The core idea of the draft is to reduce the number of entities qualified to export grain from Ukraine. There are three purported categories of exporters:
1. agricultural producers of grain, acting to the extent of domestic production;
2. other business entities that (i) operate in the grain market; (ii) act to the extent specified in grain growing agreements (contracts) with agricultural producers; and (iii) have been making advance payments to the extent of at least 50 percent of the price, which is quoted for the relevant product in the Ukrainian market, and for at least the growth season of the relevant agricultural crop; and
3. governmental operator of grain exports.
Agricultural producers
The first category raises no question as agricultural producers must have the right to dispose of its crop without restriction. It would be odd to prohibit them doing so. Yet, the expression “to the extent of domestic production” sounds uneasy. Who is going to determine that? The government apparently. But on what basis? National average yield indices? That is, if the yield of a particular producer is two times the national average, the government will not allow exporting the half of it? This provision should be made more specific and its application should be clear at the time of adoption; otherwise it will trigger corrupt practice.
However, agricultural producers are now weak due to the continuous lack of sufficient financing they have been suffering for years and will be unable to cause any substantial export whatsoever.
Exports are very capital intensive. Also, they require the knowledge of markets and the understanding of logistics (transshipment and maritime transportation), legal aspects, how trade finance works and so on. Agricultural producers capable of becoming independent exporters are very few today.
Other business entities
The provision concerning “other business entities” involves a fully operational system of grain production pre-financing just like in Brazil. Grain traders there can pre-finance future crop and be dead sure that they will acquire the rights to it when it is harvested. The implementation of a similar system is currently discussed in Russia.
Ukraine has no such system, absolutely no doubt about that. Its development will require changing a large number of fundamental law and social institutions, including the title to agricultural land and the current land register for starters, having the opportunity to promptly and efficiently enforce the security interest over land, enjoying an effective and fully operational system of grain pledge instruments, and, finally, rooting out corruption in courts.
As managing partner of a law firm that is very active in the Ukrainian agricultural sector, I am positive that the provision concerning “other business entities” will not be working in the context of the current situation in Ukraine.
Governmental operator of grain exports
There is yet a “governmental operator of grain exports” which will become a major grain exporter should such the act come into force, and provided that the current architecture of relations in the agriculture will remain unchanged.
What will be the results of such legally approved status then? The key word here is competition. Competition will be totally demolished in the national market of grain procurements and this will produce a number of adverse effects:
· Producers will not have any other operating mechanism for export purposes and this will cause a fall in domestic procurement prices as they will be imposed upon the producers. This will cause the impoverishment of agricultural producers and drop in agricultural production. And as a result, there will be a jump in food prices in the next years.
· General disappearance from the market of the international companies, which in addition to trade operations, and contrary to the prevailing opinion, made substantial investments in the agricultural infrastructure, and specifically, in the storage, transshipment and food processing facilities, and etc.
Only a land moratorium kept such international companies from making large-scale investments in the agricultural sector. Should such draft act be adopted, then the issue will be taken off the table in whole.
· A decreased interest of the financial community to the Ukrainian agricultural sector, and as a result more expensive loans for purchasing equipment, fertilizers, crop-protective agents and etc.
· A drop in the prices of the Ukraine-based agricultural assets as a result of the outflow of foreign capital.
· Wrecked plans of the Ukraine-based private companies as to entering capital markets as the investors will not be interested in investing their assets if such assets cannot generate currency cash flows, which can be achieved only through exports.
· Wrecked plans of the national companies as to investments in the agricultural production as return of investments will be questionable.
And though this list of disadvantages can be added, it is really difficult for me to find any advantage which such new measure can bring to the Ukrainian market. Time will tell.
Andrey Astapov is managing partner of AstapovLawyers at http://www.astapovlawyers.com/.
