Identifier
Created
Classification
Origin
07KYIV124
2007-01-19 05:03:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE: GRAIN EXPORTS BLOCKED; TRADERS SUFFERING

Tags:  ETRD EAGR ECON PREL UP 
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VZCZCXRO2298
RR RUEHDBU
DE RUEHKV #0124/01 0190503
ZNY CCCCC ZZH
R 190503Z JAN 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 0951
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000124 

SIPDIS

SIPDIS

STATE PLEASE PASS TO USTR FOR LMOLNAR/CKLEIN/SDONNELLY
COMMERCE FOR CHRISTINE LUCYK
USDA FOR ALLISON THOMAS, JONANN FLEMINGS


E.O. 12958: DECL: 01/18/2017
TAGS: ETRD EAGR ECON PREL UP
SUBJECT: UKRAINE: GRAIN EXPORTS BLOCKED; TRADERS SUFFERING


Classified By: Ambassador, Reasons 1.4 (B) and (D)

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000124

SIPDIS

SIPDIS

STATE PLEASE PASS TO USTR FOR LMOLNAR/CKLEIN/SDONNELLY
COMMERCE FOR CHRISTINE LUCYK
USDA FOR ALLISON THOMAS, JONANN FLEMINGS


E.O. 12958: DECL: 01/18/2017
TAGS: ETRD EAGR ECON PREL UP
SUBJECT: UKRAINE: GRAIN EXPORTS BLOCKED; TRADERS SUFFERING


Classified By: Ambassador, Reasons 1.4 (B) and (D)


1. (SBU) Summary: Exports of wheat, barley, corn, and rye
from Ukraine remain completely blocked as the GOU has not yet
implemented the export quota system it authorized on December
8, 2006. Traders estimate that there are over 1.5 million
tons of grain in storage at ports, where it is beginning to
rot. The GOU is expected to begin issuing export licenses
around January 22, but even then, the meager size of the
quotas (a total of 1.1 million tons of barley and corn, and
only 3000 tons of wheat) will severely limit trade and
compound the millions of dollars in losses already suffered
by grain traders and by Ukraine's farmers. Speculation on
the GOU's motives runs from a desire to create more
opportunities for corruption, to an intention to restore a
state monopoly over the grain market in Ukraine. Major grain
traders met with the AmCham and U.S. and European diplomats
on January 16 to discuss coordinating approaches to get the
GOU to change its policies. They noted that Ukrainian
farmers were difficult to mobilize because they were poorly
organized and most had cashed in their crops before the
restrictions were in place. Post is aggressively urging key
GOU officials to reverse this policy and is looking for new
ways to approach the issue, but the Government appears to be
dug-in. End Summary.

Rotting Away in the Ports
--------------


3. (U) At a meeting with U.S., German, and EU diplomats at
the American Chamber of Commerce, representatives of Cargill,
Bunge Ukraine, and Toepfer (80% owned by Archer Daniels
Midland) discussed the grave situation the GOU has created by
restricting grain exports. The GOU has not issued any export
licenses since November and the grain trade has ceased
entirely. Industry representatives estimate that there are
1.6 to 1.7 million tons of grain in temporary storage at
Ukraine's major ports (Yuzhniy, Odesa, Mykolayev, Mariupol,

and Sevastapol). About half of this grain consists of
barley, and wheat accounts for between 200 and 300 thousand
tons.


4. (U) The grain, in facilities unsuitable for long-term
storage, is suffering from rot and insect damage.
Temperature of grain stored at Yuzhniy port has exceeded 110
degrees. A surveyor hired jointly by several traders has so
far inspected 20 to 30 thousand tons of stored grain at
Yuzhniy, and has already separated out over 7000 tons in such
poor condition that it can no longer be sold. Since the port
storage facilities can be used only to load ships, and not
trucks or trains, returning the grain to suitable grain
elevators was not an option. One company, Nibulon, had
reportedly already resorted to dumping rotting grain into the
water. Bunge had alerted its insurers of the likelihood of
filing a claim for losses of $6-8 million at Yuzhniy port
alone. Insurance companies had jointly sent a representative
to the port to keep tabs on the situation. AIG was
reportedly in discussions with EU officials on the situation.

