Reuters International

By Maha El Dahan and Olga Popova

ABU DHABI/MOSCOW (Reuters) - A deal struck in October for Syria to buy one million tonnes of wheat from its ally Russia to prevent bread shortages in government-held areas has not been fulfilled and may never be, Syrian and Russian government sources said.

A Syrian government official with knowledge of the deal said a final contract had still not been agreed and blamed bureaucratic delays, but added that there were no shortages.

An official at Russia's agriculture ministry said the core problem was that the little-known firm that won the tender lacked experience and set the price too low.

Syrian state buyer Hoboob set three separate tenders to buy an unprecedented 1.35 million tonnes of wheat last year, after continued fighting from the country's nearly six-year war and poor rainfall halved the nation's harvest to 1.3 million tonnes, the lowest in 27 years.

The last of the three tenders was specifically for wheat from Russia, which supports President Bashar al-Assad's government in the war and from whom Syria often buys its wheat.

Although foodstuffs are not restricted, banking sanctions and asset freezes imposed by Washington and Brussels have made it difficult for some trading houses to do business with Assad's government. Trade with Russia poses fewer problems. The biggest tender of the three, for one million tonnes, was supposed to arrive in batches of 75,000 tonnes every month starting 60 days after the letters of credit were opened, the Syrian government source said.

But "the letters of credit haven't been opened yet," he said. "There is a certain system, routine and approvals that are needed, (so) the contracts have not been finalised."

"We have received nothing from the Russian company," he said.

A source at Russia's agriculture ministry told Reuters on Tuesday he did not think the contract would ever be fulfilled because the company that won it, Zernomir, could not source the wheat at the agreed price, which was too low.

The contract was awarded at 150 euros ($161.37) a tonne, on a cost and freight basis. That compares with the Black Sea price of $185 per tonne on a free-on-board basis (before adding the cost of freight) for Russian wheat with 12.5 percent protein for February supply quoted at the end of last week, according to Russian agricultural consultancy IKAR.

Both government sources asked not to be named because they were not authorised to speak to the media.

Attempts by Reuters to reach a Russia-registered firm called Zernomir were not successful.

The Syrian source said there would be other ways to source the wheat if the deal ultimately fell through, and that there was no shortage of bread thanks to Syria's "strategic stock".

"We realise the price is very low, and I'm sceptical too about the deal, but it doesn't matter," he said. "Even if that wheat doesn't come, we have more than one way of fulfilling our needs and there is no shortage."

Flat bread is a subsidised staple for Syrians, who have suffered under a conflict that is estimated to have killed several hundred thousand people and forced millions to flee their homes.

The Russian ministry source said he hoped another Syrian tender could be arranged in the future.

QUESTIONS FROM THE BEGINNING

Andrey Sizov, the head of SovEcon agriculture consultancy, said the problems with the deal were unlikely to have long-lasting implications for Russia's relationship with Syria.

"The military and political cooperation is far more important than wheat supplies. Plus, Russia does not say that it would not supply anything, it is just the matter of difficult logistics," Sizov said.

From the first two tenders, 350,000 tonnes have arrived and an additional 50,000 tonnes has been shipped, the Syrian government official told Reuters.

Those numbers could not be corroborated by Russian customs data, however. Russia supplied a total of 48,300 tonnes of wheat to Syria in calendar 2016, a source familiar with Russian export data told Reuters.

Russia also plans to give Syria 100,000 tonnes of wheat in humanitarian aid in four cargoes, the Russian agriculture ministry source said. The first cargo is expected to be loaded in the first half of February.

It is unclear why the Syrian government chose to award the contract to Zernomir. Russian government and industry officials had expressed doubt about the deal from the beginning.

    The head of a non-state Russian farmers lobby group, when asked in October to comment on whether a deal had been agreed, had said it was unclear whether the company was capable of fulfilling the contract.

On Thursday, Grain Union chairman Arkady Zlochevsky told Reuters: "The contract is not being executed. It confirms my point of view on it.”

Syria was a wheat exporter before the war, producing four million tonnes in a good year and able to export 1.5 million tonnes. But farms, seed distribution, milling and bakeries have all been damaged and disrupted by the conflict.

Assad's government managed to collect only around 400,000 tonnes of the 1.3 million tonnes that the U.N. Food and Agriculture Organization estimated Syria produced last year.

The bread-basket provinces of Hasaka, Raqqa and Deir al-Zor, which are largely outside government control, account for nearly 70 percent of total wheat production.

While the government ensures cheap prices for bread in the areas under its control and aid agencies offer supported prices in some areas, Syrians elsewhere complain of shortages and high prices.

($1 = 0.9295 euros)

(Reporting By Maha El Dahan in Abu Dhabi and Olga Popova in Moscow; additional reporting by Polina Devitt in Moscow and Michael Hogan in Hamburg; Editing by Sonya Hepinstall)

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