UKRAINE UPDATE: 7 JUNE 2023
Wheat prices surge after Kakhovka dam blast; China and France work on ‘political settlement process’
China says its top diplomat discussed working towards a political solution in Ukraine with a French official as President Xi Jinping tries to position himself as a potential peacemaker in the conflict.
Wheat prices surged for a fifth consecutive day after fighting between Russia and Ukraine escalated, with the destruction of a dam and damage to an ammonia pipeline that Moscow views as key to negotiations for extending the Black Sea grain deal.
Russian crude oil flows to international markets are continuing unabated, with no substantive sign of the output cuts that the Kremlin insists the country is making.
China and France work on ‘political settlement process’
China’s top diplomat, Wang Yi, and President Emmanuel Macron’s foreign policy adviser, Emmanuel Bonne, agreed during a Monday call to “create conditions to begin the political settlement process,” the Chinese Foreign Ministry said in a statement, without elaborating on what this would entail. The French Foreign Ministry hasn’t published an account of the call on its website.
Macron had earlier tasked Bonne to work with Wang to establish a framework that could be used as a basis for future negotiations. It’s not clear if Macron has support for his plan from Kyiv and its allies, many of whom have dismissed ceasefire proposals that would allow Russia to keep territorial gains.
Any future negotiations would be dependent on several conditions, including a successful Ukrainian spring offensive that would put Kyiv in a position of strength during any talks, Bloomberg previously reported.
Beijing published a 12-point position paper on Russia’s war in Ukraine earlier this year that called for a ceasefire. Indonesia’s defence minister echoed that solution at a security forum in Singapore this month, with a proposal that Ukrainian Defense Minister Oleksii Reznikov said sounded “like a Russian plan”.
Wheat jumps on dam blast as fighting escalates in Ukraine
Wheat surged for a fifth consecutive day after fighting between Russia and Ukraine escalated, with the destruction of a dam and damage to an ammonia pipeline that Moscow views as key to negotiations for extending the Black Sea grain deal.
Ukraine said Russia blew up the dam in the country’s south, unleashing a torrent of water that threatened residents and complicated the battlefield separating forces along the Dnipro River. The dam is some way from the three Ukrainian ports covered under the grain deal, but flooding poses a severe risk to people, transport and logistics. Russia denied any responsibility.
“The short-term impact is the damage of grain silos and other equipment situated in the low banks of the river,” said Sergey Feofilov, head of UkrAgroConsult.
Wheat futures were 0.3% higher as of 9.38am in Chicago, after earlier surging by as much as 3.9%. Maize rose by as much as 2%.
“These lands were not completely suitable for farming, but the dam was feeding into irrigation canals for the majority of the Kherson, Zaporizhzhya regions, and partially Mykolaiv region,” said Evghenia Sleptsova, a senior economist at Oxford Economics. The destruction will also affect drinking water, land fertility and cause the closure of factories.
Ukraine also reported that an ammonia pipeline was damaged by Russian shelling in the Kharkiv region, close to the border between the two countries. Russia regards the pipeline, which was shut during the war, as key to talks on keeping Ukraine shipments flowing through the Black Sea corridor.
China edging out Russia as sanctions redraw Kazakhstan trade
An economic seesaw between China and Russia in Central Asia is moving towards a new equilibrium for Kazakhstan, which expects its eastern neighbour to come out on top as international sanctions over the Kremlin’s invasion of Ukraine transform commerce.
In the more than three decades since the collapse of the Soviet Union, Russia held on to its spot as the biggest trading partner for Kazakhstan even as China made inroads across much of the region that stretches from the Caspian to Manchuria.
But financial and economic sanctions that have sidelined Russia and diverted trade flows are creating an opening for China. Serik Zhumangarin, Kazakhstan’s deputy prime minister and its minister of trade and integration, said it’s a matter of a few years before China overtakes Russia.
Here’s what to know about the Ukraine dam explosion: Q&A
The destruction of a dam in southern Ukraine is a major escalation in Russia’s 15-month-old invasion.
The blast early on Tuesday has triggered a man-made catastrophe that will complicate Kyiv’s plans for its counteroffensive against Russian forces and preoccupy officials as they scramble to confront a humanitarian disaster.
1. Who’s behind the Kakhovka dam explosion?
Ukraine has blamed Russia, saying the blast was aimed at stalling Kyiv’s advances. Russia has denied it is responsible, saying the explosion was an act of sabotage by Ukraine.
