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IF Insights: Black Sea Deal saga threatens to derail inflation fight

Experts believe that the domino effect of Russia’s action will be reflected in global inflation which, in 2023, started showing signs of calming down

IMF chief Kristalina Georgieva recently noted that with the economic activity slowing, global growth prospects could remain weak, and inflation would remain higher.

And to make matters worse, we have Russia pulling out of the Black Sea grain deal, thus jeopardizing the safe passage for Ukrainian grain exports.

Wheat prices on the European stock exchange soared by nearly 9%, within hours of the Kremlin pulling itself out of the deal. US wheat futures saw a jump of 8.5%, the highest daily rise since the Ukraine war broke out in 2022 February. Corn prices have also gone up by 5%.

What’s The Scene Now?

Experts believe that the domino effect of Russia’s action will be reflected in global inflation which, in 2023, started showing signs of calming down.

Ukraine, one of the world’s biggest exporters of food grains, used to play a significant role in the United Nations food aid programmes till February 2022. Russia’s invasion of its neighbour saw the global food grain prices getting expensive.

Turkey and the United Nations brokered a deal in July 2022, which made Moscow lift its naval blockade of Ukraine’s Black Sea cities and set terms for exports of food grains from Ukraine. While the deal’s expiration date got extended multiple times, this time it didn’t happen as Russia wanted its Agricultural Bank Rosselkhozbank to be reconnected to the SWIFT international payments system, which the West declined.

Asia used to receive 46% of Ukrainian food grain shipments under the Black Sea Deal, while Western Europe and Africa took 40% and 12%, respectively.

Pavlo Martyshev, a researcher at the Center for Food and Land Use Research at Kyiv School of Economics, Told Aljazeera that Asia, including China, is better placed than Africa to weather the collapse of the Black Sea Grain Deal.

Correlating Grain Price Rise & Overall Inflation

In 2022, economic shocks like the Ukraine war and the COVID pandemic were cited behind the “acute food insecurity” in 27 countries, thus affecting nearly 84 million people. This revelation was made by the Food Security Information Network, a data-sharing platform funded by the European Union and the United States.

The global food price index compiled by the UN’s Food and Agriculture Organization hit an all-time high in March 2022, but was falling since then. Food prices became the driving factor behind the overall inflation in the United Kingdom and the Eurozone. In May 2023, food prices rose by 18.4% in the UK and by 12.5% in the euro area compared with the same period a year earlier. Russia pulling out of the crucial Black Sea grain deal comes at a time when the inflation in Europe was cooling down. Expect the trend to reverse.

Take the United Kingdom for example. The European country’s consumer price inflation stood at 7.9% in June 2023, down from 8.7% the month before. However, the ‘Russian Setback’ now has sent wheat and corn prices soaring at the European markets. Harvir Dhillon, an economist at the British Retail Consortium, told the media that food inflation might not fall as quickly due to Russia pulling out of the grain deal.

Throughout 2022 and the half of 2023, food inflation hammered the UK economy and Russia’s latest action ensures the continuation of this headwind.

Africa Is In Dire Straits

Russian President Vladimir Putin has now claimed that Moscow will replace the food grain supplies to Africa.

Moscow’s announcement comes ahead of the scheduled Russia-Africa Summit and Russia-Africa Economic and Humanitarian Forum. It is worth remembering that in 2022, during a United Nations vote to condemn Russia for invading Ukraine, 25 African nations voted to abstain or did not vote at all.

Politics aside, let’s look into what’s the food security scene in Africa.

For example, East African countries, which have been rattled by climate change, rely on Ukrainian grains for sustenance. The unfortunate developments around the Black Sea Grain Deal now create a price rise-like situation in this part of the world.

Some 32.8 million tonnes of Ukrainian corn, wheat and other grains were exported around the world since the agreement Black Sea Deal came into effect in 2022. Over half of this grain went to developing countries, including Ethiopia, Kenya and Somalia. Overall food costs too dropped about 23% from the March 2022 peak.

However, the region will now have to look up to Putin, to get their share of food grains. Parts of Africa are reeling from unpredictable seasons, poor crop yields and livestock deaths.

We have South African food inflation taking a toll on its households, with the families struggling to put food on their tables, thereby leading to malnutrition. While food prices have gone up above 12% since 2022, severe acute malnutrition in children younger than five has gone up by 26% since 2018.

Nigeria has declared an emergency that will allow its government to take exceptional steps to improve food security and supply, amid surging prices.

Concluding Words

The Russia-Ukraine grain deal was critical to keep global food prices and overall grain supply secure and stable. While Moscow has put itself out of the deal, to make matters worse, after July 17, it bombed Ukraine’s port of Odesa, destroying over 60,000 tons of grain.

All these developments now threaten to derail the inflation fight, apart from pushing vulnerable regions like Africa further towards food insecurity. Will the world take note of this and act proactively? We have no other option but to wait and watch.

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