The Peter Zeihan Podcast Series - Russia Terminates the Black Sea Grain Deal with Ukraine || Peter Zeihan

Episode Date: July 18, 2023

Russia announced on Monday that the Black Sea grain deal will not be extended. This initiative has enabled Ukraine to export agricultural products through Russia’s blockade of the Black Sea; however, Ukrainian exports are only at a fraction of pre-war levels. Full Newsletter: https://mailchi.mp/zeihan/russia-terminates-the-black-sea-grain-deal

Hey everyone, Peter Zion coming to you from Colorado. Today I want to talk about the wheat situation in Ukraine and Russia. Now, for the last several weeks, UN staff and diplomatic personnel from Turkey and Pacific have been working to broker a deal that would allow Ukrainian wheat to leave Ukrainian ports under Ukrainian control and get to the wider world. There's a lot of moving pieces here. For one, the Ukrainians of mine to their own ports to inhibit the Russians of to launch amphibious assaults, so they have to guide the vessels through. And then, of course, the Russians are assaulting everything that moves and a lot of things that are not. So you have to get the Russians to agree to stop their assaults on the ports. Now, right now, the Ukrainians have about 18 million metric tons stored up in their silos at or adjacent to their ports. That's a lot that needs to move. That is in excess of half of a normal harvest for the country. On Monday, August 1,

we got our first ship, the Rizoni, to dock, to load up, and to leave for Lebanon. It's carrying 26,000 metric tons. So we need 700 more ships of this size if we're going to get that grain out. Unfortunately, the Ukrainian harvest starts in less than 45 days. So you're talking about needing to get a dozen or so vessels in there every single day. So far we've had one. I don't have a lot of hope for this. And then the real problem, of course, is next, is the harvest. Two problems. Right now, the Ukrainians have nowhere to put it. Their silos are full from last year's harvest.

They weren't able to export because the war started back in February. And second, even if the farmers were able to work their fields and not be molested by Russian troops, and remember, we've already had mass evacuations from eastern and southern Ukraine, the problem remains is that they can't get fuel into the country. So you're talking about needing to harvest industrial levels of wheat, without industrial equipment and that's just not possible. So likely end result here is that this is the last year that Ukraine participates in international grain markets. They simply don't have the capacity

to get stuff up at a scale. In fact the only place that they might be able to ship stuff is by rail and at most with significant upgrades that have not yet been done. They can probably only ship about one-fifth of their normal produce out that way. The rail lines are just not designed for that kind of bulk cargo and a lot of them have to transit a little territory called Transnistra, which is under Russian control. You remove the world's fourth largest wheat exporter from the market, and you're going to look at cascading problems, not just with food prices and malnutrition, but civil conflict and breakdown, most notably in the Middle East. The last time we had a doubling of global wheat prices, we saw the Arab Spring back in 2011. What we're dealing with is an order of magnitude

more complicated and deeper rooted. And to think that we're only going to have a doubling of prices is ridiculously optimistic. Now, in the United States, this isn't necessarily a disaster. You double the price of wheat. You actually only increase the cost of a loaf of bread by 25 cents. We don't subsidize food processing like, say, Egypt does. So here, it's a little uncomfortable. It'll probably be noticed, but it's not going to be a deal killer.

Other parts of the world, not so much. The Russians are throwing a bit of a fit about the grade and important they have with the Ukrainians. Now, Ukraine until very recently was one of the world's five biggest agricultural exporters for wheat and number four in corn and it's number one in sunflower, you know, all important things that help prevent a lot of countries from starving to death. Well, the problem is that most of the stuff that comes out of Ukraine is shipped by water. It's far easier to chip things by water than it is by land. in terms of rail versus water, about a three to one cost difference. And Ukraine is perfectly set up for that,

because they've got the Nipa River that cuts right south to north through the middle of the country. And so everything just gets on the arch, goes out, eventually hits the city of Kyrson and Odessa, are put onto big bultures that then take it through the Black Sea, the Turkish straits, and the rest of the world. What has happened, however, is with the Russians first capturing Pearson

and then putting Odessa under assault, This has all been disrupted. So the only way to move things out of Ukraine at present is by rail. And not only does Ukraine not have a well-developed rail system, it doesn't use the same gauge as the European ports. So it's been very, very difficult to get out. Really less than about one out of six bushels that they use to ship, they can ship now. Now, the Turks in league with the United Nations have convinced the Russians to sign on

to a grain deal. And this grain deal allows ships to come into Odessa, get searched by the Russians on the way in to make sure they're not carrying weapons, and then load up with grain, and then get searched on the way out to make sure that they're not carrying anything that the Russians don't want to get out.

