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Russia is not going to extend the grain deal with Ukraine. What does that mean?

During the Cold War, the economic performance of the Soviet Union regarding wheat production was weak, as it was a net importer, and much of it came from its big enemy: the US.

Following the collapse of the USSR, the government removed barriers to business, allowing farmers to reach global markets and get foreign agricultural technology. This provoked that with Putin, Russia became the biggest exporter of wheat in the world (18% market share) followed by the US (16%), Canada (14%), France (10%) and Ukraine (7%). Wheat is essential for the production of pasta and bread, among others. Many African and Asian countries import more than 50% of their grains from both Ukraine and Russia, like Egypt, Turkey, Nigeria and Bangladesh.

Besides wheat, sunflower supplies are also being heavily affected by the war. Indeed, Ukraine is by far the largest exporter of sunflower oil, accounting for more than 40% of the global supply, whereas for Russia it is 25%. The yellow color on the Ukrainian flag represents the country’s vast golden fields of sunflowers, and this oil is crucial for households in many developing countries, and it’s also the source of the crisp in potato chips.

When Putin ordered its troops to launch a full-scale invasion of Ukraine in February 2022, the Ukrainian navy mined its entire coastline to prevent an amphibious invasion by Russian forces. This move altered the trade routes in the Black Sea, and the fact that Russia blocked the exit of grain from conflict zones, made that about half of the 50 million tons of wheat that Ukraine normally exports each year were unable to reach out the international markets in 2022.

In addition to that, international sanctions against Russia limited its own cereal exports, and fertilizers (n°1 exporter in the world, with 16% of the market share, followed by Canada with 10% before 2022). Together with the pandemic and an expansive monetary policy from central banks around the world, the disruption of the cereal trade because of the war in Ukraine has been a main factor for food inflation, which sharply impacted poor countries.

Currently, war-affected Yemen imports about 40% of its wheat from both countries. Lebanon is facing shortages, while Libya, Tunisia, and Algeria are all on the edge. To prevent a major food crisis in the world, and because many countries in Africa and Asia impacted by this trade disruption are allies of Russia, the governments of Putin and Zelensky signed an agreement in August last year that was backed by the United Nations and Turkey.

The agreement needed to be renovated each six months, and it stipulated that officials from Turkey, United Nations, Russia and Ukraine would jointly supervise the ships entering/exiting Ukrainian ports. Then, the Ukrainian military would be in charge of guiding the vessels through "safe channels'' that cross the mined waters of the Black Sea towards the Bosphorus Strait, in Turkish territory. Finally, both Ukraine and Russia agreed not to bomb these vessels nor the ports that are used to export grains.

The deal worked pretty good in the last 12 months, with no major disruptions. However, after sending many threatening cancellation messages, Russia announced this Monday that it will not renovate the grain deal, asking instead two demands: that Ukraine reopens the pipeline of ammonia, a key ingredient in fertilizer, which in turn is a top Russian export product, from Russia to the Ukrainian port of Odessa, and the reconnection of the Russian Agriculture Bank to the global payments network, SWIFT.

The ammonia pipeline was badly damaged the last 8th of June in an explosion that both Russia and Ukraine blame the other for, so neither is taking responsibility to repair it. At the same time, western powers need to reach a consensus about giving a Russian bank access to SWIFT, which could be seen as an "unnecessary gift to Putin", because the grain trade worked very good in the last year without this financial request.

To add more complexity to the situation, at 3 a.m of this Monday, just some hours before the Kremlin announced the no-extension of the grain deal, the Kerch Bridge was damaged with water-drones attacks, killing two Russian civilians traveling by car. This bridge connects mainland Russia to annexed Crimea, and it is most likely that Ukraine was behind those attacks.

The Kremlin denies that the explosions into the Kerch Bridge were the cause of deciding to pull-out from the grain deal on Monday, but it is very unlikely that this is true, as Russia has acted like that with previous attacks to the same bridge in October last year, and on other infrastructures. Thus, the situation seems to be without solution in the short-term, and it is the poorest countries that would be affected by this shortage of cereals.


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