Russia escalates military tensions in Black Sea after blowing up grain deal

Moscow is ramping up its threats to Ukraine’s Black Sea ports and the ships that dock there, heightening the risk of conflict in the key trade route and sending global wheat prices sharply upward.

Russia’s defense ministry warned in a statement Wednesday that “all vessels sailing in the waters of the Black Sea to Ukrainian ports will be regarded as potential carriers of military cargo.” The statement added that “the countries of such vessels will be considered to be involved in the Ukrainian conflict on the side of the Kiev regime.”

The U.S. also has information that indicates Russia has placed more sea mines around Ukrainian ports and could attack commercial ships in the region, according to White House National Security Council spokesperson Adam Hodge.

"We believe that this is a coordinated effort to justify any attacks against civilian ships in the Black Sea and lay blame on Ukraine for these attacks," Hodge said in a statement.

The moves seemed to be a response to Ukrainian President Volodymyr Zelenskyy, who vowed that his country would continue to ship grain through the Odesa port even after Russia on Monday pulled out of the year-old agreement lifting its military blockade of Ukraine’s Black Sea ports. Coming on top of a second night of Russian bombing at the Odesa port, it is likely to freeze further shipments of grain from the major seaports of Ukraine — one of the world’s leading exporters of wheat — and unsettle grain markets, at least temporarily.

Since Turkey and the U.N. brokered the grain deal last summer, major global shipping companies, including the U.S.-based agricultural shipping giant Cargill have transported wheat, corn, sunflower oil and other food staples through a humanitarian corridor to an inspection facility in Istanbul before heading to world markets. Threats from Russia, which is also a major wheat exporter, have previously halted those shipments at times, though only for a few days.

But the missile bombardments Monday and Tuesday nights tore through grain terminals and unleashed fires within key port infrastructure, leaving it “heavily damaged,” said Oleskii Goncharenko, a member of the Ukrainian parliament representing Odesa.

The signal Moscow seems to be sending now is that “this time they are serious” about leaving the deal, said Andrey Sizov, head of SovEcon, a Black Sea agricultural market research firm focused on Russia and Ukraine.

Wheat prices quickly spiked in response to Russia’s statement Wednesday, with trading halted for the day after hitting its market limit. While analysts predict the markets will settle back down in the coming days and weeks, even short-term or small spikes in food prices are something world leaders and hungry populations cannot afford. Nations across the globe are already reeling from sky-high food costs in the last year. In the United States, Biden administration officials are increasingly wary of any surges in food prices ahead of the 2024 election, fearing it will give Republicans a potent talking point.

Odesa is the traditional center of Ukraine’s agricultural sector, which serves as a key lifeline to the country’s economy. USAID Administrator Samantha Power visited the port at Odesa after the first wave of Russian missile strikes Monday night, where she declared Russian President Vladimir Putin was willing to inflict “humanitarian pain on innocents” by targeting this port that helped to “feed the world.”

But since Russia’s invasion, the U.S. and other Western countries have worked to help Ukraine build out new overland and river routes and lessen its reliance on Odesa’s ports. That push has paid off, according to U.S. officials involved in the effort.

“It removes Russia's veto over whether Ukraine exports grain,” Jim O’Brien, the State Department’s head of sanctions, said in an interview last year as administration and European officials were scrambling to find new ways to get grain out of Ukraine amid skyrocketing global food prices. President Joe Biden was also publicly pressing for increased efforts to unlock Ukraine’s key grain supplies as a way to calm rising prices.

American officials are talking with Turkish, Ukrainian and other foreign officials as they search for new ways to increase exports from Ukraine, according to a U.S. official, who was granted anonymity to discuss private conversations. That includes looking at ways to further expand overland routes from Ukrainian territory, according to the official.

A makeshift export route via the Danube river near Romania now handles the main flow of food exports from Ukraine to world markets, according to the U.S. official. That route, however, is extremely expensive and also risks putting additional stress on commodity prices and infrastructure in Romania and other nearby nations, which has angered farmers in those countries.

Sizov said the expanded river route is now expected to ship some 40 million tons of grain in the coming harvest season, which is close to the volumes Ukraine normally ships through its major seaports. Given that new reality, “Odesa is not that important,” Sizov said.

Still, given Odesa’s prominence in global trade routes, the Russian threats to commercial ships in the Black Sea has sent panic through world markets and rippled through global food prices in the short-term. A Cargill spokesperson said its ships and facilities that are based in the nearby Pivdennyi port in the Black Sea were safe. They declined to say whether Cargill would continue to operate in the Black Sea following the new Russian threats as shipping companies reevaluate the changing conditions.

Sizov said he expects markets to settle after this initial shock, as long as exports continue to flow through the Danube route. And he noted the market was slow to react initially to Russia’s decision to leave the deal Monday, with traders appearing to wait and see if Moscow was serious this time about blowing up the arrangement.

The immediate price spikes from Russia’s escalation in the Black Sea will be “minor” in the overall outlook, agreed Joe Glauber, a senior research fellow at the International Food Policy Research Institute and former chief economist at the U.S. Agriculture Department.

But long-term, the toll Russia’s war is taking on Ukrainian farmers and shippers will ripple through the global market for years, Glauber added. Key production estimates for Ukraine’s agriculture sector, which regularly feeds more than 400 million people across the world, are down by nearly 30 percent this year.

The U.S. official also noted record Russian profits on its own agricultural exports in recent months, as Moscow “tries to increase their own market share and keep food prices artificially high” by continuing to attack Ukraine.

Alex Ward contributed to this report.