Following the Russian invasion in February 2022, shipping Ukrainian grain exports via the Black
Sea became virtually impossible. Three barriers stood in the way.
For one, Russia blockaded the region.
Any ships trying to move grain through the Bosporus Strait were liable to be sunk
before getting anywhere near the pathway that leads toward the Mediterranean Sea.
For another, Ukraine worried that Russia
might attempt a sea landing a la the D-Day Normandy invasion.
To prevent Russian ships from getting close, Ukraine mined its own harbors.
And to top it all off, all of these dangers made it impossible for would-be shippers
to take out insurance on their journeys.
All of that changed after a July 23, 2022 meeting in Istanbul.
Russia, Ukraine, Turkey, and the United Nations announced a
deal—with an asterisk—to reopen grain shipments along with some other foodstuffs.
The resulting agreement is officially called the Black Sea Grain Initiative.
Under it, Ukraine would guide commercial ships through the minefields.
Then Turkey would examine outgoing ships to ensure that only grain was going out.
On the way in, Turkey would ensure that no weapons were headed
to Ukraine. This was a big deal for Kyiv.
Prior to the war, Ukraine exported 18
million tonnes of wheat annually, bringing in 3.6 billion dollars.
The agreement was seemingly doing a favor for Ukraine
despite the fact that Russia was at war with it. So what is going on here?
One possibility is that it’s just a trap.
With apologies to the United Nations,
international agreements do not have independent third-party enforcement.
If a deal is not in a country’s best interest, it need not follow through on it.
Leadership worldwide recognized this possibility.
U.S. State Department Spokesman Ned Price told reporters that
“They welcome the announcement of this agreement in principle,
but what they're focusing on now is holding Russia accountable for implementing it.”
Those concerns became further elevated after Russia struck a shipping site
along the port city of Odesa less than 24 hours
after the agreement was signed. How would Russia gain from such duplicity?
The simplest explanation is that it just wastes Ukrainian policymakers’ time, causing them to
exert effort to implement the shipping lanes instead of trying to win the war.
From a tactical perspective,
tracking the escort ships would provide intelligence about possible sea landing roots.
It is possible in the long run that Ukraine will open more pathways, giving Russia more options.
But Ukraine is aware of those possibilities,
and it is likely Ukrainian artillery is trained on those paths.
The big brain strategic play is to keep foreign markets from adjusting. Ukraine
exports a lot of grain, but Russia is the world’s largest exporter,
clocking in at more than 37 million tonnes annually.
It’s also one of the few things that have evaded sanctions
due to how critical Russian wheat is to the international food supply.
As I discuss in my book on the war,
Russia therefore has a vested interest in keeping
Ukrainian grain off the market and artificially inflate prices.
This would seem to be further reason to keep the blockade running.
However, if Ukraine’s wheat stays off the market in the long run,
other farmers are going to reconsider the allocation of their fields.
This will bring down wheat prices from the war levels,
though not back to what would be the case in an open and efficient market.
Consequently, Russia has an odd incentive to keep competitors unsure about whether
Ukrainian wheat will come back to the market, thereby preventing the market from adjusting. []
However, at least at the time of this recording,
the policymakers themselves believe it is likely to work out.
After all, Ukraine, Turkey, and the United Nations went through with it,
and the United States supports it, and the markets have stabilized grain prices somewhat,
which would be weird if they all anticipated that Russia was going to immediately cancel the deal.
Consistent with that, the first ship to go through the system,
the Razoni, did so successfully on August 1 and began headed toward Lebanon.
And four more ships began their journey on August 7. Thus, it seems that our default
expectation should be that this will work, with the possibility still out there that
Russia may end it prematurely, before its 120 day sunset provision naturally comes to pass.
With that in mind, the remaining four possibilities explain why Russia has an
incentive to follow through on allowing shipments.
One of these is straightforward: Russian fertilizer.
Although the Ukrainian grain has been the main focus of the agreement,
Russia was quietly the beneficiary of a side deal.
The United Nations committed to allowing Russian food and
fertilizer to be traded free from restrictions.
Given Russia’s position as the world’s largest wheat exporter,
keeping its own market access is critical.
Disrupting Ukraine’s shipments
risks terminating the United Nations’ commitment on Russia’s shipments.
This is the classic tit-for-tat style deal that underlies much
of international cooperation worldwide. []
Next up is the possibility of reaching a settlement of reaching a broader settlement.
After a turbulent first month of the war that saw Russia fail
to make progress in the heart of Ukraine,
things have started to settle. Very little movement of the front lines occurred during June,
and even less happened over the course of July. If you are Putin, now looks like a good time to
consolidate Russia’s gains around the separatist republics and its land bridge to Crimea.
