Ammonia-flavoured grain: What russia got for the extension of the Istanbul Agreement

Ammonia-flavoured grain: What russia got for the extension of the Istanbul Agreement

The operation of the "grain corridor" from Odesa ports will last at least until 19 March. What had to be sacrificed to make export possible

Ammonia-flavoured grain: What russia got for the extension of the Istanbul Agreement

On 17 November, the day before the formal termination of the Istanbul Agreement, the "grain corridor" from Odesa ports was officially extended for another 120 days. The corresponding agreement was signed in Istanbul. Turkey and the UN remain the guarantors of its implementation.

"I welcome the agreement by all parties to continue the Black Sea Grain Initiative to facilitate safe navigation of export of grain, foodstuffs and fertilisers from Ukraine," said UN Secretary-General António Guterres.

At the G20 summit, which took place simultaneously, the subject of the "grain corridor" was clearly not a priority in the public part of the programme by contrast to the forecasts of the previous month. This was perhaps because after its pointed withdrawal from the agreement russia was forced to return to implementing it and hardly had the strength for a second demarche that would require a consolidated response. However, several bilateral meetings on this topic occurred on the sidelines of the summit, between Antonio Guterres and Russian Foreign Minister Sergey Lavrov in particular.

Turkish President Recep Erdogan, the "father" of the grain deal, who attended the Bali summit as well, expressed confidence that the agreements will operate further even after 19 November.

That the Istanbul Agreement will remain in force was displayed by the most honest and unbiased index – grain crops exchange quotation. Wheat prices on the main locations – Chicago and MATIF in Paris – showed stability and even slightly decreased, at the one percent rate.

Prolongation of the "grain corridor" made the whole world breathe a sigh of relief, as the supply of Ukrainian grain gives a chance to keep the food inflation from spiralling and control the humanitarian crisis. For Ukraine, the preservation of maritime exports is virtually the only condition for the economy to function and the key agricultural sector to survive. Mind investigated, what was the price of this achievement?

What does Ukraine intend to export via the "grain corridor 2.0"? During the first 120 days of the Grain Initiative, Ukraine exported more than 11 million tonnes of agricultural products to 38 countries, according to the Ministry of Infrastructure.

In the next four months, adjusted for traditionally less intensive navigation in winter, the volume of Ukrainian maritime trade is unlikely to increase. Given the 15+ million tonnes of the market surplus and the new harvest (40+ million tonnes) received, it will not be possible to fully unload it during this period.

Why is 120 days of assured exports not enough for Ukrainian producers? The next reporting period of the grain initiative is 19 March, 2023.

Given the dynamics of geopolitical developments, this period seems to be quite an adequate forecasting time-frame. Although, for the agricultural sector with its six-month production cycle, this is not enough, even if we get on faith that russia will fulfil the agreements.

It is no coincidence that the Ukrainian party insisted on extending the deal for a longer period – a year – to allow farmers to plan their activities for the season, and traders to make forward purchases and thus bring money into the industry.

Based on the final result, this was not achieved. Therefore, the matter of the volume and structure of areas under crops will remain open before the start of spring field works, if there are no changes on the front and/or in the architecture of the Istanbul Agreement. Depending on the weather, farmers should get a concrete picture on these issues in late February – early March.

Read also: The autumn sowing campaign is hopelessly behind the plan: A quarter of the area has been sown. The war was not only to intervene, but also the weather

The option was also discussed to include the Mykolaiv port in the grain deal, the operation of which became theoretically possible after the province was liberated from the invaders. This issue will probably be made relevant after the Ukrainian military is entrenched in the region and  the state of the port infrastructure, which has been under shellings for months, is inspected.

What improvements are needed in the work of the "grain corridor"? One among the positive changes in the work of the "grain corridor" is expected to be intensified inspections in the Bosporus, where about 100 ships have gathered by now. It is not yet known whether this will happen through increasing the number of inspectors or relaxing the inspection procedure. In particular, the option of selective inspection of ships leaving Ukraine loaded with grain was discussed.

