‘The agreement won’t last long’ What the Black Sea grain deal means for Ukraine, Russia, and the wider world
On July 22, Ukraine and Russia signed agreements with Turkey and the United Nations designed to restore the export of grain from Ukrainian ports. The deal stipulates that Kyiv can export grain from the Odesa, Chornomorsk, and Yuzhne ports on the Black Sea. However, Ukraine will not remove the mines protecting its ports: ships will travel through safe clearways instead. In addition, the Russian side will be involved in inspecting ships destined for Ukraine’s ports for any weapons. The day after the agreements were signed, however, Russian missiles struck the port of Odesa. For insight into what the Black Sea grain deal means for Ukraine, Russia, and the wider world, Meduza turned to Andrey Sizov, an expert on agricultural markets and the CEO of the research firm SovEcon.
To what extent did the agreement between Moscow, Kyiv, and Ankara affect the world grain market? Was it an important step in overcoming the global food crisis?
Fundamentally, nothing changed after the signing of the agreement between the three countries. Yes, there was a lot of optimistic commentary, but this is only a small step towards the normalization of Ukrainian exports. Right now, Ukraine exports around 1.5 million tons of grain per month — this much less than in peacetime. Back then, [monthly] exports reached almost seven million tons.
The fact that the war began and the ports closed was a key, but not the only factor in the growth of world grain prices in February and March of this year. After that, prices actively began to decline, but there was no talk of a deal. When the deal was signed, the markets reacted [that same day] with a noticeable drop in prices, five to six percent.
The strike on Odesa showed that this reaction recouped quickly, prices went back up. All because the war is ongoing. And this flies in the face of the peaceful export of grain from Ukrainian ports. How can we talk about the normalization [of deliveries] if active hostilities are ongoing within several hundred kilometers or even less? Of course there will be missiles flying and they will fly towards grain terminals. Therefore, we believe that the question of active exports is still very remote.
How important are Black Sea ports for exports?
This is almost the entirety of Ukrainian grain exports. The Odesa and Mykolaiv regions accounted for 90–95 percent of all exports. If in some ideal scenario the deal worked, then we could talk about a breakthrough. In this case, Kyiv could increase [monthly] exports to 4–4.5 million tons. Of course, the maximum figure of seven million [tons] per month is still a long way off, but it's better than nothing — especially considering the fact that last year was a record year for Ukraine and now there’s up to 20 million tons of grain in the country that cannot be moved.
Now, a new grain year has begun, the new harvest started in July. If exports aren’t unblocked, then the Ukrainian market will collapse. The amount of grain supply will be three times higher than domestic consumption, which will affect both prices and the entire industry. And agriculture plays a big role in Ukraine’s economy — it’s 10 percent of the country’s GDP.
Clearly this deal is beneficial for Ukraine. But why does Moscow need it?
There was talk that Russia is opening the Black Sea for Ukrainian ships and, in exchange, restrictions on Russian grain exports are being lifted. But this story doesn’t fully explain the situation. Even before the deal, Russian grain and fertilizer exports were going on as usual. Russian ports briefly halted [operations] in February, but by March and April the usual volumes of grain were already being exported from the country. The same goes for fertilizers. Although there were personal sanctions against the beneficiaries and top management of a number of Russian producers, exports still went on.
Yes, in anticipation of a record harvest and, accordingly, record exports, it was necessary to somehow reassure traders, ship owners, banks, and other partners. Naturally, they feared falling under some sort of secondary sanctions, although there are no such restrictions — and both the U.S. and the EU have pointed this out several times.
However, even after this, Kyiv’s benefit from the deal — in our [SovEcon’s] opinion — is much higher than the benefit for Moscow. Therefore, it seems that the agreement won’t last long, since it’s unclear why the Kremlin would help Ukraine so much. As I have said already, the opening of the Black Sea is a very important story for Kyiv.
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If the agreement means so little so far and won’t last long, how much will it worsen the global food crisis? Will more people go hungry because of it?
The number of undernourished people [in the world] has been growing for several years in a row, this story started even before the war. [The rise in food prices] started in the second half of 2020. At the beginning of that year, we thought that the peak of rising food prices had passed, but then the war began. It gave impetus to a new rise in the prices.
