Publication

Opinion: Ukraine's War Harvest: New Delivery Routes

on 24.06.2022

Russia’s war against Ukraine has created an export crisis of similar proportions as the one that occurred during the fall of the Soviet Union. Agriculture has always represented a backbone of Ukraine's economy, where in 2021 its share of Ukraine’s GDP was more than 10%. In the same year, the sector showed the highest increase in production – 14.4%.

Traditionally, Ukrainian agricultural exports have almost exclusively relied on naval routes through the Black Sea. Since February 24, the war has made Moscow a de facto gatekeeper in the northern part of the Black Sea due to its naval supremacy. With this advantage, the Kremlin is now leveraging its ability to blockade the Sea and is attempting to conditioning safe exports corridors with the removal of sanctions. Prior to the war, 89% of Ukraine’s grain exports were transported via the ports of Odesa, Chernomorsk, Pivdennyi, and Mykolayiv that were handling up to 6 million tonnes of grain per month in 2021.

As the 2022 harvest season approaches, Ukraine’s naval capabilities and transportation routes are being progressively destroyed or controlled by the Russian military blockade. Only two small ports in the Danube delta – Izmail and Reni – remain functional. It is noteworthy that these two ports were not used for grain exports before the Russian invasion.  Instead, they were normally used for ore, coal, metal and chemicals transshipments. Since the war started Izmail and Reni had to take over an important share of cereal exports from Odessa port and handled around 45% of the total grain exports from Ukraine in May. The rest of 55% was exported via railway or road.   Due to limited port capacity, more than 20 million tons of grain that were supposed to reach the global market remain blocked in Ukraine.

Source: University of Illinois, February 2022, USDA data

Average exports graph

The future harvest is also threatened not only by the destroyed infrastructure, but also by the fact that financial institutions may not be willing to extend loans to farmers as financing agriculture is often perceived as risky. This shortage of wheat adds market panic, prices volatility and future uncertainty to the already existing crisis of ‘new all-time high’ food prices.

Ukraine is known for being a global leader in export of several agricultural commodities.  It was the world's fifth-largest grain exporter in 2020 and the fourth in 2021, shipping staples such as wheat and maize to Africa and the Middle East, as well as supplying half the grain procured by the U.N.'s World Food Programme for emergency aid. Unfortunately, since the Russian invasion, Ukraine’s share in global exports of grain halved due to extremely limited in its shipments by sea, which traditionally accounted for the bulk of its exports.

Source: Foreign Agricultural Service/USDA, June 2022

Wheat exports graph

 

Russia’s war against Ukraine amplified the already risen prices. In addition, some countries banned their exports of grains further tightening global availability. In response to the volatile market place,  as of April 5, 2022, 11 countries have implemented export bans, including Russia, Belarus, Hungary, Serbia, Turkey, North Macedonia, and Egypt, for products ranging from wheat. The resulting shortages and price increases of these commodities due to the war are having negative impacts on food security in many countries in the Middle East, as well as parts of Central America and spurring famine-related conflicts on the African continent. About 346 million people in Africa are facing severe food insecurity, meaning they have likely experienced hunger, in the worst crisis since 2017. Last year, the figure was about 286 million.

Taking control over the Black Sea commercial routes started years ago

It must be recognized that the Black Sea access denial, including the commercial one, did not occur with the beginning of the war against Ukraine on February 24th, 2022. Its genesis was in 2014 with the illegal annexation of Crimea. While the West was still hesitant in adopting coordinated measures against Russia, the Black Sea - a significant import-export gateway has been the focus of a dramatic increase in Russian military build-up and capabilities that allowed Russia to exert its control over the cargo shipment also. The 2018 launching of the 19km long bridge linking Crimea with Russia represented the physical unification with Crimea.

The “miracle” as Putin called it, was announcing Kremlin’s return to the game it played in the Cold War time and before, when Russia dominated the Black Sea. While the Western countries perceived Black Sea projects as commercial projects, Russia expanded its geopolitical and strategic influence and reshaped the balance in the transportation routes in the Black Sea.  Due to the Russian control of the Kerch Straight, the export capacity of Berdyansk and Mariupol ports, at that time still controlled by Ukraine, decreased.

Russia imposed „passive” impediments — it prohibited ocean-going ships with a length exceeding 160 meters from navigating in the Kerch Strait. The introduction of the new size limits prevented 144 vessels that had previously been using the Ukrainian ports from passing through the strait. This accounts for 23 per cent of the total number of vessels. In the period from May to the end of November 2018 Russians disrupted the passage of 741 ships bound for or leaving the ports of Mariupol and Berdyansk: 110 vessels were detained in the Azov Sea, including 30 ships flying the flag of EU member states or owned by a shipowner from the EU; 323 ships going to the Sea of Azov were detained for up to several days in the Kerch Strait, separating the annexed Crimea from mainland Russia; and 308 ships were detained on the way to the Black Sea.

