Ukrainian farmers came out en masse on March 20 and blocked highways across the country in protest against what they described as an unfair tax policy.
The farmers demanded that the government pass a law that would restore reimbursement of export value-added tax — or VAT — for producers of soybeans and rapeseed. They wanted lawmakers to cancel changes to the tax code that they blamed for imposing enormous losses on small and medium-sized agricultural producers.
The country-wide protest was the culmination of a struggle over tax legislation affecting what is perhaps Ukraine’s most important industry: oilseed farming and oil production.
When the Verkhovna Rada passed the annual budget and tax code amendments in December 2017, the parliament’s tax committee proposed hundreds of pages of additions cancelling the export VAT reimbursement for oilseeds at the last moment.
“When they brought this to the floor, the paper was still hot from the printer. Nobody was able to read it (yet),” says parliamentarian Ivan Miroshnychenko, a member of the Rada’s agricultural committee and one of the initiators of the bill that the farmers were supporting.
Miroshnychenko — a member of the Samopomich political party, which has 26 seats in the Rada — says he was the first who uncovered what was really in the tax code amendments, which he says would cost agricultural producers up to Hr 16 billion ($573 million). Although he initially succeeded in removing the amendments, their supporters managed to re-submit them and get them passed.
Why would Ukraine’s heavily populist parliament pass a bill so detrimental to the country’s farmers?
The answer, according to Miroshnychenko, is “Big Crush” — the handful of people who own Ukraine’s large domestic oilseed crushing industry.
At the center of that group stands Kernel, one of Ukraine’s biggest agricultural holdings and largest exporter of sunflower oil.
And the 2018 VAT showdown was just one of the most visible cases where top agricultural holdings appear to exert an undue influence on Ukrainian politics. Experts say conflicts of interest are a serious and widespread problem in the Verkhovna Rada.
Public-private partners
From early on, Kernel has had close ties to politics. The company was founded in 1995 by Andriy Verevsky. He would go on to serve in parliament from 2002 until 2013, when a higher administrative court stripped him of his mandate for serving on the Rada’s agricultural committee while leading a company.
Despite that, Kernel has maintained its ties to the parliament. In 2015, parliamentarian Vitaly Khomutynnik — co-chair of the 26-member parliamentary faction Vidrodzhennya and a member and, previously, chair of the Rada’s tax committee — purchased 5 percent of Kernel’s shares through his Cascade Investment Fund. In 2017, Cascade increased its ownership of the company to 6.59 percent.
Around the same time, Ukraine’s Anti-Monopoly Committee gave the Cyprus-registered company Cacique Limited, which also belongs to Khomutynnik, the right to purchase majority shares of the charter capital of seven agricultural companies. The seven firms previously belonged to Verevsky, who remains chairman of Kernel’s board of directors to this day.
Many believe this glaring potential conflict of interest has already yielded results.
In 2015, while passing the 2016 budget, the Verkhovna Rada also included a series of changes to the tax code that set up two registers for VAT refunds.
The first register included companies that export at least 40 percent of their production abroad. They would receive automatic VAT refunds. The second register included everyone else, who would likely not see any VAT refund.
Kernel obviously fell in the first group — in fact, it is regularly the largest recipient of VAT tax reimbursements in Ukraine, receiving millions of dollars back.
In 2017, Yaroslav Yurchyshyn, the executive director of Transparency International Ukraine, suggested that the country’s National Agency for Preventing Corruption must investigate Khomutynnik’s role in the 2015 law for possible conflicts of interest.
That would mean questioning his “parliamentarian colleagues about whether Khomutynnik tried to convince them to vote (for the changes), had any conversations with the Finance Ministry or budget and tax committees, whether there were any illegal activities,” he told the Ukrainian National News agency.
The National Agency for Preventing Corruption did, in fact, open an investigation into Khomutynnik’s alleged conflicts of interest at the request of Radical Party Member of Parliament Oleh Kuprienko.
Vitaly Khomutynnik (L) at work inside the Verkhovna Rada. The long-serving parliamentarian is a member of the tax committee and also owns a 6.59 percent share of the agricultural behemoth Kernel through his Cascade Investment Fund, raising concerns of a conflict of interest. (UNIAN)
In August 2018, the agency told Ukrainian National News that it had found no evidence of a conflict of interest.
Khomutynnik says that his Kernel holdings do not violate the law.
“I have no relation to the operation of Cascade Investment Fund,” he told the Kyiv Post in an email. “The fund is run by professional managers, to whom I handed control of the fund as required by law. I am the beneficiary of the investment fund. Therefore, there is no conflict of interest with my work in parliament.”
Khomutynnik also says that he did not introduce the legislation in question because his name is not on it. This is correct.
However, MP Miroshnychenko says the initiators of legislation and amendments are not always the real people behind them.
“Usually people who really lobby such conflicting and discriminating laws do not put their signature,” he told the Kyiv Post in a message. “They find someone to do so.”
And Yurchyshyn believes that this does not prevent Khomutynnik from lobbying for policies that would benefit his firms. Additionally, as co-chair of a parliamentary faction, Khomutynnik can also have influence over the voting of other members.
