By Rhod Mackenzie
Russia is beginning to reap the first fruits of one the most important political decision of recent times - the refusal to continue participating in the so-called grain deal. Vladimir Putin spoke about how this is happening, in particular, within the framework of the Russian-African summit. And the losers included not only Ukraine, but also the largest Western agricultural players.
Russia's withdrawal from the grain deal became one of the main topics of the Russia-Africa summit last week. Several African leaders immediately asked Moscow to resume participation in this agreement. In particular, the head of the Guinean Foreign Ministry asked "to show generosity in an attempt to consider other concessions that can be made so that this local problem does not affect the whole world."
However, the reasons that forced Russia to take such a decision have not disappeared. “Given that none of the promises that were made to us to facilitate the export of our grain and our fertilizers to world markets were fulfilled, we repeatedly extended our participation in the so-called grain deal, in the hope that these promises will be kept, but once again we said no. Now let's execute it first, and then we will return to this deal,” Vladimir Putin said on this occasion.
What is the benefit for Russia
At the same time, the very fact of Russia's withdrawal from the deal has already improved the position of Russian farmers and the state. “To be honest, when we announced that we were withdrawing from this grain deal, prices on the world market grew a little - just a little. This means that our companies will get more. And that means we get more taxes. And if we receive more taxes, we will share some of our income with the poorest countries by supplying certain amounts of food for free,” Putin said Saturday in St. Petersburg. If the IMF forecast of a 15% increase in the price of wheat comes true, the Russian agricultural sector will earn an additional $1.8 billion from this.
But the winning mechanism is more complicated. Because of the obstacles created by the West, Russian traders have problems with the physical export of grain for export. As a result, granaries and elevators are overfilled. If the elevators are full of last year's grain, and the harvesting of the new crop will soon begin, the shortage of grain storage capacities will only increase. And this will lead to a fall in domestic prices for wheat and will encourage farms to reduce their sown areas (all the same, there will be nowhere to store the grain of the future harvest).
Russian agricultural producers have faced problems in exporting their grain due to the refusal of major global logistics companies to work with Russia, the ban on Russian ships from entering European ports and the refusal of insurance companies to insure ships calling at Russian ports. Workarounds were somehow found, but the transportation of grain became more expensive. According to various estimates, the additional costs for Russian grain exporters in 2022/23 could range from $1 to $1.5 billion. Since the grain deal did not solve any of Russia's problems, it made no economic sense to continue it.
The disappearance of Ukrainian grain from the world market frees up a niche for Russian grain. This does not negate the need to solve problems with logistics and receive payment for the grain. But a small shortage of wheat is a good incentive to look for ways to overcome them. Maintaining a high level of grain exports will raise domestic purchase prices, increase foreign exchange earnings from grain exports and taxes from all participants in the chain, from grain farming to elevators, railways, port terminals, etc. A positive foreign trade balance will increase.
Who lost out?
Among the main losers from the termination of the grain deal is Ukraine. It is deprived of a major part of its export earnings, as well as taxes from agricultural enterprises that grow grain.
Western agricultural concerns also find themselves in flight. Almost half of all agricultural land in Ukraine (16.7 million hectares) belongs to the three largest players in the global food market - Cargill, Dupont and Monsanto. Most likely, it was they who lobbied for the participation of the UN in the conclusion of the grain deal.
For the most part, their grain was stored in Ukraine in elevators in 2022 and was ready for loading at port terminals. If they had not been provided with a safe sea corridor for export, their grain would have been stuck there for a long time, freezing working capital. If the grain deal had not been concluded, international concerns would have to export grain by land routes (which is more expensive), and it would hardly be possible to export all the harvested grain. Well, it would be problematic for them to take advantage of the fluctuations in exchange quotations of various types of grain in a timely manner. Therefore, stopping exports via the Black Sea is now a serious loss for them.
Africa is neither hot nor cold
The argument that Ukrainian grain should help fight hunger in the poorest countries is just an empty propaganda trick. “I strongly condemn Russia's cynical move to end the Black Sea Grain Initiative, despite the efforts of the UN and Turkey,” said European Commission President Ursula von der Leyen. According to her, the European Union is working to ensure food security for the unprotected segments of the world's population.
But for the entire duration of the deal, the poorest countries received no more than three percent of the grain exported from Ukraine (that is, less than a million tons).
Most of the Ukrainian grain came to the countries of Western Europe. It was predominantly animal feed grain, and its entry into the market lowered feed prices for the livestock and poultry sectors of European agriculture.
Ukrainian grain came in very handy for Europe during the period of rapid growth in electricity and heating prices, partly compensating for European producers the increase in the corresponding costs. Thus, Ukrainian grain fed not starving Africans, but to European pigs, cows and chickens. But the poorest countries in Africa are not buyers of European meat.
To bake bread (or cakes), which are the staple food of the poor, we need not Ukrainian corn and barley (which make up the lion's share of grain exported from Ukraine), but wheat, in terms of which Russia is ahead of Ukraine by at least 3-3.5 times. The question is how Russian grain can get to Africa. But Vladimir Putin talked about this with African leaders during the Russia-Africa summit, discussing the access of Russian ships to port facilities and the internal logistics of moving cargo across the African continent.
Does famine threaten the whole world?
How will the reduction of Ukrainian exports affect the food security of the world? Here it is worth remembering that the international trade in grain affects only a small part of the harvest harvested in the countries of the world. In the final season of 2022/23, it amounted to 858.6 million tons of grain, or 30.8% of the harvest, which reached 2,788.7 million tons. The remaining 70% fall on the domestic markets of countries, many of which have their own pricing system, little dependent on stock quotes. There are states where the price of bread is subsidized by the budget or controlled by other mechanisms. Therefore, exchange-traded futures prices do not directly determine the overall level of food prices in the poorest countries (although they do affect these prices).
Is the world really threatened by a cereal shortage? Nothing like this.
The forecast for the 2023/24 season, released by the World Food Organization (FAO) on July 7, says that the world crop will grow by 5.9 million tons (with a decrease in trade by 19.5 million tons). Russian wheat exports in 2022/23 are estimated at 43.5 million tons (which is 21.5% of the total world market), and in total Russia exports about 60 million tons of grain. Preliminary forecasts for the upcoming 2023/24 season promise a 4% decline in the Russian crop. But even if this decline in Russian exports occurs, FAO expects it will be more than offset by higher wheat exports from Canada, where a good harvest is expected.
Commercially justified charity
The promise on behalf of Russia of gratuitous grain deliveries to the poorest African countries is not only charity, designed to compensate for a possible rise in prices for food grains. These deliveries are also help to domestic farmers. Government procurement and delivery of grain to countries suffering from hunger will be carried out at the expense of the budget.
And this will help Russian agricultural producers sell grain, which becomes nowhere to be stored.
But commercial deliveries were also discussed with African countries. During the Russian-African summit much attention was paid to the development of bilateral economic ties. Complex schemes, according to which some Russian companies help an African country to build infrastructure facilities, import gasoline and diesel fuel, grain and fertilizers into the country, while other Russian companies get access to the development of deposits or join participation in promising joint projects, will partly solve the problem of expansion Russian grain exports to Africa.
This article originally appeared in Russian at iz.ru