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Publications - Ukrainian grain exports: one-man show?

Ukrainian grain exports: one-man show?

Vol. 26 • February 2011

Before the ink could dry on Cabinet of Ministers of Ukraine’s (the CMU) Decree No. 1254, which has established compulsory registration of the  foreign economic contracts with the Agrarian exchange (see “Grain Saga”: new season, old story for details ), as the producers “got a buzz” from another great surprise.

On February 2, 2011, Draft law No.8053 “On Amendments to the Law of Ukraine “On State Support of Agriculture” (regarding specifics of exports subject to state price regulation)” was registered with the Committee on Agrarian Policy and Land Relations of the Verkhovna Rada of Ukraine. This Draft law states that export of commodities subject to state price regulation (including inter alia wheat, corn, barley, sunflower seeds, rape seeds, flour, granulated sugar, dried milk, cattle and poultry meat, butter and sunflower seeds oil) shall be effected only by the agricultural producers within in-house volumes and a state agent in charge of exports subject to state price regulation. The list of exported products subject to state price regulation will be defined by the government annually based on results of monitoring of the agricultural products market. In other words, during sowing period a producer will hardly know whether it can freely sell its products in external markets afterwards.

Pursuant to Draft Law No. 8053 “a state agent for ensuring exportation” is a state enterprise or a business entity with a state share in its statutory fund, which is determined on a competitive basis by the Cabinet of Ministers of Ukraine. However, Draft Law No. 8053 provides for neither a size of the state share nor requirements to private participants in “the state agent”.

Certainly, under these conditions export arrangement becomes an impossible task for the majority of agricultural producers that are mostly small and middle farms. Hence, should Draft law No.8053 be passed, the feasible export will be only available for minor percent of manufactures, those which own enough facilities, while others will be forced to sell cheap their commodities to a state agent. In turn, chances are that dealers involved in grain wholesale and purchase and agricultural sector investments would be squeezed out of the market. Thus, in case Draft law No.8053 is adopted, the agricultural commodities market will be, actually, monopolized by the state.

Who is this “state agent”, indeed? One can easily guess. Considering January 2011 way of quotas allocation, we can come to a quite consistent assumption that “a state agent” is none other but the famous Khleb Investbud Comany, which is a successor of Khlib Ukrainy State Joint-Stock Company and a subdivision of the State Food and Grain Corporation of Ukraine (SFGCU). Another interesting fact is that, according to Minister of Agricultural and Industrial Complex of Ukraine (the AICU), Mykola Prysiazhniuk, the state share in the Khleb Investbud capital stock equals 61 percent.[1]  Who is the owner of the rest remains to be seen…

As to Khlib Ukrainy Company, the issue on its activity has been raised as far back as 2008 during Ukraine’s accession to the WTO. The Working Party’s Report on Ukraine’s accession to the WTO reads that the Working Party members marked existing discrimination of other companies in favour of Khlib Ukrainy, and recommended Ukraine to reject any possible measures that could somehow favour state traders vs. private trades.

Apparently, Draft law No.8053 runs counter to the whole range of regulations of the current laws of Ukraine. First, under the p. 2 of Article 42 of the Constitution of Ukraine the state shall be obliged to ensure protection of the business competition, prevent abuse of dominant position in the market, and unlawful restraint of competition. In fact we see the inverse process: the state itself undertakes the power to export socially important commodities. Moreover, provisions of the Draft law, obviously, conflict with those of Economic Code of Ukraine and the Law of Ukraine “On Grain and Grain Market in Ukraine” protecting freedom of competition and the right of business entities to enter into export contract. And it cannot be denied that the law on protection of economic competition is also violated…

 The Main Scientific and Expert Office of the Verkhovna Rada also supported this viewpoint. In its turn, it recommended to vote down Draft Law No. 8053 in the first reading. Unfortunately, this is not to say that the document will not be adopted.
Global community response to anticipated market monopolization was rather expectable. On February 15 the Grain and Feeds Trade Association (GAFTA) notified Ukrainian law-makers about its application to the WTO as regards Draft Law No.8053 and its intention to oppose its adoption in every possible way.[2] As such, it would be in place here to analyse the compliance of the Draft Law with WTO Agreements.

It is quite obvious that Draft Law No. 8053 conflicts with Article XVII of the GATT -1994 prescribing that:

а) state trading enterprises shall act in a manner consistent with the general principles of non-discriminatory treatment prescribed in the GATT-1994 for governmental measures affecting imports or exports by private traders;

б) such enterprises shall make any such purchases or sales solely in accordance with commercial considerations, and shall afford the enterprises of the other contracting parties adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases or sales.

So, we believe the Draft Law in question violates the aforesaid provisions. Moreover, in this case one may even mention a practical violation of national regime, as should the Draft Law be enacted foreign companies will hardly get the opportunity to export commodities subjected to state price regulation. Besides, the violation of Article XI ГАТТ-1994 prohibiting quantitative restrictions is also on agenda.

Once and again the USA in person of Elizabeth Hafner, Director for USTR's Russia and Eurasia Office, voiced their concern about the current situation [3], and Leigh Turner, British Ambassador in Ukraine, admitted the deterioration of business-climate in the country. [4] According to the Ambassador’s statement on the business and investment climate in Ukraine, the most predictable and worst consequence of Draft Law No. 8053 is that the country’s agrarian sector will face the outflow of investments thanks to which it mostly functions today.

In a word, prospects both for domestic agrarians and foreign traders seem to be rather looming. After being considered by the Committee on Agrarian Policy and Land Relations of the Verkhovna Rada of Ukraine, Draft Law No. 8053 was forwarded for revision despite agrarians’ protests and experts’ opinions. The date for another consideration is set on March 1, 2011.

Therefore, see you after “entr'acte”…

Iryna Polovets, Tetiana Kheruvimova – Associates with Volkov and Partners Law Firm, Kyiv, Ukraine

1. http://www.kommersant.ua/doc.html?DocID=1574817
2. http://www.gaftakyiv.com/events/letter_to_auth_02_2011/scan_2.pdf
3. http://news.ukrhome.net/content/1748582/SSHA-pred’yavili-pretenzii-k-politike-na-rinke-zerna-v-Ukraine.html
4. http://www.kyivpost.ua/business/news/posol-britanii-rasskazal-o-katastroficheskoj-situacii-dlya-biznesa-v-ukraine.html

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