that last year, Russia imported 27 million kilograms and 29 million kilograms the year before. And Ukraine has been steady at around 4 million kilos each year over the last three years. So that's approximately 10% of all tea shipped by Sri Lanka.
"The impact of these two markets is varied in the sense that they buy a whole cross-section of grades from small-leaf high growns, to a mix of black leaf orthodox teas. And that could be a definite issue with the depth of demand at the digital auctions, given the uncertainty over trade with these countries," said Cooke. "Auction prices are beginning to reflect slackening demand for Russia and Ukraine. The positive aspect is that it's gradual. Right now, Colombo, Sri Lanka is in the midst of its western quality season. And it's been pretty dry with production low. So, I don't see this being felt until a few weeks further downstream, because there is ample demand to take up the available quantities on offer right now," writes Cooke.
Russia imports $70 million worth of tea, cut flowers, and fruit annually from Kenya, and Ukraine buys $3 million of the same.?
"Being largely orthodox markets, Kenya may not feel a big hit, but of course, our exports to these countries have been growing, especially now that we produce some volume of orthodox," writes John Bett, general manager of Afribridge Trade Exporters in Kenya. "This is the component that will be affected. In addition, the general effect of the war on the global cost of living will impact us regardless of the export destination," writes Bett.
Sanctions?
China, the world's largest producer, is allied with the Russian Federation, but India, Sri Lanka, and Kenya supply 65% of Russian tea imports. China, Vietnam, and Malaysia account for only 25% of Russia's tea. ?
In recent years Russia has imported about 150,000 metric tons annually. In a typical year, Ukraine imports 17,000 metric tons.?During the first six months of 2021, tea imports increased to 77,400 metric tons compared to the 76,200 landed during the same period in 2020.
Russia imports tea from 45 countries in quantities that vary by season. Statistics for 2020 released by the Russian Foreign Trade Customs for the spring quarter show that India accounted for 32% of imports by volume (27% by value), Sri Lanka 19% volume (27% value), Kenya 12.8% (11% by value), Vietnam 10% (6% by value), China 9.9% (9.5% by value) and Indonesia 4.5% (3% by value) of the 37,500 metric tons landed during that period.?
Sales for the first quarter were $101 million, of which $91.5 million was for black tea (34,400 metric tons) and $9.6 million green (3,100 metric tons).?
This week the US warned China that "any country that tries to evade sanctions will also face the consequences of its actions. I don't want to speculate with what that would be,"?according to the South China Morning Post.?China accounts for 15% of the global economy.?
China is likely to ignore that warning and provide a financial lifeline to Russia. Chinese banks are part of the Russian payments settlement system (a rival to global SWIFT). The Bank of Russia holds $80 billion of debt in China's yuan, and Russia's National Wealth Fund holds $60 billion in yuan, money that could be liquidated to offset sanctions.?
China is the world's largest tea producer, exporting $2 billion of mainly green tea in 2021. Russian tea drinkers prefer black, but China also produces black tea in significant quantities and can easily expand that capacity to meet Russian preferences. Many green tea cultivars make excellent black teas.?
"If this drags on, I suspect that within a decade Russians will be drinking mostly Chinese tea," quipped one trader.?
Fertilizer?
Russia is the top exporter of nitrogen fertilizer, accounting for 17% of the global market by volume. According to the Wall Street Journal, Russia and Belarus are the second-and third-largest potash-producing countries globally, and Russia is the third-largest phosphate exporter. "Expect a global supply crunch, prolonging the current shortage and exacerbating the already high prices for farmers," experts warned.
Tea feeds ravenously on fertilizer which must be applied in adequate quantities and in a timely manner to achieve optimal yields. Fertilizers are applied after the first spring rain and as the leaves appear in March and April. Nitrogen is critical to promote the growth of leaves and phosphorous for root health. Proper fertilization is also critical for soil management, maintaining pH levels, and enabling plants to ward off pests. Trees with a nutrient deficiency do not recover quickly when soils are depleted.
Current Packaged Tea Prices in Moscow (March 1)
According to Russia's Federal Customs Service, Russia spent $442 million importing tea in the past 12 months, down from the more than $684 million the country purchased in 2013. Russia is home to 145 million people but declines in volume and value have made Russia a much less appealing market in the past decade. According to Euromonitor, the black tea category struggled in 2021 due to the growing popularity of fresh coffee. As consumers confront double-digit inflation and reduced availability, many will trade down to instant coffee and tea. A year from now, tea drinkers will longingly recall a time when they paid "ONLY" 227.99 rubles or about $2.25 US for 200 grams of mid-grade Maiskiy Korona Tea, the "Crown of the Russian Empire."