MOSCOW, RUSSIA – Despite looming concerns over shipping safety in the Black Sea region and continuing economic sanctions pressure, Russian grain exports are nearing record highs. Band-aid solutions helped to overcome logistics and transaction challenges, but the established schemes look fragile.
From Aug. 1-27, Russia exported 6.4 million tonnes of grain, 27% more compared with the same period of the previous year, the Russian Grain Union (RGU) estimated. Wheat exports jumped by 29% to 5.3 million tonnes, barley by 15% to 910,000 tonnes and corn by 60% to 166,800 tonnes. Since pulling out of the Black Sea Grain Initiative on July 17, Russia has seen high demand for its grain in the Middle East, Africa and South America.
“The demand for Russian grain is exceptionally high,” Elena Tyurina, chief of the RGU’s analytical department, said, adding that the export geography has changed dramatically during the past year.
For instance, Algeria, ranked second in the list of largest importers of Russian grain, increased purchases sixfold to 518,000 tonnes. In Africa, Kenya expanded Russian grain imports ninefold to 320,000 tonnes and Sudan by 150% to 180,000 tonnes. Russia’s grain exports to Latin America also have increased. In August 2023, Russia exported 224,000 tonnes to Brazil, 125,000 tonnes to Mexico, 59,000 to Venezuela, and 55,000 to Peru. None of these countries imported Russian grain in August 2022, Tyurina said.
Russian grain also is gaining a foothold in the countries of Southeast Asia. In August 2023, exports to Bangladesh soared 47-fold to 263,000 tonnes. Nearly 133,000 tonnes were exported to Indonesia compared to small quantities in August 2022.
In addition to the growing demand, the value of Russian grain exports also has risen. On average, Russian grain was exported at $250 per tonne in August 2023, Tyurina said. This may indicate that Russia is no longer discounting its grain sold to foreign customers.
Deal viewed as a burden
Russian grain industry officials welcomed the end of the Black Sea grain deal. The agreement cost the Russian industry around $1 million of lost income since it was the key factor making the very existence of the discount possible, explained Akrady Zlochevsky, president of RGU.
“Everyone was watching with pain at how this deal, incurring damage to the Russian grain suppliers, was extended,” Zlochevsky recalled, adding that Russian fertilizer exporters also suffered losses from the agreement.
The discount typically ranged between $10 to $20 per tonne, but at its peak it reached a stunning $70 per tonne, Zlochevsky estimated. There are fewer alternatives to Russian grain on the global market, so Russian farmers expect the discount to gradually disappear.
“Since we entered the (global grain) market in 2002, we fought 10 years to get rid of a similar discount, which was around $10 to the global prices. And for how long do we now have to work to terminate the discount from this deal?” Zlochevsky questioned.
However, in some cases, Russia deliberately agrees to sell grain at a discount. Russia said on Aug. 6 that Turkey agreed in principle to handle 1 million tonnes of grain that Russia plans to send to Africa at a discounted price with financial support from Qatar. Alexander Grushko, deputy head of the Russian Foreign Affairs Ministry, said the parties are working to iron out the issues related to grain exports, including logistics and method of payments.
The Black Sea grain deal has never helped the Russian grain industry but also never has been seen as a threat, said Eduard Zernin, chairman of the Russian Union of grain exporters.
“We have repeatedly stated that we are not afraid of competition from Black Sea grain of any origin,” Zernin said. “But we want equal conditions. Grain of both Russian and any other origin should have equal opportunities on the world market, both in terms of logistics and in terms of transactions for delivered goods.”
Problems with bank transactions was a fundamental issue the Black Sea grain deal was called to solve for the Russian side. Zernin said it was one of the reasons the list of Russian grain importers shortened last year.
“Entire states have become hostages of the global banking system, which prevents settlements for grain of Russian origin,” Zernin said, adding that this situation has caused disastrous losses for small companies. “Every transaction is like a roulette; you never know whether the payment will pass or not.”
Russian industry officials are reluctant to disclose how Russian grain exporters collect payment for delivered goods.
Several sources in the grain industry who wished to stay anonymous argued that this settlement issue was not that pressing. They explained that the payments go through banks in the post-Soviet states, including Armenia and Kazakhstan, with which Russia shares a regional analogue of the SWIFT banking network. Some collect money through banks in Turkey and the UAE, while a few try to collect payments in national currencies.
