On The Hot Seat

Ukraine, a topworld grain producer, rattled fragile global markets last autumn when it followed Russia in imposing export restrictions amid forecasts for poor global harvests.

The government justified the move as necessary to protect domestic food security, including keeping prices affordable for consumers. However, the 2010 total grain harvest came in at about 40 million tons, off only 13 percent from the previous year — making the export restrictions unjustified, according to some critics.

By placing curbs on Ukraine’s multibillion-dollar grain export business, the government hurt precious hard currency earnings. It also punished some of the nation’s largest investors – international grain traders and agribusinesses.

Ukraine’s Minister for Agrarian Policy and Food Mykola Prysyazhnyuk

Experts, however, said farmers were the most vulnerable and hardest hit. As in past years when export restrictions were introduced, farmers were prevented from selling their grain at world market prices. Now many wonder whether it’s worth their while to plant crops this season. Those who want to plant are struggling to get bank loans to finance what some see as an increasingly risky market.

The government’s new policies also included the granting of export quotas in an allegedly non-transparent way, triggering an international outcry.

These debates are taking place against the backdrop of whether Ukraine’s agriculture sector will reach its potential as “the breadbasket of Europe” and an agricultural superpower.

Experts say protectionist policies, such as a moratorium on the buying and selling of land, stifle efforts to bring more investment.

Billions of dollars of fresh investment into agriculture could boost yields on what is regarded as some of the world’s richest farmland, the famous black earth or “chernozem.”

For insight into government policy, the Kyiv Post turned to Agrarian Policy and Food Minister Mykola Prysyazhnyuk. He is at the center of the ongoing conflict between international grain trading giants and Ukraine’s government.

Kyiv Post: It is far from a secret that many grain traders operating in Ukraine – foreign and domestic – have since last autumn protested the government’s grain export restrictions, calling them unjustified, as well as an export quota issuance process that they claim is non-transparent. They are also deeply disturbed by Ukraine’s grain market reform plans, including a law adopted last week by parliament which would force traders to pay money for grain export quotas, which, if signed into law by President Viktor Yanukovych, would use the funds raised for forward grain purchase contracts to help farmers that have been hit by the export restrictions. What is the root of this conflict?

Mykola Prysyazhnyuk: Last year’s (harvest season) was a difficult one for the global grain market – one of panic. We saw one country after another downgrading their grain harvests, starting with Russia, then Ukraine, as well as Austria, Argentina, Brazil, the U.S. and European countries.

When Ukraine started harvesting, our pricing policy was Hr 800-900 ($100) per ton of wheat. Last June, we expected a harvest of 48 million tons. But within weeks, [harvest predictions fell due to bad weather and other factors] and prices started sharply rising. We saw we wouldn’t get the harvest expected. The panic started.

Ships filling with grain in the Odesa port. Export restrictions since last August have roiled the agricultural industry, with grain traders crying foul over the allocation of a large share of the valuable export quotas to Khlib Investbud, a partly state-owned firm whose private owners are not clear. (UNIAN)

We had about 12-13 million [tons] of grain left over, which we could have exported.

But the general global panic forced the government to act. I understood that it would be better to have a civilized grain market regulator. But we saw that all countries were worried about their food security. And in this light, we had to take into consideration protection for a part of our society which does not live at a European level, and could not sustain European pricing.

Of course, the quota issue could have sparked complaints, as conditions were not worked out that could have given grain traders a chance to orient themselves. But the blame lies on both sides: our government and grain traders.

Last August and September, we routinely met with grain traders with the aim of working out a joint action plan. Our government was clear: food security is priority number one. But we did not manage to jointly develop a strategy. Government was, therefore, forced to introduce quotas.

By the way, this is not prohibited by the rules of the World Trade Organization [of which Ukraine is a member.] In taking this road, we were criticized, even as our neighbors completely banned export.

