Russia calls off grain deal after Crimea bridge strike, revokes safety guarantee

Russia has officially sent a letter formally objecting to the extension of the Black Sea grain deal to the primary stakeholders in the four-way agreement, in which the government has revoked its safety guarantee in the region, a statement from the Russian Ministry of Foreign Affairs said Monday. 

"In accordance with Paragraph H of the agreement, the Russian side objects to its further extension, of which the Turkish and Ukrainian sides were officially informed today, and the UN Secretariat was also notified," the statement said.

The move follows an explosion that has reportedly caused damage to a key strategic bridge linking the Russian mainland with the disputed region of Crimea - first invaded by Russian forces in 2014.

"This means the withdrawal of guarantees for the safety of navigation, the curtailment of the maritime humanitarian corridor, the restoration of the regime of a temporarily dangerous area in the northwestern Black Sea and the disbandment of the SKC in Istanbul," the statement said, declaring that "without Russia's participation, the 'Black Sea Initiative' ceases to function from July 18." 

Along with that, the Russian ministry supported its statement with another swipe at familiar themes around the intention of the corridor as a humanitarian supply chain for the developing world. 

The letter claimed that the initiative is "contrary to the declared humanitarian goals, the export of Ukrainian food was almost immediately transferred to a purely commercial basis and until the last moment was aimed at serving the narrowly selfish interests of Kyiv and its Western curators." 

A regular complaint from Russia has been their assertion that the bulk of Ukraine's exports have gone to developed countries, such as the European Union, instead of developing countries that Russia claims the scheme was intended to help.  

It was also said that, "the geography and commercialization is clear", as big parts of the land in Ukraine is owned by western corporations such as Cargill, DuPont and Monsanto," according to the statement - international players many of which have curtailed operations in Russia in recent weeks.

Along with that, the statement also said European buyers are importing Ukrainian products effectively at dumping prices - processing it and then re-exporting it as goods with added value.

But the statement also later claimed Ukrainian grains were "bad quality," seemingly contradicting the statement's own earlier argument that grain was being dumped to depress prices and that processing it was controversial, especially given the strict quality rules applied in the bloc.

"In addition, the US and EU are speculating on prices, creating an artificial shortage of goods, and are pushing Russian agricultural products out of world markets through the imposition of illegal unilateral sanctions," it said.

Against that, the document also returned to regular complaints about what Russia was getting out of the agreement - with previous complaints about access to the international financial system along with acknowledgement that the requests had not been met.

That included a requirement to reconnect government agricultural bank Rosselkhozbank to the SWIFT payment system, a move that had not been realised despite a “feverish last minute” proposal from the UN secretary general that was “unrealizable and unviable”.

The first response came from Turkish President Recep Erdogan quoted in local media just before heading to Saudi Arabia that “thanks to the deal up to 33 million mt of grains were delivered," and hoping that Russian president Vladimir Putin would "want this humanitarian bridge to continue."

While the UN's official statement said that they deeply regret the Russian decision, but that the organization will not stop their efforts to facilitate unimpeded access to global markets for food products and fertilizers from both Ukraine and the Russia.

"With the decision to terminate the Black Sea Initiative, the Russian Federation also terminated its commitment to “facilitate the unimpeded export of food, sunflower oil, and fertilizers from Ukrainian controlled Black Sea Ports” -- as expressed in Paragraph 1 of the Memorandum of Understanding between the Russian Federation and the United Nations," according to the statement, which can be found here. 

"Ultimately, participation in these agreements is a choice. But struggling people everywhere and developing countries don’t have a choice," the note has also said. 

Finally, Vladimir Zelenskiy, the president of Ukraine, has said in his official statement that while Russia withdraws its agreement with Turkey and the UN, it does not mean the agreement between Ukraine, Turkey and the UN has also stopped. 

"Even without Russia, all needs to be done so that we can continue to use the Black Sea corridor. We are not afraid. We were approached by companies that own ships. They said that they are ready if Ukraine will let them go and Turkey will allow them to pass, to continue supplying grains," the statement said. 

He also added that he has ordered the foreign affairs minister to prepare the official signals to the UN and Turkey, thus they would respond to the president of Ukraine that they are ready to continue the initiative. 

Meanwhile, in the early morning of Monday, the Russian bridge over the Kerch Strait was attacked in what Russian authorities claim was a Ukrainian attack.

Ukrainian authorities have not commented on the explosion, but did recently confirm an earlier attack on the bridge back in October 2022 that caused Russia to pull out of the grain corridor deal at the time.

Trade sources have said that the Kerch Strait - the key waterway connecting the Azov Sea with the Black Sea, is currently closed to commercial vessels and transshipments, meaning that grain loadings from Azov and Kavkaz ports are currently suspended for an unknown period of time.

As a reaction to the news, Euronext wheat futures moved up by €5/mt for September to €235/mt and €3.75/mt to €242.25/mt for the December contract as of 12.40 EU time - a relatively modest response, according to trade sources. 

But later in the day, the futures market calmed, with the end of the day increase only at €1/mt and 50 cents respectively. 

“Yes, (futures are up) with the potential end of the corridor. Even if I think an agreement will be reached this week, you have a reaction on the risk of this halt and Matif is up,” one broker told Agricensus - referring to the old name for Euronext French milling wheat futures contracts.

“I think the reaction is not 100% priced in. I'm wondering how the end of corridor could impact freight premiums out of Russian panamax ports as, without the corridor, Russian ports could also become exposed to Ukrainian strikes, which was not the case when the corridor was open,” one trader said.

The Ukrainian strikes could represent a significant escalation of the situation, but a muted response from futures came as the slow strangulation of the corridor means that Ukraine has been struggling to export via the Black Sea's deep water ports anyway, and focus has already switched to Danube ports and other export alternatives. 

The deal was originally signed back in July 22, 2022 and so far has enabled 32.8 million mt of agriculture products to be moved from Ukraine to the world market - with most of the volume accounted for by corn and the biggest single customer to date proving to be China.

The aim of the deal was to facilitate exports from three deep water Ukrainian sea ports - Pivdennyi, Odesa and Chornomorsk - as the international community tried to cap world food prices that had surged in the immediate aftermath of Russia's invasion of Ukraine in February 2022.

“Crops from Ukraine are sold around the world, including to countries where some of the population is experiencing food insecurity. Cargoes may be processed and re-exported from the initial destinations,” a statement from the UN said at the time.

“The Initiative does not stipulate where exports should go. Exports to any country, rich or poor, however, can help to calm global markets and mitigate food price inflation,” it continues.

However, since June 26 no new inbound vessels have been registered for the scheme, as Russian inspectors have slowed the pace of inspections effectively to a standstill. 

For vessels that were already in the queue, the lack of inspections on inbound vessels has starved Ukrainian ports of new vessels and there are currently 28 vessels still waiting for inspection.

Last week, market talk suggested that the UN had offered to try and reconnect financial institutions to the international system SWIFT in return for extending the grain deal, but no more details on this were heard and the UN has previously said that its influence in banking arrangements is minimal.