Short corridor: Grain deal extended for 120 days, but de facto for half of this period

Short corridor: Grain deal extended for 120 days, but de facto for half of this period

Extension of the Istanbul agreement allowing Ukraine to export agricultural goods left uncertainty over its duration

Short corridor: Grain deal extended for 120 days, but de facto for half of this period
Photo: depositphotos.com

The Black Sea Grain Agreement, which provided grain export from the ports of Greater Odesa and expired on 18 March, has been extended once again. It was announced by Ukrainian and Turkish officials and confirmed by the United Nations in its communiqué.

"The Black Sea Grain Initiative, signed in Istanbul on 22 July 2022, has been extended. The Initiative allows for the facilitation of the safe navigation for the exports of grain and related foodstuffs and fertilisers, including ammonia, from designated Ukrainian seaports," the statement said.

The start of maritime exports with mandatory inspection transit through Istanbul in August allowed Ukraine to export about 25 million tonnes of grain and food to 45 countries.

The main intrigue that has remained after the official confirmation of the agreement is the extension period.

The 120-day period, which the Ukrainian side initially considered insufficient, should be reduced even further – by half, according to russia.

It is for 60 days, starting from 19 March, that russia believes the "grain initiative" is valid. Ukraine, according to Oleksandr Kubrakov, Vice Prime Minister and Minister for Communities, Territories and Infrastructure Development, considers the Black Sea Grain Initiative to have been extended for the standard 120-day period.

Mind investigated what does this contradiction in dates mean, and why has it arisen in the first place?

Are there any legal grounds for the contradiction with the dates? No, there are not.

The document, originally signed on 22 July 2022, had only one period of 120 days. In order to make any changes to the agreement, russia (or any other party) must file a formal objection, otherwise, the agreement will be automatically extended on the prescribed terms.

No such formal objection has been filed.

Then what is the problem? The fact is that the aggressor country is not subject to the law, and therefore, in 60 days, export may stop due to a military threat, or at least there will be another reason for bargaining and blackmail.

There is no doubt that russia will defend the official version of 'two months': russian foreign ministry spokesperson maria zakharova said that any claims of extending the grain deal for more than 60 days are "deliberate manipulation".

The two-month horizon does not allow Ukrainian farmers to fully plan their activities during the sowing season and also confuses international partners. As a result of this uncertainty, freight rates from the ports of Reni, Izmail and Kilia have increased by 30-40%. The additional costs are borne by buyers, traders and ultimately by Ukrainian producers.

How long does the UN consider the agreement to be extended? In keeping with the best traditions of the organisation, the UN communiqué avoids the main contradiction. It does not mention the new term of the grain initiative at all.

And Turkey? Turkish President Recep Erdoğan also did not name a specific timeframe, but only noted that the agreement would continue working after 19 March.

Why exactly 60 days? On 14 May, presidential and parliamentary elections will be held in Turkey.

If Recep Erdoğan fails to retain his post, which is likely after being criticised for his handling of the February earthquake, his successor may change the approach to implementing the grain deal.

What are russia's claims? Besides the understanding that active Ukrainian export and, as a result, the strengthening of the Ukrainian economy is hardly in the interests of the aggressor, russia has claims to the implementation of the second, "russian" part of the agreement. It provides increased export of russian grain and fertilisers, and the UN has indeed pledged to facilitate this.

"The russian side, noting the package nature of the Istanbul agreements proposed by UN Secretary-General António Guterres, has no objection to another extension of the Black Sea initiative after the second term expires on 18 March, but only for 60 days," said russian Deputy Foreign Minister sergei vershinin.

According to vershinin, progress in the russian part of the package deals will be assessed by May, and "the further position will be determined depending on the real – not just in words, but in reality – progress in terms of russian export to the world market."

What are russia's real, not declared, 'wishes'? Connecting russian agricultural bank to SWIFT and launching the Togliatti-Odesa ammonia pipeline.

Are the problems with the grain deal limited to the terms of validity? No, this is just the tip of the iceberg. There are many bottlenecks and difficulties within the processing of its execution.

One of the main issues is the queues for inspection. When the queue is 80–90 vessels with an inspection rate of no more than 4–5 vessels per day, the temptation to pay for your progress can be too great. A day of downtime costs cargo owners five figures, and delivery sometimes takes 120 days. The grain was contracted after the next extension of the grain agreement and arrived at the buyer just in time for the end of the next reporting period.

The Ukrainian Grain Association has made several amendments and proposals to the organisation of the corridor, including queuing by terminal rather than by ship, giving priority to those who were already in line as of 9 February, allocating quotas for operators, etc.

According to Andriy Klymenko, Head of the Institute for Strategic Black Sea Studies and editor-in-chief of BlackSeaNews, the slowdown of the corridor is a deliberate policy of russia, which has resulted in a decrease in the number of ships sailing daily through the grain corridor from the Bosphorus Strait from 5–6 to 2.5–3.

What does Ukrainian business say? Volodymyr Slavinsky, Deputy General Director for Trade at Nibulon, recalls that there are about 100 ships in line to enter the grain corridor. All of them were chartered to fulfil contracts to be loaded in March. Due to the destructive actions of the russian side, a transitional queue has been created within the joint coordination centre.

Since then, the price environment in the agricultural market has changed, and buyers will have legal grounds to refuse to fulfil Ukrainian contracts because the supplier fails to meet delivery deadlines.

In other words, Ukrainian exporters will be forced to look for a new buyer for their goods at a lower price and compete with each other, having cargo in hand and chartered ships waiting in line.

Can we expect an expansion of the export range to include metals and ore? No, this possibility is as far away as ever.

According to exporters, the russian inspection in the Bosphorus is particularly thorough in checking cargoes for any metal.

The main conclusion from the status quo. A fully-fledged grain market is forward sales. The inability to plan activities for at least a quarter actually kills it.

It is impossible to export with a two-month planning horizon and with the understanding that export may de facto stop as early as May.

The uncertainty is further aggravated by the fact that it has occurred during the Ukrainian sowing season, which is already underway in a truncated form.

Even after the agreement is extended, there are no preconditions for the corridor's capacity to be increased. At the rate of three vessels per day, the existing queue will be enough for another month or more in advance. Therefore, we should not expect any new large-scale grain sales.

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