Russia agreed to extend the Ukrainian Black Sea Grain Initiative (BSGI) for a period of 60 days only, until 18 May 2023, with the understanding that it won’t do so again until real progress has been made in ensuring the smooth and sustainable export of Russian food and fertilizer, which, while not specifically mentioned in the sanctions, have been negatively impacted by limitations on insurance services, logistics, and bank transfers.
The Russian move infuriated Ukraine as the agreement provides for a 120-day automatic extension. This is the second extension of the agreement, which was originally signed on 22 July 2022, under the sponsorship of Turkey and the UN, for a period of 120 days up until 19 November 2022, before being extended on 17 November 2022, for an additional four months.
Gainful Rebounds
The BSGI’s extension sent out encouraging signals to international markets, allaying worries about the agreement’s potential longevity, particularly after Moscow suspended its participation in it in late October. According to data from the United Nations Conference on Trade and Development (UNCTAD), Russia and Ukraine account for about 27 percent of global wheat trade, 23 percent of global barley trade, and 14 percent of global corn trade, which highlights the significance of this agreement for the world economy. The following is a summary of the effects of extending this agreement on international food security:
• Price Stability of Food Commodities: The BSGI helped keep food costs relatively steady. The FAO food price index fell by about 0.8 points on a monthly basis and by about 29.9 points when compared to the record level set in March 2022, reaching about 129.8 points in February 2023 as shown in figure 1. This is the eleventh consecutive month that the index has fallen, and what made things worse was the drop in price indices for vegetable oils and dairy products, as well as the drop in grain prices.
Figure 1: FAO World Food Price Index (points)
Source: FAO Food Price Index
The FAO index is expected to fall further in the coming months if food supplies stabilize, especially given the drop in wheat futures contracts immediately following the announcement of the BSGI extension. Despite this, food prices remain high in comparison to pre-war and pre-pandemic levels, with prices 45 percent higher than the two-decade average. Furthermore, climatic risks, supply disruptions, export restrictions, rising energy costs, and weak global food demand continue to raise concerns about future food price stability.
• The Ongoing Supply of Food to International Markets: Since it was signed, the BSGI has helped 45 countries receive about 23 million tons of grain and food, reducing food insecurity and the dangers of rising global poverty and hunger. As shown in figure 2, maize was the most popular cereal shipped, followed by wheat and sunflower oil.
Figure 2: Grain shipped under the BSGI (%)
Source: UNCTAD’s report, “A Trade Hope: The impact of the Black Sea Grain Initiative”
According to figure 2, out of the 23 million tons of total grain shipments, corn accounted for about 49 percent, followed by wheat by 28 percent, sunflower oil by about 5 percent, while barley accounted for 4.3 percent and the remaining grains accounted for 14 percent. This data shows that the BSGI has helped ensure that strategic food commodities have access to international markets.
• Improving Food Security in Emerging Markets: Extending the BSGI agreement may result in improved food security conditions in fragile African and Middle Eastern countries suffering from a variety of difficult economic conditions, even if they benefit indirectly from global grain price stability. However, there are barriers preventing these countries from taking advantage of this, such as declining exchange rates and high domestic inflation rates, let alone the fact that the main recipients of grain shipments were China, Italy, Spain, Turkey, and the Netherlands, meaning that grain exports primarily go to Western countries rather than African and Middle Eastern nations.
Obstacles Ahead
The extension of the BSGI for only two months, rather than the four months that were originally planned, presents a number of challenges that can be explained as follows:
• International Concerns: Russia’s recent decision shows that it will not hesitate to use economic tools, such as food weaponization, utilizing its export capabilities, and the potential of its withdrawal from the agreement, to achieve its own interests in order to lessen the pressures brought on by economic sanctions. These interests include removing roadblocks to ship insurance and banks’ dealings with the “Swift” banking correspondence system, allowing for the smooth export of Russian fertilizers and agricultural products, and resuming the supply of agricultural machinery.
In addition, Russia’s conditions increased international worries that Moscow might refuse to renew the agreement after the allotted time has passed, as it did in October 2022 in response to a string of Ukrainian drone attacks on Russian ships in the Gulf of Sevastopol, which overlooks the Crimean peninsula. However, Moscow later announced that it would resume its participation in the agreement. Russia’s possible refusal to renew the agreement would increase global food prices, particularly given the already high cost of ship insurance due to the ongoing conflict in the Black Sea.
• Widening Export Gap: Although the BSGI helped to more than double the amount of grain exported to developing and least developed countries between July 2022 and March 2023 compared to the start of the war, these nations still face numerous challenges in meeting their food needs for both domestic and international reasons.
The domestic causes are related to a decline in these nations’ capacity to pay the costs of importing goods as a result of the depreciation of emerging currencies, which made it more difficult to import staple foods and eroded the benefits of lower international prices. The international causes are related to the slowing down of ship inspection and the ability to conduct 5 to 6 inspections per day, which caused crowding of ships. Domestic factors include a decline in these countries’ capacity to pay for import costs due to pressure from the depreciation of their currencies, which made it more challenging to import staple foods and eroded the advantages of lower global prices. The global factors, however, are the slowing down of ship inspection and the allowing of five to six inspections per day, which caused a buildup of ships in the ports. Moscow repeatedly denied this, reiterating that it conducts continuous and routine inspections in accordance with the BSGI. All of these factors contributed to a widening gap between the levels of food exports to developing countries before and after the Ukrainian war. Figure 3 depicts this.
Figure 3: Change in wheat exports to developing countries, 2021–2022.
Source: UNCTAD’s report, “A Trade Hope: The impact of the Black Sea Grain Initiative”
According to Figure 3, wheat exports reached 18.2 million metric tons in 2021, or prior to the Ukrainian War, and increased to about 2.8 million metric tons after the War between January and July 2022, just before the launch of the BSGI, before rising to 3.7 million metric tons between August and December of the same year, which indicates that wheat exports to developing nations amounted to approximately 6.5 million metric tons in 2022, a decrease of approximately 11.7 million metric tons from 2021.
• Accelerated Production of Biofuels: Despite its environmental advantages, the rise in biofuel production could undermine the BSGI’s role in improving global food security because many nations tend to use grains, particularly maize, for the production of biofuels rather than to feed their people. The International Energy Agency predicts a 20 percent increase in global demand for biofuels between 2022 and 2027, driven primarily by the economies of developed countries. This could have negative consequences for the food security situation in developing countries and their ability to purchase foodstuffs due to a decrease in the global supply of food and rising prices. As a result, governments need to find a middle ground between halting climate change by weaning themselves off oil and diesel and keeping food prices stable around the world.
In conclusion, the midterm extension of the BSGI agreed upon by the international parties sent encouraging signals to the global markets regarding the desire of the two warring countries, Russia and Ukraine, to ensure the flow of food supplies and the stability of their prices, which will, either directly or indirectly, improve the conditions of food security in developed and developing countries. While generally positive, these signals were tempered by global caution and fears about Russia’s possible return to food weaponization and BSGI’s inability to restore food export levels to pre-war levels.
