Risk of ‘big disruptions’ high in grain markets, says Black Sea expert

Since Russia refused to renew the Black Sea Grain Initiative – a U.N.-brokered deal to keep Ukraine’s grain flowing from its Black Sea ports amid Russia’s full-scale invasion – it has unleashed a campaign of attacks on Ukraine’s port and grain infrastructure.

In late July, Russia carried out a series of attacks against Ukraine’s southern port city of Odesa, followed by drone strikes on Ukraine’s Danube River terminals.

Attacks on Russian port infrastructure in the Black Sea region have also been reported in recent days, presumably carried out by Ukraine in response to Russia’s attacks on its grain export infrastructure.

Kyiv has not directly claimed responsibility for the attacks, but Security Service of Ukraine (SBU) chief Vasyl Maliuk recently called these attacks “absolutely logical” and “completely legal,” effectively admitting Ukraine is behind the recent strikes.

While attacks on Odesa carry a lot of symbolic weight, the Danube River terminals have become the main export route for Ukrainian grain, and any serious disruption to the Danube region could cause real problems for Ukrainian grain exports, Andrey Sizov, managing editor of the Sizov Report on the Black Sea, told the Kyiv Independent in an interview.

The Kyiv Independent spoke to Sizov on the heightened risks of attacks in the Black Sea area and what effect they could have on both Ukrainian and Russian grain exports, the grain market’s reaction to recent events, and the likelihood, or lack thereof, that the grain deal could be revived.

The following interview has been edited for clarity.

Kyiv Independent: You recently wrote on Twitter that if Ukraine witnessed more attacks on its Danube River ports it could be a real game-changer. What effect has this last attack had on Ukraine’s ability to export its grain through its Danube terminals?

Andrey Sizov: So far, it hasn’t been impacted noticeably. We hear more reports that vessel owners are refusing to send their ships to the Danube, but the majority are still ready to send their vessels. The freight rates have increased and the trouble is that they could increase further because of the recent attacks. But so far, there is still a long waiting line near the Danube and it’s running more or less okay, just at a slower pace because of the last attack.

But we could see bigger problems in the not-too-distant future, especially if we see more attacks on the Danube, which I believe is quite likely. We thought that the Kremlin would stay away from the Danube because of NATO warnings and Romania’s statements, but we know now that’s not the case. Drones are also cheaper and Russia can send more.

Eventually, (more attacks) could lead to a majority of vessel owners refusing to send their ships. And that will be a big problem for Ukraine. The Danube terminals are the main export route for Ukraine right now and have been the main export route for months even before the end of the grain deal.

In terms of numbers, the Danube can ship around 2 to 2.5 million metric tons a month probably. Ukraine could also probably ship around 2 million tons by land to the European Union, to Romania, Poland, or via Romania and Poland to other destinations.

All in all, Ukraine, even if Odesa terminals remain blocked, can ship around 40 million tons without Odesa. And that is actually very close to the export potential for this new season. From a practical point of view, 40 million metric tons can be done without Odesa if the Danube terminals are running.

Kyiv Independent: What is Russia trying to accomplish with these drone attacks, in your view? Is it trying to stop Ukraine from being able to export its grain?

Andrey Sizov: Probably, yes. I think this whole story has become partly personal for (Russian President Vladimir) Putin. He lost face so many times to that grain deal and now he wants some kind of revenge.

The last extension (of the grain deal), for example, wasn’t Putin, it wasn’t the Kremlin, it was Erdogan who said the deal would be extended. Prior to that, it always looked like Ankara had a final say in the case. So we think that Putin felt like he was losing face as a result of those endless extensions.

Russian military bloggers, who are relatively influential and have been meeting with Putin, were also very irritated by the deal because they couldn’t understand why Russia was standing for it. Then we had the story of the Azov commanders who were sent back to Ukraine despite an earlier agreement with Russia. Then we saw the attack on Odesa, a few angry comments from Putin, and the deal was over. Maybe Putin got too irritated.

Russia is also, I think, quite happily watching what’s happening between Ukraine and Poland. Obviously, if there are problems on the Danube, that just adds fuel to the fire. If there are no problems with Eastern Europe, the Danube is slightly less important, but if there are, the Danube becomes more important. That is why the Kremlin could be deliberately targeting those terminals.

Kyiv Independent: Does the recent spat between Ukraine and Poland’s embassies over Poland’s ban on Ukrainian grain signal an escalation in tension between the two, and could we end up seeing the ban being extended?

Andrey Sizov: Yes, it’s clearly an escalation and it remains a politically sensitive topic for Poland. They have their elections in October and the ban is supposed to be lifted in mid-September. Ukraine does have a point when it says that the European Commission has said many times that this ban will be lifted but it hasn’t done so.

We also saw very angry comments, which I agree with, from the German minister of agriculture, who asked why it is that Poland is taking money from the European Union while at the same time trying to decide what they want and don’t want. They shouldn’t be able to do that. There is a common trade policy. If the ban is extended, Brussels will look pretty weak again.

