Russia’s Withdrawal from Black Sea Grain Deal
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Bottom Line: Russia has an incentive to agree a new grain deal with the UN and Turkiye, as otherwise it could hurt export revenue at a time when Russia exports and government revenues have fallen from the 2022 highs. While this is the central scenario, an alternative is that Russia take months to agree a deal to try and squeeze Ukraine revenue during a crucial phase of the war. Russia current guidance does not provide clarity on the two alternatives at the moment and thus uncertainty will remain.
The Black Sea grain deal expired as of July 17 as Russia announced its decision not to extend it, arguing that Russia’s requests on removing obstacles to Russian agricultural exports was never fulfilled, and the grain exported from Ukraine (which were meant to be shipped to poor countries) headed towards developed Western countries. Russian Defense Ministry announced on July 19 that “Russia would consider all ships going across the Black Sea and destined for Ukrainian ports as carrying military cargoes, starting from July 20.” The Ministry also indicated that the flag states of such ships will be deemed to be involved in participating in the war on the Ukraine side. It is worth mentioning that Moscow’s Spokesman Dmitry Peskov recently underlined that Russia is willing to return to the agreement if Russia’s requests are fulfilled but the re-extension of the deal remains questionable.
It is obvious that cancellation of the deal would have direct impacts not only the parties of the war but also on the rest of the world taking into account that the deal was crucial in providing food supply to less developed countries and soothing food price fluctuations. (Note: The original deal was first signed on July 22, 2022, in Istanbul in order to resolve the problem of food and fertilizer supplies on global markets after the war and it was extended many times in the last one year.)
Turkiye is hopeful that the deal will be reinstated, having an important arbitrator role in the deal so far together with the UN. Turkish President Erdogan said on July 21 that he expects to restart the deal soon and added and will hold talks with President Putin(here).
However, despite UN and Turkiye’s efforts, the signals on the future of the deal from the parties remain complicated. Let’s start from the Russian side:
Russian President Vladimir Putin mentioned in an article published on the Kremlin's website on July 23 that "The continuation of the deal is meaningless, which did not justify its humanitarian purpose. I want to assure that our country is able to replace Ukrainian grain both commercially and free of charge, especially since we again expect a record harvest this year." Putin indicated that "Russia will continue to vigorously work on organizing the supply of grain, food, fertilizers and more to Africa”. Russian Deputy Foreign Minister Sergey Ryabkov took the same stance as well suggesting that Russia may want to displace Ukraine rather than restart the agreement.
Additionally, Ryabkov also mentioned that the country is having difficulties in delivering agricultural products due to logistics, ship insurance and payment problems. First Deputy to the UN Dmitry Polyansky has also recently argued along these lines (here). This could mean Russia fears that Ukraine could have more benefit from the grain deal if it continued in the face of Russian problems.
On the other side of the coin, Ukraine has declared that they would continue exporting its grain via the Black Sea despite Russia’s withdrawal from the deal. Ukrainian President Zelensky emphasized on July 17 that ship owner companies told Ukrainian authorities that they would be ready to proceed with exporting grain from Ukrainian ports if Ukraine will permit the ships out of ports and Turkiye would allow them to pass through the straits. Meanwhile, Zelensky also clarified recently that Ukraine and NATO would like to find out ways to "unblock" the corridor as Ukraine proposed to proceed the process without Russia's involvement. However, Turkiye is unlikely to anger Russia by allowing ships through and NATO will not escort ships in the Black Sea.
Meanwhile, after the expiration of the deal, according to Reuters, Russia allegedly hit Ukrainian food export facilities for a fourth day in a row on July 21 and practiced seizing ships in the Black Sea in an escalation that will likely slow most shipping.
The impacts of the cancellation of the deal remain multifaceted. The termination has caused major food price fluctuations as prices of the agricultural commodities began to go up moderately. For instance, wheat prices increased by 14% from $6.17 per bushel to $7.03 in one week after the cancellation of the deal. (Figure 1). Prices of soybean and rice surged by 5.4% and 4.8%, respectively, during the first week of the termination.
Figure 1: Price of Wheat No.2, Soft Red ($/Bu)
Source: Datastream
It appears the termination decision would have consequences in the region as well, though this is secondary to the impact on African countries. Five central European countries (namely Bulgaria, Hungary, Poland, Romania and Slovakia) continue to claim that Ukrainian grain imports are hurting their domestic ag industries and they request the restriction on domestic sales of Ukrainian wheat, maize, rapeseed and sunflower seeds by the EU should continue. The countries are worried that the termination of the Black Sea deal may lead to increased grains flows into their countries through land transportation to the other ports in Poland, Romania and Lithuania which could finally hurt domestic agricultural producers in the Region.
Re-instating the deal is critical to provide food security, prevent hunger and food price fluctuations which continue to affect all countries. Russia has an incentive to agree a new grain deal with the UN and Turkiye, as otherwise it could hurt export revenue at a time when Russia exports and government revenues have fallen from the 2022 highs. Though reaching a re-extension of the deal may take time, we think that current deadlock can be solved if Turkiye and UN are able to persuade Russia to return to the negotiation table by reassuring priorities of Russia would be met. The main alternative scenario is a further political and military squeeze by Russia over Ukraine by halting the deal on a prolonged basis. Russia guidance does not provide clarity on the two alternatives at the moment, and thus uncertainty will remain.