Ukraine has warned repeatedly Russia may attempt to blow up the dam, one of the most strategic objects of the war. Its reservoir supplies the cooling systems of the Zaporizhzhia nuclear plant. Both sides need the Soviet-era 5,700MW plant to power the economies of the territories they hope to hold or regain by the end of the war.
2. What’s the impact of the Ukraine dam attack?
The detonation wrecked the hydroelectric plant attached to the dam, according to utility Ukrhidroenerho, halting the supply of power to a region which had a pre-war population of around three million people. The city of Kherson and villages on the western bank of the Dnipro River were at risk of flooding and Ukrainian authorities started evacuations.
The blast also threatened to cut off irrigated water for the grain-producing farmlands of Ukraine’s south, including the Crimea peninsula, which was annexed by Russia in 2014. The canal delivering mainly agricultural water supplies to the region was likely to be affected. The officials said reservoirs for drinking water were about 80% full.
3. What does it mean for the Ukraine counteroffensive?
With floodwaters now inundating scores of settlements in the south, it will probably end even the remote possibility of a Ukrainian assault across the Dnipro into occupied southern regions. That should allow Russia’s commanders to focus their limited forces and attention elsewhere while distracting Kyiv with the need to deal with the civilian effects of the disaster.
As floodwaters recede, however, the landscape could change — especially above the reservoir, where water levels should fall. “I don’t think the military impact will be huge, given that crossing the Dnipro was hardly planned as a major thrust, but more likely as something supplementary” to the counteroffensive, said Mykola Bielieskov, a research fellow at the National Institute for Strategic Studies, a government think tank in Kyiv. “Both Ukraine and Russia can now free up some forces, so it’s only an issue as to which can move them elsewhere faster.”
4. How have markets reacted?
While crops aren’t immediately at risk, wheat prices surged by as much as 3% over eventual supply concerns. Separately, Ukraine reported an ammonia pipeline was damaged by Russian shelling in the Kharkiv region close to the border between the countries.
That’s also feeding into market concerns because Moscow regards the pipeline, which was shut down during the war, as a key issue in talks on maintaining grain shipments through the Black Sea corridor.
5. What else is at stake?
Having received tens of billions of dollars worth of arms to support its counteroffensive, Ukraine needs to show significant success on the battlefield this summer or risk growing international pressure to accept a ceasefire that would leave Russia in control of swathes of its land. That would be especially true if there should be a change of US administration next year.
Ukraine has said the attack could also threaten the nuclear plant, which depends on the reservoir for cooling its reactors. The immediate risk has been reduced because the plant’s nuclear reactors were already switched off. Longer-term, the International Atomic Energy Agency has repeatedly warned about the dangers of the plant in a war zone, especially after Russian forces began to evacuate civilians from the area last month.
Russian crude flows stay high as Opec+ partners call for clarity
Russian crude oil flows to international markets continue unabated, with no substantive sign of the output cuts that the Kremlin insists the country is making.
Four-week average seaborne shipments, which smooth out some of the volatility in weekly numbers, edged higher in the period to 4 June, rising to 3.73 million barrels a day from a revised 3.68 million in the period to May 28.
Flows to international markets were more than 1.4 million barrels a day higher than they were at the end of last year — more than can be accounted for by the diversion of pipeline flows or lower refinery runs. Shipments have also risen since February, the baseline month for the pledged production cut.
Moscow’s Opec+ partners have sought clarity and transparency from Russia on the country’s crude production. They noted that Moscow had made a commitment to accept a reassessment of February’s production level by Opec’s secondary sources. The assessment by those seven companies currently stands at 9.83 million barrels a day.
There is little evidence that the 500,000 barrels a day of cuts have been made. Moscow has cited the diversion of crude previously piped to Germany and Poland through the Druzhba pipeline as a reason for robust shipments; but that switch happened in January and February, before the output cut was due to come into effect. Flows of Russian crude through the pipeline, now limited to deliveries to Hungary, Slovakia and the Czech Republic, have been stable at about 240,000 barrels a day since February.
And while Russian refineries cut their crude processing in the first part of May, runs recovered in the final week of the month, rising by about 180,000 barrels a day from the previous seven days. Despite the dip in refinery runs, there is no sign of a corresponding drop in overseas shipments of refined products.
Russia’s revenues from oil are still being hit hard, despite robust overseas flows. May’s budget proceeds from oil taxes plunged 31% from a year ago to 426 billion roubles ($5.2-billion), according to Bloomberg calculations. DM