Russia builds alternative route for grain exports

27 October 20229 min reading

“The North-South corridor is strategically important for Russia. Russia aims to expand the supply of its agrarian products to the Persian Gulf. This is a very important region in terms of Russian agricultural exports. We are considering using the transit capabilities of Azerbaijan and access to the ports of Iran, including Bandar Abbas, to deliver our products to the countries of the world. This issue is in the range of our interests and will help expand the export potential of our food products.”

Arkady Zlochevsky
Russian Grain Union

The Russian Grain Union hosted an International Grain Trading Conference “Global Grain Outlook” on October 4-7, in Baku, Azerbaijan. Participants discussed the global changes in the structure of production and consumption of grain, developing new supply chains and creating new transport corridors.

On the sidelines of the conference, Arkady Zlochevsky, the president of the Russian Grain Union, gave an exclusive interview for Miller Magazine. Zlochevsky answered our questions on grain markets, Russian wheat export, the Blacksea grain deal and the North-South grain corridor. 

Zlochevsky said that the increase in freight and insurance rates due to the sanctions imposed by the West on Russia has created obstacles in the export of Russian grain to world markets. Russia exported wheat to more than 40 countries in August 2021. However, this number decreased to 10 in June 2022. And half of the Russian wheat was shipped to only 4 countries in September.

Zlochevsky underlined that alternative and competitive routes are needed for grain export. In this respect, he pointed out that the North-South corridor should be developed and used more effectively with the cooperation of Russia, Azerbaijan, Kazakhstan and Iran.

Could you give some information about the grain harvest season in Russia? 

We had a record harvest this season. We’ve got a historical record of 150 million tons of grain, about 100 million of which is wheat.

How sanctions have affected Russian grain exports? How is Russia’s wheat export pace since the conflict?

As a matter of fact, there are no direct sanctions against Russian grain but they are much more related to the logistic processes and shipment. It is hard to find ships for Russian grain and that has been reflected in disproportion in the price patterns of the transportation. Certainly, the sanctions are quite painful to us. Although the capacity and the potential are higher, grain exports have decreased by 20 percent compared to last season.

Russia’s wheat harvest reaches a historic 100 million tons and Russia’s wheat stocks are higher than in previous years. Will Russian farmers be able to safely store their newly harvested grain?

Yes, if we take into account the newly harvested wheat, we have more wheat stocks compared to previous years. So, it causes a problem. But the problem isn’t short-term storage. Short-term storage can be solved easily. There are storage solutions in the PVC packaging. But coming to long-term storage, yes, it is questionable and disputable. How that would be addressed in this harvesting season would only be clear in the second half of the season. When we come out from the winter season, we will be in a better situation to answer this question.

There were some concerns that the quality of this harvest would be less because it is normal that the quality could be a little low when the yield is very high. And while you are storing long term, you can lose the quality. Besides, we have to calculate the cost of long-term storage.

The Black Sea grain corridor deal needs to be extended in November. However, there are some concerns about the fate of the deal. Do you think it will be extended?

First of all, I should say that the deal is not being implemented to facilitate Russian fertilizer. Although the deal allows fertilizer exports from Russia, Russian fertilizer has been blocked from reaching its export destinations.

And we do not understand why such an extension of this agreement needs by the world community and why they are so insisting on that. The implementation of this grain corridor deal is a harmful element for us. The Turkish companies that traditionally import Russian wheat now prefer Ukrainian wheat because it is cheaper. But Turkey is being replaced by new buyers. We have substituted it with the new supply channels. We are actively enhancing the supply to Saudi Arabia, Iran, and Egypt. For example, shipments to Saudi Arabia tripled. As the opportunities for Ukrainian supplies under the grain corridor deal are exhausted, Turkey will return to Russia to buy wheat. But then Turkey could be in the queue to compete with the new buyers. Maybe our export volume could look lower but I am sure that demand for Russian grain will restore.