Quotas Not Yet Operational...
--------------


5. (U) The quota amounts that the Cabinet of Ministers
established by decree on December 8 permit export of 3000
tons of wheat, 600,000 tons of barley, and 500,000 tons of
corn. Companies seeking a share of this 1.1 million tons of
exports submitted applications for licenses totaling 3.9
million tons they were already prepared to export. On
December 28, an interagency committee proposed a schedule of
allocation of licenses and began to verify that companies
actually controlled their claimed quantities of grain. It
expects to complete that task by January 19, allowing the
Ministry of Economy to begin issuing licenses on January 22.


6. (SBU) In accordance with the CabMin decree, 80% of the
quota allocation was apparently based on the historical
market share of traders. The proposed allocation of the
other 20%, reserved for new entrants, however, caused concern
among grain traders. A small Donetsk firm called Reider
Trade, for example, received rights to export over 95,000
tons of corn and barley. (Note: Although Reider Trade is
believed to be a nominally independent company, its founder
has links to Ukraine's leading oligarch Rinat Akhmetov.) The
grain traders at the AmCham meeting said they doubted small
firms receiving quotas actually controlled the grain, but had
falsified warehouse receipts to gain the quotas. Cargill's

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representative told us separately that it had checked on one
silo receipt Reider had submitted for 20,000 tons of corn.
In fact, according to Cargill, there was no corn in the silo,
and the receipt was a forgery.

...And They're Too Small Anyway
--------------


7. (SBU) The amount of grain that Ukraine could potentially
export before June 30 likely well exceeds even the 3.9
million tons that firms sought to export under this quota
allocation. Ukrainian farmers have not yet sold 40% of the
crop. Toepfer estimates that Ukraine has an exportable
surplus of around 4 million tons of grain beyond that
permitted by the quotas.

GOU Motives: Corruption, Statism, or Saving Face?
-------------- --------------


8. (SBU) Grain traders dismissed out of hand the idea that
the export quotas stemmed from a concern for bread prices or
a wheat shortage. The fact that Ukraine was placing severe
limits on corn and barley was a prima facie refutation of
that argument. Another theory was that Ukraine had stumbled
into this policy without realizing the consequences, and now
needed a face-saving way out. GOU officials have repeatedly
cited the experience of the bad harvest of 2003, when Ukraine
was caught unprepared and had to import grain. Grain traders
said they had proposed face-saving solutions to Deputy Prime
Minister Klyuyev repeatedly, and had handed proposals to
Prime Minister Yanukovych during his recent U.S. trip. Their
proposals would allow the GOU to increase its grain stocks,
declare victory, and free up exports, but the GOU had shown
no interest in pursuing such a compromise. Cargill noted
that Klyuyev had already begun talking about the size of
quotas for the 2007-2008 market year.


9. (C) In a January 15 discussion with Ambassador, Economy
Minister Makukha implied that the GUO may find export
restrictions, at least for wheat, necessary in the next
market year. He noted that 80% of Ukraine's wheat crop was
winter wheat, and that the current mild winter was
encouraging unseasonably fast growth of the crop. This meant
it was highly vulnerable to a late winter frost, which could
cause a disastrous 2007 harvest, according to Makukha.


10. (SBU) Whether the GOU initiated the quotas out of a
sincere concern over shortages, or in order to help
politically powerful bakers and millers, they have allegedly
created opportunities for corruption. Without citing any
specific allegations, the industry reps were convinced that
Klyuyev was the chief beneficiary of this corruption.


11. (SBU) Another theory gaining currency is that the GOU
intends to reintroduce a monopoly on Ukraine's domestic grain
market under the state trading company "Khlib Ukrainy" (Bread
of Ukraine). Leonid Kozachenko, President of the Ukrainian
Agrarian Federation, told Ambassador of this theory in late
December and added that the GOU also intended to set up a
state-owned commodity exchange run by the Ministry of
Agriculture. Cargill's Ukrainian vice president noted that,
though Khlib Ukrainy now lacked the funding to take on this
role, its representatives were meeting regularly with
Yanukovych to find a way to overcome that obstacle.


