MOSCOW, RUSSIA — Russia’s exit from the Black Sea grain deal, followed by barrages of strikes unleashed on ports in Odesa, the Mykolaiv River, and most recently, the Danube River, threatens to plunge the Ukrainian grain industry into chaos.

In chess, a gambit occurs when a player gives up material to attempt to achieve some subsequent positional advantage. By pulling out of the deal two weeks ago, Russia might have suffered certain reputational losses, and the pledges made by Russian President Vladimir Putin during the summit in Moscow to provide African countries with grain free of charge should cost millions of dollars to the country’s treasury. However, the potential benefits of the Russian strategy may justify the sacrifices, analysts told World Grain.

Even when the grain deal was operational, Russia has been putting much effort into pushing Ukraine from its key grain export markets, Andriy Dykun, head of the Ukrainian Agri Council, explained. Vessels spent significant time waiting for inspections in the Port of Istanbul, forcing charterers to terminate the contracts and buyers to refuse to accept the cargo, he added.

Last year, a lack of Ukrainian grain on the global market triggered a 20% jump in global grain prices, endangering consumers in Asia and Africa and fueling food inflation across the globe. There are signs that the new blockade of the Ukrainian grain exports by sea will lead to similar consequences, said Dykun.

“By closing exports from Ukraine, Russia provokes a threat of world hunger and establishes a situation when many countries see the dependence on its supplies tightening,” Dykun said, expressing an opinion that the gradual replacement of Ukrainian grain with Russian grain over the past year perfectly fits that logic. “From the first days, the grain initiative was simply a way for Russia to manipulate the world powers.”

It is hard to say to what extent the Russian complaints about the Black Sea grain deal were justified.

Russia said that the West has failed to fulfill its promises made as part of the Black Sea Grain Initiative, namely, reinstating the SWIFT banking facility so Russian grain and fertilizer traders can get paid, said Mike Lee, director of Green Square Agro Consulting, specializing in Black Sea grain market intelligence.

The list of demands also includes allowing Russian vessels shipping insurance and access to ports; allowing the import of agricultural machinery and spare parts into Russia; and opening the Togliatti-Odesa ammonia pipeline, which Russia uses to export 2.5 million tonnes of ammonia annually.

“However, given that Russian grain and fertilizer exports are thought to be at record levels, though this information is never fully transparent, they appear to have circumnavigated the payment and shipping problems caused by sanctions,” Lee said.

A section of the Togliatti-Odesa pipeline in Ukraine’s Kharkiv region was damaged, with both sides blaming each other, but, presumably, the pipeline could be fixed relatively quickly if all parties agree, he added.

That leaves the seemingly innocuous issue of agricultural machinery and spare parts.

“It’s difficult to assess the impact of a shortage of spare parts,” Lee said. “My experience waiting for a combined spare part to be delivered to a stationary combine in the middle of harvest is that it can be critical, certainly enough for Russia to include it in their list of demands. This might be less of an innocuous demand than we first thought.”

After quitting the grain deal, Russia declared that the northwestern Black Sea was once again temporarily dangerous. The following days saw constant attacks on Odesa, Mykolaiv, and several ports along the Danube River with missile and kamikaze drones, some of which, as reported by Ukrainian officials, hit the targets only 200 meters away from the border with Romania, a NATO member.

Russia said it aimed at military infrastructure, while the Ukrainian president’s office published the footage of destroyed grain storage, calculating 60,000 tonnes of grain were lost in the Odesa seaport alone. These attacks promise to paralyze the Ukrainian grain export by sea and river.

“Unfortunately, attacks on the grain infrastructure make sense,” said Svitlana Lytvyn, an analyst with the Ukrainian Club of agricultural business UCAB. “Partial destruction of the grain infrastructure of seaports will not allow to quickly restore full-fledged export shipments.”

In June 2023, Ukraine exported 2 million tonnes of grain through the Danube River ports, nearly as much as through its largest Odesa seaport. The lack of agricultural export by sea and river jeopardizes the entire Ukrainian budget, Dykun said.

“Agriculture is the backbone the Ukrainian economy has been relying on this year,” he added.

As the Ukrainian ports are under constant attacks, and shipping in the Black Sea is risky, Ukrainian market players doubt foreign ships would dare export grain from the country. The United States fears that the Kremlin may be preparing a false flag operation in the Black Sea, US State Department spokesperson Matthew Miller said at a briefing on July 24. In light of this, insurance costs for ships calling the Ukrainian ports would be insanely high.

“The question now is, will Russia attack the railways exporting grain through the western borders?” Lee said, pointing out to one of the few options Ukraine has left to take its grain to foreign customers.

The Ukrainian grain industry has no easy way out of the current predicament. Ukrainian press outlets reported, citing the presidential representative in the Verkhovna Rada, Fyodor Venislavsky, that Kyiv insists that grain transportation must go through the territorial waters of Romania and Bulgaria under the escort of NATO convoys.

In the 1980s, during the Iran-Iraq War, the US Navy carried out Operation Earnest Will, when tankers carrying oil, primarily from Kuwait, were accompanied by American ships. However, the passage of warships through the Black Sea straits is strictly regulated by international law, so it is unclear how the same scheme could be applied to Ukrainian grain exports.

“It remains to be seen if NATO and the West will negotiate at the barrel of a gun,” Lee said.

The lack of export chokes the Ukrainian grain industry, as farmers find it extremely difficult to make ends meet.   

“The inability to generate revenue from exports has direct implications for the future of the agricultural market, as it means no money for fertilizers, seeds, equipment, and labor costs for the next season,” Dykun said. “Without the sea corridor, farmers will have even fewer opportunities to fund their operations.”

Ukraine can export up to 5 million tonnes of grain per month via alternative routes: up to 3 million tonnes through the Danube ports, 1.2 million tonnes by rail, and 800,000 tonnes by road.

The success of the Russian strategy could ruin more Ukrainian farms, causing much pain to the national economy.

Ukrainian farmers already have been hit by low ex-works prices, often below the cost of production, Lee said, adding that overall, total grain and oilseed cropping only dropped by less than 2%. But if ex-works prices continue to remain low and are likely to do so under the current situation, then he expected farmers to plant less of all crops.

For now, Ukrainian farmers remain optimistic and keep running business as usual whenever possible, even though they have only a vague understanding of where they are going to store grain and how to sell it when the autumn harvest begins.

In 2023, Ukraine anticipates harvesting 62 million tonnes of grains and oilseeds, 11% less than the previous year. The main reason for the decline is a change in the structure of crops, as farmers sow more oilseeds as they are easier to export, Lytvyn explained.

“Many Ukrainian farmers curtailed operations, as there are many factors that prevent them from continuing to work on the land,” Dykun said, admitting there are no concrete figures indicating how many farms were closed since the beginning of the hostilities.

“Currently, more than 400 enterprises out of 1,100 members of the All-Ukrainian Agrarian Council, for example, are currently under occupation or in the de-occupied territories and are yet to be restored,” Dykun said. “And these are only our members, farmers with a land bank of 1,000 to 3,000 hectares. In general, there are many small farms in Ukraine that have ceased to exist because of the destroyed cities, the occupation, and the inability to recover.

“Many farmers currently serve in the Ukrainian Armed Forces and defend every inch of Ukrainian land.”

Further turbulence in Ukrainian agriculture could deprive the already reeling national budget of billions of dollars of tax income in 2023. Russia used a powerful tool of attrition, and it remains to be seen whether Ukraine and its Western allies would find a reasonable way to parry this blow.