This has increased the volume to about 20 to 25% of the volume that the Ukrainians could do before the war. So still not great. Now, if you've been following the war, you know, that throughout the winter, the Russians have been bombing the power grid with drones and missiles to try to kill as many Ukrainians as possible. They've been doing this in the winter, thinking that if you can freeze the country to death, many tens of thousands, about hundreds of thousands of people

be injured and killed, and that might weaken the war effort. Once we get to summer, that's going to change. So what the Russians are facing here is they, the grain deal is normally renegotiated every 120 days. They're now insisting that they've only wanted 60-day renewal. Well, if you fast forward from late March, 60 days, we're getting into the beginning of summer. In the beginning of summer, the Russians won't have a vested interest in destroying the power grid because no one's going to freeze today. So they're going to go after the agricultural system, everything from fertilizer on the front end

to the silos and the rail stations on the back end to try to kill as many people as possible that way. So last year was probably the last year that Ukraine will be a significant agricultural exporter at Paul. And we should not expect to see the Green Deal renewed Cullate May. That's just a situation we're at. And if you throw in the problems with natural gas and nitrogen processing in Europe hitting the fertilizer market, the problem's getting potash out of Belarus hitting the fertilizer market, the problem's getting phosphate out of China heading the fertilizer market.

Later this year is going to be really rough for a lot. of places. I want to use today as an opportunity to talk about some of the agricultural things that are going on in the Ukrainian space. Specifically, we now have a coalition of five EU countries that have decided they're not going to accept any shipments any longer from Ukraine. They'll still allow transshipments. So it's not like this stuff is completely gone now, but they're not going to take the deliveries themselves. You've got five countries, Poland, Hungary, Slovakia, Bulgaria, and Romania, all of who are relatively significant agricultural. cultural producers for a lot of the same products that come out of Ukraine.

And what's been happening is the Ukrainians have lost the ability to do their normal export systems. Normally, they would ship everything out by water down the Niebuhr, get a package at a place like Nikolaiv or Odessa and then shipped out to the wider world. Or they would process it and crush it in the case of sunflower at home and then ship out the intermediate product. They can't do any of that right now. Power grid is not stable enough to do the crushing, and most of the crushing is in ports, several of which are under Russian control, and the Russians have the ability, because they have naval supremacy in the area, to prevent any sort of bulker from coming or going without their express say-so.

Now, there has been a deal in place that allows the Ukrainians to export somewhat. Basically, the Russians insist on inspecting the bulker on the way in and the way out to make sure it's not being used to smuggle, and that deal has basically fallen apart now. So it's been going less and less and less over the winter, and now it's basically defunct, and the Russians are indicating that they really have no intention of re-upping it at all. Now, this used to be 80%, almost 90% of Ukraine's exports. You can rail stuff out, but now three problems.

Number one, there's a different rail gauge between the European Union and the former Soviet world, so that's a problem. And there are only so many carriages that can adjust. Number two, all of the countries that, are on the edge, you know, Poland, Romania, and the rest, they're all grain exporters themselves. So when the Ukrainian stuff was coming in, it was getting dumped on the local market, local farmers were getting quite aggroved, and now they can't do that. So you can still export it through these countries to other places, but then you need twice

as many rail cars that are capable of that jump, or you need a facility at the border that can shift the grain from one car to another, and those just don't exist at scale, and now you need twice as many to get the same amount of stuff out. So all told with these two problems in place, you're looking at Ukrainian grain exports dropping by roughly 80 to 92%. And there's really no way around that. The third problem is that processing stage. The Ukrainians, while always being a significant exporter of the raw stuff,

also did a lot of crushing specifically for their sunflowers. Well, with that crushing now inaccessible, they need to find another facility. There are facilities in all five of these countries, but they process local stuff. So once you process an agricultural commodity into things like oil, it takes up a lot less space. It's higher value to bulk. Well, not only are the Ukrainians not able to do that now, so they've got this higher, bulk, lower value product.

They have to send it farther. And it just takes too much effort and too much cost, and there's not enough infrastructure to support it. They've been trying to build out the rail system. They've been trying to bring in more rail. carriages, but it just hasn't been enough to move the needle. And so even without the Russians deliberately attacking the agricultural infrastructure, which they are doing, you're still looking at that 80 to 90 percent reduction in the ability of Ukraine to participate in the international market. The biggest losers, aside from the Ukrainians, of course, are the Egyptians,

who source the majority of their imported wheat from Ukraine specifically, but there's a large number of countries in Africa and in South Asia that source ultimately Ukrainian and to a lesser degree Russian wheat and we're going to see all of them get hit to a significant degree. The question will be if we get to a point where the Russians start actually targeting shipments themselves. We're not there yet. It's probably just around the corner. The only way that this is going to change is the Ukrainians get access to the water again. And that means if this counteroffensive that they've just launched is successful, it would have to include, at a minimum, the liberation of the entirety of the Crimean Peninsula. Because most of the grain goes down the Nieper River to Odessa.

And as long as any part of that route is within range of Russian weaponry, it's just a no-go. So you're talking about them having the Ukrainians would be deliberate the entirety of southern Ukraine and the entirety of the Crimean Peninsula. and that is a very, very tall order probably won't happen this year, which means that any of the agriculturalists and farmers in Ukraine who get screwed this year because of a lack of export options won't have the income that's necessary to afford to plant next year. And assuming a runaway Ukrainian victory, it still means that Ukraine is not going to be a significant agricultural player in the world for several years. And then, of course, if the counter-defense fails, a lot longer than that.

You know,