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The greatest deal ever

04 August 20239 min reading
Russia decided to finish the grain agreement with rockets. That is why they are attacking Odesa, Mykolaiv and the Danube port infrastructure so that Kyiv does not even have the technical possibility to restore it. By controlling Ukrainian ports, Russia will control Ukrainian exports. By controlling Ukrainian exports, they will control food prices. By controlling food prices, they will control politics in Africa and the Middle East. 



On July 18, 2023, Russia refused to continue Grain Agreement. Year after it was launched. Just because Ukraine, unlike Russia, continued to supply wheat to those who need it, sometimes for free. 

Since August 2022, about 33 million tons of agricultural products have been exported through the Grain Corridor. It’s around 44% of war-time Ukrainian exports. The grain agreement softened the blow dealt to Ukraine by the war unleashed by Russia. Before the full-scale invasion, Ukraine was a serious player in the global grain and oilseeds market. The war was the main reason for the strong reduction in sown areas and yields in 2022. Russia is going to become the only big wheat-selling country in the Black Sea Region and made Turkey, Africa, the Middle East and Asia depending on their supply. Russian tray is seen in some Eastern European countries who banned Ukrainian grain, but the key problem is that sea gates are blocked. 

Export by sea is the fastest and cheapest way to transport large volumes of commodities. If the grain agreement is not extended, we will see a repeat of the situation in the spring of 2022, when the prices of grain and vegetable oil on the world market reached record levels, when prices in Ukraine fell sharply due to the large amount of grain reserves in the absence of the ability to export it efficiently. For a Ukrainian farmer, this also means an increase in the logistical component of the price at which he sells his goods. Recall that in the spring of 2022, Ukrainian farmers often sold grain at a loss, just to keep their business afloat. In the long term, the lack of maritime merchant shipping will mean that Ukrainian farmers will continue to reduce their acreage.

In addition to rising world prices for grain and vegetable oil, the international market may face a shortage of supply as early as next year. The aforementioned reduction in sown areas in Ukraine will lead to a reduction in exports. And if in 2022 the world was lucky with a record wheat harvest in Russia, and Australia, then in the next seasons, especially with the constantly rising average temperature of the planet, more frequent droughts and other natural disasters, such luck may no longer happen. Russian crop is expected to reach 85-90MMT including wheat on occupied territories. Australian officials announced a 34% decline compared to the previous season. World’s population is also constantly growing. The war, which Russia starts against Ukraine, reinforced global after-covid inflation. The loss of Ukraine as one of the leading exporters of grain and oilseeds threatens the food security of the whole world.

Russia continues to manipulate and insist on their terms:
1. To lift sanctions. But all Russian politicians say that sanctions are useful for Russia. Moreover, there are no sanctions on the food supply
2. To reconnect SWIFT. Lots of times Russians officially were saying that nobody needs dollar trading, western banks going bankrupt and they will establish their own transaction system. So why do they need SWIFT?
3. To restart ammonia supply via the Ukrainian Port of Pivdenniy. That’s why they excluded it in the last month of the Agreement. But they know that it’s too dangerous and unrealistic and some other, same manipulative terms. 

In the form in which the agreement worked in the previous season, its renewal would involve Russia’s participation in it. But for Russia, the work of the grain corridor is not important. Its Black Sea ports are not blocked or shelled. Moreover, grain exports from Russia increased by one and a half times compared to last season. Yes, first of all, this was facilitated by a record harvest, but it is obvious that the existing restrictions in the form of a SWIFT ban do not have a significant impact on Russian exports. Wheat shipped anywhere except the poorest countries. So Russian statements that Ukraine feeds only reach people isn’t true: corn always was a queen of Ukrainian trading steam, the poorest countries don’t need corn, and the share of those who are in need in Ukrainian wheat exports is around 40% - African countries by themselves take 20%.  