Nevertheless, the "grain corridor", even limited in time and not working flawlessly, remains an oxygen bag for the agricultural sector. "There is no scalable and economically viable alternative to sea exports of oilseeds," says a report by Ukraine's largest oilseed processor, Kernel Holding.

"I don't see any other way but to preserve the grain agreement", said the President of the Ukrainian Grain Association Mykola Gorbachov.

Ukraine and Russia provide about 30% of world exports of wheat and barley, 20% of corn and more than 50% of sunflower oil. russia is also the largest exporter of fertilisers with 15% share.

What does russia want to obtain? In July, along with the grain agreement, another one was concluded.  According to it, the UN pledged to facilitate the promotion of russian grain and fertilisers to the world market. It became obvious (first of all to russia) by September that the success in this area was by far modest compared to the dynamics of Ukrainian grain trade.

It is unlikely that the UN sabotaged its promise. But the nomenclature and variety of anti-russia sanctions made any transactions with "made in russia" commodities too risky, which was reflected in the cost of insurance and freight.

António Guterres, when commenting on the continuation of the "grain corridor", said that the UN is also "fully committed to removing the remaining obstacles to the export of food and fertilisers from the russian federation."

The UN, according to Lavrov, "gave written assurances of good intentions" to the West (the US and the EU), which will pave the way for the export of russian grain and fertilisers. This stipulates that all economic operators involved in russian fertiliser and grain supply chains will not face sanctions. russian vessels will be allowed to enter European ports and foreign vessels to enter russian ones. This is formally possible now, but operators resort to self-sanctions, being afraid of legal consequences. russia will be able to use the same route through the Black Sea as Ukraine does to ship grain.

Possible unblocking of the operations of the state-owned Rosselkhozbank Russian State Agrarian Bank was also discussed; namely the resumption of the connection to Swift for the financial institution that serves as a partner in agricultural export operations. It is currently unknown whether any consent was received. As of now, the most likely version is that correspondent relations in American banks, not Swift, would be opened for the russian lender.

Will the rf get access to the ammonia pipeline? The main thing that the kremlin achieved in exchange for extending the Istanbul Agreement was the resumption of the use of the ammonia pipeline that runs through the territory of Ukraine to Odesa. Sources with close ties to the negotiations, cited by the British media, say: Complaints about the slow pace of grain exports and banking sanctions were most likely just a cover, and the true russia's goal was ammonia.

The Togliatti–Odesa ammonia pipeline was shut down by Ukrkhimtransammiak pipeline operator after 24 February. Before the invasion, it transported about 2.3 million tonnes of ammonia, equivalent to $2.4 billion in export revenue. The transit fee paid to Ukraine is about $100 million. russia exported another 1.9 million tonnes of ammonia through the Baltic ports, but russian goods are not very welcome there either.

In 2021, the largest purchasers of fertilisers from Odesa were Morocco (800,000 tonnes), Turkey (600,000), India (360,000) and Tunisia (190,000).

Ammonia is a key component for nitrate fertilisers, a shortage of which the world has already been experiencing. The campaign for the return of russian agrochemicals to the market, particularly to the climatically challenged countries of Africa, began in September. Representatives of the UN and the World Food Programme served as its speakers, in particular.

Read also: Transit is a delicate business: Why russia may resume demands to pump ammonia through the territory of Ukraine in exchange for the "grain corridor"

How real is it to fulfil these whims? It is assumed that ammonia produced by the russian Uralkhim will be purchased by the American commodity trader Trammo before it is put into the pipeline in order to avoid political tension and facilitate the communication of the deal within Ukraine. This will remove the issue of transit of russian goods via Ukraine.

Uralkhim is owned by russian oligarch Dmitriy Mazepin who is under sanctions so the American trader will obviously need additional guarantees and permits for the deal. There is no official confirmation that this format has been agreed by all parties.

Pumping of ammonia and accumulation of it at the Odesa Port Plant also excludes waging hostilities in that area, as any hit threatens with a large-scale environmental disaster. Nobody knows how such a ceasefire and "ammonia armistice" can be ensured.

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