Graham Stack in Kyiv -

Viktor Ivanchyk, CEO, founder and co-owner of Warsaw-listed sugar producer Astarta Kyiv, one of Ukraine's top-three agribusinesses, got advanced warning of the coming crisis in September direct from the Chinese leadership.

"We were attending the 2008 'New Champions' forum in Tianjin, China," he recalls, "and on September 27 Chinese Premier Wen Jiabao talked at the opening about the gravity of the crisis. Taking into account how cautious Chinese leaders are in their statements, we realized how serious things were becoming. On the same day we got back to Kyiv, we started our anti-crisis planning."

This didn't prevent Astarta announcing ambitious capital expenditure plans in October, which had to be slashed only weeks later. But the company was wise to decline an expensive tied loan in October, and instead took out a five-year $25m credit facility from the Netherlands development bank FMO, which Ivanchyk calls "a credit of confidence." And Astarta was able to completely finance the processing of its sugar beet crop in the fourth quarter 2008.

Coping with the global financial crisis would be enough to handle, but 2009 had two further unpleasant surprises in store for Ukraine's sugar industry. First came a surge in first-quarter gas prices after the gas conflict with Russia. Gas prices account for 15% of Astarta's costs. Then the consequences of Ukraine's fast-tracked WTO accession in 2008 came home: Ukraine's government had agreed to very soft conditions, especially regarding sugar, conceding large quotas for import of raw cane sugar at mini 2% tariffs. As a result, Doomsday scenarios are now rife - local media are reporting that up to 50% of Ukraine's sugar refineries could close in 2009, spelling an end to the sector that won Ukraine the sobriquet, "the sugar bowl of the Soviet Union."

Sweet prospects

Despite these difficulties, of all Ukrainian companies that have IPO'd in recent years, Astarta Kyiv's share price has held up best, according to a recent PBN report, with a drop of only 38.55%. But it's not just Astarta: sunflower seed and oil producer Kernel Holding has also fallen by "only" 48.75%. These results compare favourably with the previously booming real estate and construction sector, where companies such as XXI Century Investments have had almost total share price collapses verging on 100%.

This is partly because investors see good chances for leading agribusinesses such as Astarta to act as consolidators in highly fragmented sectors. Ivanchyk prefers to emphasise organic growth, but admits that much of 2008's 50% surge in production was down to the acquisition of the Narkevychi refinery in Western Ukraine. With sugar refineries shutting up shop as they lose access to funding, and sugar beet producers going out of business as raw cane sugar imports come on the market, it's large integrated farming and refining operations like Astarta that will pick up the pieces.

Secondly, despite the short-term shock caused by WTO accession, Ivanchyk argues that trade liberalisation is the road ahead, giving Astarta the chance to expand its export business, especially grain exports. Sugar beet cultivation requires extensive crop rotation, meaning that Astarta is also a producer of grain and dairy products, and the company's long-term strategy sees the non-sugar business accounting for 50% of revenues, and nearly 100% of foreign exchange revenues. "We haven't yet felt the benefit of WTO accession," he says.

Tellingly, instead of criticising the government for agreeing disadvantageous WTO terms, he lashes out at the decision in 2006 to impose restrictions on grain exports that lost producers foreign markets. He also attacks new protectionist EU restrictions on grain imports imposed in the autumn of 2008.

The third big potential gain could be the long-awaited end of the current moratorium on sales of agricultural land. Incredibly for a country with such agricultural potential as Ukraine, an investment-stifling populist moratorium on all land sales still holds sway, meaning that Astarta only leases its land. Despite government promises, a majority of deputies in the parliament continue to block the move "out of populist considerations," laments Ivanchyk. "Political will is needed," he says, "but it will not happen before the January 2010 elections. We expect it to go through immediately after."

"Removing the moratorium will significantly increase both the attractiveness for agriculture for investors and also the efficiency of agriculture in Ukraine," says Ivanchyk. Business, he says, is far more efficient when companies own the land directly and can also use the land as security to obtain funding. "It should have been done three-four years ago," says Ivanchyk. "Because of this, Ukraine has missed out on hundreds of billions of dollars in investment that would have already changed the face of Ukrainian agriculture."

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