Ukraine’s economy is dealt a blow, but Western aid is adequate to help offset it
At the global level, expect food prices to stay higher for longer, with this grain export avenue likely ended for the duration of the war. For Russia, rising agricultural export revenues thanks to higher prices and record export volumes, the end of the deal is highly beneficial to help support the otherwise flailing ruble and help sustain a key economic sector amid the weakened economy. As for Ukraine, depending upon the loss of Danube ports as well as land routes into Europe, the impact will be substantial though not debilitating. Assuming other export routes are found to help sustain some of the grain exports and large Western financial assistance continues, Ukraine will be able to weather this problem but may require a slightly greater devaluation of the hryvnia and potentially sooner.
Overview
- On July 17, Russia ended the UN-brokered Ukraine grain export deal that had been functioning since July 2022, after having warned of its impending departure from the deal for months.
- In the ensuing days and weeks, Russia bombarded ports and export infrastructure in Odesa as well as on the Danube along the border with Romania (not strictly part of the grain export deal).
- Turkiye’s President Recep Tayyip Erdogan claimed Russian President Vladimir Putin signaled his willingness to come back to the deal in the days after the deal’s end, though Putin has since clearly demurred, including in a meeting with Erdogan in early August.
- Central European nations—Poland, Hungary, Romania, Slovakia, and Bulgaria—have likewise blocked imports of Ukrainian grain through September 15, when the countries have signaled their interest in extending the blockade through the year’s end to protect local agricultural producers from competition.
- China voiced its disfavor with Russia’s termination of the deal, with China receiving around 25% of Ukraine’s grain exports this past year.
Our View
Ultimately, Russia has weaponized grain, identical to gas and oil earlier in the war, with the intention to undermine both Ukraine and its Western backers in this war of attrition. Given this context, although still possible, Russia is unlikely to return to the grain deal. Moscow’s complaints regarding the deal are facetious, indicating its disinterest in sincere attempts to revive the deal. Moscow ostensibly seeks the reconnection of Rosselkhozbank (Russian Agricultural Bank) to the SWIFT international payments system and an end to an alleged ban on Russia’s grain exports, despite the fact that no ban is in place and Russia has been able to process payments via other banks. Far more likely, Russia is likely pushing for major sanctions relief across the board—not just related to the Russian agricultural bank—as a concession for returning to the deal, which the West is hardly likely to consider. Moreover, Russia’s destruction of export infrastructure at several ports demonstrates its longer-term interest in devastating this vital lifeline of the Ukrainian economy amid the war.
Perhaps more telling, Moscow’s political motivation for staying in the deal has seemingly been deprioritized. While for the previous year Russia had been incentivized to sustain the deal in deference to its interests in currying favor with the Global South against the Western world, in this post-Prigozhin-mutiny political environment, domestic interests now trump foreign ones. With consistent complaints from hardline, right-wing nationalists who strongly opposed the grain deal since its inception, Putin likely made a political calculation to appease these vocal and hostile domestic interests. Not unrelated, Putin has now sought to silence all opposition to the war, and thus arrested the right-wing leader Igor Girkin, who had been highly critical of the war, in a turn of policy demonstrating that criticism of the war would no longer be tolerated. Ending the grain deal helps mollify these disgruntled nationalist forces.
Furthermore, Russia benefits economically from the grain deal’s termination. Between July 2022 and July 2023, Russia exported a record-high 60 million tons of grain, and with expectations of a further record to be set in the coming year. The timing is also propitious: harvest season has begun and removing Ukrainian grain from global markets boosts prices just as Russia exports record volumes.
Meanwhile, the impact on Ukraine is substantial but manageable. Export losses are estimated at around US$ 800 million per month from this—a sizable but absorbable amount to Western donors providing tens of billions since the war’s onset and at least through 2024. Meanwhile, should the Danube export corridor remain open, Ukraine’s expected monthly export volumes of ~4 million tons, down significantly due to loss of grain output from the war, in the future can nearly be satisfied even with the end of the export corridors out of Odessa guaranteed by the grain deal.
Under current conditions with the Danube and Odessa ports closed, however, Kyiv’s economy will be under notable pressure. Prior to the war, agricultural exports amounted to 40% of all exports with nearly all exported via the Black Sea. Though Kyiv has signaled its intention to continue exports, it is unlikely to be able to reopen its supply chain routes by force, and Western countries are highly unlikely to provide passage given the risk of expanding the war into a direct NATO-Russian conflict. We have seen Ukraine retaliate already with attacks on Russian ships in Novorossisyk, indicating an uptick in assaults on Russian military and commercial ships supplying the military.
More broadly, the end of the grain deal further intensifies the need for Ukraine to win this war sooner and motivates the Western world to assist this not just for Ukraine but also to help lessen the global fallout. The impacts on inflation and resulting civil/political fallout in Europe are considerable, in addition to the humanitarian implications for Africa and elsewhere, with the potential for rising migration to Europe as a result.
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