Kremlin's Cup Runneth Over with Grains and "Goodwill"
What Does Free Grains Buy? | Russia's Bumper Grain Harvest | Ukrainian Black Sea Success
Dear BWR Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways” on the main topic, followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” are “Follow-ups” regarding previous publications and “Quick Bites” briefly addressing emerging events.
In last week's BWR, I discussed the mutually beneficial Russia-Cuba relationship. The economic and intelligence benefits.
In this week’s BWR, I will discuss Russia’s bumper grain harvest and the Kremlin’s attempt to weaponize another commodity—grains—at the expense of Ukraine and the global south.
In Quick Bites, I provide a brief summary and links about the US House of Representatives’ approval for $61B military aid to Ukraine and the REPO for Ukrainians Act.
Takeaways:
GRAIN MARKETS: The 2023/2024 Russian grain harvest will be the second-biggest in five years. The Kremlin is seeking to supplant Ukrainian grains with Russian grains in the global marketplace, thereby depriving Ukraine of cash and gaining political influence over these countries — mostly African countries.
COMMODITIES WEAPONIZATION: As Germany and the EU demonstrated with Russian natural gas, the weaponization of commodities has limitations when alternative sources exist. Russia does not have a monopoly on grains, and the market’s invisible hand will eventually bring prices to an acceptable equilibrium.
GLOBAL INFLUENCE: Free and discounted preferential pricing for grains is an unsustainable foreign policy strategy for the Kremlin. The Russian economy does not have the strength to project global influence. In return for free and discounted commodities, the Kremlin “rents” the client states. Once the discounts end, so do the relationships, and the client states will seek new patrons — either China or the West.
Background
When Putin launched the second invasion of Ukraine in February 2022, Western powers were concerned about the impact the war would have on grain transportation out of Black Sea ports, both Ukrainian and Russian. At the time, Russia and Ukraine combined represented 27% (51 MMT in 2020/2021 season) of global wheat exports, which are crucial to feeding the world, particularly African countries. It is worth noting that most African flour milling plants are Soviet-era, designed specifically for Eurasian grains. It was thought that the war would have “catastrophic” consequences on Black Sea exports to the greater global south, resulting in famine.
Out of this concern was born the Black Sea Grain Initiative (BSGI), the United Nations package of agreements brokered by Turkish President Erdoğan and UN Secretary-General Guterres and operated by the Joint Coordination Center (JCC) located in Istanbul. Under the agreement, Ukrainian grain shipments received safe passage through the Black Sea. Through the BSGI, Ukraine was able to ship 32.9MMT of grains between July 2022 and July 2023, with the biggest portion of these shipments going to China, Türkiye, and Spain. In July 2023, Russia abandoned the program due to unfulfilled UN BSGI commitments related to Russian grain shipments (Russian Agricultural Bank SWIFT access) and promised Russian exports of anhydrous ammonia through the Tolyatti-Pivdennyi pipeline, which ends in Odesa. SWIFT access was never granted to Russian Agricultural Bank, and Tolyatti-Pivdennyi has remained closed since February 2022.
Since July 2023, the Ukrainian armed forces, through resilience, innovative military strategy (airborne and seaborne drones), and the supply of Western matériel, have neutralized the Russian Black Sea fleet and established the “Humanitarian Black Sea Corridor” securing safe passage for Ukrainian grains to international markets.
The Ukrainian armed forces have disabled 30% of the Russian Black Sea fleet and pushed the remainder to the easternmost shores of the Black Sea, and, as a result, ensured the safe passage of 13MMT of Ukrainian grains between August and December 2023. The sea route hugs the Black Sea coast of EU and NATO countries to the Bosporus. Ukraine has also established the Solidarity Lanes, a combination of road, rail, and river transport corridors through EU countries, allowing for additional exports.
What Does Free Grains Buy?
The Kremlin is targeting the Ukrainian economy, particularly the agricultural sector, for several reasons. First, it wants to deprive Ukraine of the cash the sector generates for the economy. Second, it wants to weaponize grains and use them as a soft power play directed at the global south, or as the Kremlin now calls it, the “world majority.” In 2021, the value of Ukrainian exports was $68B, of which agriculture represented $27.8B. In 2022, Ukrainian exports were valued at just $45.6B, of which $23.7B came from agriculture. For those interested in a deep dive regarding the Kremlin’s weaponization of grains, I recommend reading “Food as the “Silent Weapon”: Russia’s Grains and Ukraine’s Losses”.
Putin has publicly stated that Russia will substitute Ukrainian grains with Russian grains. Russian grain harvest for 2024 is expected to be 145MMT, of which approximately 92MMT is wheat. This will be the second-biggest Russian harvest in the past five years, and it has put downward pressure on global grain prices, wheat in particular.
It has also created problems with EU farmers, who have placed the blame for low prices on Ukrainian imports, even as Spain, France, and Italy buy cheap Russian grains. The EU is considering tariffs on Russian grain imports to help alleviate the problem of angry EU farmers, especially in Eastern Europe.
Global wheat prices are now at pre-war prices, but input and labor costs have risen due to higher-than-usual global inflation and higher interest rates. As a result, margins have compressed, particularly for Western farmers, unlike the subsidized Russian agro-industrial groups. The illustration below shows the wheat FOB price over the past five years.
