Ukraine - Breadbasket of the World in Forced Closure
What is The Black Sea Grain Initiative? Who Are the BSGI Beneficiaries? Why Did Russia Exit the BSGI Agreement?
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In this issue, I will discuss Russia’s exit from the Black Sea Grain Initiative (BSGI), followed by a short commentary on the continuing fallout from the Wagner Revolt.
BSGI Facts and My Takeaways:
Ukraine exported 32.9 million metric tonnes (MMT) under the BSGI Between July 2022/23;
China was by far the largest recipient of BSGI exported grains, received 25% of the total;
China, Spain and Turkey received 52% of all BSGI exports;
Russia will likely rejoin the BSGI under pressure from Turkish President Erdoğan and China’s Chairman Xi, after Putin attends the Africa-Russia summit in St. Petersburg and meets with Erdoğan in August (of course, subject to Ukrainian battlefield conditions);
Erdoğan wields increasing influence over Putin as Turkey becomes an ever more important trading partner and logistical hub for Russian trade, particularly agricultural exports;
Putin’s has become more dependent on Xi and Erdoğan, and this has weakened him at home and abroad;
Russia’s exit from BSGI was driven by geopolitical and international commercial considerations: the initiative threatened both Russia’s projection of its global influence and its market share of agricultural exports;
BSGI generates much needed export revenue for Ukraine, undermining Putin’s strategy of wearing out western support for Ukraine;
Follow-ups & Quick Bites – My Takeaways:
Prigozhin remains free and Minister Shoigu and General Gerasimov in place. His life and their government tenure depend on the success or failure of the Ukrainian counter offensive;
Igor Girkin (aka Strelkov), Z military blogger and former Russian intelligence officer convicted in absentia for the downing of MH17, has been detained and charged with extremism. A Stalinist-lite purge and re-education of nationalists bringing them back in line with the Kremlin narrative.
General Ivan Popov, commander of the 58th Army responsible for the Zaporizhzhia front, has been dismissed. This dismissal is a function of an antsy and insecure General Gerasimov and unrelated to the Prigozhin revolt.
What is the Black Sea Grain Initiative?
The BSGI is a United Nations package of agreements brokered by Turkish President Erdoğan and UN Secretary-General Guterres. A Joint Coordination Center (JCC) is located in Istanbul and staffed by Russia, Turkey, Ukraine and the UN. Its mission is to facilitate the implementation of the agreement allowing ships to safely export grain, fertilizers (including ammonia), and other foodstuffs from three Ukrainian ports – Odesa, Chernomorsk and Yuzhny – via a maritime humanitarian corridor.
(Source: United Nation JCC)
Included in the BSGI package of agreements is the “Memorandum of Understanding between the Russian Federation and the Secretariat of the United Nations on promoting Russian food products and fertilizers to the world markets”. This part of the BSGI includes action:
“to establish a process to facilitate the unimpeded access of food….to global markets originating from the Russian Federation.”.
The Kremlin alleged this part of the BSGI remains unfulfilled and not enough exports are going to undeveloped countries. However, the latter claim is not a metric in the agreement; it serves as a pretext to exit the agreement.
The BSGI was signed in July 2022 and has been extended several times up until 17 July 2023, when Russia exited the agreement by allowing it to expire. Russia had threatened to exit the deal several months prior to the July 2023 expiration, citing the lack of progress in resolving barriers that it claims obstructs the export of Russian agricultural products to international markets.
Who are the BSGI Beneficiaries?
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, Ukraine exported 32.9MMT of grains. China was the biggest recipient of grains at 8 MMT. Spain and Turkey followed with 6 MMT and 3.2 MMT, respectively.
(Source: UN BSGI Joint Coordination Centre)
In terms of developed vs developing countries, most of the BSGI exports went to developing countries as illustrated in the chart below.
(Source: UN BSGI Joint Coordination Centre)
During this same period, Russia managed to export 60 MMT of grains, representing $41B in export revenues.
Why Did Russia Exit the BSGI Agreement?
The Kremlin cited two reasons for exiting the agreement. Firstly, not enough BSGI grains were reaching developing markets – Africa, Middle, East, and Asia – a metric absent from the BSGI agreement. Second, the portion of the BSGI related to the export of Russian agricultural products remains unfulfilled. The latter includes the export of Russian fertilizers plus related raw materials such as ammonia. This represents the most likely reason for the exit.
As stated earlier, Russian and Ukraine represent approximately 27% of global wheat exports. With this market share of critical foods to the world by nature comes geopolitical influence and commercial benefits. For price-sensitive African countries, Russia and Ukraine are long-established sources of inexpensive grains. How this 27% market share is distributed between Russia and Ukraine impacts Russia’s political influence in those markets, export revenues to both Russia and Ukraine, and the Ukrainian economy. Depriving Ukraine of these export markets weakens its economy, forcing western countries to continue — and likely increase — direct economic support to Ukraine. Russia’s continuing missile attacks on Odessa’s port facilities one day after their exit from the BSGI agreement highlights Russia’s intent to deprive the Ukrainian economy of its agricultural export revenues.
While Russian agricultural products are exempt from sanctions, Russian agricultural exports still face formidable challenges, because the private companies needed to facilitate the trade are reluctant to participate, for reasons ranging from uncertainty over regulatory consequences to the fear of public opinion to return on investment.
For a global commercial bank, it is legal to finance Russian agricultural trade today; however, the legality of these transactions is subject to change at moment’s notice, thus exposing the bank to legal and regulatory risks. Assuming the aforementioned can be mitigated, the bank still faces the court of public opinion about facilitating commercial trades that fill the Russian government coffers with cash, which is in turn used to finance the war on Ukraine.
It should be noted that most western companies that operated in Russia have exited, including nearly all global western banks, except for those who have been forced to stay. However, a select few of the global banks maintain a corporate presence in Russia for the sole purpose of trade finance services, at the request of western government(s).
To address this problem, Russia is demanding among other things, the following:
Lifting of sanctions against Rosselkhozbank (Russian Agricultural Bank) and readmitting it into the SWIFT payments system;
“Comfort Letters” from certain governments to service providers – banks, insurance companies, logistics, transport, etc. – supporting their engagement in Russian agricultural exports;
The concept that private businesses have the agency to make their own business and risk decisions is an elusive concept to the aging silovik in the Kremlin.
Follow-ups & Quick Bites:
PMC Wagner:
The fallout from the Wagner Revolt continues, as Wagner mercenaries began to set up camp in Belarus, allegedly in preparation for future deployment to Africa, according to a video released by Prigozhin.
The military’s purge of Wagner sympathizers continues to play out, but it seems to be coming to an end. So far, 13 officers have been detained and 15 dismissed or reassigned. While General Surovikin remains unseen in public, I would not be surprised if he is “rehabilitated” and put back into action, given he is considered one of the competent officers with a following among the troops.
Igor Girkin (aka Strelkov):
Strelkov, the former Russian intelligence officer who led Russia’s covert intervention in Donbas in 2014 and was convicted in absentia for the downing of MH17, is now a “Z blogger” with 800,000 subscribers on his Telegram channel. Strelkov was detained in Moscow on charges of “public incitement of extremist activity”. A nationalist and critic of the Ministry of Defense, he went a step further on his Telegram channel 18 July calling for Putin’s resignation and stating, “The country will not survive another six years of this cowardly mediocrity in power.”
Vol 1, No 3 - BWR 22.07.2023
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