The FAO [the Food and Agriculture Organization of the United Nations] and the World Food Program estimate that the number of undernourished people will increase by 20–50 million people this year. Last year there were 193 million [people facing acute food insecurity].
But if we look at the price dynamics in recent months, food prices [on wholesale markets] are falling and the fall will likely continue through July. The market lives for the future, therefore, after February, the expectation of a future deal [between Russia and Ukraine] was priced in.
But this wasn’t the most important criteria. Much more important was the fact that Russian exports continued as normal and, as I already said, it was a record year. Against this backdrop, opening the Black Sea doesn’t significantly affect prices.
In this case, is it safe to say that Russia unleashed a grain war?
The start of the war really did lead to a rise in food prices. Ukraine’s exports stopped, supply decreased sharply — and prices soared 1.5-fold. Now they’ve already returned to the pre-war level.
But in addition to its military campaign, the Kremlin has a more serious, heavy weapon: its own exports. Russia is the leader in grain exports and now, with Ukraine’s withdrawal from the wheat market, Russia’s influence is unprecedented. That’s why at the beginning of the war there was a very alarming narrative where the export of wheat from Russia was associated with sanctions: [Moscow] said, lift the sanctions and we’ll sell. Putin clarified this issue at the SPIEF [the St. Petersburg International Economic Forum], saying that Moscow would not reduce exports.
If the situation had been different, then the rise in prices on February 24 would have seemed like an easy warm-up. We could have expected at least a 1.5 fold increase from the record levels that occurred at the start of the [military] campaign. This would have been a catastrophe.
So at present, we cannot talk about a global grain war. Especially since such a decision would be a shot in the foot for Moscow. Such a move would be catastrophic not only for the world, but also for Russian agriculture.
How prepared was Russian agriculture for the war and its consequences? Will sanctions and restrictions affect it?
It’s too early to predict the situation for the next year. In all likelihood, the harvest will be smaller than this year: after all, this is a record year. But it needs to be understood that Russia works very closely with the rest of the world, including in agriculture. And this is largely the basis of Russia’s agricultural successes. We export wheat, corn, barley, and meat. But at the same time, we actively use international agricultural technologies.
This market is controlled by just over ten global corporations that invest in R&D [research and development], produce new seeds, develop products for protecting crops, and produce machinery. They work for all eight billion [people], for the entire planet. Replacing these technologies is simply unrealistic, since investments in development run into the hundreds of millions of dollars. Nobody will do the same thing in the Russian market, which is much smaller than the global one.
Because of the war, some of these companies left Russia. That is to say that in the next year, there’s a likelihood of losing access to modern agricultural technologies. For example, the American [companies] John Deer and AGCO, the biggest producers of agricultural equipment in the world, left [the Russian market] almost immediately. Yes, they are expensive and their share in the Russian market is small. But even Rostselmash is a global company. And what will happen with spare parts and consumables remains unclear. In fact, what’s happening in the automotive market, can be projected onto the agricultural market.
Suppliers of crop protection products and seeds have fulfilled their obligations for 2022, but what will happen next year remains unclear. All this can lead to a decrease in [crop] yields. How serious [a decrease] is an open question. This depends on the specific crops: for example, wheat, by and large, does not depend on imports in terms of seeds. Other crops — corn, sunflower, sugar beets, and potatoes — are much more dependent on technology.
The size of sown areas will not necessarily change. Here, farmers can reduce costs in various ways: in some places they will introduce less fertilizers, less crop protection products. The equipment will be simpler. Usually farmers try to use technologies to balance out bad weather. If they don’t stint on fertilizers and protection products, then in bad weather the yield will drop by five percent. And if they don’t have all that, and the weather fails, then it can depreciate by 20 percent. This is an approximate calculation, but this is the logic.
Due to all of this, could Russia see rising prices for bread and other groceries?
Retail prices are very loosely connected to wholesale grain prices. This is one of a great number of variables, but far from the most important one. Logistics, the cost of fuel, wages, and taxes are far more important.
Translation by Eilish Hart