KP: Lobbyists representing multinational grain giants operating in Ukraine have described your government’s actions as the “Great Grain Robbery.” They say that export restrictions were not justified, given that the harvest was still big, about 40 million tons. They said that government actions glutted the market with inexpensive grain, creating a situation where there is not enough room to store the new harvest. And, they say, that traders and banks are not willing to finance grain purchases given the risk that they may not be able to export it. They also complain that the biggest grain export quota share was given to one previously little-known company, Khlib Investbud. They say this situation smacks of corruption. Foreign ambassadors to Ukraine are also expressing such concerns, that corruption could be at play.

MP: First of all, I am far from this. If some actions are classified as corruption, they deserve to be investigated.

Secondly, with respect to the formation of state company Grain Ukraine, the state made the right decision here, which made it possible to preserve state assets which in previous years under state company Khlib Ukraine were constantly [at risk] of bankruptcy. Today, Grain Ukraine, [which is inheriting much of Khlib Ukraine’s assets, including grain silos] is an attractive company. It will be turned into a joint stock company soon. We will agree with financial companies of world class about this. Thus, the state will not be a monopolist. The government never aimed to have a state monopoly.

As for the quotas, to some degree, they may have been introduced not at the right time. We are jointly, along with the traders, to blame for this. We are working with the European Business Association, American Chamber of Commerce in Ukraine, to develop a memorandum on how we will act next season. Because today, once again, nobody, including us, can say what the harvest will be like.

It is critically important for us to be a strong player on international grain markets. We understand that the market foremost wants our grain, not for now so much of our meat, chicken, vegetables. At this first stage, we are ready to fill this demand.

KP: Do you support, and do you think the president will sign the law adopted by parliament last week which would force traders to pay for quotas, with the funds in turn being used to support farmers? The Chamber of Commerce, EBA and traders say this law is not acceptable.

MP: It was the idea of traders [late last year] themselves to introduce quotas. We will see if the president signs it or not. His administration is today analyzing it.

KP: Maybe it’s true that traders wanted the quotas instead of a complete export ban, but they complain that the quota issuance process was non-transparent. Traders, their lobbyists and Western diplomats say that Khlib Investbud received the lion’s share of the quotas, despite the fact that it was little known, has unclear ownership and unclear grain stockpiles available for export. They say also that it looks as if the state and you are supporting this company.

MP: The emergence of Khlib Investbud, in my view, is a consequence of Ukraine’s law on state procurements. In this law, it is written that a state structure, such as the Agrarian Fund [state grain reserve], is not eligible to fulfill the role of a single bidder.

It is written in the law that if a single company wins the contract for food security and formation of the reserve, then it must be a company in which no less than a 51 percent stake is private.

The government is now in talks with the World Bank to remove such nuances from our legislation. In my view, the state has the right to buy at its own cost the amount of agriculture products which are needed to protect food security and prevent unstable prices.

KP: Who are the private investors in Khlib Investbud?

MP: I don’t know this and should not know this. But these are sufficiently transparent financial structures. Even the press has written that it is Russia’s VTB [Vneshtorgbank bank,] is this not the case? You need to look at the registration documents.

KP: It is hard for us as journalists, as well as for the international grain traders, to understand what is really going on when the agriculture minister and Prime Minister Mykola Azarov say, as he has said in the past, that they don’t know who the state’s partner is in this company which plays a huge role on the grain market.

MP: If it is needed, we will provide [such information.] I can tomorrow give you registration [documents showing] the owners [Editor’s Note: The documents were not received by the time this edition of the Kyiv Post went to press on April 14]. It is, by the way, known in all circles who the owners are.

KP: So, you know who the owners of Khlib Investbud are?