Given the money at stake, it is hard to imagine any world
in which Ukraine agrees to any sort of ceasefire while its ports are locked down.
Opening them could be Russia’s first movement toward ending broader combat operations.
War is costly, of course, and so settlements exist in principle that leave both parties better
off than had they fought to one side’s military defeat. We might call that a “bargaining range.”
But whether a ceasefire at the status quo is better than continued war
from Ukraine’s perspective is a different story.
One of the reasons for the current slowdown is U.S. shipments of HIMARS,
a truck-mounted artillery system. Touted as a great equalizer, Ukraine has used them to
hit Russian supply lines and ammunition depots, limiting Russia’s ability to keep pushing forward.
If Ukraine thinks that this will also weaken Russia’s ability to hold the captured land
in the long term, then the current status quo is not something it should settle at.
The disagreement between the two on the eventual outcome may continue, but grain
shipments would still be a step toward getting the parties fully back to the bargaining table.
It’s also possible that Russia is not doing this to help Ukraine at all
but rather to keep up its own popularity abroad.
Given the war, it’s easy to focus on Ukraine’s desire to sell its wheat.
But that wheat matters to its buyers as well.
Egypt is the largest importer of Ukrainian grain.
Other notable Middle East or North African importers
include Lebanon, Morocco, Tunisia, Yemen, Libya, and Jordan.
The conventional framing of this problem is a net benefit
to Russia. Food scarcity will bring instability to those countries.
In fact, U.S. Secretary of State Antony Blinken believes that
we may have already seen these effects in Sri Lanka with the recent popular uprising.
But over in the Middle East and North Africa,
these problems more immigration into Europe, and more political divisions for Putin’s antagonists.
That is all true, but it overlooks the fact that Russia has tried to establish
better ties with those countries in recent years.
Egypt has been critical of Russia’s invasion of Ukraine
and has often voted with the western block at the United Nations.
Outside of that, though, its criticism has been muted.
That would change if the wheat forever disappeared.
There is a similar story with Indonesia, Ukraine’s second largest importer.
Russia has a larger financial stake here, as Indonesia is a major purchasers of Russian arms.
Meanwhile, Pakistan is the third largest importer
and has maintained a policy of neutrality during the conflict.
If Russia wants to keep its friendships together, a blockade is a bad way to do that.
The last possibility is that free-flowing wheat is
actually critical for Russia to keep its war chests afloat because of oil.
As is the case whenever there is a disruption to supplies,
oil prices became elevated at the start of the war.
This has been good your traditional for oil-exporting countries.
But Russia was not invited to that party.
Western sanctions have limited Moscow’s access to the market.
The result was a plunging price for Urals oil,
while the otherwise similarly priced European oil trended higher.
The start of the summer saw prices rise across the board,
but things cooled down afterward,
with Brent prices slightly higher than before but Urals prices notably lower.
Being somewhat close to par is still a victory for Russia
because Putin desperately needs those funds to continue the war effort.
OPEC, the cartel of oil producing countries, has helped Russia here
by not substantially raising outputs to take advantage of the higher prices.
However, many OPEC countries import large quantities of wheat.
This is even more true among countries in OPEC+, a broader ad-hoc coalition created formed in 2016.
And while Ukraine might not be their primary supplier, they can’t just write off the problem.
Think about the broader economic consequences of the blockade.
These countries are big importers of wheat, but they are not the biggest.
Egypt, China, Turkey, and others would also experience a shortfall,
and they are going to seek alternative sources for their food needs.
That raises prices for everyone, regardless if they are directly connected to Ukraine.
These countries have a clear way to punish Russia: extract more oil, lower global prices,
and put Russia in a position where it can no longer afford to continue the war.
This is why President Biden recently flew to Saudi Arabia despite
more hostile rhetoric on the 2020 campaign trail.
It’s also why Putin recently made a trip to Iran, with the exact opposite intention in mind.
Even if those countries do not want to actively interfere in the war,
they might not have a choice.
They will need a way to make up for the higher prices,
and securing more oil revenue is the easiest way to do that.
And if prices don’t soar in those countries, Russia still must worry that many of them
are friendly with those that import Ukrainian wheat and could turn on the taps in solidarity.
And that’s a snapshot of the Black Sea Initiative. Let me know what you think in the comments.
And shoutout to these guys
for correctly identifying that it was John Kerry looking for donuts in Moscow…
…which apparently is a thing he used to do when he was traveling around as Secretary of State.
In any case, I hope you enjoyed this video. And if you did, please like, share, and subscribe,
and I will see you next time. Take care.