Black Sea Grain Initiative (BSGI) – Incentives & Influence
Putin’s BSGI Pros & Cons. What influences the decision to rejoin BSGI? What’s next?
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In the previous issue, I discussed the what, why, and who of the Black Sea Grain Initiative (BSGI). In this edition, I will discuss the pros and cons of BSGI participation for the Kremlin, what are the influences to rejoining BSGI, and what’s next.
BSGI – Incentives & Influence – My Takeaways:
Withdrawal from the BSGI is an example of the clouded judgment we are increasingly seeing from Putin, as he lashes out in frustration from a range of challenges, e.g. failing war, domestic uncertainty, “Et tu, Brute?” paranoia, etc.
Putin risks alienating both his most meaningful partners — Erdoğan and Xi — as well as the global South if he does not rejoin the BSGI;
Putin is attempting to deprive Ukraine of agricultural export revenues;
Ukraine is successfully developing alternative export routes (rail, road, and river) away from the Black Sea;
Follow-ups & Quick Bites – My Takeaways:
The poor attendance of African leaders - 17 this year vs 43 in 2019 - at the much touted “Russia - Africa Summit” in St. Petersburg, from the eyes of African leaders highlights the transactional nature of the relationship with Africa and the limited value on offer by Putin;
Like a carpet stain, Prigozhin is back. Prigozhin was at the “Russia - Africa Summit” serving his own interests and those of Putin and of course Rodina. Putin still sees value in him, and as long as he delivers value he will remain among the living;
Preliminary back-channel discussions on ending the war appear to be taking place;
The Ukrainian counter-offensive remains the determining variable for Putin’s survival and the resolution to his war. A successful Ukrainian counter-offensive will be the first domino in a chain that will collapse the Putin regime.
Putin’s BSGI Pros & Cons:
Pros:
The BSGI served the economic, domestic political, and geo-political interests of the Kremlin when it was active.
As described in the previous Barbershop Whispers, a separate agreement, negotiated with the US and EU at the time BSGI was agreed, envisioned the easing of sanctions to facilitate Russian agricultural exports. This side agreement preserved Russian agricultural export revenues (valued at $41B), and this was realized during the BSGI‘s lifespan. This benefited both the Russian agricultural industrial sector and the state treasury. It also enhanced the political position of Agriculture Minister Dimitri Patrushev, son of Nikolai Patrushev, secretary of the Security Council. Another beneficiary was Demetra Holding, Russia’s second-largest grain exporter, partially owned by Alexander Vinokurov, the son-in-law of Foreign Minister Sergei Lavrov.
The sons and daughters of the Siloviki are being groomed for political and private sector positions, a topic that warrants a separate publication series, and we are seeing glimpses of this apprenticeship training during Putin’s war.
The financing of these exports was to be facilitated by three banks – Bank Rossiya, Promsvyazbank, and Rosselkhozbank – when sanctions are lifted in accordance with the agreement. These banks also represent important state actors and siloviki. The lifting of sanctions would have included readmitting them into the SWIFT payments system, allowing them to move funds freely.
The Kremlin’s geo-political influence in Africa is a function of the continent’s reliance on Russian and Ukrainian wheat. Several African countries depend on Russia for more than half of their wheat imports: Madagascar, Tanzania, Rwanda (all over 60%), Sudan (around 70%), and Benin (100%).
At the same time, Ukrainian wheat represents 48% of Libya’s annual supply, followed by Eritrea at 37% and Tunisia (36%), Ethiopia (36%), Egypt (29%), Mauritania (26%), Morocco (21%), and Kenya (17%).
But because Russia effectively controls the Black Sea, Ukraine’s primary export corridor pre-Feb 2022 invasion, it also controls the flow of Ukrainian wheat to Africa, thereby strengthening the Kremlin’s influence over the African market and politics even further.
(Lama Jacques Sevoba, Guinea Embassy in Russia)
While not directly impacted by western sanctions, the dependence of Russian farmers on imported seeds and other agricultural inputs also deserves consideration. Russian farmers are dependent upon imported seeds for potatoes (90%), rapeseed (70%), sugar beets (97%), sunflower (73%), and non-GMO soybeans (45%). They are also dependent on imported pesticides (30%), veterinary products (70%), and up to 70% of agricultural equipment — sourced mostly from Germany and the Netherlands. These agricultural inputs are important to a successful 2024 harvest, which would preserve Russia’s political and economic influence as well as the associated revenues. Without these inputs, next year’s Russian harvest will be challenging.