12. (C) Comment: While we believe that some officials may
advocate such a plan, we are skeptical that it is a serious
option for the GOU. It is likely that the GOU ill-advisedly
launched the export restrictions, and that a powerful
constituency of venal stakeholders has evolved hoping to
perpetuate arbitrary state control over exports. Some
traders believe the objective is to force foreign traders out
of the market and place the export trade in the hands of
local cronies. End Comment.

PR Message: Quotas Hurt Ukraine, Not Just Traders
-------------- --------------


13. (SBU) Cargill, Bunge, and Toepfer agreed to undertake a
public relations effort with the goal of creating a political
problem for the GOU. There was no sympathy in the population
for the big international grain traders. The GOU had
convinced Ukrainians that the traders themselves, by
exporting "too much" grain early in the market year, had made
the quotas necessary. To counter this, it would be necessary
to recruit the farmers to take an active role. This would be

KYIV 00000124 003 OF 003


a challenge, since small farmers were unorganized, and most
had already cashed in their crops by selling to the traders
early. Although the traders estimated that 40% of the crop
was still unsold, most of that was in the hands of the 500 to
1000 large agricultural enterprises, who were capable of
storing grain until prices recover. If exports do not free
up, however, farmers will face serious losses in the next
harvest, beginning in June. With the huge carryover from
this year, the domestic market will be oversaturated and
storage space very scarce. Moreover, if the gap between
world and Ukrainian prices remains at the current $30-$45 per
ton, Ukrainian farmers could lose hundreds of millions.

Diplomatic Approach
--------------


14. (SBU) Grain traders welcomed our offer to lend a
diplomatic hand. They said, however, a reprise of the
November press conference that the Ambassador held together
with his German and Dutch counterparts could reinforce the
impression that this was a foreign, not a Ukrainian problem.
One effective approach might be to appeal to national pride
by showing "Ukraine's gold" rotting in the portside storage,
they suggested. A visit by Ambassador to such a site could
attract press coverage. They encouraged high level
U.S-Ukrainian meetings and offered to accompany the
Ambassador if appropriate. (Embassy note: The Ambassador
has consistently raised this issue with PM Yanukovych, DPM
Kluyev and other key GOU officials, and in spite of their
assurances, the issue has not been resolved. End Note.)
Companies said they thought the quotas would be a barrier to
WTO accession and suggested the USG make that point to the
GOU.

EC Cautious
--------------


15. (SBU) EC Mission Econ Chief Luis Portero took a
conservative line at the meeting, saying that there could be
no expectation of getting the GOU to eliminate the quotas.
The goal therefore should be to ensure that licensing
procedures were transparent. To that end, the EU was sending
technical experts to Ukraine the week of January 22 to advise
the GOU on licensing. He said the Commission had also
decided to hold meetings with Ukrainian officials on January

31. European Commission head representative Ian Boag
admitted to the Ambassador January 17 that talking to the GOU
about improving licensing procedures could easily be
construed as accepting the quotas. However, Boag said that
the EU would look for next steps after their January 31
meetings. The EC had not discussed whether the quotas
constituted a barrier to WTO accession. German agricultural
attache, Stefan Kresse, who personally advocates more
aggressive action, said he doubted Brussels would make that
link explicit.

Comment
--------------


16. (C) These costly quotas undermine the Yanukovych
government's efforts to appear pro-market. In combination
with the return to a corrupt system of securing VAT refund
payments from the GOU, the quotas confirm the business
community's fears about the direction of Ukraine under
Yanukovych. Since Post's aggressive private and public
diplomacy has not yet produced tangible results, we continue
to look for new ways to raise the profile of the issue and
are considering a February 1 visit to a grain port facility
for the Ambassador.
Taylor