NEW DELHI: Russian President Vladimir Putin last week pushed the global economy into further turmoil as he withdrew from the Black Sea Grain Initiative that allowed ships the right of way to transport grains produced in war-torn Ukraine. Letting foodgrains from Ukraine reach international markets was vital because of the country’s sizable contribution to the global granary. Ukraine’s international market share of wheat, maize, barley and sunflower oil was substantial.
At an estimated 39.5% of sunflower oil, pre-war Ukraine was the world’s biggest exporter of that product. It occupied the fourth position globally in both the export of barley (11.8%) and maize (13.2%). As for wheat, it stood fifth, contributing 8% to the global basket. Blocking Ukrainian grains not only stoked inflation, it made food even more scarce for the poorest of the poor. Wheat futures have already shot up in response to Putin weaponising food. Why did he do so and what are its political and economic consequences?
Black Sea Grain accord
The accord was clinched five months after Russia invaded Ukraine and blocked Ukrainian ports in the Black Sea by planting sea mines along their approaches. A United Nations-brokered humanitarian initiative, the deal was signed on July 22, 2022 in Turkiye’s Istanbul. Under the initiative, a joint coordination and inspection centre was set up in Turkiye, with the UN serving as the secretariat. It opened a safe shipping corridor for food through three Ukrainian ports - Odesa, Chornomorsk and Yuzhny/Pivdennyi. Cargo ships from the ports were escorted by Ukraine vessels so as to avoid the mined areas and reach international waters. The first port of call for those cargo ships was Istanbul where the joint coordination team that had members from Russia, Ukraine, Turkey and the UN would together inspect and clear them for their onward journey. A parallel UN accord with Russia allowed the export of its food and fertilisers. Russia was never comfortable with the Black Sea agreement which had an initial expiry date of November 19, 2022. It withdrew from it for a short while after a drone attack sank its naval ship in the Black Sea and wounded its pride but later yielded.
Russia’s grouse
On July 17, Russia blamed its withdrawal from the accord on Western sanctions targeting its nationals and the state agriculture bank. It also complained about its own exports of food and fertiliser getting hampered. Besides, it demanded the Russian Agricultural Bank’s re-entry into the SWIFT international payment system.
UN chief Antonio Guterres in his counterpoint recently cited the Russian Union of Grain Exporters and Russian Fertilizer Producers Association as recently claiming that their country’s grain trade has reached high export volumes and fertiliser markets are stabilising with Russian exports nearing full recovery. Moscow, however, argued that the lifting of certain sanctions has not been clear enough to give insurers the confidence to underwrite Russian ships that carry food. Russia also wants the assets of its companies dealing with food and fertiliser exports unblocked. On SWIFT, it wants full and direct access without any workaround. The United Nations recently brokered a proposal to enable a subsidiary of the Russian Agricultural Bank to regain access to SWIFT with the European Commission within the existing rules, but Putin rejected it.
Russia’s other charge is that the Ukrainian grains mostly went to rich nations. To an extent it is right as 90% of corn and 60% of wheat exported under the initiative went to high and upper-middle-income countries; while 10% corn and 40% wheat were bought by low and lower-middle-income countries, according to UN data. But that proportion is in line with Ukraine’s trade trend since 2017. Anyway, the initiative did not stipulate deciding the export destination. It left it to the exporters to determine who should get what. Incidentally, China was its biggest buyer. India, too, was a beneficiary of the initiative.
Key achievements
Even if the grains did not go to poor nations in the proportion that would justify the initiative’s humanitarian objective, the deal helped stabilise global food prices and cooled them by 23% since March last year, bringing across-the-board relief. About 33 million tonnes of grains were exported from Ukraine to 45 countries across three continents. It allowed the UN-led World Food Programme (WFP) to transport more than 7,25,000 tonnes of wheat to the poor in Afghanistan, Ethiopia, Kenya, Somalia, Sudan, and Yemen. Ukraine’s share in WFP’s wheat basket was 50% in 2022. This year it was 80%. Of the grains and other foodstuffs exported so far under the initiative, 46% went to Asia, 40% to Western Europe, 12% to Africa and 1% to Eastern Europe. The shipped commodities included corn (51%), wheat (27%), sunflower meal (6%), sunflower oil (5%), barley (4%) and rapeseed (3%).
Should the initiative continue?
UN experts fear the lack of food supplies would produce a knock-on effect on the lives of millions of people, particularly the poorest, hitting them hard in the areas of health, education and social cohesion. There already are grim reports of food shortages at African refugee camps. So, putting the initiative back on track is a global imperative.
The rumbling
The warning bells were already ringing months before Putin pulled the plug. Shipments had come down significantly over the last few months as Russia chose slower inspections. It also got the Yuzhny/Pivdennyi port excluded, which, too, slowed the pace further. While 11 shipments were on average inspected daily in October 2022, the corresponding figure fell to under five in April, May and June. The UN is said to have the capacity to inspect 40 ships a day. Since the implementation of the scheme was based on consensus, all parties had to agree on any inspection but Russia was not keen to step on the gas.
Alternative route
Ukraine is weighing options to transport its goods overland through the European Danube river ports, but it would raise the logistics costs for farmers. The idea is to transport the grains across Ukraine’s border with Poland and take them to ports on the Baltic Sea or via Romania. But the pain point is the rail track as the gauge in Ukraine and Europe are different. It means consignments have to be unloaded at Ukraine’s border and reloaded within Europe.
What next
Putin apparently does not want Ukraine to raise revenue through food exports. Of Ukraine’s three Black Sea ports that were allowed to function, Yuzhny/Pivdennyi got excluded from the initiative some months ago. Russian missiles are now pounding the Odesa port to demolish the grain infrastructure there. They have already destroyed 60,000 tonnes of grains and oil stored there. The only port left unharmed so far is Chornomorsk. Getting Putin back to the negotiating table is not easy but cannot be given up either. He apparently thinks he has the leverage to extract further concessions. Russia and its ally Belarus control 14% of the global fertiliser market. They could squeeze it if things go out of hand.
Turkiye President Recep Tayyip Erdogan is optimistic of renegotiating the deal with Putin when he visits Russia next month. Ukrainian President Volodymyr Zelenskyy is okay with it. The matter could possibly come up during the forthcoming BRICS summit in South Africa, which Putin will attend through video conferencing so as to duck an international arrest warrant against him. Chinese President Xi Jinping and Prime Minister Narendra Modi will participate. It could be time for a fresh shot at diplomacy.
India’s position
A day after Russia withdrew from the grain deal, India’s permanent representative at the UN Ruchira Kamboj expressed hope for an early resolution of the impasse.