Sergei M. Smirnov

Admiral Nevelskoy Maritime State University, Vladivostok

Abstract: The article analyzes the causes and features of the crisis in the world grain market, the role of international organizations and non-economic factors that contribute to the development of a negative scenario. The author describes specifics of the grain export logistics system in the Russian Federation, which ranks first in the world in the supply of wheat. Until recently, the main focus in this area was on the development of infrastructure at deep sea terminals in the Black and Azov Seas, the main importers of Russian grain were in the countries of the Middle East, North Africa and South Asia. However, current trends in the grain market require a reorientation to consumers from the Asia-Pacific countries. Specific recommendations are proposed for the creation and development of transport and logistics infrastructure and technologies for processing grain and its products in the eastern territories of Russia and in the Far Eastern seaports.

Key words: grain market; Western sanctions; deep-sea terminals; transshipment hubs; containerization of grain; Black Sea Grain Initiative

In the spring of 2022, at the suggestion of the leading UN agencies – the FAO (“Food and Agriculture Organization”) and the WFP (“World Food Programme”), the topic of the threat of a food disaster in the world due to the events around Ukraine began to unwind. WFP Executive Director David Beasley1 spoke about this with particular emotional anguish: Right now, Ukraine’s grain silos are full. At the same time, 44 million people around the world are marching towards starvation. We have to open up these ports so that food can move in and out of Ukraine. The world demands it because hundreds of millions of people globally depend on these supplies. We’re running out of time and the cost of inaction will be higher than anyone can imagine. I urge all parties involved to allow this food to get out of Ukraine to where it’s desperately needed so we can avert the looming threat of famine” [1].

I apologize for such a long quote. However, it is important for understanding how destructively political decisions can affect the economy, and what do the activities of respected international organizations look like at present. A little over two years ago, the WHO “distinguished itself” by rushing to declare a deadly COVID- 19 pandemic and after that essentially withdrew itself from coordinating efforts in the fight against the disease, not to mention leading the process. The genie has been released from the bottle. Chaotic lockdowns, quarantines, the war of vaccines, etc., dealt a powerful blow to global supply chains, led to a general imbalance in the global economy, shortages and precipitous price increases in a number of its key areas.

The global agricultural market looked quite decent and stable against this background. A good harvest in 2021 and optimistic forecasts for 2022 did not give any reason to worry about the fate of the world population. If it were not for the consequences of the logistics crisis – a shortage of containers, disruptions in the schedules of liner carriers, as well as echoes of the fight against a new coronavirus infection. However, the indiscriminate anti- Russian sanctions of unprecedented scale – the de-facto blockade of seaports, restrictions on transport insurance, the impossibility of making financial transactions within the banking system, etc. happened to become the main destabilizing factor for the agrarian market – 2022.

Russia ranks first in terms of wheat exports in the world, Ukraine is in the top five. The share of these countries in the export of oilseeds and vegetable oil is even higher. The main volume (up to 80-90%) of grain exports from both countries falls on the deep- water ports of the Black and Azov Seas.

The crisis around Ukraine, which escalated after 02/24/2022, of course, organizationally complicated the situation with the export of agricultural products from the Black Sea region, especially grain.

Nevertheless, it would be a big mistake to evaluate this situation in a simplified “black and white” pattern, in particular, to believe that the transportation of “Ukrainian” grain is being hampered solely because of the ongoing hostilities. In fact, the structure of the grain business and logistics in the region is so intertwined that it is almost impossible to establish for certain who is the owner, partner or beneficiary of a particular transaction. This business involves transnational corporations, large and medium traders, agricultural holdings, while the share of state-controlled companies is small in both Russia and Ukraine. Customs statistics and port reports also do not give a complete picture of “whose” grain is being shipped. Therefore, the imposition of Western sanctions on specific ports of shipment, specific consignments of grain exports, and specific banks through which payments are made just imitates vigorous activity, but in reality, it seriously worsens the already difficult situation in the global agricultural sector.

