Ukraine ‘breadbasket’ prepares for its next heyday

By bne IntelliNews October 7, 2015

Benjamin Rahr in London -

Despite Ukraine's 18-month-old civil war and the loss of territories in the east of the country, it has impressively maintained its status as one of the world’s leading exporters of agricultural products. Now the pro-European government in Kyiv hopes that its agribusiness, bolstered by a bumper 35mn tonne grain harvest and some bold planning, will act as the green shoots of a general economic recovery. 

In order to attract large-scale international investment, Ukrainian Minister for Agrarian Policy and Food Olexiy Pavlenko has been mulling a controversial land reform draft that is hoped to open up the field, quite literally, to investors. But critics say it will instead allow a handful of multi-nationals and domestic oligarchs to live off the fat of the land while leaving local farmers out in the cold.

Although Ukraine has undergone - to quote the US State Department - "an historic transformation since 2014, which has laid the foundation for a dramatically improved investment climate in the future”, the country narrowly avoided bankruptcy earlier this year and remains in desperate need of foreign money. 

Most of Ukraine's heavy industry is located in its eastern regions and so has been crippled by the conflict with pro-Russian separatists. Last year, exports from the historically strong metallurgical branch dropped by one sixth. And while the country’s 2014 GDP shrank by 7%, agriculture became Ukraine’s beacon of hope as the only economic sector showing a positive performance – albeit at a mere 3%.

According to Gilles Mettetal, Director for Agribusiness at the London-based European Bank for Reconstruction and Development (EBRD), Ukraine’s economy might be battered but its agriculture is enjoying a period of record exports, defying geopolitical challenges and the fighting in the East.

"Ukraine has already become the world's third largest exporter of grain and they still have even more potential to improve the yield, cultivate more land and add value to the export," Mettetal told bne IntelliNews. "So, there is potential. The fundamentals are right: the land is good - it's probably the best land in the world or among the best in the world, the companies are good, the private sector has received very little support but has nonetheless developed a very efficient operation. They are very competitive, probably one of the most competitive in Europe."

Despite Russia's annexation of Crimea in March 2014 and subsequent loss of control over parts of the eastern Donbas region, Ukraine has remained the world’s leading exporter of sunflower oil. Once known as the "breadbasket of the Soviet Union", it has lived up to its former fame: its agriculture has shown steady overall growth over the past 15 years and is valued today at $13.5bn.

Off to pastures greener

The "plan is to use all opportunities to double our production by 2020", minister Pavlenko tells bne IntelliNews on the fringes of a conference jointly staged by his ministry and the EBRD in London with the aim of attracting foreign investment. "Agribusiness in Ukraine has 30% of the whole world's black-soil, very good moisture, also people, skills, port facilities, infrastructure, and we see huge potential to increase not only exports but also production."

Pavlenko pointed to the fact that the post-Maidan government has implemented reform measures and fulfilled International Monetary Fund (IMF) requirements to secure a new loan. While a year ago foreign exchange reserves were down to $5bn, the National Bank of Ukraine (NBU) now has $13bn in reserves, enough to stabilise the national banking sector.

"We can see a very big difference between the stage we had one year ago and the current situation," adds Pavlenko. "First of all, in terms of stabilising the currency, agribusiness plays a very vital, a key role: 37% of total export is coming from agribusiness. At this moment, the total export is at the level of 34.6mn tonnes of grain - we had record figures last year, amounting to $15bn. We are the number three exporter after the USA and the European Union."

But there are still not enough investors, despite the great potential. "In our estimate, up to $8bn [in] potential projects are currently available for investments, including irrigation projects, in machinery, in leasing, in dryers, in seeders, in planters," says the minister.

You can lead a horse to water...

The country’s chief banker Valeria Gontareva says that over the next months Ukraine will suffer one of the deepest recessions in years as its economy struggles to regain momentum. The NBU predicts a 7.5% GDP contraction this year. At the same time, inflation is expected to remain high at 25% and will recede only marginally to 17-18% in 2016.

Private foreign capital has almost completely vanished, and for now Ukraine has to rely on international institutions. Since 2011, the EBRD has pumped 200mn annually into Ukrainian agriculture. "Over the past five years we have invested more than 1bn but this is a drop in the ocean," said Mettetal.

So it is no surprise that the bank’s focus is on getting more investors on board. While Ukraine will be facing huge challenges for the foreseeable future, the government is committed to accelerating reforms, cutting through red tape, fighting corruption and creating the right environment for businesses to operate. Kyiv hopes that its reform efforts will soon bear fruit, even while taking heavy flak for the lack of fast visible progress.

"Together with the EBRD, the IFC and the World Bank, we are trying to show investors where to invest," said Pavlenko. “We have twenty-four different reform groups, covering twenty-four different sectors, from land reform to tax issues, food safety, deregulation, state-owned enterprises and many other sectors, which are really vital and key for the investors."

Serious investors need a stable legal environment and a degree of certainty that they will reap a decent return on their capital. So far, it looks promising in Ukraine, says EBRD’s Mettetal: "We have asked 14 large companies how much they would be prepared to invest in the next few years, and it amounted to more than €2bn."

"Agribusiness is one of the major sectors that takes the loans," adds Pavlenko. "There is a higher rate of growth where the banks put capital." But as long as Ukraine is viewed as a high-risk country, foreign loans remain very expensive at annual rates of up to 30%, "which is very high - but still, it is the most interesting sector to finance". 

Chinese hand on the plough 

Despite being set against a background of political instability, financial risk and economic weakness, the country’s economic potential caught the eye of a new investor who has never set foot on Ukraine’s fertile soil before - China.

Today, Ukraine has overtaken the US as China's largest grain supplier, while the Asian economic superpower announced plans to lease and work up to 5% of Ukraine's farmland. Since the outbreak of the Ukrainian turmoil in late 2013, the agricultural partnership between Kyiv and Beijing has gradually intensified. But the People's Republic is not the only country that is now tilling the black soil fields. 

"We see big interest from Asian countries as well as from Saudi Arabia, Kuwait, Qatar and Europe," said Pavlenko. European businesses and very big European funds from Germany, from France, from UK and from the USA are interested as well."

To further intensify the war on corruption, the government is now preparing an extensive privatisation programme. "We are sure that putting up state-owned companies for privatisation as soon as possible will bring in capital investors and also help to eradicate corruption in those enterprises," said Pavlenko. 

Breaking the land lock

Another major stumbling block that has kept many investors away from Ukrainian agribusiness is the ban on sales of farmland to large investors. Pressured by the World Bank and the IMF, but wary of domestic resistance, the government is drafting a land reform that might lift those restrictions. Given that less than a quarter of the population supports foreign land sales, according to the minister, "you need to educate the people telling them that land sometimes must be a commodity. It must be a viable instrument to track financing."

Selling Ukraine's "fields of gold" to international investors and conglomerates is expected to create a backlash from the rural community, which the minister says is canny enough not to "buy a pig in a poke". Although the government estimates that $10bn could easily be attracted very fast to the land and to the market within a very short period of time, critics fear that it would hand over control of the breadbasket to domestic and foreign oligarchs, since local farmers would not be able to raise the requisite capital to take part in the auctions.

Therefore, the majority of Ukrainians favour the existing model of long-term agreements with small holders and hope that the authorities will simplify the legislation of land leases, provide realistic finance options to local farmers and open up new export markets.

However, faced with ever-growing economic problems and a huge mountain of debt, Kyiv is dependent on money from the international community, which is the main sponsor of the proposed land reform. Who the government will listen to in the end, the citizens or international institutions, remains to be seen. Ultimately, whatever the government decides, it will reap what it sows.

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