The countdown: What will change in the "grain corridor" format when/if it is extended
Ukrainian and Russian sides have opposite forecasts on the further work of the Istanbul agreement after 20 November
Having quickly regained its status as the main channel for grain exports, the sea may close again. In less than a month, on 22 November, expires the Istanbul Deal, which allowed Ukraine to resume exports of agricultural products, and importing recipients to partially solve food problems and generally reduce price tensions in foreign markets.
Despite the fact that there are only a few weeks left until the end of the grain corridor, there are no clear unanimous guarantees that it will continue its work. What are the options for further developments?
Minister of Infrastructure Oleksandr Kubrakov confidently promised that the agreement on the "grain corridor" will remain in force after 22 November. But the prolongation requires a quadripartite consensus, which is currently not visible.
Russia puts pressure on the "unevenness" of the profits received. "I would not like to rush things, but frankly speaking, I would not stake much on prolongation of this agreement in the situation in which we find ourselves," Deputy Permanent Representative of the Russian Federation to the UN Dmitry Poliansky said during a meeting dedicated to this issue According to him, Russia is not satisfied with the imbalance of the outcomes achieved by the Istanbul agreement: while Ukraine is actively exporting grain through the grain corridor, the second part of the agreement, which concerns Russian interests, has apparently sagged.
Read also: Prolongation of the "grain corridor" may become problematic: russia is already sabotaging the inspection of ships. Who can Ukraine rely on?
As a refresher, along with the agreement on the grain corridor, a bilateral memorandum was also signed in Istanbul between Russia and the UN, under which the latter pledged to facilitate the removal of barriers to the export of Russian food and fertilisers. According to Poliansky, practical results are far from expected, and "what was promised has not been implemented". "We expect that it will be implemented, as well as the Ukrainian part of the agreement, as long as it is a package," he said.
Today it is not clear how to meet the demands of the Russian side, and this task seems insoluble. And it is not the UN's willingness or unwillingness, but the fact that buyers are afraid to deal with Russian goods, even if they are not formally under sanctions. The compliance of Western companies treats such transactions as high-risk, which affects the demand and the amount of insurance premiums.
How important are grain supplies by sea? As of 20 October, 363 vessels with 8.1 million tonnes of food left the three Ukrainian ports covered by the Istanbul Agreement. The largest amount – 3.4 million tonnes – is corn, wheat – 2.4 million tonnes, rapeseed – 0.6 million tonnes.
Almost half of this volume was sent to European countries – 3.9 million tonnes. Africa was supplied with 1 million tonnes, Asia – 3.2 million tonnes. In general, the geography of Ukrainian military maritime exports covers 38 countries. This ratio allowed the Russian side to declare that Ukrainian grain goes not to Africa, for the sake of saving it from hunger, but to "rich buyers".
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According to Roman Slastion, Director General at the Ukrainian Agribusiness Club, Europe is supplied mainly with coarse grains, primarily corn, while bread-grain goes to Africa. "43 ships went in this direction [to Africa], not two, as Russia says. These data are open, they are on the UN website, they can be viewed and refute any manipulations in the work of the corridor," he said.
After a month-long "swinging" in August, the sea is gradually regaining its status as the main channel for grain exports. In September – October, the "grain corridor" accounted for 60% of all agricultural supplies. That is, it works – and perhaps even better than Ukraine hoped. And much better than Russia expected.
Why is it critical that the "grain corridor" continues to work? As of 20 July, million tonnes of transit stock were formed in Ukraine against an average annual level of no more than 5-6 million tonnes. The forecast of the new harvest of grains and oilseeds in 2022 averages 70 million tonnes, which, given the level of domestic consumption at 20 million tonnes, forms 50 million export potential.
To encash it smoothly, monthly exports should be at least 6 million tonnes. Without the sea, Ukraine is able to transship 3-3.5 million tonnes per month through all alternative routes. That is, if we exclude the "grain corridor", then exports will stretch for 1.5 years – this is provided that the grain of the new harvest will not arrive.
