Friday, July 19, 2024

Russia ends the Ukrainian grain deal. What does that mean for prices – and Putin


Vladimir Putin is indicating that he really means to get out of the Ukraine grain deal this time around. The Black Sea Grain Initiative, as the deal is officially known, has enabled Ukraine to maintain fairly normal exports of wheat, corn and other foodstuffs over the past year, and dampened global prices that soared after Russia’s invasion in February 2022.

Moscow withdrew from the agreement on July 17, claiming that the United Nations and Western partners ignored commitments to facilitate grain and fertilizer exports to Russia. Putin emphasized this point with massive bombing of Ukrainian ports. “The expiration of the agreement could lead to a ransom of global food security,” says David Miliband, head of the International Rescue Committee.

Markets get upset too. Chicago-traded wheat futures, which before the war supplied Ukraine with a tenth of world exports, rose 6%. This is not a panic in terms of commodities. There is still a good chance for Russia to join the deal.

From a cold business perspective, it’s a bad deal for Moscow, allowing its wartime enemy to earn billions while lowering the price of competitive sales to Russia. But the grain deal benefits Putin’s two most important remaining international friends, China and Turkey. Beijing has been by far the biggest customer for Ukrainian exports. Türkiye mediates all shipments and reaps global prestige.

“The grain deal is important for both Turkey and China, and Russia has no alternative to its dependence on them,” says Alexandra Prokopenko, a researcher at the Carnegie Russia Eurasia Center. Accidental damage by Russian missiles to the Chinese consulate in Odessa, Ukraine’s main port, will not ease relations with Beijing.

Prokopenko says he may make a stand for re-entry to save face when he hosts the African Leaders Summit starting July 27, as he looks for positive PR in the Global South. Putin had previously commented about free Russian grain for “particularly needy African countries”.

Secondly, Ukraine quickly developed its Plan B. They have increased capacity as much as eightfold at reserve grain terminals near the mouth of the Danube, says Michael Magdowitz, senior commodity analyst at Rabobank. From there, exports could reach the Black Sea via neighboring Romania or Moldova. Overall, Ukraine could make about 80% of its pre-war grain exports through alternative routes protected from Russian attack, Magdowitz figures.

Oksana Antonenko, a global fellow at the Kennan Institute, says Kiev may continue to ship from its Black Sea ports despite Russia’s flexing of muscles. “Russian military influence is very weak,” she says. “It is entirely worthwhile to ‘manage the blockade’ if the Western Allies can provide an insurance fund.”

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The Russian Defense Ministry aims to quash such talk with a warning that merchant ships bound for Ukraine would be deemed “involved” in the war.

Magdowitz says markets have already factored in the massive war damage to Ukrainian agriculture. World wheat prices are a quarter higher than pre-pandemic levels. Corn, Ukraine’s other strategic agricultural export, is up more than 40%. About 15% of Ukraine’s grain capacity is offline due to its proximity to combat zones.

“Ukraine has been one of the strongest emerging companies in global agriculture,” says Magdovitz. “Continued economic scars for its farmers will raise the floor for grain prices.”

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Therefore, no clear end is in sight.

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Rainerio Manuel
Rainerio Manuel

"Infuriatingly humble alcohol fanatic. Unapologetic beer practitioner. Analyst."