GP Short Notes # 712, 20 July 2023
In the news
On 18 July, Russia withdrew from the Black Sea Grain Initiative, a deal allowing grain exports from Ukraine through the Black Sea. This move comes despite the UN's final attempt to persuade Putin to extend the deal through a proposal connecting a subsidiary of Russia's agricultural bank, Rosselkhozbank, to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) international payment system. The EU aims to increase the transportation of Ukrainian grains through the road and rail of neighbouring countries to offset Russia's withdrawal from the Black Sea exports deal.
Also on 18 July, Russia attacked the Odessa port, causing damage to the Black Sea port city's infrastructure. In response, Ukraine activated its aerial defences.
On 17 July, the President of Turkey, Recep Tayyip Erdoğan, stated: "Despite the statement today, I believe the president of the Russian Federation, my friend Putin, wants the continuation of this humanitarian bridge." The latest extension of the deal expired on 17 July after being extended three times the previous year. Kremlin's spokesperson, Dmitri S Peskov, commented: "As soon as the Russian part is fulfilled, the Russian side will immediately return to the implementation of that deal."
Issues at large
First, a complicated deal and diverging objectives. In July 2022, brokered by the UN and Turkey, the Black Sea Grain Initiative stabilized global food prices and eased shortages in Africa and the Middle East following the war in Ukraine. To renew the deal, Russia demanded reconnecting the Russian Agricultural Bank to SWIFT, and lifting restrictions on maritime insurance and agricultural machinery spare parts. Russia asserts that the institutions are crucial for its food and fertilizer sectors should be exempt from sanctions. However, Ukraine's allies are concerned about the potential misuse of these institutions for non-food exports, such as crude oil, leading to reluctance in granting the requested sanctions' relief. Similarly, Moscow claims the deal has not adequately benefited poor countries, while the UN argues it lowered global food prices by over 20 per cent.
Second, the disruption of Ukraine's grain exports. The trade flow in the Black Sea region has been declining steadily since May, triggered by Russia preventing ships from accessing the port of Pivdennyi in the Ukrainian city of Yuzhne near Odessa. This particular port had been a crucial route for Ukraine's seaborne food exports since the inception of the grain deal. The disruption in Black Sea trade poses significant challenges for Ukraine's food export capabilities.
Third, global food prices and threat of food insecurity. Suspending the deal had immediate effects on wheat markets, causing price fluctuations and raising food security concerns in developing countries. Nearly 14 African countries depend on Ukrainian and Russian wheat imports. According to the UN, under the deal, 32 million tonnes of food commodities have been exported from three Ukrainian Black Sea ports to 45 countries across three continents; 46 per cent to Asia, 40 per cent to Western Europe, 12 per cent to Africa and one per cent to Eastern Europe. The deal allowed Ukraine to export nearly 33 million metric tonnes of grains, contributing to a 23 per cent drop in food prices. The WFP has shipped about 725,000 metric tonnes of Ukrainian wheat to Afghanistan, Sudan, Djibouti, Ethiopia, Kenya, Somalia and Yemen to fight hunger.
Russia's withdrawal from the Black Sea Grain Initiative has major implications on global food security and commodity markets, particularly in Ukraine. Restarting shipments is challenging due to limited and time-consuming alternative routes. Ukrainian farmers may have to lower prices, potentially causing tensions with neighbouring countries. Utilizing the EU's new transportation strategy becomes crucial for stabilizing food prices. The withdrawal also raises security concerns for Ukrainian ports involved in grain exports. The attack on Odessa port indicates that other ports, such as Yuzhny and Chornomorsk, could also be at risk. Russia's withdrawal may be perceived as a political move to correct military fallouts to the Wagner mutiny.