MP: Of course. I will give it to you tomorrow, today…

Questions have been raised about whether Party of Regions lawmaker Yuriy Ivaniushchenko is involved in the grain business, specifically with Khlib Investbud. He did not respond to Kyiv Post inquiries before this edition was published. He claims to have known President Viktor Yanukovych for a “long time.” Both are from Yenakieve in Donetsk Oblast. (Natalia Kravchuk/Korrespondent)

Robert Browdi is general director of Khlib Investbud. A representative of the company said the firm’s ownership would be disclosed through the Agriculture Ministry. But when this edition of the Kyiv Post went to press on April 14, the information had not yet been received. (www.hlib-invest.com.ua)

KP: You must have heard that much of the grain market, and Western diplomats, are convinced that a certain [Party of Regions] lawmaker, Yuriy Ivaniushchenko, is the person who controls this company. And they say that you are close with him, and that the situation is not transparent. Maybe he is a de facto owner?

MP: I know all 450 parliament deputies, each one. And it’s normal for a minister to know them all, including him.

KP: Does he have any relations to [Khlib Investbud]?

MP: Everyone says what they want to say, isn’t it so? My job as a minister is to protect food security. I am obliged to have a certain amount of grain and to preserve the attractiveness of the country’s agriculture sector.

We are certainly doing this. Moreover, we are now holding talks with grain traders, and I am not satisfied that they only jump into work when harvesters collect grain. There is world experience – of Brazil and Argentina – where the harvest is financed one year in advance. This is our goal and the world market wants our grain.

KP: But banks and traders say that they can’t put money into such ventures given what they just experienced, in not being able to export the grain, and given their big questions about future reforms of Ukraine’s agriculture business.

MP: What reforms do not appeal to grain traders today?

KP: For example, they say the market is being monopolized.

MP: Why?

KP: They are pointing the finger at Khlib Investbud, that they received the lion’s share of quotas.

MP: But we are now talking about cancelling quotas for next season. We hope we will have enough grain for the domestic market and export. Let’s work together. Today, the state is not capable, nor is the agriculture market, of independently investing the funds needed to increase the harvest. Where shall we get the funds?

KP: But grain traders say that if the state did not interfere so much in the grain market, if the market was more predictable, they and banks could provide the financing.

MP: You are saying that the state interfered. But what did grain traders do for the past 19 years? Why did they not provide the financing?

KP: They say that what is happening now happened before, in 2007, for example. There were grain export restrictions imposed, and, in their words, an unfair quota issuance process. How much have international grain traders invested in Ukraine to develop the market?

MP: I can’t underestimate the role of grain traders. We understand we can’t develop this market without them. This is for sure. And I am confident that we will at this phase find the right joint plan on exports, food security and investments. You should understand that about 15 million people live in our villages. About 32 percent of our population is rural, compared to 2-3 percent in developed countries.

A complete industrialization and globalization of our market is being proposed. We are not against it, but we need to take into consideration the realities and interests of our villagers and farmers.

KP: We heard that the state could soon sell its shareholding in Khlib Investbud.

MP: We will auction it off, sell it, both the Grain Ukraine company and Khlib Investbud.

KP: Nibulon, one of the biggest domestic agribusinesses, has recently filed a lawsuit against Ukraine for hurting its business through non-market and non-transparent policies. Other grain firms say they could do the same. Will Ukraine win such lawsuits?

MP: I don’t think that grain traders will be motivated to do so. We are in constant talks with graders to come up with transparent, normal and mutually beneficial conditions As for Nibulon, we will face them in court. Let the court decide who is right and wrong.

KP: Will Ukraine continue to restrict grain exports?

MP: The restrictions are to be lifted July 1. We are today discussing ways to speed up this process. Nonetheless, despite the existing restrictions, about 10 million tons of grain was exported.

KP: And who exported it? Can you give a breakdown?

MP: All the companies. This is not secret information. We will provide it to you. [Editor’s Note: When the Kyiv Post went to press on April 14, the newspaper had not received the information.]

KP: Maybe its the case that traders are not telling the whole truth when they say they were not allowed to export their grain?

MP: We would be wrong to blame the grain traders in saying that they are not telling the truth. I understand them.

They are a business. It’s another issue that we failed to find common ground. This is our mutual fault.

I do not lay all the blame on grain traders, but I also do not want to take all the blame upon myself.