A carefully negotiated agreement for Ukraine to export 600,000 tons of sugar duty-free to Russia this year has effectively been for naught, government spokesmen say.
'Well, if you count 10,000 tons of sugar as significant, then there was export,' Oleksander Petrichenko, a spokesman for Ukraine's state sugar company Ukrsakhar, told the Post. 'But in practical terms, we have sent nothing to Russia this year.'
By comparison, in 1997 Ukraine shipped 500,000 tons of duty-free sugar to Russia. And in Soviet days Ukraine met 65 percent of Russia's sugar needs.
The grim result appears to be the culmination of a carefully orchestrated scheme by Russia to convert almost entirely to cane sugar imports, even after it had complete the intense negotiations with Ukraine to eliminate excise duties on Ukrainian sugar.
Today, Ukraine's sugar production capacity is 5.5 million tons. Actual production last year was a shade over two million, mostly refined from the revered Ukrainian sugar beet at the country's 132 sugar mills. Annual Ukrainian sugar consumption is given variously at 1.5 to 1.7 million tons.
Worse off in terms of both processing capacity and the quality of its sugar beets, Russia currently produces about 1.5 million tons of sugar annually. Russian consumption, on the other hand, is about 4.5 million tons annually. With this gap in mind, Kyiv has long sought low customs barriers to Ukrainian sugar in the Russian market.
Moscow has not always obliged Kyiv on this matter. Russia has in recent years used import taxes to limit Ukrainian sugar's access to the Russian market, in part to protect its domestic producers, but also as a response to Ukrainian barriers to Russian products. And while Ukraine eventually convinced Russia to eliminate those import taxes, a hefty value added tax remained.
In addition, Russia has actively promoted cane sugar as an alternative to Ukrainian sugar beets as the prime raw material for Russian sugar manufacturing. It is this cane that Ukraine must compete with for a chunk of the Russian market.
The international market can deliver a ton of semi-processed sugar cane – known in the trade as 'raw cane,' and in Russia's case coming from sources as varied as Africa and Central America – for some $270 a ton. From there, the raw cane is converted into refined sugar in Russian plants.
Too bulky to ship efficiently, Ukrainian sugar beets can be made into refined sugar in a Ukrainian mill for around $300 a ton.
Whether Ukrainian sugar can compete with tropical raw cane thus depends on the cost of converting raw cane into refined sugar within Russia. 'It costs about $70 in production costs for the Russians to convert raw cane into sugar,' said Petrichenko. 'That makes their total cost around $340.'
Which makes Ukrainian sugar look pretty good – until taxes are taken into account. The Russian government offers favorable tax terms to import cane sugar. Raw cane destined for Russian processing plants is hit only with a symbolic 1 percent import tax. On the other hand, Ukrainian sugar is subject to a 25 percent Russian value-added tax when crossing the borer into Russia.
The result is clear, according to Petrichenko. 'Once you add in what we pay for Russian VAT, our selling price in Russia is $370 to $400. So we can't compete.'
The victory of raw cane as the main source of Russian sugar is, at least from one point of view, somewhat ironic. The British sugar company Tate and Lyle invested heavily in a sugar joint venture in Odessa two years ago when the Russian and Ukrainian governments jointly clamped down on raw cane processing as a source of sugar for the Ukrainian market. Aimed at providing Russian soft drink factories with high-quality sugar, the enterprise failed, costing Tate and Lyle a reported $15 million.
'They both want to protect domestic processing and their local sugar beet industry,' an executive told the Post at the time.
In the case of Tate and Lyle, the foreigners lost out. Now that raw cane – admittedly processed by Russian not Ukrainian mills – is effectively filling two thirds of Russia's sugar needs, it's the foreigners that have the upper hand.
It may not last, however. In what may be a boon to Ukrainian sugar companies, on July 17 the Russian government jacked up the import tax on raw cane to 70 percent. Precipitated by the Russian government's dramatically falling state receipts, the move would theoretically raise the price of Russian produced sugar to $500 or more.
If the tax goes into effect – by no means a certainty given the fragility of the Russian economy – Russian companies like Aquilon (Altai territory), Kubansakhar JSC (Krasnodar territory), and Alpha-Eco JSC, Trading House Rosprod JSC and Stern-Impex JSC (all of Moscow) may stand to lose the hammer lock on the Russian sugar market they have built on processing raw cane at the expense of Ukrainian sugar beets.
A drought in Cuba – a prime cane growing region – this year may also lift Ukrainian sugar exports.
'Theoretically, Ukrainian sugar has some of the cheapest manufacturing costs in the world,' said Petrichenko. 'The trick is finding markets for it to access.'