Wheat prices have fallen back in line with long-term levels — between $200 and $300/MT — from the peak in May 2022, which saw prices above $600MT. The price spread between US and Russian wheat FOB is also a measure of competitiveness. For example, in March 2024, U.S. soft red wheat was quoted at $216.24/MT FOB, while Russian FOB was at $204/MT.
With a second year of Russian bumper harvest and pre-war global wheat prices, the Kremlin sees an opportunity to strengthen ties with authoritarian regimes in Africa and Latin America (Cuba comes to mind), which will increase his support at the UN and provide influence in the global south.
During the Russia-Africa Summit in Moscow, Putin promised to send free grains to Africa. In February 2024, Minister of Agriculture Dmitri Patrushev informed Putin that .200MMT of free grain had been sent to six African countries: Somalia, Central African Republic, Mali, Burkina Faso, Zimbabwe, and Eritrea. These markets have typically bought from both Russia and Ukraine, but the Ukrainian presence has eroded due to the war.
BSGI Revival—No Reason for It
Reuters recently reported that Türkiye had brokered a deal with Russia and Ukraine to ensure the safety of shipping in the Black Sea. These discussions have been ongoing for several months, and Türkiye was to announce the agreement in late March, but Ukraine walked away from the deal at the last hour. Details of what was tentatively agreed upon and why Ukraine walked away are unclear. However, it has been confirmed that the safety of civilian cargo ships was the primary goal of the agreement.
Ukraine has been successful in exporting grains and importing needed goods through the humanitarian corridor protected by the Ukrainian armed forces. Given its success with the solidarity lanes and humanitarian corridor, it does not make sense why Ukraine would need a renewal of the BSGI or a similar agreement with Russia.
Conclusion:
Like a fork attack on the chess board, Putin’s forking piece is his war on Ukraine, and the forked pieces are the global south and Ukraine’s survival. While Putin has often played weak hands well, in this case, his forking piece is his weak hand.
The Kremlin’s attempt to supplant Ukrainian grains with Russian grains is unsustainable and will not survive the duration of the war; and certainly not a post-war market environment. The Russian economy does not have the economic power to project global long-lasting influence abroad. By shipping free grains and offering discounted preferential pricing, it is merely renting the junta governments it is supplying until such time he is no longer able to provide them with the goods – it is finite – at which time they will seek other patrons. Ukraine has demonstrated that it will not be permanently displaced from its traditional grain export markets. It has established durable alternative routes, including the Humanitarian Black Sea Corridor, to get its goods to market.
As Germany and the EU demonstrated with Russian natural gas, weaponizing commodities is vulnerable to like and alternative substitution. As Adam Smith rightly pointed out, the invisible hand of the market will bring prices into equilibrium.
Follow-ups & Quick Bites:
Follow-ups:
US House Approves Ukrainian Aid and REPO for Ukrainians Act
After five months of delay and dysfunction, the Republican-led US House of Representatives passed a $61B military aid package for Ukraine and the REPO for Ukrainians Act.
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The House bills now go to the US Senate for approval on Tuesday (23 April), then to President Biden for signature. The US Senate has already demonstrated bipartisan support for Ukrainian military aid and the REPO act, and President Biden has publicly stated he will sign the bills.
The US military aid complements the €50B EU financial aid to Ukraine. The REPO Act passage turns up the pressure on the EU to confiscate CBR foreign reserves frozen at Euroclear, Clear Stream, and EU commercial and central banks.
Further “Barbershop Whispers…Russia” readings on these topics can be read here:
Central Bank of Russia’s Foreign Reserves: Let Me Count the Ways…Freeze, Immobilize, Confiscate
The Case for Confiscating the Central Bank of Russia’s $350B+ Foreign Reserves
Quick Bites
TIME Magazine’s Most Influential Woman
Yulia Navalnaya, the widow of the late Alexei Navalny, has been included on Time magazine’s annual list of the world’s 100 most influential people.
In the interview with TIME she voiced frustration with Western leaders, who she said have shied away from sanctioning President Vladimir Putin’s wealthy inner circle.
“Such sanctions really hit Putin’s power, whereas the sanctions that affect random people, like the ones that were imposed by the EU and Great Britain after Alexei’s killing, they are quite laughable. These are sanctions against the rank and file,”
Russian TU-22 Bomber Shot Down By Ukrainian Armed Forces
Ukraine claimed responsibility for shooting down a Russian Tu-22M3 long-range bomber as it was flying back to its Russian-occupied base in Stavropol. The Ukrainian armed forces said:
"For the first time, anti-aircraft missile units of the air force in cooperation with the defense intelligence of Ukraine destroyed a Tu-22M3 long-range strategic bomber,"
The Russian Defense Ministry said a “technical malfunction” caused the crash.
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Footage circulating on social media shows the bomber spinning as it descends to the ground with a fire near its tail.
Georgians Protest Foreign Agent Law
20,000 Georgians flooded the streets of Tiflis, the Georgian capital, protesting a Kremlin-like law that would require organizations receiving more than 20% of their funding from abroad to register as agents of foreign influence. The proposed law was also the spark for a brawl in the Georgian parliament.
Opponents say the legislation will damage Georgia's bid to join the European Union and turn Georgia into a vassal state of Russia.
Vol 2, No 19 - BWR 21.04.2024
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