But more important from a practical point of view is what Romania will do. Constanta is key for Ukrainian grain exports. There was a report from around three or four weeks ago saying that the Romanian Minister of Agriculture was considering how to prioritize Romanian goods and grain. If they somehow limited the flow of Ukrainian grain to Constanta, that would be a huge problem. The important thing is that there are no prioritizing or restrictions on Ukrainian grain flowing through these countries. That’s the key to keeping Ukrainian exports running.

Kyiv Independent: You wrote on Twitter that the wheat markets basically shrugged off the attack on the Danube. Why do you think that is?

Andrey Sizov: I think it’s a mistake. We hoped a Russian attack on the Danube terminals would be a one-time event, but now we know it isn’t. And there is a chance there will be more attacks. If there are, Ukraine could face huge problems with shipping via the Danube.

But the Chicago funds mainly based in Chicago in the United States don’t think that’s the case. They don’t believe in any substantial disruptions in the Black Sea. I think the probability of big disruptions is high.

The Black Sea is obviously topic number one for the wheat market right now. If something big happens somewhere, especially in the Black Sea, there will be huge losses. But as of now, as of this week and actually starting from last week and until now, traders have been selling wheat contracts very aggressively.

But the problem is not only in the Danube River area. The Danube is very important for Ukraine, but if you look at the global wheat market, Russia in terms of wheat is a way more important supplier. And if we see any problems for Russian exports, that would be even bigger than the Danube.

So we have elevated risk for the Danube and high risks for Russia, as we just saw when a maritime drone attacked Novorossiysk. The attack damaged a naval base that are located close to grain terminals. Novorossiysk is the number one grain export terminal for Russia.

If we see events like this. If we see attacks on the Crimean Bridge, which is very important infrastructure, very important symbolically, and a very important military target, it also means that the Kerch Strait is shut down. And if it’s closed, it means that around one-third of Russian grain exports are blocked.

After the attack a couple of weeks ago on the Crimean Bridge, they had to close the trade (on the strait) for three or four days. It wasn’t a big game changer because it was only a few days, but if navigation is stopped for a week or two, that would be a substantial problem.

So there are lots of risks and they are all getting bigger in recent weeks. But because of funds’ typical approach, they want to sell wheat no matter what and they are ignoring (these risks).

Kyiv Independent: Given that the risks are increasing for both Ukraine and Russia in the Black Sea region, could we see the grain deal being restarted? What did the Putin and Erdogan conversation signal about the likelihood that the deal could be revived?

Andrey Sizov: The grain deal could be restarted somewhere in the future. But I don’t think it will happen any time soon. The statements were quite different. Ankara said that both presidents would meet soon in Turkey. Shortly after, Moscow made a very different statement saying that, yes, they could meet, but they hadn’t agreed on the date and the place. I doubt Putin would agree to go to Turkey with the arrest warrants out for him.

So, yes, they talked about it and said, “We discussed the grain deal and decided that we’ll continue to discuss it” and that’s it. So not much there. It didn’t sound like they got somehow closer to restarting that deal at all. And again, I think Putin is pretty angry about the deal. And I don’t think he will be willing to restart it shortly.

Kyiv Independent: I think there’s this assumption that Africa and China should be furious with Russia for ending the deal, that they should be saying, this is an injustice, you’re causing problems for us to get grain. But that’s not what we see. So where is that disconnect between people thinking that Africa and China should be reacting one way and what we’re seeing?

Andrey Sizov: I think that’s a misconception. There was an article a couple of weeks ago about how China will try to force Russia to renew the deal because China is the key buyer of Ukrainian corn. That is indeed the case. But that’s a misconception about how the global grain market works. It’s fluid. It’s not a pipe going from A to B.

If you are a global trader and you’re looking at dozens of regions and you can skip someplace, sell something, you just make a deal. It’s not important in many cases where that grain comes from. And it’s not important where that grain goes in many cases. So it isn’t important who the key buyer of Ukrainian grain is, whether it’s China, Sudan, the EU, or Turkey. It’s actually not important at all.

So the takeaway should be simpler: If there are no disruptions for the grain to get to the global market, Ukrainian grain prices are somewhat lower everywhere. Whether it’s Spain, whether it’s the Netherlands, whether it’s Yemen, they will be lower everywhere. If that grain cannot reach global markets, no matter where it’s going specifically, prices will be higher, as we saw a year ago when prices were almost two times higher than they are right now.

But I think for China, (Ukrainian grain) is not really the number one topic. Getting cheap energy from Russia would be more important than the restart of that grain agreement. China can easily get corn from the U.S., Argentina, and Brazil. In recent years they have been expanding their trade with Brazil quite extensively. Brazil is a huge supplier of corn and soybeans, and we can probably assume that China tried to boost their relationship with Brazil to have an additional source of corn and other crops in addition to the U.S. and Ukraine. So it’s not really that important in our view. China is not happy, but it is not the main issue for them.

Tags: export, grain, Black Sea, Black Sea ports, Danube River, Black Sea Grain Initiative, terminals, grain infrastructure, Ukraine, Russia