Russo-Ukrainian Grain After the Black Sea Deal

theeconreview

Dec 4

Following the end of the Black Sea Grain Initiative, Russia has intensified its attacks on Ukrainian ports in an attempt to damage Ukraine's economy and capture a larger portion of the global agriculture market.

By Derek Parr

Edited by Subha Sivakumar

This summer, the Black Sea Grain Initiative, which worked to ensure the safe export of Ukrainian food products from Black Sea ports and facilitate Russian exports of food and fertilizer, expired. In the few months since, little progress has been made towards its renewal and a new deal seems unlikely. The grain agreement, which was signed in Istanbul on Jul. 22, 2022, was partially in response to climbing food prices around the world, which were exacerbated by the conflict between Russia and Ukraine. Supported by Turkey and the United Nations, the agreement sought to reduce prices, especially in food-insecure, developing nations which were most impacted by commodity inflation. It was reported that approximately 61% of the Black Sea Initiative's 32.9 million metric tons of exports went to low and middle-income nations. The initiative expired in July of this year after a number of deal extensions, with no new agreement having been reached between Ukraine and Russia.

The Russian Ministry of Foreign Affairs cited the lack of Ukrainian shipments to low-income nations and Western sanctions on Russian agricultural exports as the primary reasons behind Russia's withdrawal from the agreement. However, shortly after, the U.S. State Department released a statement that "no G7 sanctions are in place on Russian food and fertilizer exports" and urged for the deal's renewal. China, the largest importer of Ukrainian grain during the food deal, also called for the resumption of Ukrainian and Russian food exports. Efforts have also been made, both by Turkish president Recep Erdoğan and the UN, to broker a new deal, but no breakthroughs have been announced beyond announcements of Russian agricultural aid to developing African nations. In exchange for the resumption of the Black Sea Initiative, the UN offered to reconnect a subsidiary of the Russian Agricultural Bank to the SWIFT (Society for Worldwide Interbank Financial Telecommunication) international payment system, create an insurance platform, unfreeze foreign assets of Russian fertilizer producers, and allow Russian ships to enter European ports. Nevertheless, Russia refused, arguing that these measures failed to properly lift the burden of the economic sanctions on their agricultural products.

In the meantime, Russia has ramped up attacks on Ukrainian ports, destroying Ukrainian grain shipments and port infrastructure. The Russian Defence Ministry has also declared all cargo ships heading to Ukraine through the Black Sea as viable military targets. In the Danube River region, which has become a key route for grain exports, Ukrainian officials claim that "Russia is systematically hitting grain silos and warehouses to stop agricultural exports." In response to these attacks on grain silos and port infrastructure, the U.S. and Ukraine have further accused Russia of "weaponizing food" in an attempt to enforce its aggressive political goals. Russia argues that global grain prices have steadily declined to levels below those at the time of the Black Sea Grain initiative, and points to their free wheat shipments to struggling African nations as evidence of their concern for food-insecure regions. In the 2022-23 agricultural year, Russia reported record amounts of grain export with high forecasts for the next year. Additionally, although Ukraine has been forced to shift much of their grain exports to the Danube River and overland routes, they have returned to levels of grain exports comparable to the previous year under the Black Sea Initiative.

Image Source: Fortune

While this diversion of Ukrainian agricultural exports into the neighboring markets of the European Union has kept the levels of grain exports steady, it has also resulted in a sharp decrease in prices, prompting farmer protests. Proposals from the European Commission to extend the duty-free and quota-free import of Ukrainian grain have created further political outcry. In May, the EU decided to allow Poland, Hungary, Romania, Bulgaria, and Slovakia to ban the sale of Ukrainian agricultural products, while supporting the transit of these goods for export to other nations. However, in September, after the EU decided against extending the ban, Poland, Slovakia, and Hungary created their own national restrictions on Ukrainian imports against the advice of EU trade officials. These trade restrictions have created tensions between Ukraine and their Western neighbors, threatening to weaken unified Western support for Ukraine against Russia. Polish president Andrzej Duda, when asked about a potential meeting between himself and Ukrainian president Volodymyr Zelenskiy, said that "the atmosphere has become tense." Ultimately, Russia benefits from these tensions as Western support for Ukraine falters and Ukraine is forced to rely on more expensive transportation routes.

Given current difficulties in the export and production of Ukrainian grain, Russia has declared their ability to replace Ukraine in the global market with respect to both commercial sales and free aid. This announcement came at a BRICS—i.e., Brazil, Russia, India, China and South Africa—summit in August as Russia attempted to assuage concerns over their withdrawal from the Black Sea Grain Initiative. This season, Russia is expected to increase their share of the global wheat export market to 22.5%, up from 16% two years ago. This increased market power may result in both increased Russian agricultural revenues and greater Russian influence over foreign nations.

While at the moment grain prices remain low, if Russia decides to restrict the export of agricultural products to enforce their geopolitical goals, there could be a substantial increase in global food prices. Additionally, potential escalations in the war could damage Russian export capacity as Ukraine displays the capability to strike Russian port cities. Russian dependence on Black Sea shipping routes may be exposed with Ukraine increasing attacks on Russian vessels and the Crimean Bridge. If such escalations continue, there may be a resurgence of rising food prices globally, resulting in an outsized impact on food-insecure regions. Many countries in sub-Saharan Africa and the Middle East are especially vulnerable to heightened food prices. A rise in commodity prices could further destabilize these vulnerable countries, creating widespread humanitarian crises as the economic fallout of the Russo-Ukrainian conflict spreads globally.