Ukraine: GOU Imposes New Grain Export Limits

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SUBJECT: Ukraine: GOU Imposes New Grain Export Limits

Ref: Kyiv 1422

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1. (U) Summary: As foreshadowed by recent official statements
(reftel),Deputy Prime Minister Victor Slauta announced June 20 that
the Cabinet of Ministers has made a decision to limit exports of
grain, beginning July 1, in order to form a state grain reserve and
limit growth in bread prices. Political concerns in the run-up to
the September 30 elections over increasing bread prices was the
trigger: PM Yanukovych pledged to keep bread prices stable and
threatened to fire ministers who failed to keep them low. In
reality, there have been no significant increase in bread prices
recently, but rumors of bread price rises clearly spooked the
current government. End Summary.

CabMin Announces Limitation of Grain Exports
--------------


2. (SBU) According to a June 20 announcement by Deputy Prime
Minister Victor Slauta, the Cabinet of Ministers issued a resolution
to limit exports of wheat and grain. The limitations come into
effect on July 1. The resolution does not set the date, when the
limitation is to be lifted and has a clause that the limitation is
in place "until the stock is replenished", although Minister of
Agrarian Policy Melnyk stated they would be in effect through
October 1. (Note: As of June 22, the resolution had not yet been
published.) The limitation will apply to milling wheat, corn and
the mixture of wheat, barley and rye. Exports of only a token
amount of 3 thousand tons of each type of grain will be permitted.
Sources in the Ministry of Foreign Affairs told us Minister
Yatsenyuk vehemently argued in the Cabinet meeting against imposing
the export ban, but was overruled.

GOU Rationale - Bread Prices and Shortages
--------------


3. (U) The GOU defended the decision to introduce the quotas,
arguing that the drought had caused a scarcity of grain inside the
country and referring to the politically-sensitive issue of growth
in bread prices. After the GOU opened up exports of wheat this
spring, domestic prices rose to approach world levels - wheat went
from $173/ton on May 18 to $209/ton on June 8. Prime Minister
Yanukovych on June 14 ordered Slauta and Melnyk to come up with
controls on bread prices, or lose their jobs. Politics quickly
intruded: Deputy Prime Minister for Agrarian Policy Viktor Slauta
accused opposition deputies from the Yuliya Tymoshenko bloc (BYuT)
Trinduk and Khmelnitskiy of ordering bread price increases at
bakeries under their control (in Dnepropetrovsk and Kyiv,
respectively). The two deputies countered that these accusations
were false.

Bread Prices Remain Stable So Far
--------------


4. (U) Although data is not yet in for June, according to the
Ukrainian Statistics Committee, bread prices grew modestly in May
2007 by 0.2% over April and 0.3% in April over March. The
agricultural market analysis company UkrAgroConsult reported that
prices for the three most popular types of bread have not changed
much in May. Prices for bread from the flour of the 1st grade
remained the same in 22 regions, grew 0.5-2.8% in 5 regions; prices
for bread from wheat and rye flour did not change in 23 regions and
grew by 0.5% - 3% in 4 regions; prices for bread from the flour of
the higher grade remained the same in 24 regions, and grew by 1.2-3%
in 3 regions. Nonetheless, according to anecdotal reports, bread
prices have gone up in June in some regions by as much as twenty
percent.


5. (U) Bread prices are controlled by local goverments, who
regulate only prices for three most common types of bread. However,
these three types of bread account for over three-quarters of all
bread consumed. Currently, local authorities have a range of
instruments available to keep bread prices low. For instance,
because many bakeries are responsible for over 35% of bread
production in their respective regions, their ability to raise
prices is limited by the Antimonopoly legislation. Local
administrations also have the authority to set retail prices on

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bread, as an essential food product, in accordance with a December
1996 Cabinet of Ministers resolution.

Grain Stocks Reported on Sufficient Level
--------------


6. (U) Another argument, used by the GOU in justifying the export
limitations, is the concern that the drought, which hit 10 Ukrainian
oblasts, may leave the state without adequate domestic grain
supplies. According to the June 18 report of Deputy Prime Minister
Slauta, the grain stock on hand in the country is 4.4 million tons,
of which 2.5 million tons is wheat. This level is equivalent to
that accumulated in the same period last year. (Note: Most of
these stocks are in private hands, as only half a million tons are
owned by the Agrarian Fund or the State Grain Reserve. End Note.)
Agrarian Policy Minister Yuriy Melnik also confirmed at the June 20
Agrarian Policy Ministry meeting that current domestic grain stocks
were sufficient to avoid a crisis. Moreover, the GOU is predicting
a wheat crop of around 11.7 million tons, despite the drought, while
projecting domestic consumption of only six to seven million tons
for the next market year.

Ambassador Criticizes Export Ban
--------------


7. (U) In a June 20 interview with Channel 5 television, Ambassador
criticized the government's imposition of a ban. He argued it would
be much better to let market mechanisms work, noting that a ban
would harm Ukrainian farmers and the overall investment climate.
MP's Hanna Herman and Vasyl Kiselov, who belong to the Prime
Minister's party took exception to the Ambassador's remarks, terming
them interference in domestic affairs.


8. (SBU) Comment: Although the ban could have been worse (some
traders feared an immediate ban on exports),its speedy imposition
points to political panic as the motive. As with the previous ban
of last fall, there are clearly also interests (millers, bakers, and
livestock producers) who will benefit from an export ban that
depresses domestic grain prices. However, for a government now
facing elections in September, there is a clear interest to avoid
politically-ruinous bread price increases -- at least until the
elections are over. This time around, as traders have exported most
of their stocks and not purchased more grain, the full weight of the
ban will fall on domestic farmers and not on politically-expendable
(and largely foreign) grain traders. The reaction of Ukraine's
farmers will be key -- one trader told us he had heard already of
plans by farmers to stage protests in Kyiv over the export ban.
TAYLOR