What’s in Istanbul grain deal for Russia?

What’s in Istanbul grain deal for Russia?
Ukraine's grain exports have been unblocked by a deal struck in Istanbul last week, but what did Russia get out of it? / wiki
By Ben Aris in Berlin July 28, 2022

Millions of tonnes of grain trapped in Ukraine can now be exported thanks to the Istanbul grain deal that was signed on July 22 by Russia, Ukraine, Turkey and the UN. But what does Russia get out of the agreement?

Russia made several demands during the talks and got most of what it asked for, including easing of sanctions that threatened Russia’s own food security.

As a result of the deal Ukraine is expected to start the export of an estimated 22mn tonnes of Ukrainian wheat, corn, and other cereals from the ports of Odesa, Chornomorsk and Yuzhne.

Under the agreement, Ukrainian naval vessels will escort the ships carrying the grain. Turkey and the UN will inspect the cargo ships to make sure they are not carrying weapons. An international coordination centre has already been set up in Odesa to oversee the operation.

One of the reasons for Russia’s decision to sign the agreement was pressure from Moscow’s partner-states in the Middle East and North Africa that faced food shortages and possible social unrest. As Russia needs all the friends it can get in the Global South, the deal will allow Russia to supply these countries with badly needed grain.

“Since the beginning of March, the leaders of countries as diverse as Turkey, Egypt, Iran, Saudi Arabia and Israel have all voiced their concern to Moscow both formally and informally – over blocking grain exports via the Black Sea. Problems with food supplies, they argued, could destabilise the region, just as they did during the Arab Spring,” scholar Alexandra Prokopenko said in a paper for Carnegie Endowment for World Peace.

The deal allows not only for Ukraine to export more grain, but also Russia. Russia is enjoying a bumper harvest and earns tens of billions of dollars from its own exports. Easing sanctions to facilitate Russian agricultural exports wasn’t officially a part of the Istanbul grain deal but was successfully negotiated in parallel talks with the United States and European Union. In 2021, Russia took in $11bn from exporting grain and with wheat prices currently at record highs it could earn even more this year.

And the deal will put money into the pockets of the Kremlin’s elite. Several high government officials have interests in the agriculture business.

Agriculture Minister Dmitry Patrushev has been deeply involved with Russia’s agricultural business. He is the former chairman of the state-owned Rosselkhozbank, the Russian agricultural bank that provides loans for farmers and considered one of the most corrupt and inefficient banks in the sector. He is also the eldest son of Security Council secretary Nikolai Patrushev, a former FSB chief, a close confidant of Putin and also a possible successor to the president.

Another former agricultural minister, Alexander Tkachev, owns Agrocomplex, another big player in the agro-business.

Demetra Holding is Russia’s second-biggest grain exporting company and part-owned by structures within the Marathon Group that belongs to Alexander Vinokurov, son-in-law of Russian Foreign Minister Sergey Lavrov.

And the Linnik brothers that own Miratorg, Russia’s largest meat producer and a major landowner, have been linked to former president Dmitry Medvedev’s wife.

Finally, the state-owned banking major VTB Bank has been buying up grain traders and was a major player in the grain business. Last year VTB acquired two major Black Sea grain terminals and has agreed to buy control of rail-freight operator RTC Group. It’s also in talks to purchase a stake in another Black Sea port facility, Grain Terminal Complex Taman. The bank was in the process of building up a grain-based business that it intended to eventually IPO. The bank has reportedly sold many of these businesses after it was put under sanctions.

In general, Russian banks will also benefit from the Istanbul deal, as some of those involved in the business have had capital unfrozen to facilitate the export of Russian grain and get it to market quickly. Banks that have benefited from this include the sanctioned Bank Rossiya (owned by Putin’s friends Yury Kovalchuk and Nikolai Shamalov) and Promsvyazbank, which was taken over by the state during a near-miss banking crisis in 2018 and is now tasked with servicing the defence sector.

Imports will also be made easier. Despite the size of Russia’s agricultural sector and years of heavy investment by the state, Russia remains heavily dependent on the import of agricultural equipment and products.

While Russia is entirely self-sufficient in wheat seeds – the most important crop – it relies heavily on the import of seeds for most other grains. For example, 90% of potato seedlings are imported, 70% of rape seeds and 30% to 90% of fruit and berry seeds, according to Carnegie.

Livestock is a bit better, as Russia is self-sufficient in beef and covers 70-75% of its own needs, but breeding stock remains heavily dependent on imports, as do animal medicines.

The story is the same with agricultural machinery. In the 70s the Soviet government mechanised agriculture and the tractor became the symbol of the Soviet wonderland. Many of those tractor plants are still going today, such as the famous tractor plant in Minsk, but three quarters of machinery was imported last year, mostly from Germany and the Netherlands.

The Kremlin has already won concessions to ease some of these sanctions, but it will continue to play games with grain exports to maintain the pressure while it lobbies to have more of the sanctions lifted.

“Moscow may decide at any moment to withdraw unilaterally from the agreement, despite all the benefits for Russian farmers and the economy. During the past five months, President Vladimir Putin has made it clear time and time again that economic logic is of little use in trying to predict his actions,” concludes Prokopenko.