According to the Russian Ministry of Agriculture, the share of “friendly” countries in the structure of Russian food exports increased to 87% in MY 2022/23. A month ago, it was reported that since the beginning of 2023, Russia has concluded more than 750 contracts in national currencies for the supply of grain, butter and sugar abroad, most of all transactions with Iran, Syria, Egypt and the CIS countries. The gradual increase in Russian export rates every month indicates that the Russians have learned to circumvent the bans imposed on them. In addition, Russian media wrote that payments with “friendly” countries are made in rubles or in the currency of importers, which also helps to circumvent Western sanctions.

Until July 18, there were signals that international companies were ready to risk entering the Black Sea in the event of Russia withdrawing from the grain deal. Such readiness may have been based on the experience of the autumn, when Russia withdrew from the agreement and for three days only vessels under the control of Ukraine, the UN and Turkey were allowed to pass. Moreover, the JCC then showed much greater efficiency and speed of the passage of ships. 

However, now the situation is different. Not only are threats coming from Russia (a warning that the northwestern Black Sea is a dangerous area), but seaports, grain terminals and processing plants located in ports are also being shelled. Some of them, owned by international companies, have already received serious damage. If the grain agreement comes to an end and there is no alternative, we believe that grain volumes will go mainly from the Danube ports.

We also export grain across the western borders in trucks and wagons. The monthly volume of exports through the western borders could reach 2-2.5 million tons of all kinds of grains and by-products. Capacities of the Danube ports handle 2-3 million tons of agricultural products per month as well, but now they are under Russian missiles attacks as well.

The absence of a grain corridor will increase the logistics leverage, especially along the land route, which will put pressure on the prices of internal and external logistics. But this season, given the reduced crop and the absence of large volumes of carry-overs, the load on elevators and export infrastructure will decrease, which will help reduce storage and transportation costs. Consequently, there are signs of a decrease in the logistical component in the structure of the formation of grain prices compared to the previous season.

Putin offers Turkey a bribe in exchange for principles
In an effort to block the Black Sea grain corridor, Moscow has threatened to attack any vessel bound for Ukrainian Black Sea ports. Such a strategy will not benefit the Russians and will create serious threats to the global oil market. After the Kremlin’s “promise” to attack ships heading to Ukrainian ports, Kyiv also promised to turn Russian vessels into targets. In fact, the Kremlin is opening Pandora’s box, from which it will suffer.
Moscow is the second exporter of crude oil in the world (only the Saudis are cooler) and the largest supplier of petroleum products. About half of these exports are carried by tankers across the Black Sea. Now these oil tankers are at risk of being attacked by the Ukrainian Armed Forces.

The world media write that such statements create a danger of interruptions in shipping in the Black Sea. If an oil tanker becomes a target, or even if Black Sea shipping rates and insurance coverage increase, oil prices will jump. On the other hand, the White House even warned that the Russian Federation would plan an operation “under a foreign flag”: attack civilian vessels, blaming Ukraine. Other oil suppliers will win from this, but not Russia as their key buyers – India and China – will still pay with a huge discount. 

Since military blackmail is not very effective, the Kremlin will consider bribery. Moscow offers Ankara to transport Russian grain instead of Ukrainian grain - with a big discount. The trick is that the recipient of the grain will be the Turkish food industry, which will process it into flour and resell the finished product to African countries. In essence, the Kremlin is offering a bribe in the form of billions in earnings for an entire industry. Negotiations between the two countries are ongoing, and for too long, because for Turkey it’s not just about money – it’s about dignity and human merit.

Putin again promises free grain to Africa. But while he is once again trying to buy politicians, wheat does not seek to return to the levels where it could be, considering the volume of production in the whole world. Russia decided to finish the grain agreement with rockets. That is why they are attacking Odesa, Mykolaiv and the Danube port infrastructure so that Kyiv does not even have the technical possibility to restore it. By controlling Ukrainian ports, Russia will control Ukrainian exports. By controlling Ukrainian exports, they will control food prices. By controlling food prices, they will control politics in Africa and the Middle East. By controlling the politics of these regions, they will control global migration. But we do remember, how all such attempts ending.



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