NO, BUT YES: WHY RUSSIA IS GOING TO EXTEND THE GRAIN DEAL

Every week, high-ranking Russian officials make statements that Russia has no intention of extending the grain deal, which is set to expire on July 17, 2023. In mid-June, Russian Foreign Minister Sergey Lavrov stated that if the Istanbul deal is not in full effect by July 17, then there can be no talk of an extension. At the same time, Putin also said that the Kremlin was considering withdrawing from the grain deal, complaining that the corridors used for grain-loaded ships were being used to launch Ukrainian drones. Peskov stated that there was little hope for Russia's demands regarding the grain deal to be met, and without those, it would not be extended. Finally, on July 4, the Russian Foreign Ministry officially stated that there were no grounds for extending the grain deal. However, Russia will extend the deal.

As a result of the full-scale invasion of Ukraine, by May 2022, global grain and food prices had reached historical highs. In May 2021, a bushel of wheat was priced at $6.5, but by the end of spring 2022, it had risen to $10.9. By the end of 2021, Russia and Ukraine accounted for 27% of the world's total wheat exports. But the war changed everything. Due to the naval blockade of Ukrainian ports, grain from Ukraine has only been able to reach global markets in small quantities through its land borders with the EU, and the sown areas have significantly decreased because of a lack of machinery, labour, and hostilities in rural areas. Russian exporters have faced logistical problems and difficulties in paying for supplies due to Western sanctions. It has become more expensive and challenging for producers to maintain imported agricultural machinery. For instance, in March 2022, the German company CLAAS, a European leader in agricultural machinery production, announced the suspension of its Krasnodar combine harvester plant.

Global grain prices, 2018–2023, USD per 100 bushels of wheat

As a result, according to a report by the United Nations World Food Programme, 'War in Ukraine drives global food crisis,' in 2022, the number of people in dire need of food increased worldwide to a record 65 million. Of these, 75%, or 50 million, found themselves in this situation as a direct result of the war in Ukraine. According to the report's authors, 30 million of the affected individuals reside in Africa, and an additional 7.5 million in Asia. In the poorest countries of Africa and Asia, the rise in global grain prices leads to hunger and social instability: a year before the 'Arab Spring,' in 2008-2009, wheat prices were at levels comparable to those of May 2022, at around $10.8 per bushel.

To stabilise the situation globally, the grain deal was brokered by the UN and Turkey in Istanbul in the summer of 2022. It consisted of two parts: the 'Black Sea Grain Initiative' and a memorandum of understanding between Russia and the UN. The first outlined the scheme for exporting Ukrainian agricultural products from the ports of Odesa, Chornomorsk, and Yuzhne, while the second involved the removal of restrictions on Russian agricultural exports. This deal helped to stabilise food prices. According to experts' calculations, from the summer of 2022 to May 2023, Ukraine was able to export over 30 million tons of grain and other foodstuffs. By May 2023, wheat prices reached pre-war levels of $5.9 per bushel.

Every country in the world has benefitted from the grain deal except Russia. Ukraine received additional foreign currency revenue and the opportunity to engage in agriculture in 2023, as without last year's grain sales, Ukrainian farmers would have had no incentive to reseed their fields. The Global South was once again able to import food at reasonable prices. Preventing hunger and social upheaval in African and Asian countries helped the West to avoid a new wave of refugees and also curbed food inflation at home, which reached its highest levels in decades in 2022.

Turkish President Erdogan, who brokered the grain deal, also benefitted considerably from the deal. Ankara's role in the Black Sea region has grown, giving it additional leverage to exert pressure on Kyiv and Moscow. The deal helped to slightly slow food inflation in Turkey itself, which was important for Erdogan in the run-up to the presidential elections. And, of course, the deal raised Turkey's profile on the world stage. 

Even India, the world’s largest wheat producer and one of the major new buyers of Russian oil, benefitted from this deal. Initially, Delhi had planned to capture the Ukrainian grain market, but by May 2022, Indian grain exports had grown so substantially that they threatened the domestic market, prompting Delhi to take emergency measures and ban wheat exports altogether. Only the fall in global prices after the Istanbul deal led to a normalisation of the situation.

On the contrary, Russia is the only country in the world to remain unhappy with the grain deal. According to the Kremlin, and as regularly stated by high-ranking Russian officials, the second part of the deal, the lifting of restrictions on Russian agricultural exports, has not been implemented. In reality, however, sanctions against Russian agricultural exports have not been imposed. Western companies, fearing secondary sanctions and reputational risks, refused to import from Russia themselves. At the same time, the decline in grain prices that occurred as a result of the grain deal, combined with a strong ruble and record harvest last year, as well as increased logistical costs, led Russian exporters to sell grain either at cost or even at a loss. As a result, grain exports from Russia throughout 2022 lagged behind the annual average, despite the record harvest. Grain reserves in Russia reached historic highs at the end of 2022 and the beginning of 2023. Storage facilities were filled to capacity. As a result, Russian farmers lost motivation to fully seed their fields in 2023.

Nevertheless, Moscow signed the Istanbul deal under pressure from its 'allies,' primarily Turkey. Turkey remains a crucial southern corridor for Russian imports and exports after the loss of corridors to the West. Initially, the Russian side demanded the inclusion of the following points in the agreement: Ukraine ceases its offensive on Kherson, and Russian military personnel inspect dry cargo ships in Odesa. However, in the end, Russia was forced to remove these points.

Russia has constantly threatened to withdraw from the deal. For example, after the autumn drone attack on Sevastopol, which allegedly originated from a safe corridor intended for Ukrainian grain exports. However, each time it threatens its withdrawal Russia has not dared to take that step. Apart from its relations with Ankara, Russia will find it difficult to explain the non-extension of the deal to the global South, which has not supported Western sanctions but will undoubtedly react harshly if such a step is taken on fabricated grounds.

Realising that withdrawing from the deal is virtually impossible, the Kremlin is attempting to bargain for something, exploiting the ambiguous wording in the second part of the agreement. Every 120 days, the deal is supposed to be extended by all parties. As the deadline approaches, Moscow says that the deal will not be extended and is intentionally setting unattainable conditions: the reopening of the Tolyatti-Odesa ammonia pipeline and the connection of Rosselkhozbank (RSHB) to SWIFT. This was the case in November, in March, and is again happening now. This strategy is yielding some results. On July 3, there was media speculation that the EU may allow RSHB to create a subsidiary connected to SWIFT for the sake of the grain deal. However, as recently as late May, an EU representative officially stated that RSHB would not be connected to SWIFT under any circumstances.

Nevertheless, this grain deal mishap in one way or another demonstrates Moscow's diplomatic weakness: it fails to leverage the 'grain factor' to its own advantage and has to settle for regular threats as its only available form of image capital.