Meanwhile, the banks that service the companies trading in these inputs and equipment will be more inclined to facilitate the trades if the BSGI is in place. The agreement gives them the needed humanitarian cover for trade that would mitigate accusations of financing Putin’s war.
However, the sanctions on the banks were never lifted, nor were they re-admitted to SWIFT. The EU did offer a solution – a representative subsidiary branch in Switzerland – that would handle all the grain payments. This was rejected by the Kremlin. The Kremlin also requested “comfort letters” to companies and banks doing business with Russia, and this idea was rejected by certain western governments.
Cons:
The BSGI preserved Ukraine’s grain export market share in Africa and the Middle East, as well as the associated export revenues of approximately $22B under the agreement. This hampers the Kremlin’s strategy of depriving Ukraine of export revenues, which are required to keep the Ukrainian economy functioning, which in turn helps limit western fatigue towards the war.
As we wrote in the previous Barbershop Whispers, Russia and Ukraine represented nearly 27% of global wheat supplies, or 51 MMT, in 2021, according to the U.S. Department of Agriculture (USDA). Under the BSGI between July 2022 and 2023, Ukraine exported 32.9MMT of grains, of which 57% went to developing countries in Africa, Middle East, and Asia.
The leaders of these developing countries have expressed great concern about Russia’s exit from countries the BSGI, because food prices will increase and that can translate into civil unrest, which was the genesis of the Arab Spring.
One example of the chain of consequences: Türkiye is a value-added re-exporter of Russian and Ukrainian grains. It accounts for 20% of the global flour export market. According to 2021 Turkish government statistics, Türkiye exports flour to Iraq (47%), Yemen (9%), and Syria (6%). Supply disruptions and price increases in these supply and price sensitive markets could result in civil unrest.
What’s Next?
Putin is under substantial pressure to rejoin the BSGI. Turkish President Erdoğan and Chinese Chairman Xi have economic and political interests in a restart: they are its two largest beneficiaries. China was the largest recipient of BSGI grains, representing nearly 25% of the 33 MMT exported under the agreement. These grains supplement domestic grain production in China and are important to feeding the country.
Putin is trying to deprive Ukraine of its agricultural export markets to choke the Ukraine economy. This would force additional western funding of Ukraine and further test western resolve for supporting Ukraine. But Putin’s efforts are failing. Ukraine is successfully diversifying its export routes through ‘solidarity lanes’ (rail, road, and river), reducing its dependence on the Black Sea corridor. This success has not been lost on Putin, as demonstrated by the bombing of Ukrainian grain storage and shipping infrastructure on the Danube, less than a few hundred metres from the NATO border.
Putin is doubling down on a weak hand, increasing the risk of an accidental NATO encounter, and expecting the west to fold on his bluff.
As in the past, once the west calls Putin’s bluff, the rational Putin will reappear and rejoin the BSGI – probably sometime after his meeting with Chairman Xi in September.
Follow-ups & Quick Bites:
Russia-Africa Summit:
During this week’s Russia-Africa Summit in St. Petersburg, which saw the attendance of 17 African leaders (less than half of the number from 2019), there was little public talk about the Russia’s withdrawal from the BSGI. As a gesture of food security to the African nations, Putin offered 25KMT of free grain to African nations – a drop in the bucket compared to the 33MMT shipped to Africa during the 12 months the BSGI was active.
More interesting than the 17 African leaders and thought-provoking events such as “Conversation with Maria Zakharova, Russian Foreign Ministry Spokeswoman” was the attendance change agents such as Viktor Bout who led a session on logistics, and Yevgeni Prigozhin, Konstantin Malofeyev, and other representatives from the dark side of Russian influence operations.
(Wagner Leader Prigozhin with Ambassador Freddy Mapouka Central African Republic)
Back Channel Track 1.5 Discussions:
Over the past several months, there have been confirmed reports of back-channel secret discussions between former US government officials, and Russian officials to lay the groundwork for negotiations to end Putin’s war. The White House has officially denied these talks.
Richard Haass, Thomas Graham, and Charles Kupchan, all former senior government officials and members of the Washington DC Beltway think tank elite, met with Russian Foreign Minister Sergei Lavrov in New York.
The fact that these meetings are taking place is not unusual and frankly expected.
Vol 1, No 4 - BWR 30.07.2023
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