According to leading analytical agencies, freight rates for grain transportation have increased by 30–70% since the beginning of this year, depending on the route [2]. Combined with the increase in purchase prices caused by negative expectations of impending grain shortages (for which there are no grounds in principle), the threat of food deficiency due to its sharp rise in prices and of subsequent famine looks quite real today, especially for developing countries in Africa and South Asia. The concern from the UN bodies is appropriate here. However, the methods proposed by the United Nations bureaucracy [3] highlight their ‘concern’ and imitate activity instead of solving the problem on the merits. Just like it was two years ago during the “crusade” against the coronavirus.

Well before the start of Russian special operation, some Ukrainian companies tended to slow down grain deliveries; perhaps they were simply not technically ready to fulfill their obligations under export contracts. For example, in May 2022 Egyptian General Directorate for the Supply of Goods terminated the contracts for the purchase of 240,000 tons of wheat from Ukrainian supplier companies Inerco2 and Nibulon3. Further, it was reported that

Ukraine has already exported 18 million tons of grain by mid-April 2022, which is 90% of the annual USDA estimate [2]. It turns out that for more than three months between April publication and signing of the UN sponsored ‘Black Sea Grain Initiative’4, Ukrainian companies did not export grain at all, otherwise where did the 3 million tons stored in Odessa, Yuzhny and Chernomorsk (seaports mentioned in the agreement), come from? The transit of Ukrainian grain and other cargo via the Dniester River and overland routes to the countries of Eastern Europe, including Romania and Bulgaria, which have sea grain terminals, has not been hindered at all. Moreover, even according to Ukrainian media reports, the grain storage and processing system (elevators, silos, dryers, transshipment terminals, etc.) was practically not damaged despite the continuing hostilities in various parts of Ukraine [4]. All these details and inexplicable discrepancies in figures make us think about the background of the current situation with Ukrainian grain exports and, in general, about the threats and challenges in the global food sector. The events of 2022, having created a number of serious problems for the Russian grain industry, at the same time contribute to a long overdue rethinking of the strategic vector of the industry’s development. The previous emphasis on the development of deep sea grain terminals in the Black Sea basin5 was reasonably justified from a commercial point of view – proximity to the main areas of production of marketable grain, to primary importers, the availability of labor resources and a modestly developed transport and elevator infrastructure. Grain is shipped to consumers in large batches loaded onto ships with a deadweight of up to 70,000 – 110,000 tons directly from wagons or through port elevators – silos for temporary storage. Grain is delivered to the port, as a rule, by rail in special wagons – grain carriers. The main export product is wheat in grains.

The main importers of Russian wheat today are Turkey, Egypt, Iran, Saudi Arabia, Sudan, Nigeria and Bangladesh. Geographically, most of these countries are convenient for delivery from the Black Sea ports; politically today, they are also “not unfriendly“. However, the consumption markets of these countries have limitations in terms of capacity and solvency, and uncontested maritime communications through the Black Sea straits are subject to existential strategic threats. Therefore, the issue of diversifying the infrastructure serving domestic grain exports is becoming very relevant today. Especially, taking into account the trends on the global market of grain products [5]. As of 2021, six countries in Northeast and Southeast Asia6 were among the top 15 wheat importers in the world, with Indonesia topping the list with 6.1% of global wheat imports ($3.5 bn). At the end of 2021, Asia-Pacific countries showed the highest dynamics of growth in grain imports: Vietnam increased wheat imports by 57.1%, the Republic of Korea – by 39%, Japan – by 17.1%. At the same time, the situation with wheat exports from Russia to the Asia-Pacific countries is paradoxical: in 2021, the volume of deliveries to Indonesia (I remind you that this is the world’s main wheat importer) almost halved and amounted to less than $1 million ($825,000), which is 60 times less than that of Bulgaria, and 1000 times less than Ukraine. China bought $13.8 million worth of Russian wheat last year, which is 60 times less than imported from the US and 1.27 times less than purchases from Lithuania. The only exception is Vietnam, where the volume of Russian wheat exports increased, but in absolute terms, it was insignificant.

