July and August traditionally mark the beginning of the harvest season in Ukraine. Consequently, grain volumes increase in the domestic market, which need to be exported since Ukraine has no issues with meeting its own needs. Typically, during these months, traders actively ramp up grain exports while keeping a portion in storage to sell later.
A year ago, the Ukrainian agricultural sector found itself trapped: the remaining stocks from spring could not be exported due to Russian aggression, and new harvests were underway. In July, Ukraine had over 20 million tons of unexported crops from the previous season, while the best-case scenario for monthly exports was 3 million tons.
The situation was salvaged by the “grain initiative,” which started on August 1, 2022, despite pessimistic expectations. Since then, over 30 million tons of crops have been shipped by sea. Currently, after numerous manipulations by Russia regarding the alleged end of the “grain initiative,” Russians have decided to exclude themselves from this agreement, but it was not a surprise.
“The world has become less sensitive to Ukraine”
“In the United States, we are already witnessing a surge in wheat prices,” said UN Secretary-General Antonio Guterres on Monday, condemning Russia’s decision to suspend its security guarantees for the “grain initiative.”
The UN emphasizes that the livelihoods of thousands of people in poor countries depend on Ukrainian grain.
Due to the absence of Ukrainian exports, wheat and corn prices skyrocketed by hundreds of dollars in 2022. As a result, consumers in African and Asian countries were unable to purchase grains elsewhere.
Although grain prices worldwide increased by 3-4% after the Russian announcement, they returned to relatively stable levels within a few hours. The issue lies in the fact that over the past year and a half, Russia has persistently taken away key Ukrainian markets.
Russian exporters intercepted Ukrainian contracts while the Black Sea was blocked. Even after the corridor started operating, Ukraine couldn’t regain all its buyers, especially in Egypt. Due to vessel delays awaiting inspections in Istanbul, charterers were canceling contracts and buyers were refusing cargoes.
“There is no longer such a significant reaction in the global market to Russia’s announcement of its withdrawal from the ‘grain agreement’ because we are reducing our role in it. In 2022, Ukraine produced 30 million tons less grain. In 2023, the harvest will be below 60 million tons, significantly lower. Consequently, the Ukrainian role is much smaller, and the sensitivity towards it is also much lower than before,” explains Oleg Nivievskyi, the founder of Agrocenter at the Kyiv School of Economics.
Moreover, thanks to other exporters like Brazil, the world does not anticipate a significant grain shortage.
Previously, the head of the Ministry of Foreign Affairs, Dmytro Kuleba, mentioned the reason why Russia pursued the “grain initiative”: political support from African countries. By replacing Ukrainian suppliers in this market, the aggressor aimed to make these countries less dependent on food supplies from Ukraine.
Nivievskyi suggests that the absence of the “grain agreement” may have a positive impact on investments in alternative export routes. Previously, with the option of sea exports available, the market hesitantly invested in railway transshipment. Now, market participants will have to actively work on ensuring alternative pathways.
Better than last year
Harvesting has already begun in Ukraine, with over 2 million tons of grain collected. Harvesting has also begun in the European Union, which means Western ports will be loaded with their own grain, limiting the opportunities for Ukrainian exports. It is not surprising that Russia decided to withdraw from the “grain agreement” precisely at this time. However, the current situation differs from last year’s.
Firstly, due to the conflicts and occupation of certain territories, the harvest of the previous season was significantly smaller than in 2021. Currently, there are only 9 million tons of transitional grain stocks in the market, and there is enough storage capacity for them. According to Denys Marchuk, Deputy Chairman of the All-Ukrainian Agrarian Council, there is a storage capacity for 44 million tons of grain.
Secondly, the capacity of railways, road transport, and Danube River ports has significantly increased over the year. Railways can transport over 1 million tons of grain per month, while trucks can handle over 600,000 tons. Danube River ports export over 2 million tons per month and have the potential to reach 3 million tons. According to Mykola Horbachov, the head of the Ukrainian Grain Association, Ukraine has reached an agreement with Romania to increase the number of pilots on the Sulina Channel and operate around the clock starting from August.
Therefore, if in 2022 all three routes could only export 2 million tons of grain per month, now the overland route and the Danube can provide an export capacity of about 5 million tons.
