KYIV BLOG: Grain, grain go away…

KYIV BLOG: Grain, grain go away…
Ukraine is being strangled by Russia's restrictions on its grain exports and the budget is in increasing trouble / bne IntelliNews
By Ben Aris in Berlin November 14, 2023

There are two important grain stories in the list today. Firstly, Ukraine is on course to bring in a bumper harvest, but thanks to the war with Russia grain exports are down by a third in recent months and Ukraine’s farms are loss-making.

In the second, Russia is also on course to bring in a bumper harvest – and not just any bumper harvest, a really big one. Again thanks to the war Russia should take in over 150mn tonnes of grain. That is about 20mn tonnes more than the average good harvest pre-war. The additional grain is of course due to harvesting Russia’s “new” territories.

That means that Russia is exporting record amounts of grain as a result – about 15mn tonnes more than the pre-war average – and this earns really good money; billions of dollars. Moreover, remember that not only is grain not sanctioned, as grain is a quintessential commodity, any shortages anywhere send prices up everywhere. The West can’t sanction Russia’s grain exports even if it wanted to as food inflation is already a big global problem.

The bottom line is that while the West has attempted to sanction Russia with middling success – the Russian economy is actually doing better than most EU economies – Russia has in effect sanctioned Ukraine’s grain exports at the point of a gun with a lot more success.

We have another story in the list reporting Finance Minister Serhiy Marchenko’s comments that Ukraine’s 2024 budget has a $29bn hole in it of international aid that is not allocated to anyone. This is partly due to the falling US support but the problems have been compounded by the falling export revenues due to the lower than hoped export of grain amongst other things; Ukraine is currently running a trade deficit that is putting even more pressure on its budget.

Ukraine is ok for the moment, but worrying signs are appearing. International reserves have fallen for three months in a row, but are still at record highs. But the numbers are starting to not add up.

Ukrainian Prime Minister Denys Shmyhal said earlier this month that Ukraine anticipates receiving $18bn from the European Union in 2024, approximately $12bn from the United States, and another $13bn in odds and sods, which would cover the $41bn the 2024 budget has pencilled in. EU foreign policy chief Josep Borrell was talking about the EU upping its contributions to €30bn next year, without giving much details on why and where from. Someone amongst this list is not paying their fair share and countries like German have already made it clear it is not happy about covering for the slackers.

But it's starting to look like Ukraine is going to have a funding crisis again next year. Marchenko is already talking about spending cuts and raising taxes, but there is not much wiggle room left in Ukraine’s economy for these kinds of measures.

Another trend that is becoming clear is that the financial burden for the cost of supporting Ukraine is rapidly shifting from the US’ broad shoulders to Europe’s.

But getting the EU’s proposed four-year €50bn support package through against the opposition of Hungary is also not going to be ease. EU members states are starting to feel the pain of paying for Ukraine’s war and this source of money is also likely to be reduced soon.

Nevertheless in the short-term Germany will remain one of Ukraine’s most trusted partners. German Defence Minister Boris Pistorius indirectly confirmed earlier reports that Germany would double military aid to Ukraine to about $8.5bn (€8bn) in 2024, German public broadcaster Deutsche Welle reported on November 12.

The EU has already overtaken the US in terms of macroeconomic support with the last transfer of support, the ninth this year, and until US President Joe Biden’s proposed $106bn spending bill goes through, or whatever compromise they come up with, US financial support is de facto suspended now. The Pentagon says it only has $1bn left over from previous allocations.

In this context there is no chance Russian President Vladimir Putin will be willing to start peace talks, despite the chatter, as he only has to wait for things to deteriorate even further.

Russia intends to help with that. The heating season officially started on November 7 with the EU gas tanks 100% full. But there are reports that Russia has built up a reserve of 800 smart missiles and it’s pretty clear it is intending to bomb the power and heating facilities again when the snow comes. It looks like it will be a pretty miserable winter in Ukraine this year.


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