Agribusiness losses mount amid damaging "Great Grain Robbery"

Morgan Williams writes: Ukraine's huge potential is being unmet.

Ukraine historically has been called “the breadbasket of Europe.” Even this underestimates Ukraine’s potential. The nation today can be a huge “market basket” of high-value products, not a “breadbasket” of low-value products.

Agribusiness is Ukraine’s most promising sector. But experts generally agree that Kyiv is moving in the wrong direction in this industry, with severe restrictions and monopolization. An environment for high growth is not being created.

Some government leaders are talking about the same issues today as they were in the early 1990s, such as whether the private or public sector can do a better job of developing agribusiness, or whether it is good or bad to have international investors.

Huge potential unmet

Year after year, Ukraine has been an underperformer. Everyone is tired of talking about “potential.”

Most discussion centers on alarming trends and troublesome conditions, the lack of confidence in the business and financial community, the deteriorating and damaging investment climate, the obstacles being created by government agencies and instability in the marketplace.

Investor appetite is lower. The basic philosophy of some government officials towards private economic development is not positive and friendly. Business and investors report that expansion plans are on hold. There is increased frustration.

Wrong direction

Investors say they could double investments in agribusiness if the environment was right. Bankers and investors say lending and investment is far below what is possible. Many are not willing to finance the planting of 2011 crops due to government policy.

In light of the announced economic goals, it is a surprise to find the high speed train of agribusiness economic development in Ukraine is moving rapidly in the wrong direction and on the wrong track.

Many talk about the “Great Grain Robbery” in Ukraine when discussing the major grain export restrictions which began in August and continue today.

Policies since August

Here are the major problems the business community has identified:

1. Value-added tax: The VAT system remains non-transparent and subject to manipulation. There has been pressure on exporters from tax authorities and the legal/security services, including criminal charges for alleged violations. Automatic VAT reimbursement will not apply to all and arrears persist.

2. Export restrictions: A whole series of export and other market restrictions have been introduced since August. Their justification and subsequent quota allocations lack any sort of transparency or accountability. Most international traders have been excluded from the export market. The major players in the private sector logically assume corruption and control is the driving force.

3. Monopolistic state control: Several programs have been put in place through government regulations which basically allows the government to monopolize and restrict in key areas, including grain exports, seed imports, cane sugar imports, detention of grain ships and forcing local commodity sales at below market prices. Also, several laws that give the government monopolistic power have been introduced in parliament.

These actions have caused huge losses and disruptions from the farming fields to family tables. Hundreds of millions of dollars of losses have been incurred by farmers, domestic and international agribusinesses, and other businesses in the food chain.

Experts estimate that the farmers’ direct losses due just to export restrictions for the 2010/2011 marketing year will be more than $2 billion through depressed local prices.

Losses in the food chain could reach $5 billion. Long-term losses could reach $15 billion if present practices continue.

Positive changes needed

Most major players are loudly urging government to review their actions, to change course as soon as possible.

The government should open a real dialogue with the private business sector, bring transparency to the market, and provide new market tools such as pledges of long-term leases, pre-harvest financing, hedges, real commodity exchanges, crop insurance, liberalization of central bank rules and other such positive actions.

The people of Ukraine need and deserve an abundant supply of high quality, reasonably priced food products. The world is counting on Ukraine to do its part to substantially increase the world’s food supply in the next 15 years to feed the growing population.

The amount of high value, high quality food products Ukraine could produce in the next 15 years is staggering – easily more than double what is now being produced.

The amount of food the world needs and wants to buy from Ukraine is also staggering. All of which will produce needed jobs for Ukraine, income for the people, taxes for the government, wealth for Ukraine, overall economic growth and prosperity all the way down to the village level.

But for this to happen, Ukraine’s potential in agribusiness will have to become reality – the sooner the better.

Morgan Williams is director of government affairs at the Washington D.C. office of SigmaBleyzer. He serves as President of the U.S.-Ukraine Business Council (USUBC), www.usubc.org.

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