Is Russia trying to do with soft commodities what it has tried to do, albeit with limited success to date, with oil?
That’s a question posed by Russia’s decision to withdraw, not for the first time, from the Black Sea grain deal that was brokered by the United Nations after Russia’s invasion of Ukraine last year threatened world grain supplies and sent the prices of wheat, corn and oilseeds soaring.
Pre-war, Ukraine was one of the world’s largest grain exporters, supplying about 10 per cent of the trade in wheat, about 15 per cent of the corn market and more than 40 per cent of the sunflower oil market. Russia is the world’s largest wheat exporter and a major supplier of barley, sunflower oil and fertiliser to world markets.
At the onset of the war Russia blockaded Ukraine’s Black Sea ports, shutting down its seaborne trade, with its grain exports falling more than 80 per cent. The United Nations and Turkey were, however, able to negotiate a deal that allowed exports to resume. The shipments have been subject to inspections (including Russian inspectors) to ensure they weren’t carrying anything other than the grains.
While there have been several near-breakdowns in the agreement, Ukraine has shipped nearly 33 million tonnes of grains since the deal was struck while Russia’s soft commodity exports, which have been excluded from Western sanctions, have been at record levels.
Soft commodity prices have subsided, although they remain above pre-war levels.
It wasn’t a great surprise that Russia formally withdrew from the deal this week.
Ukraine’s shipments had been dwindling in recent weeks as the inspections of the cargoes became increasingly, and probably deliberately, protracted.
As the deadline for a renewal of the deal loomed on Monday, it became apparent that Russia would walk away from it, despite efforts by Turkey’s president, Recep Tayyip Erdogan, to negotiate an extension.
Russia’s rationale for abandoning the deal is that has been too one-sided.
Its demands have included that the West allow its agricultural bank access to the SWIFT international messaging service that is vital in cross-border payments, the lifting of sanctions on maritime insurance and on the supply of parts used in agricultural machinery, the lifting of sanctions on fertiliser companies and the reopening of a war-damaged ammonia pipeline that passes through Ukraine.
The UN, with the help of JPMorgan Chase, has built a payment mechanism outside SWIFT for The Russian Agricultural Bank and there was little, if any, opposition to the reopening of the ammonia pipeline, an important base material for fertilisers.
That wasn’t, however, sufficient for the Russians.
Even though most of Ukraine’s grain exports go to Europe, China and generally developed economies, it is an important supplier to African countries. Of the roughly 33 million tonnes it has shipped since the Black Sea deal has been in place, about 17 per cent has been exported to Africa. Nearly half goes to Turkey, China and other Asian countries and the rest to Europe.
Russia has cited the proportion of exports flowing to rich and middle-income countries as a failure of the agreement to deliver the grain to the poorest countries and as a reason for it to ditch the deal.
The impact of the shipments, however, has been to ensure that the world trade in grain has held up.
Wheat prices had fallen nearly 20 per cent and corn 26 per cent this year before they started edging up as the deadline for an extension of the deal neared. The UN’s Food and Agriculture Organisation’s global Food Price Index in May was more than 23 per cent below its post-invasion highs.
Ukraine’s volumes have helped the inflated post-invasion prices return to levels that are affordable for those countries in Africa, the Middle East and Latin America that the UN is most concerned about. It’s not so much about who the Ukrainian grains are sold to but their impact on global supply.
If the safety of ships in the Black Sea is no longer guaranteed by Russia it won’t shut down Ukraine’s exports.
Ukraine has been shipping an increasing volume of its exports by land and river, using trains and barges. While it could ramp up those volumes further, it is more costly and takes a lot longer to get the commodities to the market and the lower returns to the farmers make planting less attractive, threatening future production.
Ukraine has been bravely saying that it will risk the Russian threat to shipping but neither NATO nor the Turks, who earlier had offered a naval escort for Ukraine’s cargoes, appear willing to risk a conflict at sea with Russia. Without insurance – and no insurer appears willing – no owner will risk their ships either.
Another change of heart by Russia is conceivable, given how changeable it has been on this issue over the past year.
Russia’s rationale for abandoning the deal is that it has been too one-sided.
It is also possible that Turkey, whose trade with Russia has soared since the invasion and which has become a key hub for unsanctioned Russian economic activity, might make another more successful attempt to bring it back to the table. Or that China, the major buyer of Ukraine’s grain, might use its relationship to convince Russia to take whatever concessions the West is offering to allow the shipments to continue.
Given Russia’s own record exports its withdrawal from the agreement while impacting Ukraine’s exports means it would be taking competitive volume out of the market. Prices for the affected commodities were rising over the past couple of weeks as the likelihood that the deal wouldn’t be extended increased.
In the oil market, Russia and Saudi Arabia have been cutting their production (or at least Russia has said it is cutting production) to try to force the oil price up.
That would help Russia offset the loss of revenue because of the G7 price cap on its oil exports with fatter margins on the oil it has been able to sell using its own tanker fleet and other sanctions-circumventing tactics. Between them the sanctions on Russian oil and gas have almost halved its energy revenues.
While the oil strategy has had limited success, with prices only edging up after the latest announcement of production cutbacks, could the decision to walk away from the Black Sea agreement be motivated by a similar objective, or at least produce the outcome Russia was seeking in the oil market?
Could it – whether by design or, perhaps, fortuitously – deliver Russia a windfall from grains that helps at least partly offset the massive losses of energy revenues it is experiencing from the sanctions on its oil and gas?
Source: Thanks smh.com