Ukraine: pain, but no grain

Ukraine is known as the breadbasket of Europe, but something very strange is going on in the grain market, writes Anna Babinets. A hitherto unknown company with dubious connections has been appointed state trading agent, the farmers and traders are being badly hit, and there is no prospect of clarity any time soon.

Anna Babinets
27 April 2011

Ukraine is one of the world’s eight major producers and exporters of grain and grain products, selling mainly low-grade feed grain, such as maize and wheat. Huge tracts of land, favourable weather conditions and very fertile soil (black earth) contribute towards Ukraine being described as an agricultural state. Yet at the moment there are serious concerns at the legitimacy of its grain market. Earlier this month, the American Chamber of Commerce in Ukraine was even moved to write to President Yanukovych declare it had “no clear understanding of the Ukrainian government’s agricultural policy”.

Grain Ukfraine

The Ukrainian government has declared intent to 
increase state control over the the country's grain 
market — one of the world's largest — but it is doing so
in obscure fashion

Large- and small-scale producers are bewildered by what they see as the government’s constant changing of the rules and trading systems. “We grow grain and must have clear rules” says Alexei Tsokalov, a farmer from Kirovohrad region in central Ukraine. “At the moment we don’t even know what to sow.  In previous years we worked with two big grain traders: we had contracts and were able to get on with our jobs in peace. Now their telephones are turned off. In the Agricultural Directorate we had to work with one firm representing the state”.

Tsokalov is, by Ukrainian standards, a small farmer: he has about 400 hectares, which he farms with his sons. Theoretically he can export his own grain and sunflowers, but in practice this is almost impossible because of problems with transport and shipping, so he has been working with grain traders for a long time, and it suited him.

Ukraine is one of the world’s eight major producers and exporters of grain and grain products, selling mainly low-grade feed grain, such as maize and wheat. Huge tracts of land, favourable weather conditions and very fertile soil (black earth) contribute towards Ukraine being described as an agricultural state.

But this, apparently, didn’t suit the Ukrainian government. In August 2010 the Deputy Prime Minister Andrei Klyuev announced that “state control of the grain market should be strengthened.” Shortly afterwards a hitherto unknown company called Khlib Investbud became the state trading agent in the grain market, i.e. with exclusive rights to effect all operations connected with grain on behalf of the state. Even that wasn’t enough. In October 2010 the Ukrainian government introduced grain export quotas. Officials remained impervious to foreign criticism, while the granting of export permits to a few firms is clearly not in keeping with the laws of the free market. Then, six months ago, the quotas were distributed in such a way that the lion’s share went to Khlib Investbud.

The quotas have been re-distributed several times, but each time the mysterious company emerged as the main exporter and huge international concerns, such as Cargill, were sidelined. As, indeed, were all the large Ukrainian grain traders.

In its letter to Yanukovych, the American Chamber of Commerce described the procedures for distributing the export quotas as “non-transparent” and claimed Khib Investbud as was, in fact, a “quasi-state concern”. Ukrainian journalists also made frequent attempts to ask government leaders about this firm, but to no avail. Prime Minister Mykola Azarov said he didn’t know if it was a state concern or not. The Minister of Agrarian Policy and Food, Mykola Prisyazhnyuk, said he couldn’t recall the capital structure of the company monopolising the Ukrainian grain market.

Pressed by journalists, the firm’s director, Robert Brovdi, claimed the company’s founders include “organisations affiliated to leading world financial institutions, most of which can be found in Wall Street”. When they looked to confirm this information, journalists found instead that 49% does in fact belong to the state, and the remaining 51%, entirely to a private firm called Kolossar. This firm has connections with people linked to the Minister of Agrarian Policy, Mr Prisyazhnyuk and with the Russian bank Vneshekonombank, whose board of directors, incidentally, is headed by Prime Minister Putin.

So it turns out that a not-entirely state concern is acting on behalf of the government, and operating with privileges that would usually be accorded to a state concern.

Meanwhile, in April the International Grains Council published its forecast: world grain consumption this year will increase by 1.7% by comparison with last season and will reach a record 1.79 billion tonnes of grain and cereals. Ukraine’s fertile black earth could not only feed the world but earn the country the funds so desperately needed to pay off its foreign debts.

But the country’s export prospects leave so much to be desired. In April, for example, the US Department of Agriculture reduced its expectations of 2011 Ukrainian exports to 11.6 million tonnes, the lowest figure for several years. Last year Ukrainian grain exports totalled 20.5 million tonnes. That, of course, was before the government decided to increase its control of the grain market, and before they secretly introduced the state trading agent (which turned out to be not quite state).

The Ukrainian Minister for Agrarian Policy Mykola Prysyazhnyuk drives a Maserati Quattroporte and makes no secret of that fact. This Italian car costs 260,000 USD;  his official salary is 2,000 USD per month.

Farmer Tsokalov recently travelled to Belarus with his colleague Viktor Chimlenko to observe how one firm, appointed by the government, operates in the grain market. They wrote about their visit in the local newspaper: “The Belarusians only sow once [a year] and they receive instructions as to where they should deliver their entire harvest. Which they do. But they get 55 USD per tonne of barley and we get approximately 250 USD”.

The major Ukrainian grain traders are afraid to make a fuss publicly, because everyone hopes that conditions might change.  Some of them are suing the government for inequitable distribution of the quotas, but others are just hoping to sit it out. Yet it would certainly appear that they have little chance of getting back to the market. Behind Khlib Investbud are very influential people who are aim to completely dominate the Ukrainian grain market. They will no doubt dictate conditions to suit them, and will keep everyone else out.

The Ukrainian Minister for Agrarian Policy Mykola Prysyazhnyuk drives a Maserati Quattroporte and makes no secret of the fact. This Italian car costs about 260,000 USD.  The ministerial salary is about 2,000 USD per month.

Not coincidentally, Mr Prysyazhnyuk is also a long-standing acquaintance of President Yanukovych.  In the ‘80s and ‘90s he worked in Yenakievo in the Donetsk Oblast, which is Yanukovych’s home town. They have a friend in common – Yuriy Ivanyushchenko, described as the most influential man in Ukraine. Not much is known about him, except that he is a member of the Ukrainian Parliament, and spends most of his time in Monaco.  Mr Ivanyushchenko does not conceal his grain market interests or that he is a friend of the Minister for Agrarian Policy.

Interestingly, the president of the country that is one of the world’s leading grain exporters has made almost no comment on the problems in the grain market. Mr Yanukovych has not replied to the letter from the American Chamber of Commerce and has so far ignored the foreign experts who have brought attention to the strange machinations in the grain market

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