Why Putin has now abandoned the grain deal

Written by Javier Blas

Wheat is the world’s most important staple – so, perhaps unsurprisingly, it has also been used as a powerful weapon. Fortunately for the world, this time it mostly turns out to be a bomb that won’t go off.

The United States armed grain against the Soviet Union in 1980, when President Jimmy Carter imposed a grain embargo on its Cold War rival in response to the invasion of Afghanistan. Four decades and another Russian invasion later, it is Vladimir Putin who is dragging wheat into war, imposing an embargo on Ukrainian grain exports that could cost the country up to $800m a month in much-needed hard currency.

The West has limited options to respond. In the absence of NATO countries available to provide escort for Ukrainian grain shipments and risk an immediate armed confrontation with Moscow, Russia has the upper hand.

Global South

When Putin agreed last year to a deal to return shipments of Ukrainian grain and oilseeds through the Black Sea, the Kremlin calculated that it would lose a lot by blocking the deal, but also gain at little cost.

In the middle of 2022, the Russian president desperately needed to keep the Global South close to him, so the blame for soaring global food prices had to be blamed. By then, the cost of wheat had risen to a record $13.40 a bushel, nearly three times the 2000-2020 average of $4.95. This has alienated Russia’s allies in Africa, Latin America and Asia. Putin also wanted to push the United States and Europe to facilitate Russian grain exports by easing banking sanctions.

For Moscow, the costs — Ukraine would earn several hundred million dollars each month from exporting food — are outweighed by the potential benefits. In any event, Kiev had already exported its agricultural products to Eastern Europe in large quantities, so the feeling in Moscow was that the deal would simply move existing Ukrainian exports out to sea from land.

A year later, the account has changed. Wheat prices are down nearly 50% from their 2022 highs, easing pressure on the global south. Despite the rally this week, the price of wheat is changing hands by about $7.50 a bushel. On the propaganda front, Moscow can show that Ukraine’s shipments flow largely to rich European nations and China, not to starving nations in Africa.

Meanwhile, Russian wheat exports have risen to an all-time high, limiting any further gains for the Kremlin from continuing the deal, formally known as the Black Sea Grain Initiative, even if Western countries accept Moscow’s demands for sanctions relief.

difficulties

In another development over the past year, Kiev is also struggling with the overland route, with several Eastern European countries imposing their own bans on Ukrainian food imports to protect local farmers. The actual ban comes in response to a flood of Ukrainian grain that has lowered domestic prices in Poland, Bulgaria, Hungary, Slovakia and Romania. Russia is not the only country that puts obstacles to Ukrainian agriculture.

So Putin called off the deal earlier this week and has solidified that stance ever since, first bombing the port of Odessa, Ukraine’s agricultural export hub, and then warning that any ship dealing with Ukrainian food would be seen as a legitimate military target. Ukraine responded on Thursday by issuing the same threat to ships heading to Russian ports.

From French President Emmanuel Macron to the White House, the West has denounced the Russian move in stark terms. “The continued weaponization of food harms millions of vulnerable people around the world,” US Secretary of State Antony Blinken said in an official statement.

Wrong analysis

They may be right in terms of the moral argument, but their analysis of the commodity market is wrong. Fortunately for global food security, 2023 is not 2022, and last year’s harvests are likely to put a ceiling on prices for wheat, corn and soybeans. Ironically, Russia is helping to keep prices under control thanks to these record wheat exports. In 2023-24, Moscow is expected to export 47.5 million tons of wheat, more than double the amount it exported a decade ago.

Global food prices are down by more than a fifth from their peak in 2022, according to the Food and Agriculture Organization of the United Nations. Wheat prices have halved. Corn prices fell by 33% and soybean prices by 15%. The only concern is the cost of rice, which has risen to a two-year high, up 30% from last year. However, Ukraine does not export rice, and the jump is due to concerns about bad weather damaging crops rather than the war.

In 1987 and 1988, US President Ronald Reagan sent the US Navy to the Persian Gulf to create a humanitarian corridor for oil tankers during the Iran-Iraq war. Could the same be done now in the Black Sea for grain shipments? The danger will be enormous. If sending NATO warships is too risky, what else can the West do? Disappointingly, the best hope is that global food prices will rise and that the Global South – especially India, Saudi Arabia and Egypt – will put pressure on the Kremlin.

If wheat prices do not rebound, Washington and Brussels will either have to accept the Russian blockade, or make concessions to Moscow and pay large subsidies to Eastern European countries to accept Ukrainian wheat. None of the above is a good option, but Kiev will need help.

The collapse of the grain corridor, along with the overland route to its eastern European neighbours, would cost Ukraine dearly. In this particular case, there are more risks than the cost of breakfast.