Moreover, delays caused by cargo inspections increased the commercial and financial risks such as the insurance prices. In the summer of 2019, Russia blocked several maritime zones without having filed any legal requests, thus interrupting navigation and obstructing international shipping to and from Georgia, Bulgaria, Romania, and Ukraine. In 2021, Russia restricted the maritime traffic as it was planning military maneuvering in parts of the Black Sea. The objective of such blockades, which often coincided with regional NATO exercises, was to demonstrate that Moscow can disrupt the commerce of neighboring NATO allies and partners.  Although a redirection via Romanian and Bulgarian ports is possible to some extent, as well to use railway, road towards Europe as well as using the Danube river ports, it is difficult to switch to these option in a short time without hampering the commercial agreements that parties undertook

EU-Ukraine solidarity lines

In seeking alternative export routes for Ukrainian agriculture products, solutions that are geographically feasible, and are backed by a practical engagement of the western community must be identified immediately.  Technically replacing the traditional routes requires rethinking logistics and supply chains, creation of additional capacity, adapting infrastructure. As an emergency response, the European Commission proposed the “EU-Ukraine Solidarity Lanes communication”, a concrete list of immediate and long-term solutions. The initiative contains 20 actions to facilitate Ukrainian export in the short-term and to strengthen EU-Ukrainian connectivity in the longer term. Some of the emergency measures are setting up a matchmaking logistics platform to help industry associations, traders, the Commission's services, the member states. Member States must increase inspection capacity at border posts to deal with arrivals 24/7. In the long term the Commission proposed to identify common infrastructure priorities and increase interoperability between the Union TEN-T and Ukrainian infrastructure, for example, by laying EU standard-gauge rail lines in the border regions of Ukraine and Moldova – both currently use a wider gauge than their neighbours.  The projects would be supported under Connecting Europe Facility, which has a budget of €25.81 billion for 2021-2027.

Despite the proposed plan, the task is gigantesque when it comes to implementing it. The effort needed to redirect the export flows overcomes the available capacity of infrastructure and machinery for the moment.  Nevertheless, redirecting Ukraine’s export could become an opportunity and could be feasible for third parties as for example, transit states or new stakeholders like export organizations that would be attracted by custom facilities and risen global prices.

Acknowledging momentum, Turkey offers a solution

Since the beginning of the war, Turkey attempted several times to play the role of the mediator between Russia and Ukraine. Istanbul condemned the Russian aggression against Ukraine but did not join the anti-Russian sanctions. As the grain exports Ukraine traditionally directed towards Middle East and African markets, Ankara understands that the maritime option is the only route that could offer a large-scale export capacity and potentially solve the problem.

A Turkish led solution for a safe Black Sea cargo corridor also reconfirms Turkey’s pivotal role in both Black Sea and the global trade flows.  Ankara is promoting a Russian-Turkish plan to ease the blockade of Odesa by Turkish vessels helping demining the coast’s waters and guarantee safe passage for Ukrainian cargo vessels ferrying the grain to Mediterranean and using the opportunity of talks around the safe Black Sea cargo corridor, are encouraging the ease of the Western sanctions against Moscow.

After Ankara hosted a meeting with Foreign Minister Sergey Lavrov at the beginning of June, the idea that a UN coordination body be set up in Istanbul to regulate how the grain is distributed across the world market emerged. Although the UN has proposed establishing a contact group with representatives from the UN, Turkey, Russia, and Ukraine to create a control mechanism for a possible safe grain export corridor, the Ukrainian government is skeptical.

In the scenario that all mines will be removed, Odesa would be without any defense against any Russian amphibious landing that might exploit the safe passage to invade Ukraine’s largest port city. Kyiv is demanding security guarantees, such as Western anti-ship missiles, which the Russian government not only refuses to allow, but Russia is raising the possibility of unblocking Ukraine’s Black Sea ports in return for a relaxation of sanctions against Russia. The offer is seen by the western countries as weaponizing the grain export and blackmailing the international community.

The EU corridor

Ukraine’s neighbors, especially the EU members that are bordering the country also offered solutions to ease the grain blockade.  Although there are infrastructure particularities in the western part of Ukraine that must be addressed, the moderate volumes of exports towards EU already started. The road and rail infrastructures are sufficiently dense in the EU bordering part of Ukraine. However, quality wise there is a need for improvement as most roads were built before 1989. Technical differences in terms of rail transport between the two countries (i.e. use of different rail gauge) and limited multi-modal transport capabilities makes cross-border transportation more difficult. Furthermore, easing custom procedures as well as coordinating of phytosanitary and veterinary certificates and documentation when transporting Ukrainian grains to Europe must also be addressed.

So far, a few bordering countries offered support in ensuring export corridors for Ukraine. Besides establishing a route through Poland, Warsaw intends to significantly simplify the border cross of Ukrainian grain goods and increase export volumes.  The German government is working to build a “grain bridge” to move agriculture products out of Ukraine and bring machinery in by railways.  Also, negotiations are being held with the Ukrainian railways and other European railways, such as the neighboring railways such as the Czech Republic, Slovakia and Romania.  Romania also offers the naval option, using the Constanta port and Danube river naval facilities. While Romania approved the modernization of its port capabilities that will increase the volume of cargo from Ukraine, Bulgaria expressed its willing to facilitate grain export from Varna port and is also planning to upgrade its infrastructure.

Having banned its grain exports, Hungary could take over the transshipment of as much as five million tonnes of Ukrainian grain by rail if it can make immediate infrastructure investments.

The Ukrainian grain export problem will exponentially increase in the nearest future as the 2022 harvest approaches. Although none of the proposed routes does not come without challenges and is not entirely answering the existing needs, any future export corridor, must primarily avoid further damage to the Ukrainian infrastructure.

Ukrainian grain exports are primarily directed to Middle East and Africa and are using the Mediterranean corridor. Therefore, in the short term, Romanian Black Sea and Danube ports as well as a multimodal transportation solution (road and railway) represent a feasible export corridor. Bulgarian ports must be also taken into consideration as a emergency solution. Overall, neighboring countries must play a more active role in upgrading cross-border railway and transshipment infrastructure. Besides the real need to modernize the infrastructure and to become more involved in the regional trade, these actions might emerge as a catalyst and opportunity for further engagement in an active role in reconstruction after the war.