“So far, everything is working like a Swiss clock,” a source said, admitting though that a longer chain of intermediates means higher costs.
Long term, the system is seen as relatively fragile.
“Everyone is afraid that tomorrow a new sanctions package will block foreign bank accounts, and everything will fall apart,” the source said. “However, these fears largely subsided over the past year since there are no real signs that such measures really are about to be taken.”
Relying on a shadow fleet
It would be wrong to say, however, that there haven’t been some negative consequences from the termination of the Black Sea grain deal.
On Aug. 4, a Ukrainian drone boat struck and damaged a Russian product tanker near the Kerch Strait, sparking concerns over the safety of the foreign-flag ships in the Black Sea. As a result of the attack, Russia’s oil exports by sea between Aug. 14-20 nearly came to a halt. Several Russian government officials warned that the incident could have long-lasting consequences for the global grain market.
Dmitry Patrushev, Russia’s agricultural minister, warned the world market to be braced for a price shock, noting that the escalation of hostilities in the Black Sea could disrupt Russian grain exports to foreign customers. In the previous year, Russia exported roughly 90% of grain through the Black Sea. New drone attacks could effectively paralyze Russian grain exports, he said.
The incident dramatically has raised freight rates and insurance costs for Russian grain exporters. Reuters also reported in early August that Russia lacked ships to transport grain in the Black Sea, as global commodity houses were no longer helping Russia with the mechanics of trading its grain. Cargill, Louis Dreyfus and Viterra stopped such work on July 1, and now Russia increasingly relies on a shadow fleet of old vessels to keep its exports running.
To compensate for the lack of foreign transport vessels, Russia will need 34 vessels with a capacity of 60,000 tonnes and 27 with a capacity of 40,000 tonnes, state agency Rosagrolising estimated. Construction of several new ships has been launched at Russian shipyards, but they will not help Russian grain companies in the foreseeable future.
Everything related to the shadow fleet in Russia is kept secret. Market players decline to discuss its operation publicly.
“There is no official information on the shadow fleet,” said Vyacheslav Kulagin, director of the Center for World Energy markets, a Moscow-based think tank. “It is clear that some ships somehow transported something. That they belong to someone through third or fifth parties. That’s all there is to say.”
Windward, an Israel-based artificial intelligence platform for actionable intel of maritime domain awareness, supply chain and container tracking, reported that that shadow fleet is estimated at around 600 vessels, with mysterious ownership designed to obscure their transport of sanctioned Russian oil and wet cargo.
Russia and affiliated organizations adopted several deceptive shipping practices from other sanctioned regimes, such as Iran and Venezuela. This resulted in many vessels that were previously uninvolved in smuggling getting flagged, according to Windward.
Turbulent economic environment
Several other factors will impact the Russian grain industry in the short run, most notably the Russian national currency fluctuations.
The Russian ruble has weakened by 26% this year as a result of a collapse in export revenues and growing budget spending, making it the third worst-performing global currency this year. During the past 12 months, the Russian ruble lost nearly half its value against the hard currency. The Russian Central Bank intervened in early August, jacking up the key interest rate from 7.5% to 12%.
Russian farmers got around 18,000 rubles for selling grain to foreign customers a year ago. Now, this figure has jumped to 25,000 rubles.
Russian farmers pay in hard currency for Western technologies, but the ruble’s devaluation is not likely to spur operational costs. In 2022, Russian farmers stocked up on foreign agricultural machinery, some of which was not even unpacked yet, Zernin disclosed.
On the other hand, the excessively high interest rate is promised to be a growing problem. Numerous middle-size farmers depend on bank loans to fund sowing campaigns, and now they are going to be more expensive. This should not impact the Russian grain industry in the short term but will heavily weigh on operations if the interest rate stays at the current level for long.
The ruble turbulence also has significantly worsened the labor crisis in Russian agriculture. Russia’s leading egg manufacturer, Sinyavskaya, recently notified retailers about supply disruptions since it lacks 25% to 30% of its normal workforce, as the weaker Russian ruble triggered an outflow of immigrants from Central Asia. Local press reported that other agricultural companies face a similar problem.
Russia Central Bank warned about a growing labor shortage in Russia in December 2022, attributing this to, among other reasons, the conscription of 300,000 civilians during the Defense Ministry’s mobilization campaign last year. In addition, from 800,000 to 1 million Russians left the country last year, according to independent estimates, which local press claimed to be the biggest immigration wave since the Communists came to power in the 1920s.