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Ukraine grain export deal: How can risks be minimized?

03 September 202211 min reading

It goes without saying that the deliveries under the Grain Export Deal involve additional risks connected with the Russian invasion of Ukraine. Nonetheless, the proper analysis of your template contract and its upgrade with the clauses addressing the challenges indicated above might minimize the risks your company will bear in such a transaction. It is therefore crucial for all the importers of Ukrainian grain to adapt their contracts to the peculiarities of the Grain Export Deal.

BEACON OF HOPE: TRADE AMIDST THE WAR

Once the Russian invasion of Ukraine started on 24 February 2022, all the seaports were blocked by the Russian navy. This blockade was a severe blow to the Ukrainian export as approximately 96% of the goods were transported by sea from Ukraine. While the market players attempted to develop alternative routes for the commodities trade (through the river ports on the Danube and Romanian/Bulgarian seaports), these steps allowed the traders to relaunch only the export of a minor part of the Ukrainian crop.

The blockade thus caused a deficit of grain on the global market and led to an inconceivable spike in the commodities prices. It was even reported that people in Ethiopia, Somalia, Yemen and Sri Lanka were on the brink of famine since the supplies from Ukraine had been interrupted by the Russian invasion. As a result, the world has witnessed the global food crisis raging on an unprecedented scale.

Given the severe consequences of the blockade of the Ukrainian seaports, in April 2022 the United Nations called the leaders of Ukraine and Russia to arrange the resumption of Ukrainian export. After several rounds of tense negotiations, the Secretary-General of the United Nations announced the breakthrough between the parties – they finally agreed to restore the export of Ukrainian grain from three deep-water seaports – Odesa, Chornomorsk and Pivdennyi (together - “Ukrainian ports”).

To this end, the document entitled the ‘Initiative for the Safe Transportation of Grain and Foodstuffs from Ukrainian Ports’ (“Grain Export Deal”) was signed by Ukraine, Russia, Türkiye and the United Nations on 22 July 2022. It is peculiar that technically there were two separate agreements signed – one with Ukraine and another one with Russia – as Ukraine refused to sign any agreement directly with the state committing war crimes on its territory.

Although Russia launched missiles at the port of Odesa almost immediately after signing the agreement, Ukraine proceeded with the preparation for resuming the grain export. In early August 2022, that is almost half a year after the outbreak of the war, the first caravan of vessels carrying Ukrainian grain finally sailed from the port of Odesa.


While the export is still possible only from a limited number of seaports in Ukraine, the Grain Export Deal has, nonetheless, enabled the traders to supply a significant amount of grain on the market. Within 1-15 August 2022, more than half a million metric tonnes of commodities were exported through the grain corridor. In the light of such developments, the United Nations have even expressed their expectation that there will be “a big uptick” in applications to pick up cargoes at Ukrainian ports soon and an export goal of 2-5 million metric tonnes per month is “achievable”.

GRAIN EXPORT DEAL: EXPLAINED 

The Grain Export Deal has created new opportunities for the importers of grain since they are now enabled to purchase Ukrainian commodities and cover the existing deficit of goods (potentially at a favourable price!). At the same time, the Grain Export Deal imposes additional requirements on the parties involved in the deliveries from Ukrainian ports making export under this initiative much more complex compared to the typical way of procuring commodities in the Black Sea region. 

To facilitate the importers of Ukrainian grain with this matter, AGA Partners will analyze in detail the main terms of the Grain Export Deal and explain how the possible risks arising from its implementation can be minimized.

The primary focus of the Grain Export Deal is the safety of transportation from the Ukrainian ports. The parties have established a number of requirements that need to be followed by Russia and Ukraine as well as by the ship owners and ship operators involved in the deliveries under this initiative. In particular, the safe passage of vessels is secured by the following commitments.


•Safety of transportation. Both Ukraine and Russia have undertaken to secure a safe environment for all vessels engaged in exporting commodities from Ukraine. Russia has consented not to attack such vessels while Ukraine ensures their safe passage through its territorial waters.

•Maritime corridor. Ukraine together with Türkiye has developed a secure maritime corridor from Türkiye to the Ukrainian ports which has been agreed upon by all the parties. The vessels carrying the goods under the Grain Export Deal are required to proceed strictly via the devised route.

•Buffer zone. Ships exporting Ukrainian grain through the Black Sea are protected by a 10 nautical mile buffer zone covering the route from Türkiye to the Ukrainian territorial seas. This means that no military vehicle will be allowed to come close to vessels proceeding via this route. Upon entrance to the Ukrainian territorial seas, ships continue to be protected by Ukrainian authorities. 

To bring the above arrangements into life, the parties have created the Joint Coordination Centre in Istanbul consisting of the representatives of Ukraine, Russia, Türkiye and the United Nations. This entity plays a major role in implementing the Grain Export Deal as it is entrusted to monitor the movement of vessels and ensure compliance with the procedures developed through the Grain Export Deal.