Such an obvious bias in the geography of grain exports is explained by both domestic infrastructural restrictions and underestimation of market tendencies, incl. determined by non- economic factors. In fact, these two aspects are interrelated.

As mentioned above, the main volumes of domestic transportation of grain fall on the railroad. In September 2020, the “Russian Railways” network loaded 3.083 million tons of grain cargo, which is 1.4 times more than in the same period last year and 10% higher than the record figure set in August 2020. 1.96 million tons of it were sent for export (+45.4% compared to September 2019), 1.126 million tons (+41.9%) were sent to the domestic market. In general, since the beginning of 2020, more than 18.3 million tons of grain have been loaded (+24% compared to January- September 2019). The largest volumes of grain were sent from Kursk (2.08 million tons, an increase of 1.8 times), Saratov (1.5 million tons, an increase of 1.9 times), Volgograd (1.16 million tons, an increase of 1.6 times), Lipetsk (1.1 million tons, an increase of 1.4 times), Tambov (0.9 million tons, an increase of 1.6 times) regions, Stavropol (1.2 million tons, -16%), Krasnodar (0.9 million tons, -8%), Krasnoyarsk (747 thousand tons, + 22%) territories. Export shipments of grain by rail for 9 months amounted to 10.6 million tons (+35.4%). The largest export volumes were sent to consumers in Egypt, Azerbaijan, Turkey, Israel, Kazakhstan, Belarus, China and Mongolia [6].

1 David Beasley gained notoriety as one of the youngest politicians in the United States, having taken his first seat in the South Carolina state congress at the age of 20, when he was still on the student bench. After sitting there for 12 years, including as the Democratic whip, David Beasley decided to change party affiliation and became the governor of his state for one term nominated by Republicans. Unsuccessful assessment of the political situation – the fight against the spread of the ideology of the Confederates in the “southern” state – cost him a loss in the next gubernatorial election. The «New Republican» Donald Trump pulled Beasley out of political oblivion 18 years later and found him a warm place as the head of the WFP.

2 INERCO is a subsidiary of the Ukrainian agricultural holding “Kernel”, the largest supplier of sunflower and sunflower oil. From 2012 to 2020, Kernel was a co-owner of the new export grain terminal “Taman” (Russia), but sold its stake to the VTB group.

3 NIBULON is one of the largest agricultural holdings in Ukraine and Europe. The name of the company was originally deciphered as NIkolaev, BUdapesht, LONdon. It has its own

sea terminal in Nikolaev, a transport fleet and 445 granaries throughout Ukraine. Taking into account the declared logistics potential, the company had to fulfill a relatively small contract for the supply of grain to Egypt without any problems. Aleksey Vadatursky, the founder and permanent leader of Nibulon, died under suspicious circumstances in his house in Nikolaev City on July 31, 2022.

4 UN Secretary-General António Guterres at the signing ceremony in Istanbul, Türkiye, on Friday, July 22 described it as an “unprecedented agreement” on the resumption of Ukrainian grain exports via the Black Sea amid the ongoing war… a beacon of hope in a world that desperately needs it.” https://news.un.org/en/story/2022/07/1123062

5 The main grain export centers of the Russian Federation are the following: the port of Novorossiysk – “KSK” terminal (capacity 6 million tons per year), “Novorossiysk grain terminal” (6.5 million tons), “Novorossiysk grain products plant” (6.14 million tons); Taman port (5, 5 million tons); the port of Azov – the terminals “Louis Dreyfus Commodities Vostok”, “Rif Trade House” (“Promexpedition”), “Azov Port Elevator”, the total capacity of 7 million tons; the port of Tuapse – the “Tuapse grain terminal” (3 million tons). For comparison, the only specialized grain terminal outside the Black Sea basin, JSC “Port elevator” is located in the seaport of Kaliningrad enclave and has an incomparable throughput capacity (about 100 thousand tons of agricultural cargo per year).

6 In descending order: Indonesia, China, Philippines, Japan, South Korea, Vietnam.

(End of introductory fragment)