In-depth | As the ‘grain deal’ hangs by a thread, Ukraine looks to another export route

As the ‘grain deal’ hangs by a thread, Ukraine looks to another export route - Photo
Photo by Valentyna Polishchuk / LIGA.net
17.05.2023, 08:16

Before the full-scale war, the three Danube ports handled up to five percent of Ukraine's exports, and now, five times as much

The war and extremely limited logistics have brought to the fore three small ports on the Danube river. Reni, Izmail, and Ust-Dunaisk have attracted unprecedented investor interest, including from such large agricultural companies as Andriy Verevskyi's Kernel and Andriy Vadaturskyy's Nibulon.

What are they betting on? And will the Danube be able to pull off Ukrainian exports in the face of Russia’s sea blockade and bans on Ukrainian agriculture from Eastern EU countries?

Russia's naval blockade

Before Russia's full-scale invasion, more than 70 percent of Ukraine’s exports – and up to 90 percent of its agricultural exports – were maritime. By last mid-summer, Ukraine’s access to the sea was completely blocked.

The Black Sea grain initiative struck in July 2022 unblocked grain and oil exports from the Ukrainian ports of Odesa, Chornomorsk, and Pivdenne. Only a third of Ukraine’s eighteen ports are now in operation.

During the eight months of the deal, Ukraine managed to export 26.3 million tonnes of agricultural products by sea. But the ‘grain corridor’ was always under threat of disruption due to Russia's blackmail.

On 8 May, Moscow again blocked the grain deal, refusing to register ships for entry and conduct inspections. Exports of Ukrainian agricultural products through the grain corridor in April fell to one of the lowest levels ever, at just 2.8 million tonnes, and by 8 May, 90 vessels were awaiting inspection in Turkish territorial waters, with 62 undergoing loading.

That was not the last time Russia had attempted to block Ukrainian maritime exports. On 18 May, it again threatened to withdraw from the grain deal. Ukraine will find this option extremely undesirable.

In 2023, agricultural exports accounted for 53 percent of the country's total and about 20 percent of GDP. The termination of the deal is especially dangerous amid deteriorating relations with neighbouring countries. In recent months, protests by local farmers demanding that Ukrainian agricultural goods be banned from entry have spread across European countries.

Several EU countries have banned some Ukrainian agricultural products, threatening about half of Ukraine’s agricultural exports – which in recent months, following Russia’s temper tantrums, have been transiting the so-called Solidarity Lanes to EU countries.

Dawn on the Danube

This predicament is pushing Ukraine to look for Plan B.

"But from a broader perspective, in many ways the Danube has already shown itself to be Plan A," Dmytro Barinov, deputy head of the Ukrainian sea ports authority (USPA), told LIGA.net in an interview.

In the last three years before the full-scale war, the share of Danube ports in Ukraine’s cargo transshipment averaged three to five million tonnes per year, or 2.5 to 4.2 percent of total exports.

Since Russia's full-scale invasion, the Danube ports of Reni, Izmail, and Ust-Dunaisk have been able to avoid Russia’s naval blockade due to their geographical location, proximity to major ports in Bulgaria and Romania, and the ability to navigate the Danube, becoming the only waterway for exports before the Black Sea grain initiative.

In 2022, cargo turnover through Danube ports tripled to 16.3 million tonnes.

This was due to several factors:

  • The liberation of Snake Island, which opened up for shipments the Bystre estuary, located in Ukrainian waters. Consequently, the Danube ports tripled their throughput capacity and brought in an additional 10 million tonnes of cargo per year, and an additional USD 1.5 billion for the economy, according to the infrastructure ministry
  • Restoring the depths of the Ukrainian part of the Danube to increase the draft of vessels to 6.5 metres, resulting in a record 12 ship calls and 90,000 tonnes of transshipment per day
  • Maximum reorientation and development of Danube port infrastructure for export cargo handling;
  • Development of railway infrastructure, including the opening of the Serpneve-1-Basarabianska railway border crossing

In the first four months of this year, exports through the Danube ports totalled 7.4 million tonnes, of which agricultural cargo accounted for 75 percent of exports, or more than 6 million tonnes, Yurii Vaskov, deputy minister of communities, territories and infrastructure development, told LIGA.net.

According to Mr Barinov, cargo transshipment in Danube ports in March 2023 rose to a record high of 93,000 tonnes per day.

"The goal now is to increase the average daily transshipment rate to 100,000 tonnes, that is, three million tonnes per month and 23 million tonnes per year," he adds.

Ukraine’s infrastructure ministry said that its goal for 2023 is to transship 20 to 22 million tonnes of exports through the ports of Reni, Izmail, and Ust-Dunaisk.

Mr Barinov believes that goal can be reached relatively quickly, but the ports’ infrastructure is not yet ready for such a pace.

"Ships from the Ukrainian Danube go to Constanta, in Romania, which is a large port, but even now its capacity is sometimes insufficient," he explains.

