Russia’s catastrophic summer drought which has brought a succession of record high temperatures and record low rainfall figures, has pushed the government to impose a temporary export ban on grain.

With Russia’s Grain Union slashing its 2010 wheat harvest forecasts to below 70 million tonnes, compared with more than 100 million in 2009 and 20% less than initial forecasts for this year, Prime Minister Putin needed to act. A temporary ban on grain exports from August 15 to December is the response.

Russia’s wheat demand is 75 million tonnes, and the potential impact for grain prices to push food price inflation could lead to a resurgence in Russia’s traditional economic weak point, just days after official data showed Russia’s inflation falling to a record low annualized figure of 5.5%. Yaroslav Lissovolik from Deutsche Bank says that the move comes against a backdrop of expectation that the government would act to head off price rises – particularly on food.

"There is an understanding that there will be some upward pressure with respect to prices in the second half of this year. The question is how significant this will be. And furthermore we are seeing stepped up statements – verbal interventions from the government – with respect to the fact that the authorities are going to try and keep prices low."

The announcement of the Russian ban saw grain prices immediately spike in major global markets. The export ban by the world’s third largest grain exporter came in the wake of a doubling in wheat prices since the first week of June, and back to the record prices seen during the food crisis fears of 2008. Late in the week it was seen in Chicago and Paris at well over $8 per bushel, with analysts saying the $10 bushel could be just around the corner.

The jump in prices since $4.25 posted on June 9 means that some Russian exporters with forward contracts, who will be forced to declare Force Majeure on those contacts after the government ban, could find it a lucrative contract cancellation, according to ING economist, Dmitry Polevoy.

“We have heard that some exporters have much lower contract price than the current – both domestically and on the world market, so this ban on exports and force majeure condition will allow exporters to not sell wheat or grain to their clients and oppositely, sell it domestically with practically the same prices on world markets and this could positively affect their financial position.”

The economic impact of the drought is expected to be relatively muted, with Russia’s economy propelled almost solely by gas and oil exports, and VTB estimating that agriculture accounts for about 4% of Russia's GDP. Provided inflationary pressures are kept in check, lasting damage from the drought will reflect reconstruction costs and agricultural subsidies required to maintain investment in agriculture. With Russia one of the few nations with capacity to significantly expand grain production the drought may provide an underlining of the need to move further and faster.