The story so far: In a move that allayed concerns about yet another disruption to global food supply chains, Russia on Wednesday re-joined the Black Sea Grain deal. The reversal came a day after Russian President Vladimir Putin stated that Moscow would suspend, but not end, its involvement in the deal.
“The Russian Federation believes that the guarantees it has received currently appear sufficient, and resumes the implementation of the agreement,” news agency Associated Press quoted the Russian Defence Ministry as saying. It added that the mediation of the United Nations and Turkey had secured the continued cooperation.
The Black Sea Grain deal endeavours to tackle escalating food prices emanating from supply chain disruptions because of Russian actions in the world’s ‘breadbasket’.
Moscow had earlier said that the move was in response to Ukraine’s involvement in an attack on Russian ships in the Sevastopol port in the Crimean Peninsula (annexed by Russia in 2014). Ukraine had refuted the charges. The development led to both United States and Ukraine accusing Russia of using food exports as a means to strengthen its position in the war.
What is the Black Sea Grain Initiative?
The deal, brokered by the United Nations (UN) and Turkey, was signed in Istanbul on July 27 this year. Initially stipulated for a period of 120 days, with an option to extend or terminate thereafter in November, the deal was to provide for a safe maritime humanitarian corridor for Ukrainian exports (particularly for food grains) from three of its key ports, namely, Chornomorsk, Odesa and Yuzhny/Pivdennyi. The central idea was to calm markets by ensuring an adequate supply of grains, thereby limiting food price inflation.
Ukraine is among the largest exporters of wheat, maize, rapeseed, sunflower seeds and sunflower oil, globally. Its access to the deep-sea ports in the Black Sea enables it to directly approach Russia and Europe along with grain importers from the Middle East and North Africa. Russia’s action in the East European country has now disturbed this route, earlier used to ship 75% of its agricultural exports – precisely what the initiative sought to address.
What are the other broad features of the initiative?
The deal put in place a Joint Coordination Centre (JCC), comprising senior representatives from Russia, Turkey, Ukraine and the UN for oversight and coordination.
All commercial ships are required to register directly with the JCC to ensure appropriate monitoring, inspection and safe passage. Inbound and outbound ships (to the designated corridor) transit as per a schedule accorded by the JCC post-inspection. This is done so as to ensure there is no unauthorised cargo or personnel onboard. Following this, they are allowed to sail onwards to Ukrainian ports for loading through the designated corridor.
All ships, once inside the Ukrainian territorial waters, are subject to the nation’s authority and responsibility.
Should there be any requirement for removing explosives, a minesweeper from another country would be required to sweep the approaches to the Ukrainian ports, in other words, accompany the vessel with tugboats. A total de-mining along the Ukrainian coastline was rejected because it was believed that it could spur their vulnerability to Russian attacks.
Moreover, in order to avoid provocations and untoward incidents, it is mandated that monitoring be done remotely. No military ships or unmanned aerial vehicles can approach the corridor closer than a pre-decided distance agreed upon by the JCC. This too would require consultation with the parties and authorisation of the JCC.
In the event of non-compliance or suspicious activities, upon the request of a party, the JCC would provide assistance to the crew or conduct an inspection against security guarantees.
Why is it important?
As per the UN Office for Coordination of Humanitarian Affairs, approximately 9.8 million tonnes of grains have been shipped since the initiative was commenced. The UN Food and Agricultural Organisation’s (FAO) Food Price Index, which assesses the monthly change in international prices of a basket of food commodities, fell for the sixth consecutive month in a row this October. Following the fifth consecutive month of decline, the supply situation in markets was seen to be easing, with the potential for further price drops. People hoarding the grain in the hope of selling it for a sizeable profit owing to the supply crunch were now obligated to sell.
The initiative has also been credited for having made a “huge difference” to the global cost of living crisis.
About 44% of the shipments, which include corn, wheat, rapeseed, and sunflower oil among others, reached high-income countries (including Spain, Netherlands and Italy among others), 28% reached low and middle-income countries (Egypt, Iran, Sudan and Kenya among others) and 27% reachedupper-middle income countries (Turkey, China and Bulgaria among others). It is important to note here that certain countries here may be re-exporters of a certain grain— thus, the indicator might only reflect the first point of export.
As pointed out by several observers, notwithstanding its reach, the initiative alone cannot address global hunger; it can only avert the chances of the global food crisis spiralling further, especially when the region is yet to scale prior year levels. A year-over-year comparison for the period between January and September illustrates an export gap of 1.2 million tonnes to least developed countries and 8.1 million tonnes to developing countries, for wheat.
Further, for maize, there is an export gap of about 2.4 million tonnes to developing countries during the same period. This can be attributed to shipping being shut between February and July— which is when Ukraine typically ships most of its maize, particularly to Europe.
What would suspension of the deal mean?
In a nutshell, the deal’s suspension was expected to re-introduce the price pressures on grain prices, especially that of wheat, with inventory being at historical lows. It could particularly impact countries in the Middle East and Africa such as Egypt, Turkey, Lebanon, Sudan and Yemen which have benefitted from the resumption (refer to the chart) and are particularly dependent on Russian and Ukrainian exports.
Joseph Glauber and David Laborde, senior Fellows at the International Food Policy and Research Institute (IFPRI), observed, “Not only are those countries more dependent on Ukraine as a supplier of wheat and other grains, they tend to buy more during the winter to supplement their own harvests, which are largely consumed by the end of the year.” Thus, according to them, the suspension could spur food insecurity as well as potentially exacerbate political tensions.
As for domestic challenges, the researchers observe that storage facilities in Ukraine are already at capacity even as farmers turn to harvest the crops planted in spring. This, combined with restricted export opportunities, implies lower prices for farmers even as shortfalls spur prices globally.
“Lower prices will bring some Ukrainian farmers to the verge of bankruptcy and create further disincentives to plant for the next crop year,” the IFPRI fellows noted. This is especially when prices of inputs such as fertilisers have been constantly rising. In fact, as reported by Reuters, the Ukrainian Agrarian Council (UAC) has already indicated that Ukrainian farmers are likely to cut the winter grain sowing area by at least 30%.
“As Ukraine typically accounted for about 10% of global wheat exports before the war, the effect on global markets is akin to back-to-back droughts over three years in a major wheat-producing region, and it likely means that global stocks will not recover for at least another year,“ the researchers said. Thus, tight stocks are expected to cause higher prices and keep markets volatile.