Russia’s invasion of Ukraine in February 2022 and the Western response in the form of sanctions badly disrupted the global supply chains. The global supply of food and energy was particularly impacted because of the significantly large share of the two involved countries in the global supply chains of the aforementioned commodities.
Ukraine is called the world’s breadbasket for its massive production of wheat while Russia is among the top producers of energy, food, and fertilizers. Together Russia and Ukraine accounted for above 24% of the world’s wheat exports, and 57% of sunflower seed oil exports during the period from 2016 to 2020.
Global Supply Chain
The disruption of the global supply chain of grain led to a hike in inflation in almost all parts of the world. The setback created a threat of famine in low-income countries of Africa. Apart from the low-income countries, the high-income countries of Europe and North America and middle-income countries also felt the brunt with food inflation touching its highest in decades.
To mitigate the impact of war on the global supply chain of food, the United Nations and Turkey helped negotiate the Black Sea Grain Deal in July 2022. The deal guaranteed the exports of Ukrainian grain from its Southern Black Sea ports via the Bosphorus into the Mediterranean.
In the absence of the deal, Ukraine could have exported grain using rail or road links through Poland or via river through Romania. Still, these quantities were very small compared to the massive quantity of grain ships were capable of transporting.
impact of Western Sanctions
Shafqat Cheema the deal enabled the transport of grain and fertilizers from the Ukrainian ports of Odesa, Choromorsk, and Pivdennyi. As part of the deal, Ukrainian ships navigated the cargo ships carrying wheat through the mined area into the international waters of the Black Sea, which would be subsequently en route to Istanbul via the mutually agreed maritime humanitarian corridor.
Inspection teams consisting of members from Russia, Turkey, Ukraine, and the UN inspected the ships. In parallel, another deal was concluded to minimize the impact of Western sanctions on Russian grain and fertilizers exports. Both the arrangements were made liable to periodic reviews.
Despite continuing hostilities and existing trust deficit, nearly 33 million tons of Ukrainian grain was exported to 45 countries as part of the deal — a significant portion of which was shipped to low and middle-income countries. According to the World Food Program, nearly 750,000 tons of grain from Ukraine was shipped through Dardanelles to countries facing acute food security crises like Afghanistan, Ethiopia, Somalia, and Sudan.
The deal not only helped mitigate the food security crisis in the above famine-hit countries but also led to a significant relaxing of global food inflation whose impacts were shifted across the globe. The global wheat prices dropped by 17% in 2023.
While the Ukrainian grain exports continued, Russia grew increasingly aggrieved at the hesitation of Western nations to ease sanctions on Russian agricultural and fertilizer exports. Moscow alleged that sanctions on Russian grain and fertilizer exports have not been lifted completely, making insurance for the ships carrying Russian grain susceptible to economic retribution.
Russia also had a list of demands including the removal of sanctions from its leading agricultural bank, resuming the supply of agricultural machinery and its spare parts, connecting its banks to the SWIFT payment system, and unfreezing of the assets and accounts of Russian export companies associated with grain and fertilizers business.
The Russian Foreign Ministry said that none of the demands were met by the West
Citing the aforementioned reasons, despite efforts by the United Nations Secretary-General to preserve the deal, Russia declared an end to the deal and alleged that parts of the deal concerning Russia have not been fulfilled by the West. On the other hand, the Western countries alleged that Russia terminated the deal because it was working to the benefit of Ukrainian farmers.
Without getting too much into the debate about which side is responsible for the collapse of the deal, its aftermath would be far-reaching and widespread.
Following the announcement of the deal termination, the Russian Ministry of Defense declared that any ship traveling from the Ukrainian ports would be a legitimate military target. Ukraine faced a naval blockade until the signing of the deal and following Russian withdrawal from the deal, the naval status quo ante might be restored for Ukraine in the Black Sea.
Given most of the grain shipments take place via commercial ships, it is highly unlikely that ship owners would be willing to allow their ships into a war zone to be drowned by the Russian navy. To add is the expected hike in war risk insurance premiums (charged when the ships enter the Black Sea), which would need to be renewed every seven days thereby massively adding to the commodity price.
The Suspension Of The Deal
The immediate impact of the collapse of the deal will be an increase in global food prices, which would lead to an increase in poverty and starvation, especially in low-income countries. According to Save the Children, a charity organization, the suspension of the deal is a “life-threatening blow” to food-vulnerable children in Africa and parts of the Middle East, particularly Yemen.
These regions are dependent in large parts on imports for their food security. Famine-hit Somalia also faces a particular risk given it is reliant almost completely on wheat imports from Russia and Ukraine. According to Save the Children, about 1.4 million children could suffer from acute malnutrition after the collapse of the deal.
Moreover, the middle and high-income countries would also be impacted by the sweeping food inflation. Given overall inflation has emerged as a major challenge after the COVID-19 and Russia-Ukraine war, the resulting food inflation will add to overall inflation and the fallout could be in the shape of social and political instability, especially in economically weak countries.
Also, the shortage of fertilizers and seeds and the resulting increase in their prices caused by the collapse of the deal would impact the production of grain in other parts of the world adding to the ongoing food crisis.