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Russia’s refusal to renew Ukraine grain deal causes concerns for global food markets

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In a surprising move, Russia has declined to renew a crucial grain deal with Ukraine, leading to potential disruptions in global food markets. The deal, which allowed Ukraine to export grain through the Black Sea, has been instrumental in supplying over 32 million tonnes of food products to world markets. With the termination of the agreement, Ukraine must now seek alternative routes for its grain exports, creating uncertainty and potential price increases.

The grain deal, originally brokered in July 2022 by Turkey and the United Nations, was a response to Russia’s invasion of Ukraine earlier that year. The Russian navy had blockaded the country’s Black Sea ports, resulting in approximately 20 million tonnes of grain being trapped and causing a significant surge in world food prices. The deal established a safe corridor in the Black Sea, spanning 310 nautical miles in length and three nautical miles in width, enabling cargo ships to transport grain to and from Ukrainian ports, including Odesa, Chornomorsk, and Yuzhny/Pivdennyi. Additionally, it allowed the Russian navy to conduct weapon inspections on ships at the Bosphorus Strait, the entrance to the Black Sea.

Ukraine, known as one of the world’s largest exporters of sunflower, maize, wheat, and barley, heavily relies on the grain deal for its agricultural exports. The termination of the agreement has raised concerns over potential food shortages in African and Middle Eastern countries that heavily depend on Ukrainian grain imports. Upon the signing of the deal and the resumption of grain shipments, global food prices experienced a decline of approximately 20%, according to the United Nations’ Food and Agriculture Organization.

Russia’s decision to refuse the renewal of the grain deal stems from a combination of factors. While Western countries have not imposed sanctions on Russia’s agricultural products, the country claims that the existing sanctions have deterred shipping firms, international banks, and insurers from engaging with Russian producers. Russia specifically requested the reconnection of its state-owned agricultural bank, Rosselkhozbank, to the Swift fast payment system, from which all Russian banks were barred in June 2022. The United Nations proposed a solution involving the establishment of a subsidiary of the bank that would be permitted to use Swift. However, Russia rejected this option, citing concerns about the length of time it would take to implement. Alternative schemes, including routing payments through JPMorgan Chase or the African Export-Import Bank, failed to materialize. Russia has stated that it would be willing to rejoin the grain deal if its conditions are met.

As Ukraine seeks new export routes for its grain, the European Union (EU) has proposed a plan to distribute Ukrainian grain that cannot be shipped through the Black Sea. The EU suggests transporting the grain across Ukraine’s border with Poland and delivering it to ports on the Baltic Sea, or using rail and barge transportation to the Romanian port of Constanta. However, these alternatives are not without challenges. Ukraine’s railways operate on a different gauge than those in the rest of Europe, necessitating the transfer of grain between wagons at the border. Additionally, the rail network in Eastern Europe lacks the capacity to handle the increased volumes of grain exports, leading to potential logjams. Consequently, a significant portion of grain has remained in countries like Poland, Hungary, Romania, Bulgaria, and Slovakia, saturating their markets and causing local food prices to plummet. To safeguard farmers’ incomes in these countries, the EU has agreed to restrict Ukraine’s food exports there until September 15.

The UN has tracked the destinations of Ukraine’s food exports under the grain deal over the past year. Approximately 47% of the exported food products have reached high-income countries such as Spain, Italy, and the Netherlands. Another 26% has gone to upper-middle-income countries, including Turkey and China, while 27% has been received by low and lower-middle-income nations like Egypt, Kenya, and Sudan. Russia argues that Ukraine’s failure to export more grain to poorer countries contributed to its decision to withdraw from the deal. However, the UN highlights that Ukraine has shipped 625,000 tonnes of food as humanitarian aid to Afghanistan, Ethiopia, Kenya, Somalia, Sudan, and Yemen under the grain deal. In fact, Ukraine supplied over half of the grain purchased by the UN’s World Food Programme in 2022.

The refusal to renew the grain deal has raised concerns about the stability of global food markets. As Ukraine scrambles to find alternative export routes and Russia insists on specific conditions being met, the international community eagerly awaits the outcome of discussions between Turkey’s President Recep Tayyip Erdogan and Russia’s President Vladimir Putin, scheduled for early August. The resolution of this impasse will be crucial in ensuring the continued flow of Ukrainian grain to meet the global demand and stabilize food prices worldwide.

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