There are internal problems, too. While before the full-scale invasion, Izmail and Reni were quiet and half-empty towns, their road are now crowded with trucks, railway crossings are jammed for several tens of kilometres, and Ukraine’s railway carrier says that the queues for cargo shipments to Izmail alone are twenty-seven days long.

"We have to improvise; there is still a shortage of warehouses," says the deputy head of the USPA.

Investments in ports

What is needed to solve these problems? First of all, money and time.

"Modernising and updating port infrastructure, attracting investment in the construction of new terminals and dredging," Mr Vaskov says.

Investors are actively working in the region. On 17 January, in Ukraine’s first auction, eight companies competed for the smallest port in Ukraine, Ust-Dunaisk, and the sale price tripled from UAH 60 million to UAH 201 million.

The winner promises to build a 50,000-tonne grain terminal in the port.

According to the deputy infrastructure minister, more than USD 15 million was invested in the Danube ports in 2022, the vast majority in the port of Izmail. The investment has already paid off, in a way: On 9 May, the port of Izmail fulfilled its annual plan for cargo handling of 6.2 million tonnes, a record-breaking annual performance rate in its history, according to the USPA.

Nibulon was one of the companies that managed to build its own terminal on the Danube in less than a year. The company has already invested USD 15.5 million in setting up its Bessarabian branch in Izmail, which will create grain transshipment facilities from rail to road and from road to river transport, Volodymyr Slavinskyi, Nibulon's trading director, told LIGA.net in an interview.

The logistics route through Izmail has become the main sales channel for the Mykolaiv-based company.

"Over the past three months, supplies via the Danube have been up to 70 percent, while only 30 percent have been exported via the ‘grain corridor’."

Grain is delivered by rail or road to the terminal, loaded onto river transport and then delivered to the Romanian seaport of Constanta, where it is transshipped from barges to ships of various classes and sizes.

This allows Nibulon to maintain flexibility, meet contractual deadlines, and control the movement of goods, making it possible to plan its activities and choose the best export options amid the unstable operation of the ‘grain corridor’, explains Mr Slavinskyi.

Another Ukrainian agricultural giant, Kernel, has acquired and urgently launched the Danube Prom Agro river terminal for transshipment of grain and meal, Kateryna Spivakova, head of communications, PR and GR at Kernel, told LIGA.net in an interview.

She says the move was due to the company’s belief in the huge potential of river transport.

"The grain initiative is unstable, and the ports of Reni can be effective both in wartime and in peacetime. That is why Kernel has obtained a 49-year long-term lease for the construction of a transshipment terminal in the port of Reni."

The company plans to invest USD 10 million of its own funds in the project, Ms Spivakova said.

Kernel and Nibulon’s combined contribution to the Danube will amount to USD 36 million under the Agricultural Resilience Initiative ARGi-Ukraine. The United States government will provide another USD 8 million under the programme, US ambassador to Ukraine Bridget Brink said in April during a visit to the port of Izmail.

It is also known that Maersk Line, the world's second largest carrier, uses the port of Reni for container shipping by barge with a connection to the Romanian port of Constanta. In addition, the infrastructure ministry and the European bank of reconstruction and development have launched a joint project to study export logistics in Bessarabia.

According to Mr Vaskov, five new private terminals are currently under construction in the region, and about 20 are already in operation. "The railway also has plans for further development," he adds.

The region’s need for investment exceeds USD 120 million, per the infrastructure ministry’s assessment.

Post-war prospects

The main problem with the Danube ports before Russia’s full-scale invasion was the risk that modernisation and bringing them up to a competitive level could be too expensive and, with the greater ports near Odesa, bring no stable cargo flows.

Post-war, the main task of Danube ports in the early period will be to maintain transshipment volumes and prevent capacity downtime, to maintain the business reorientation that is being seen now, deputy infrastructure minister Yurii Vaskov says.

"The ports of the Danube region, together with their port facilities and well-developed rear areas, can be established as a powerful production and transport hub on the border with the EU countries, which will continue to meet a large part of export and import needs," he tells LIGA.net.

What about the investors? For Kernel, steady maritime routes on the Danube river will increase its total exports to 600,000 tonnes per year, the company estimates.

Nibulon is aware of the risks that under normal peaceful conditions the Danube will be less competitive. "That is why we see our branch in Izmail as a base for the further development of new projects, primarily related to processing," Nibulon's trading director tells LIGA.net.

The company is mulling building a full-fledged elevator in the area, with a capacity to store 118.5 thousand tonnes of grain at a time, and a high-tech modern mill with a capacity of 750 tonnes per day.

After the war is over and major ports are opened, the Danube ports will still see a drop in cargo traffic, Mr Vaskov admits.

"We expect that through investment, the Danube ports will retain their importance and will be able to operate at a level of at least 15 million tonnes per year," he explains.

However, deputy head of the USPA Dmytro Barinov is convinced that the Danube will continue to play a very powerful role even if Ukraine manages to resume exports through the ports of Odesa, Mykolaiv, and Azov Sea.

"The big exporters will still be there because it will always be an alternative route."

Uliana Bukatyuk
Uliana Bukatyuk
LIGA.net business correspondent
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