Collapsed ‘grain’ and ‘gas deals’ spell disaster for Europe

9:46 08.08.2023 •

Amid the never-ending coverage of the latest offensive or counteroffensive in Ukraine, it is often unappreciated just how much worse the global economic repercussions from the conflict could have been. Russia is the world’s leading exporter of gas and provided around 50% of the EU’s demand before the war; Ukraine, meanwhile, is a major exporter of grain, alongside Russia itself. The complete disruption of either of these channels would have resulted in catastrophe, warns Thomas Fazi, a British ‘UnHerd’ columnist.

The fact this didn’t happen last year was largely thanks to two crucial agreements secured early in the conflict: the Black Sea Grain Initiative, whereby Russia allowed Ukraine to continue exporting grain via the Black Sea (which is under its control), and a deal that allowed Russian gas to continue flowing to Europe via Ukraine. But the former has just been suspended, and the latter could soon be terminated. The true cost of this war, it seems, is about to greatly increase.

On July 17, however, Putin pulled out of the deal. Russia’s move didn’t come out of the blue. As Western sanctions increased, the deal had started coming under growing strain, with the Kremlin claiming that the West wasn’t holding up its end of the bargain, which allowed for more Russian agricultural and fertiliser exports.

For this to happen, Russia insisted on reconnecting the Russian Agricultural Bank to the Swift international payment system and, among other things, the unblocking of assets and accounts of those Russian companies involved in food and fertiliser exports.

But the most important demand was the resumption of the Togliatti-Odessa ammonia pipeline, which runs from the Russian city of Togliatti to various Black Sea ports in Ukraine, and which prior to the war exported 2.5 million tonnes of ammonia annually. As part of the negotiations over the Black Sea Grain Initiative, Kyiv and Moscow struck a deal to allow the safe passage of ammonia through the pipeline — but the latter was never reopened by Ukraine. Last September, the UN urged Ukraine to resume its transport, in view of ammonia fertiliser’s crucial role in supporting global agricultural productions, but to no avail.

Then, last month, Russia once again demanded once the reopening of the pipeline as a condition for renewing the Black Sea Grain Initiative. Just a few days later, a section of it located in Ukrainian territory was blown up — according to Russia, by Ukrainian saboteurs, in a deliberate effort to sabotage the grain deal. In any case, the fate of the deal was more or less sealed at that point: when Dmitry Peskov, Putin’s spokesman, announced a month later that “the Black Sea agreements are no longer in effect”, few were surprised. The decision came just a few hours after Ukraine’s strike on the bridge connecting mainland Russia to Crimea.

As Oxfam has claimed, based on data from the UN’s Joint Coordination Centre, less than 3% of the grain from the deal went to the world’s poorest countries, including Ethiopia, Sudan, Somalia, Afghanistan and Yemen. By contrast, approximately 80% of the grain has been shipped to richer countries, mainly EU countries and China.

And the price will be paid by Western countries, too. Now that the Black Sea Grain Initiative has been paused, even greater quantities of Ukrainian grain will be transported overland across Europe through so-called “solidarity routes” set up by the EU. Yet problems had already arisen before the initiative collapsed, as cheap Ukrainian grain, much of which was exported by tax-avoiding shell firms, flooded local markets, where they undercut local produce and angered farmers.

In response, in April, the governments of Poland, Bulgaria, Hungary, Romania and Slovakia introduced unilateral bans on Ukrainian grain until an EU deal was agreed that made it possible to reduce pressure on local markets, while at the same time enabling the transit of Ukrainian goods to traditional markets in non-EU countries. With the suspension of the Black Sea Grain Initiative, however, the pressures are likely to increase.

At the moment, the future of the deal remains unclear.

And it appears a similar story of obstruction seems to be playing out with Russian gas exports.

Despite the war, Russian gas has continued to flow through Ukraine into Europe — softening the blow of the EU’s intention of decoupling from Russian energy while allowing Ukraine to raise much-needed cash in the form of transit fees.

In a recent interview with the Financial Times, however, German Galushchenko, Ukraine’s energy minister, said that Kyiv is unlikely to renew the gas transit deal when Ukraine’s supply contract with Gazprom expires in 2024. In practice, this would mean the closure of one of the last arteries still carrying Russian gas to Europe, a move which would severely weaken many energy-dependent EU countries.

Recent analysis by Columbia University’s Center on Global Energy Policy suggests that deliveries to EU countries “could drop to between 10 and 16 billion cubic meters (45 to 73% of current levels)”, according to a June analysis by Columbia University’s Center on Global Energy Policy, leaving Europe with a shortfall that cannot currently be replaced with greater liquefied natural gas imports from the US and Qatar.

Moreover, the loss of even a small percentage of supply has the potential to raise prices across the continent, given the tightness of global gas markets.

In Germany, for instance, the economy minister has hinted that the country will be forced to significantly wind down its industrial activities if the gas agreement isn’t extended at the end of the year. For a country — and indeed a continent — already struggling with creeping deindustrialisation, the consequences could be devastating.

This is especially worrying if we consider that, barring the same higher-than-average temperatures as last year, this winter Europe will have a natural gas deficit of at least 60 billion cubic meters. In other words, it’s not inconceivable that another gas crisis is around the corner — and it might be even worse than last year’s, Thomas Fazi concludes.


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