Moscow expects a more favorable environment in the coming months - by Ekaterina Zolotova .
The Black Sea grain corridor, which enabled Ukrainian food to sail from three ports, was extended for another 120 days last week, according to the presidents of Ukraine and Turkey. Russia has not said whether it will participate but did not object to the extension. Having earlier failed in a highly publicized effort to terminate the grain initiative, Moscow prefers to keep its distance from the deal so that Russian participation doesn't seem like a result of Ankara’s growing influence over Moscow. Russia’s focus now is to continue criticizing the deal while seeking opportunities to use it to advance Russian interests.
Importance of Russia’s Exports
Grain exports are an important source of power and influence for Russia. First, Russia is a prolific wheat producer, so sales abroad support the Russian economy and foreign policy goals. For years the Kremlin has been trying to boost its grain harvest and set up sustainable trade relations with wheat importers in countries in the Middle East, Africa and elsewhere. Moscow hopes these partners, craving Russian food and indifferent or hostile to Western sanctions, might support Russian strategy. Poor harvests this year in some regions due to drought or difficulty accessing energy and fertilizers may further these goals.
Second, grain provides about a third of Russia’s revenues from food exports, which is important for supporting the national budget and securing foreign currency, access to which has been limited by sanctions.
Finally, Russian farmers need to offload record-breaking production. The country’s wheat harvest reached 105 million tons this year (compared with 77.8 million tons last year), and the government expects a record total grain harvest of more than 150 million tons for the year. However, this blessing will become a curse if Russian farmers cannot get the goods to market. Shipping costs remain elevated, and Russian grain exporters have recorded difficulties chartering ships, insuring cargoes and receiving payments because of sanctions.
The Kremlin’s Game
The grain deal has been extended, but not without Russia receiving some concessions and signaling that its continued participation will always be in doubt. The Kremlin expects its leverage will only grow in the near future, citing several trends. First is Russia’s massive harvest and stocks of grain and wheat, which it can release at any time. Second is expectations of growing demand for Russian wheat as Ukraine’s exports decline next year because of the war. Third is instability in the energy and fertilizer markets, which may harm output in other countries and further boost demand for Russian wheat.
Finally, although demand is high right now, market sentiment is gloomier over the next several months. Major buyers like Egypt and Pakistan are experiencing financial trouble. Moreover, Russia’s temporary exit from the grain initiative sowed doubts about the arrangement’s future, leading major importers like Egypt, Algeria and Saudi Arabia to stock up before the deal expired. The market situation may be very different when the grain deal’s extension is up for renewal again in four months.
In other words, with patience and luck, the Kremlin may be in a much stronger position for the next round of Black Sea grain negotiations. Russia still faces barriers to the export of grain and fertilizers, the Kremlin often notes, despite earlier agreements in Istanbul. After this latest round of talks, however, the West is discussing guarantees to restart Russian exports via the Togliatti-Odesa ammonia pipeline, which was halted when the war began.
In September, Ukrainian President Volodymyr Zelenskyy expressed his opposition to restarting the pipeline, and the U.S. is rumored to be willing to ease sanctions on Russia’s state-owned Rosselkhozbank agricultural bank. France also said a corridor for the supply of Russian fertilizers to Africa via Europe had been established and could start deliveries within weeks. Moscow expects it can hold out for more such breakthroughs as market conditions develop early next year.
Strategic Patience
Russia can afford strategic patience for as long as it can satisfy its farmers. Eastern markets are too well-protected to be profitable. Farmers have almost stopped delivering grain to Uzbekistan, Kyrgyzstan, Turkmenistan and China, traditional importers, because transit tariffs on Kazakhstan’s railways are too high. According to Russian Railways, transit through Kazakhstan costs carriers as much as 3,300 rubles ($54) per ton, while a similar Russian route costs no more than 630 rubles. Russian Railways is in talks with Kazakhstan to reduce the transit tariff on agricultural products. Moscow is optimistic; stronger cooperation with Central Asia is in Russia’s interest, and some Central Asian states want access to cheaper Russian grain.
In the meantime, Moscow will distance itself from the grain deal and seek concessions, such as the easing of restrictions on fertilizer exports and payments. The near-term market outlook for Russia is positive. Over the longer term, however, eastern buyers cannot replace other markets choked off by Western- and self-imposed sanctions. With that in mind, Moscow announced an increase in the quota on grain exports to non-Eurasian Economic Union members from Feb. 15 to June 30, 2023. Until then, the Kremlin seems content to passively participate in the grain deal.
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Ekaterina Zolotova is an analyst for Geopolitical Futures. Prior to Geopolitical Futures, Ms. Zolotova participated in several research projects devoted to problems and prospects of Russia’s integration into the world economy. Ms. Zolotova has a specialist degree in international economic relations from Plekhanov Russian University of Economics. In addition, Ms. Zolotova studied international trade and international integration processes. Her thesis was on features of economic development of Venezuela. She speaks native Russian and is fluent in English.
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Ukraine' Grain Deal
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