“At the same time, the Ministry of Reconstruction is negotiating with the European Commission and Romania on transshipment in Ukrainian and Romanian territorial waters, where the depth allows for the handling of vessels with a tonnage of more than 100,000 tons,” Horbachov adds in an interview with Latifundist.
Thus, in 2023, Ukraine approached the naval blockade with better initial data than in 2022. Experts interviewed by Economichna Pravda (media outlet) agree that there will be no disaster after the termination of the grain deal. Nevertheless, the sea remains critically important for the domestic market for two reasons.
See also: The Ukrainian fleet that is needed “for yesterday”
Firstly, neither railways nor the Danube can compete with the volumes of transportation by sea. For example, the ship Kydonia under the Greek flag, departing from the port of Chornomorsk, will deliver nearly 76,000 tons of corn to China. Meanwhile, the ship Blue Gate, departing from the port of Reni, was loaded with a record-breaking 15,000 tons, which is equivalent to five “river” ships.
Secondly, the sea is the most cost-effective transportation route. Large export volumes allow for reducing logistics costs. Even with delays in the queues at the Bosporus, sea transport is significantly cheaper than the Danube ports, let alone road transport or railways. The higher the logistics costs, the less profit the agricultural sector receives.
Due to limited operations of seaports, Ukraine failed to export 25 million tons of produce. The inability to generate profits from exports has a negative impact on the agricultural market, as it means a lack of funds for fertilizers, seeds, equipment, and labor payments in the next season. Without the maritime corridor, farmers will have even less money. According to Nivievskyi, the upcoming marketing year may be worse than the current one.
Without Russia
Discussions on free navigation in the Black Sea were taking place even before the opening of the “grain corridor,” but Ukrainian officials only started talking about it in recent months.
“Even without Russia, we need to do everything to be able to utilize this Black Sea corridor. We are not afraid. Companies that own ships have approached us. They said they are ready. If Ukraine allows and Turkey allows passage, then everyone is ready to continue grain supplies,” stated President Volodymyr Zelenskyy.
The main problem is that a vessel cannot enter Ukrainian ports without insurance. Until now, the grain agreement was the only international document that provided some guarantees of vessel security.
Horbachov says that maritime navigation without Russia’s guarantees could be a realistic option if the Ukrainian Armed Forces ensure safety. This refers to the potential shelling of vessels by Russia, mines, and hostile attacks on Ukrainian seaports.
“Insurers will weigh these risks. Much will depend not only on the UN but also on Turkey and other countries, including Bulgaria and Romania, which are NATO members and can provide security for this grain corridor under various pretexts,” believes Artem Volkov, the head of maritime law practice at the law firm ANK.
According to him, the task of Russia launching missile strikes on foreign vessels is unlikely. However, the aggressor could target missiles at terminals where the ships will be docked or create a mine hazard.
All interlocutors in the Economichna Pravda emphasize the special role of Turkey. This country is a NATO member and maintains diplomatic relations with both Ukraine and Russia. It is also one of the largest beneficiaries of the “grain initiative,” as it receives port fees for the passage of vessels through the Bosporus and directs its fleet to Ukrainian seaports.
Countries can create alternative routes for vessel movement to keep them as close to the coast as possible, as it was before the full-scale war when Russia started its “exercises” in the Black Sea and the Sea of Azov, and provide escort for vessels with mine sweepers.
Meanwhile, the Ukrainian government has established a guarantee fund of $500 million for vessel owners in case of damages incurred while in the country’s territorial waters. According to Volkov, given that a single vessel costs $10-20 million, such a sum should be sufficient to cover the cost of 25-30 vessels in case of their destruction.
Therefore, maritime navigation without Russia’s involvement is possible under certain conditions, although achieving them will be challenging. It requires political agreement among partner countries, particularly Turkey, and the trust of insurers in such a configuration of security guarantees.
Currently, Ukraine hopes for the continuation of the “grain initiative,” while Turkish President Recep Tayyip Erdogan relies on another attempt to negotiate with Russians on this matter.
Originally posted by Dana Hordiychuk on Economichna Pravda, translated and edited by the UaPosition – Ukrainian news and analytics website
See also: Fate of the “grain corridor”: can Russia withdraw from the agreement?