I know that Turkey is very keen to extend the grain corridor deal and will insist after November to extend this deal. But the extension of the agreement may cost Turkey’s flour export leadership in the world. Today we are actively focusing on flour exports. Turkey could lose its flour export leadership. Russia can become the leader in world flour exports. We have surplus wheat production over domestic needs and the wheat export market is volatile because of the grain export taxes. The Russian milling industry can benefit perfectly from this situation because there is no extra tax on flour export. So, I think an extended grain corridor deal can stimulate the replacement of Turkish flour with the Russian one.

Currently, Russian flour mills use only 50 percent of their capacity. When they increase their capacity to 80 percent, Russian millers can produce an extra 7 million tons of flour to send to world markets. We need better economic conditions and better logistics supply chains to deliver Russian flour to world markets. That’s all.

Looking for the future, what are the possible impacts of the Russia-Ukraine conflict on the wheat markets?

Before the conflict, the COVID-19 pandemic has caused significant disruption to grain supply chains. Even before 24th February when the special military operation started, wheat prices were at the peak level and it has reached $450 per ton in the world market. But now, in the middle of the special military operation complications, the price is $100 less. We have to understand the consequences of such an overheated market. Because the market is based not on the ratio of demand versus supply. The key element for the market is the stocks-to-use ratio. If you have no serious problem with this ratio, you know that there will be no problem in the world.  

We will adapt and survive these hard times. We will substitute grain exports with their ready derivatives. In order to do this, we strengthen our capacities and you will be surprised that this trend will be visible in this season. For example, we will certainly enhance the stock of forage and fodder for livestock. A few people know that Russia has already commissioned factories to have artificial meat production from legumes.

Russia plans to create new transport corridors for grain exports and wants to build a North-South corridor with access to the Persian Gulf. Could you give some information about this alternative corridor?

The North-South corridor is strategically important for Russia. Russia aims to expand the supply of its agrarian products to the Persian Gulf. This is a very important region in terms of Russian agricultural exports. We are considering using the transit capabilities of Azerbaijan and access to the ports of Iran, including Bandar Abbas, to deliver our products to the countries of the world. This issue is in the range of our interests and will help expand the export potential of our food products. At the moment, the corresponding infrastructure for this route is already functioning on the territory of Iran. Russian investors have built an elevator and a hub for transshipment. All this ensures the transit of Russian grains through the territory of Azerbaijan and Iran.

Another question will be on grain export tax. How this tax has impacted Russian grain export? When do you think this tax will be lifted? 

We categorically against such measures. $3 billion have been already accumulated on account of these taxes to the Russian federal budget. That’s all been paid from the farmers’ pockets. This is quite a big amount of money and a loss in the farmers’ revenues. We regularly alert the government on this issue. One month ago, we presented a file to President Putin. I think within this current season, the government will put lifting the tax on its agenda.

Last February China lifted restrictions on imports of Russian wheat and allowed wheat imports from all regions of Russia. Could you give information about Russia’s wheat export to China? What are Russia’s goals regarding the Chinese market?

We adapted to the Chinese demand. Our goal is to dominate the Chinese wheat market in the long term. However, we need a principal decision from the Chinese government but still, there is no such decision. Therefore, we are only supplying the transborder regions with small quantities. The Siberian grain is situated adjacent to the China-Russia border. If China accepts and decides on seriously Russian grain, that would be a very powerful driver to power up the Siberian wheat production capacity. We currently produce 17-18 million tons of grain annually in Siberia. But we can easily double that production.

Is there anything else you want to add?

Competition is the best and proper driver of any development, especially for a well-diversified grain market. Understanding this situation must lead the world to maximum focus on competitive patterns. However, all the trends now are in favor of protectionism and monopolism of certain supply chain channels. That leads, on the contrary, to disproportions in competitive patterns. And this is putting a spoke in the wheel of the competition. When the world appreciates that competition is quite a powerful drive, they will remove the spoke from the wheel and we will run on the better ways.

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