The crucial function of the Joint Coordination Centre is the security check – whether vessels that are willing to carry the goods from the Ukrainian ports are acceptable under the Grain Export Deal. To pass this check, the vessels are obliged to comply with the following requirements.

•Verification of vessels. All ships calling the Ukrainian ports must be registered in the Joint Coordination Centre. Ship owners or ship operators are required to submit to the Ukrainian port authorities a special document setting out their vessel details and itinerary together with the request for port entry at least 44 hours before arrival at the Istanbul inspection area. 

•Inspection in Türkiye. After the verification, vessels will have to pass inspection in the harbours determined by Türkiye at the entry to the Turkish strait and exit from it (both inbound and outbound voyages). To this end, the inspection teams consisting of representatives of the parties will be set up in Türkiye. The primary responsibility of the teams will be to check whether there are any unauthorised cargoes and personnel on board vessels. While transiting the maritime corridor, any party to the Grain Export Deal may also request an inspection of vessels against security guarantees if any suspicious activities occur on their board. 

•Schedule of transit. Upon inspection of vessels, they will have to transit to and enter the Ukrainian ports in line with the schedule approved by the Joint Coordination Centre. 

•Guidelines for shipowners. The vessels must also follow the guidelines developed by the Joint Coordination Centre. These guidelines contain navigational and operational rules for ship operators and ship owners as well as establish additional security requirements for vessels and their itinerary. 

The Joint Coordination Centre publishes on the website of the United Nations all the information regarding the shipments carried out under the Grain Export Deal. It reports on the results of the inspection of vessels, type of commodity carried on their board, quantity of the goods and details of the vessels’ route.

It is important that the duration of the Grain Export Deal initially runs for 120 days and ends on 22 October 2022. Nonetheless, it will be automatically extended for the same period, unless one of the parties decides to terminate or modify it.

CONTRACTUAL SAFEGUARDS SHOULD BE INTRODUCED 

Should your company decide to procure the goods through the Grain Export Deal, it is essential to adapt the contract to the peculiarities of this specific delivery as it might involve additional, non-conventional risks. The properly drafted amendments might create a s afe harbour for the importers of grain amidst the storm raging in the Black Sea and enable them to use the opportunities created by the Grain Export Deal.

While the specific clauses to be added to the contract will largely depend on the particular terms of your template, it might be useful to consider supplementing the agreement on the delivery of the goods from the Ukrainian ports with the following clauses.

1. Failure to pass inspection. The entire deal on the resumption of Ukrainian grain exports is based on the inspection of vessels during their voyage. If the nominated vessel fails to pass such an inspection, the contract execution might be put at significant risk. For this reason, we suggest stipulating in your template the consequences of the vessel’s failure to pass the inspection – for instance, the buyer’s right to substitution of the vessel and/or termination of the contract. 

2. Delays/demurrage/detention on the seller. Inspections and transit through the maritime corridor combined with the hostilities in southern Ukraine create lots of uncertainty and might lead to delays in the delivery of the goods. If the timely delivery of the goods is of the essence for your company, it might be useful (a) to stipulate strict time limits for shipment of the goods or (b) to incorporate a standard extension clause in your contract which would establish the period of acceptable delay and provide for the discount in price for each day of delay. Such clauses will entitle your company to terminate the contract in case the seller does not ship goods within the agreed period.

Buyers of Ukrainian grain should also specify in the contract that the seller will be liable in damages for any costs arising from the delay caused by the accomplishment of the procedures required under the Grain Export Deal, including any demurrage/detention of the vessel.

3. Transfer of risk. Since the main challenges are connected with the transit of the vessel through the Ukrainian territorial waters, an effective contractual tool might be to amend the typical distribution of risks used in overseas deliveries (when risk passes upon shipment of the cargo). Parties may stipulate in their agreements that risks will be transferred once the vessel leaves the territorial waters of Ukraine and the insurance certificate starts to cover the war risks. Such a clause might protect buyers of Ukrainian grain from the effect of the possible hostilities in the Black Sea.

4. War risk clause. Another contractual mechanism that might be beneficial in this situation is a war risk clause which will specifically cover the events connected with the transit of the vessel through the maritime corridor and her entry into the Ukrainian ports. In this regard, the war risk clause should provide your company with a rather broad scope of remedies – for instance, with the right to termination of the contract in the case of not only actual but also threatened or reported acts of war affecting its execution.

It is important to note that specific legal mechanisms must be developed taking into account the way your business is conducted (for instance, clauses for FOB and CIF deliveries might differ). In any event, the provisions mentioned above should fit in the contract well so that no contradiction with other terms arises.

With new opportunities comes the revision of contracts!

It goes without saying that the deliveries under the Grain Export Deal involve additional risks connected with the Russian invasion of Ukraine. Nonetheless, the proper analysis of your template contract and its upgrade with the clauses addressing the challenges indicated above might minimize the risks your company will bear in such a transaction. It is therefore crucial for all the importers of Ukrainian grain to adapt their contracts to the peculiarities of the Grain Export Deal.

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