Ukraine grain deal collapse heightens food supply fears

The pact has ensured the safe passage of almost 33 million tons of crop exports via the Black Sea since it was signed in July 2022.

Bloomberg, Content provider

July 17, 2023

3 Min Read
Export ship storing grain

By Megan Durisin and Áine Quinn with assistance from Daryna Krasnolutska, Firat Kozok and Volodymyr Verbyany.

Russia ended the Ukraine grain-export deal nearly a year into the agreement, heightening uncertainty over global food supplies and escalating tensions in the region. 

The pact, previously extended in May, will cease to be effective as of Tuesday, the foreign ministry in Moscow said in a statement. Russia had repeatedly threatened to leave the deal, which had marked a rare example of cooperation during its war in Ukraine. The corridor’s shutdown will hit key buyers like China, Spain and Egypt.

“Unfortunately, the part concerning Russia in this Black Sea agreement has not been fulfilled so far,” Kremlin spokesman Dmitry Peskov said, according to Russian news agency Tass. “Therefore, it is terminated.” 

The move jeopardizes a key trade route from Ukraine, one of the world’s top grain and vegetable oil shippers, just as its next harvest kicks off. It also comes after Russia on Monday said Ukrainian drones damaged a key bridge to Crimea. 

The pact — brokered by the United Nations and Turkey — has ensured the safe passage of almost 33 million tons of crop exports via the Black Sea since it was signed in July 2022, helping world food-commodity prices ease from the record levels reached after Russia invaded. However, it has been bogged down by issues including slow vessel inspections in recent months.

Benchmark Chicago wheat futures initially rose as much as 4.2% and corn advanced advanced as much as 2.5%. The two commodities are the top crops shipped under the deal.

Russia cited obstacles to its own shipments and a bias toward Western interests as reasons for discontinuing the pact, though the nation is the world’s top wheat shipper. It said it would be willing to reconsider the deal when its terms are met.

Moscow’s withdrawal from the deal will have multiple implications, according to its foreign ministry. Those include the end of guarantees for navigation safety, the collapse of the maritime humanitarian corridor, and the disbandment of the Joint Coordination Center in Istanbul.

“Even without the Russian Federation one needs to do everything to allow us to use this Black Sea corridor. We are not afraid,” Volodymyr Zelenskiy said during an interview on Monday, according to his spokesman Serhiy Nykyforov.

Turkish President Recep Tayyip Erdogan said he would discuss the export deal with Russian President Vladimir Putin during their planned meeting in August, or perhaps sooner by phone.“I believe Russia’s head of state Putin wants this humanitarian bridge to continue,” Erdogan said in televised comments from Istanbul. Long-Term RiskFollowing repeated disruptions, the shipping corridor through the Black Sea is now nearly empty, tempering the immediate interruption to world crop flows. However, the bigger risk lies longer-term, as fractured and costly export logistics could spur Ukrainian farmers to further cut harvests already shrinking under the weight of the war.When the deal was inked, the UN agreed in parallel to improve access to Russian food and fertilizer exports. Russia has demanded several obstacles be removed to bolster trade — including reconnecting an agricultural bank to the SWIFT international payments system.No new vessels have been approved to join the Ukraine grain deal since late last month and Russia has blocked one of the three open ports. Ship inspection times have progressively grown longer, with fewer than one cleared per day in the first half of this month.

A lone vessel remains in the corridor Monday — the TQ Samsun — which departed over the weekend from the port of Odesa. Ship-tracking data show it nearing Istanbul.

Its closure will heighten reliance on alternate trade routes via the Danube River and Ukraine’s European Union neighbors, although those paths remain expensive and some countries have pushed back against the inflow. 

The routes come “at a much higher cost of transport,” said Carlos Mera, head of agricultural commodities market research at Rabobank. “That poses questions about the future production out of Ukraine. Most of the exports will flow, but some stock build-up domestically is unavoidable.”

Some traders have previously signaled interest in continuing Black Sea shipments without the deal, although that would require military and government approval.

©2023 Bloomberg L.P.

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