Explainer – Can Ukraine’s Grain Corridor Defuse Global Food Crisis?
By Nigel Hunt and Jonathan Saul
LONDON (Reuters) – It is unclear whether Moscow will extend its participation in a United Nations-backed initiative that has enabled the export of grain from Ukraine’s Black Sea ports.
Russia said on Monday it would be “inappropriate” to extend the Black Sea Grains Agreement if sanctions against Moscow following its February 24 invasion of Ukraine last year, which hit its agricultural exports, are not lifted.
The agreement on unblocking grain exports from Ukraine’s southern Black Sea ports was extended by 120 days on November 17.
Sources familiar with the matter, who spoke on condition of anonymity, said the deal must be renewed by March 20 at the latest for exports to resume.
Achieved in July last year, it created a protected maritime transit corridor meant to alleviate global food shortages by allowing exports to resume from three ports in Ukraine, a major producer of grains and oilseeds.
Here are some of the problems:
WHAT WAS EXPORTED?
Around 21.1 million tons of agricultural products were shipped under the pact to create a safe shipping channel, including 10 million tons of corn.
Wheat shipments have reached 6 million tons or 28% of the total. Other raw materials shipped are rapeseed, sunflower oil, sunflower meal and barley.
For a full breakdown of exported countries and volumes:
HOW CAN THE AGREEMENT CHANGE?
Russia is seeking the lifting of sanctions on its agricultural exports in return for its continued support for the pact.
Agricultural exports have not been specifically targeted by sanctions, but Moscow says blockages to its payments, logistics and insurance industries pose a barrier to exporting its grain and fertilizer.
It is believed that among its demands, Russia wants the West to ease restrictions on state farm lender Rosselkhozbank, which should ease Russian exports.
Ukraine has not published any changes it wants, but in the run-up to the November deal, it tried unsuccessfully to expand the deal to include more ports.
The three ports involved in the transaction – Odessa, Chornomorsk and Pivdennyi – together have the capacity to ship around three million tons per month.
Ukraine wanted to include the ports of the southern Mykolayiv region, which provided 35% of Ukraine’s food exports before the Russian invasion.
Mykolayiv was Ukraine’s second-largest grain terminal according to 2021 shipping data, so its addition could ship a much larger volume of grain and oilseeds.
Ukraine had separately sought a one-year extension of the agreement and a simplified inspection system.
HAS IT REDUCED THE FOOD CRISIS?
Reduced shipments from major exporter Ukraine have played a role in the global food price crisis.
Other factors include the COVID-19 pandemic and climate shocks that continue to challenge agricultural production, including droughts in Argentina and the United States.
The corridor has prompted a partial recovery in shipments from Ukraine, but they remain well below pre-invasion levels and will not fully recover for the foreseeable future.
Transporting grain to and from local ports is difficult and expensive, and Ukrainian farmers have cut back on sowing crops like wheat, after in many cases selling last year’s crop at a loss because domestic prices were very low.
HAS IT DRIVEN GLOBAL WHEAT PRICES DOWN?
Wheat prices on the Chicago Board of Trade rose sharply following the February 24, 2022 Russian invasion of Ukraine.
They are now at pre-conflict levels as Ukraine’s ability to export millions of tons of wheat through the corridor has contributed to lower prices.
Other factors include a bumper harvest from major exporter Russia last year, the gloomy global economic outlook and a strong dollar.
Prices of wheat-based staples like bread and pasta are still well above pre-invasion levels in many developing countries, despite the decline in Chicago futures, as weak local currencies and higher energy prices have increased the cost of transportation and packaging.
WHAT ABOUT SEAMINES?
Russia and Ukraine accuse each other of laying sea mines that float around the Black Sea and pose a significant threat. A crew member of the Sierra Leonean-flagged Razoni, the first vessel to pass through the corridor on August 1, expressed concern.
The mines are far from Ukraine’s coast, and Bulgarian, Romanian and Turkish military diving teams have defused some that landed in their waters.
Clearing out the rest could take months, and there wasn’t enough time before the Grain Pact came into force.
WHAT ABOUT THE INSURANCE?
The Istanbul-based Joint Coordination Center, which is overseeing the deal and made up of Russian, Turkish, Ukrainian and UN officials, released procedures on the shipping canal in August to address concerns from insurers and shipowners.
Insurers initially said they were ready to provide cover if arrangements were made for international naval escorts and a clear strategy to deal with sea mines.
They have since created clauses for the provision of insurance coverage, including requiring ships to remain within the corridor during transit or risk voiding their policies.
Under the July 22 agreement, Lloyd’s of London insurer Ascot and broker Marsh set up a sea freight and war insurance facility for grain and foodstuffs sailing out of Ukrainian Black Sea ports with coverage of $50 million per voyage.
However, the cost of total insurance for vessels calling at Ukrainian ports, which include separate segments of cover, is likely to remain high.
In addition, insurers will have to cover a larger part of the risk after reinsurers introduced exclusions for Belarus, Russia and Ukraine earlier this year, leaving insurers with higher risk and potentially less interest in covering cargo.
WHAT ABOUT CREWS?
In September, Ukraine implemented a decree allowing its seafarers to leave the country despite wartime restrictions, aimed at providing labor for Ukrainian grain exports and for the broader global shipping industry.
Around 2,000 seafarers from around the world were stranded in Ukrainian ports at the start of the conflict.
Industry estimates show over 300 crew members are stuck in Ukraine.
(Reporting by Nigel Hunt and Jonathan Saul in London and Pavel Polityuk in Kiev, editing by Angus MacSwan, Alex Richardson and Barbara Lewis)