Read also: Reap as you have (un)sawn: How Ukraine forms the 2023 harvest
Mykola Gorbachev, president of the Ukrainian Grain Association, reminds that the possibilities of non-maritime routes are already close to exhaustion. "It is possible to build a larger terminal on the Danube, to make the queue more orderly, but the Danube itself will not allow to increase shipments significantly. Therefore, if we manage to bring the volume of exports through the Danube to 2 million tonnes, it will be a victory," he said.
Before the war, Ukraine exported 6-7 million tonnes per month and almost 70 million tonnes per season. "Even if we bring grain to Europe in our pockets, then the infrastructure simply cannot absorb such an amount of grain – there are no such terminals and capacities," the Head of the UGA states.
In addition to volume limits, there is a problem of the cost of such land logistics. If the cost of grain delivery from Western Ukraine to the port in Romania is 130-150 $/tonne, then from the North, for example, Chernigiv Oblast, this figure increases to 200 $/tonne. With a 200 $/tonne grain cost and 320 $/tonne a selling price in the port of Constanta, considering logistics, the net loss per tonne will be several tens of dollars.
All these calculations are made by farmers when planning whether or not they should sow grain for the next harvest. Andriy Dykun, Head of the Ukrainian Agrarian Council, confirms that the extension of the Istanbul agreement is crucial for medium and small players in the sector. "When it was adopted, it was a signal for us to go out to the fields and sow. Even with the corridor in operation, this is zero work. If the corridor does not work, it will call into question the spring sowing season," he said.
Read also: Autumn sowing season is hopelessly behind the plan: a quarter of the area has been sown. Not only the war meddled, but also the weather
The uncertainty has already affected the current pace of the industry. On comparable areas controlled by Ukraine, barley crops are 60% of last year's, wheat is sown twice less. Unfavourable weather conditions were added, of course, that slowed down the sowing season. However, the shortage of funds and the inability to clearly predict the possibility of selling the harvest have contributed.
What shortcomings should be taken into account? "The issue of exports is very complicated and we need to find solutions to it. I see no other way but to preserve the grain agreement," says Mykola Gorbachev. It should be noted that even now the grain corridor is not working perfectly. Some of the troubles are caused by Russia's sabotage, the intensity of which is increasing as the day X approaches, while others have objective underpinnings.
Initially, the resources allocated for the implementation of the agreement – human and technical ones – were insufficient. This became obvious when the volume of exports from Ukraine began to grow rapidly.
In general, at the stage of the commission – mandatory inspection of vessels entering and leaving Ukrainian waters – there are four groups consisting of representatives of Ukraine, the UN, Turkey and Russia, seven people from each. Technically, they are unable to check 15-16 vessels per day.
As a result, when Ukrainian maritime exports exceeded 3 million tonnes per month, the problem of vessels pile-up at the commission on neutral Turkish territory arose. Today, about 150 vessels are already stuck in Istanbul, some of which are waiting 19-20 days for inspection and, accordingly, permission to pass. A day of downtime costs the cargo owner $20,000–40,000 depending on the tonnage and type of ship. Ukraine proposed to double the number of inspectors, but Russia blocked this proposal.
How to overcome the existing difficulties? Some of the problems are proposed to be taken into account in the new text of the agreement, which will be valid after 20 November. It is proposed in particular not to include there the inspection of ships leaving Ukraine loaded with grain. If the incoming empty ships cause fears of the Russian side regarding the supply of weapons, then for those leaving the country, this caution is unnecessary and can be reduced to random inspection, for example, every 20th or 50th vessel.
Another change is the term of the agreement. It is assumed that it can be extended for at least a year to allow market participants to plan their activities. This applies to both farmers who will be able to process the sown areas and transnational companies that will be able to return to the format of forward purchases and commodity loans.
Most likely, it will not do without concessions to russia – perhaps regarding additional guarantees of fertiliser supplies. It will be more difficult to force the developed world to buy russian grain, at least while there is a risk of buying stolen Ukrainian grain instead. Rising energy and food inflation in the EU will force everyone to try to find a compromise and influence russia. Because if Ukraine does not get to the world market with its grain, everyone will lose.
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