KYIV BLOG: Against the grain

By bne IntelliNews September 21, 2010

James Marson in Kyiv -

After Russia banned grain exports in July, worried eyes across the globe turned to neighbour Ukraine, another of the world's top grain exporters. The agriculture minister said in mid-August that a quota of 2.5m tonnes on wheat and barley exports would likely be introduced, but the government then um-ed and ah-ed for almost a month before announcing on September 10 that there was no need for limits.

The delay and subsequent decision not to introduce curbs wasn't greeted by a sigh of relief among traders and farmers, however. Traders have been complaining for several weeks that administrative barriers are blocking grain exports.

At the beginning of September, the Ukrainian Grain Association said the state customs service is holding over 20 ships in ports, carrying out lengthy "checks" on grain. Customs officials say traders are trying to export grain under falsified documents and have opened criminal cases against several companies. As a result, wheat exports dropped from 1.16m tonnes in August 2009 to just over 400,000 tonnes in the same month this year.

Traders say they believe the orders came from high up in the government. With local elections approaching in October, and the ruling Party of Regions' ratings plummeting after recent hikes in household gas prices and the retirement age for women, the authorities are desperate for the bread price not to increase.

Business daily Korrespondent-Ukraine quoted an unidentified government official on September 17 as saying that the de facto ban would last until October 31, the date of local elections.

Agriculture experts accuse the government of overreacting in a populist panic. First, the harvest is forecast to fall from 46m tonnes in 2009 to 40m this year - a significant decrease, but much smaller than Russia's forecast more than 30% drop. Second, according to analyst Andriy Yarmak, the rise in the price of grain would add only 15 kopecks (€0.01) to the price of the cheapest loaf of bread. In short, the government has placed the importance of electoral slogans over the opportunity for farmers to turn a decent profit by selling grain on the free market.

Very agricultural

The application of the governmental handbrake is hardly a new development in a sector that's bogged down by a lack of transparency and reforms.

Ukraine's agricultural sector is widely touted as a promising motor for economic growth, but bureaucracy, the lack of an open land market and the lack of financing are proving a major block. Ukraine has some of the most fertile "black earth" in the world, with just over 30m hectares of arable land, around one-third of the EU's land stock. But this land still cannot be privatized because of the moratorium on its sale, lessening incentives to invest in its development. It also means that land cannot be used as collateral to secure financing to invest in fertilisers or modern equipment.

The agriculture minister said earlier this year that the moratorium could be lifted at the start of next year, but there has so far been no movement on the laws needed in order for that to happen. Critics say parliament contains a number of large landowners who benefit from the current non-transparent land marker don't want the size of their holdings revealed.

Record harvests have been achieved in recent years (reaching 53.3m tonnes in 2008), but inertia can only take the sector so far. By preventing the development and functioning of a market, the government is blocking potential investment and hurting small producers, who are among Ukraine's poorest citizens. Although it would be hard to conclude this from government statements. For instance, grain exports aren't being blocked but "checked."

So much of what the new authorities are doing proves what a long-time Ukraine watcher reminded me recently: "Don't look at what they say; look at what they do."

Earlier in August, Prime Minister Mykola Azarov presented the third and apparently final version of the new tax code, promising that it would make taxes the lowest in Europe. Another view, however, is put forward by the owner of a number of small businesses: "It's a rope to hang small businessmen with," he tells bne. He added that the new authorities were already tightening the screws on small and medium-sized businesses, which are putting more and more off the books. (This in an economy that the government estimates is already 50% in the shadows.)

Regional tax inspectorates are competing, the businessman said, to demonstrate a high level of performance to the central authorities by collecting as much tax as possible, by whatever means. But this can't go on forever: "There won't be much meat on a chicken if you don't feed it."

Or, for the harvest, you can only reap what you sow.

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