Russia is using the drone attack on its Black Sea flagship over the weekend as justification for suspending the reopening of blockaded grain exports.
Over the weekend, a swarm of Ukrainian drones attacked the Admiral Makarov, the flagship of Russia’s Black Sea fleet. It’s not clear how much damage was done, but the Makarov fared better than the Moskva, its predecessor as flagship, which was sunk in April. It was an embarrassing moment for Russia, made all the more humiliating by the fact that the attack took place at Sevastopol, a major Russian naval base in Crimea — and a symbol of empire — for well over two centuries (it was leased to Russia after Ukraine won its independence after disputes throughout most of the first half of the 1990s).
Unwilling to give Ukraine credit for anything, Russia has said that the whole operation was masterminded by a Royal Navy unit from the southern Ukrainian port of Ochakiv, an unlikely tale, even if, judging by Russian accounts, Britain’s navy is on something of a roll at the moment. Just a couple of days ago, the Kremlin blamed the Brits for blowing up three of the four Nord Stream pipelines last month (odd that they missed the fourth, but still . . .). The Russians have also claimed (AP reports) that one of the drones that attacked Sevastopol “appeared to emanate from a civilian ship carrying agricultural products from Ukraine.”
In some respects, the Russo–Ukrainian war is beginning to resemble a conflict in which both sides are besieging each other, something likely to intensify as the war drags on. Russia is now attacking Ukrainian power stations, a move that, with winter fast approaching, promises very difficult times ahead. Meanwhile, Ukraine’s supporters in the West continue to maintain a (partial) economic blockade on Russia, to which Russia has responded in kind. One aspect of that has been Russia’s use of the food weapon.
I wrote about this back in March. Before the war, Ukraine was the world’s fifth largest exporter of wheat. Much of that wheat was shipped out through the Black Sea. Even assuming that Ukrainian farmers were able to harvest this year’s crop, the war looked to mean that one of the main ways of getting wheat out of the country would be blocked. Wheat prices soared.
Now fast-forward to July (via the Washington Post):
Russia and Ukraine agreed Friday to restart shipments of blockaded grain, in a step toward easing a global crisis that has exposed tens of millions of people, especially in Africa and the Middle East, to the threat of acute hunger, the U.N. secretary general announced.
The deal, which was brokered by the U.N. and, crucially, Turkey, a country with, obviously, a strong interest in the Black Sea and a long history of tension with Russia in that area, was for 120 days, but renewable.
The attack on the Makarov is now being used by Russia to “indefinitely” suspend that agreement, which had already been looking shaky ahead of its planned renewal.
Wheat prices soared after Russia suspended a deal guaranteeing safe passage of Ukrainian exports, with Moscow warning that shipments become “much riskier” without its participation even as new vessels loaded with crops set sail from Ukraine.
The United Nations and Turkey have been scrambling to salvage the agreement after Russia’s weekend withdrawal. Analysts say shipping and insurance costs are likely to rise even if seaborne exports continue, while new deals had already been drying up for Ukrainian exports ahead of a deadline to renew the agreement on Nov. 19.
Ukraine is one of the world’s biggest suppliers of wheat, corn and vegetable oil and the July pact to open three Black Sea ports has been vital to help alleviate a global food crisis.
The U.N., Turkey, and Ukraine have agreed that Ukraine should keep shipping grain for now, but Bloomberg quotes a Kremlin spokesman as saying that exports from Ukraine have now become “much riskier.” It would, of course, take the sinking of only one dry-bulk tanker to bring exports to a halt, as, apart from anything else, no insurers would want to take on the risk. As it is, Lloyd’s of London has said that it won’t be writing any new insurance on shipments until there’s a new deal.
PHOTOS: Ukraine Wheat Harvest
For Russia to refuse to renew the deal would make strategic sense. It would deprive Ukraine of badly needed revenues and would also use the threat of food shortages, particularly in some very vulnerable parts of the world, as a device to pressure the West to pressure Ukraine in one way or another. That this would further increase the price of food at a time of food inflation would be another bonus so far as the Kremlin is concerned.
The latest uncertainty comes as the International Grains Council estimates global grain stockpiles at an eight-year low this season. Supply is coming under increasing pressure, most recently as drought in Argentina and heavy rain in Australia hamper wheat crops nearing harvest there.
Russia, which leads global wheat exports, stands to offset some of the lost sales from Ukraine. Still, it will be key to watch how shipping costs across the entire Black Sea region are affected by the latest developments, [Matt] Ammerman [a commodity risk manager at StoneX] said.
In a report, the Financial Times noted that about half Ukraine’s grain exports had been destined for Europe. Eurozone headline inflation is now running at 10.7 percent.
According to another report in the FT, Ukraine’s exports will run at about one-third of normal levels this year, while Russia’s exports are down too (together the two countries account for about one-third of grain exports).
Meanwhile:
Weather is likely to return as a factor with the start of harvests in the southern hemisphere. This is subject to a third consecutive period of disruptive La Niña weather conditions. Rain is already causing flooding in Australia. A drought in Argentina means the harvest could be a quarter below normal.
US water shortages suggest winter wheat for harvest next year will suffer too. Russian and Ukrainian farmers may meanwhile plant less wheat next year if the war continues, impeding lucrative exports.
The FT’s report ends on a fairly sanguine note, with the comment that the wheat price, which jumped around 6 percent today, was “only slightly higher than its prewar peak of $8.4 a bushel.” That’s true enough (it reached double digits in the early months of the war), but it should be remembered that the price of wheat had been rising steadily for the 18 months before war broke out, a sign of post-pandemic inflation, among other factors. Prior to the pandemic, it had been trading between about $4.50 and $5.
Turkey claims to be pressing hard to get Russia to renew the deal, but I doubt that Russia will be in a hurry to do so.
From the Kyiv Independent today:
Ukraine’s military: Russia fires at civilian tugboats in Mykolaiv Oblast, killing 2 people. Ukraine’s Southern Operational Command reported on Oct. 31 that Russian forces hit two civilian tug boats transporting grain near Ochakiv, Mykolaiv Oblast.