Why are renewed grain exports from ports beneficial for Ukraine's economy?

Author

Valery Moiseev

Since February 24, the blockade of Ukrainian sea ports has led to tremendous problems with exports. One of the most serious consequences is the loss of foreign currency income. If the country receives less foreign currency, the value of the national currency falls, and the National Bank of Ukraine has to spend its gold and foreign exchange reserves to maintain it. However, the full extent of negative consequences is much wider than that.

It would seem that even partial elimination of the cause of the problems should be good. However, after the signing of the Istanbul agreements on the creation of grain export corridors, the Ukrainian mass media and social networks once again exploded with claims of "treason". decided to explain why this is not a loss but a win, albeit a small one.

What is happening in the blocked Ukrainian ports?

Since the beginning of the Russian invasion, 68 ships have been blocked in Ukrainian ports with 1.2 million tons of cargo on board. This was reported by the Ukrainian Sea Ports Authority (USPA).

"In the holds of the ships located in the water areas of the Pivdennyi, Odesa, and Chornomorsk ports, there are 480,000 tons of grain, oil, and corn. Another 1 million tons of grain is stored in terminals and port warehouses," the USPA noted.

When commenting on the departure of the first vessel from Odesa carrying 26 tons of corn, the USPA stated that 16 more ships are awaiting their turn in Greater Odesa ports.

Myths and reality related to grain exports

Grain is exported by transnational companies, so all the money will be left abroad

Exports via sea ports are indeed carried out by large traders. They are large precisely because they’re global companies operating in many different markets. However, there’s no other option. Ocean freight charges for shipping grain are very high, and it takes tens of thousands of tons of grain stored at the wharf to load a single vessel. More money is also needed for ship and cargo insurance, wholesale contracts with buyers, and so on.

Such companies usually abide by almost all regulations since the risks are high. That’s why they won’t leave all the income from selling Ukrainian grain abroad because it’s forbidden by law.

Ukrainian farmers won’t gain anything from the renewed exports as all the profit will go to "agricultural barons"

The Ukrainian pricing chain in the agricultural market was known to be far from perfect even before the war. The cash flow in it virtually stopped after exports were blocked, but it will resume once the grain corridors are opened. Farmers and agricultural companies will be able to pay wages, buy seeds for the next sowing campaign, fuel, fertilizer, and chemicals.

"Agricultural barons" won’t be able to have everything for themselves because they earn money in a working market, not a dead one.

Meanwhile, fighting price distortion has nothing to do with the restoration of exports.

Money will go to traders, therefore most Ukrainians won’t benefit from the restoration of exports

We’ve already mentioned the direct benefit of paid wages. Agricultural producers obtain hryvnias to pay wages and make purchases in Ukraine by selling foreign currency. Part of this foreign currency will be bought by importers to supply the country with both consumer goods and raw materials or components. More foreign currency in the country would mean its price will lower (and the hryvnia will rise) since currency is a commodity, and its price is determined to a large extent by supply and demand.

Ukrainian grain will sell at a large discount

Deputy minister of infrastructure Yurii Vaskov said that in Istanbul, all parties emphasized that the deal implied an open sales market. It didn’t provide for any discounts or exclusive buyers.

After the grain corridors are opened, some ship owners will prefer to depart unloaded to save the ship and avoid risks

Vaskov noted that there had actually been several empty ships in ports after February 24, like Polarnet in Chornomorsk. However, its owner readily accepted the proposition from Kernel to load it with grain and not go empty. "I believe all empty ships will do the same. But it’s a matter of business between two parties, including the freight charge," the deputy minister added.

The government shouldn’t engage in the matters of export because the grain is private

A normal government is supposed to respond to the problems of business. It should interfere where businesses cannot tackle the problem by themselves. The blockade of ports in a time of war is exactly the case.

Agricultural traders will apply for a VAT refund from the state budget, which is already in deficit

The operation is called "VAT refund" because companies receive money back after having paid them. This procedure is absolutely legal because it is consistent with the nature of the value-added tax and it’s also provided for by the Tax Code.

In addition, a VAT refund is delayed during the war, which means that the government receives extra benefits from this money.

In a time of war, grain exports pose a threat of hunger to Ukraine itself

Ukraine produces much more grain than it consumes as food and feedstuff.

What are other reasons for renewing grain exports?

Currently, Ukraine is estimated to have approximately 20 million tons of grain from the previous year’s harvest. Grain cannot be stored for a long time because it quickly loses its quality and eventually deteriorates completely.

Moreover, almost all storage capacities are occupied by grain, so the new harvest is often nowhere to be stored.

Renewed exports via established routes from sea ports will significantly lower logistical expenses so that grain producers may expect purchase prices to rise.