Conflicts abound
Khomutynnik’s ties to Kernel are not unique. Indeed, the company may have another connection to the Rada: Verevsky’s cousin, parliamentarian Oleksiy Mushak.
At 36 years old, Mushak is relatively young for an MP. He entered the Rada in 2014 as a member of the Petro Poroshenko Bloc — BPP — which has 139 seats and leads the ruling coalition. He is also a member of the Rada’s agricultural committee.
Mushak has previously faced accusations of taking the side of Kernel.
Andriy Verevsky, Kernel’s founder and chairman of its board of directors.
In February 2016, as the Rada prepared to vote on dismissing the Cabinet of Ministers, Mushak initially indicated that he would vote in favor. However, on Feb. 16, he ultimately voted against dismissing the government.
The following day, Andriy Vadatursky — another BPP parliamentarian and agricultural committee member — suggested to the Novoye Vremya magazine that Kernel’s easy access to VAT returns could have been invoked in horsetrading over the vote.
In a message to the Kyiv Post, Mushak denied that claim and said Vadatursky told him that he never made such a statement. Reached for comment by Facebook, Vadatursky said “Mushak is working normally,” followed by a smiley face. Kernel could not be reached for comment.
Asked about other parliamentarians with connections to Kernel, Mushak wrote: “Everybody (has) connections (be)cause Kernel is one of the biggest exporters in Ukraine.”
Ironically, Mushak’s accuser, Vadatursky, is himself the relative of a top Ukrainian entrepreneur: his father, Oleksiy Vadatursky, is the founder of Nibulon, one of the country’s largest agricultural and shipping companies. And the younger Vadatursky is a 20-percent stakeholder in his father’s company.
MP Vadatursky said he has no operational role in Nibulon. He also denied lobbying for the company, citing guarantee letters he gave to the European Bank for Reconstruction and Development and its affiliates, which provided Nibulon with a loan.
If anything, these connections drive home one of the most obvious conclusions of a 2017 analysis by the Chesno (“honest” in Ukrainian) civic movement: there are a lot of potential conflicts of interest in Ukrainian politics — and particularly in connection with agriculture.
Chesno analyzed the asset declarations of 29 members of the Rada’s agricultural committee. They discovered that only three had no connections to agricultural firms. Taken together, the 29 members of parliament had 150 companies, of which 100 were connected to agro-industry.
“The problem is that only the procedural committee or the National Agency for Preventing Corruption can make conclusions about whether or not there is a conflict of interest,” says Transparency International’s Yurchyshyn. “But they are politicized and, thus, simply close their eyes to these issues.”
Close to government
Large agroholdings also enjoy huge benefits from the Ukrainian government. State agricultural subsidies are often marketed as aid to small and medium-sized farmers and agricultural enterprises, but more often it’s the big players who reap the benefit.
In July, the Ukrainska Pravda news site reported that, of Hr 6.3 billion ($226 million) in agricultural subsidies allocated by the Ukrainian government, only 10 percent had been claimed during the first half of the year. In particular, the support programs were often too complicated for smaller farmers and enterprises to utilize.
That complication doesn’t scare away big firms.
In 2018, a subsidiary of Myronivsky Hliboprodukt, or MHP, one of Ukraine’s largest agroholdings, received a 25-percent reimbursement — Hr 812 million (nearly $30 million) — from the government for costs it incurred building chicken farms. The company can thank legislation targeting livestock, milk production, and agricultural processing for state subsidies.
Andriy Vadatursky, parliamentarian, agricultural committee member and son of the founder of agricultural holding Nibulon. (Roman Shalamov)
MHP has long been granted voluminous state subsidies. It also controls more than half of Ukraine’s quota to export poultry and dairy to the European Union.
Yuriy Kosyuk founded the agricultural firm in 1998, becoming a billionaire and earning himself the nickname “Ukraine’s chicken king.” Kosyuk also maintains close ties to President Petro Poroshenko. In 2014, he served as the head of the Presidential Administration for six months. Currently, he is an advisor to the president.
Dmytro Lyvch, head of analytics at the EasyBusiness think tank, suggests that Kosyuk was the big winner of the state subsidies. He believes the means for distributing subsidies must be more transparent.
“The government declares that we need to support small and medium farmers, but still we are supporting the big companies,” Lyvch says. “Their owners are getting huge dividends because of subsidies being spent by the Ukrainian government.”
Lyvch says he cannot state with certainty why the subsidies benefit large agroholdings, but he suspects it is the companies’ connections with the Ukrainian government.
Such connections also appear to be an important source of more extreme corruption.
In April, the National Anti-Corruption Bureau of Ukraine released covert recordings made in the office of Special Anti-Corruption Prosecutor Nazar Kholodnytsky. The recordings implicated him in blocking or subverting investigations against powerful suspects.
In one case, Kholodnytsky ordered his subordinates to take actions to stop several criminal cases and investigations against Oleh Bakhmatyuk, the owner of agroholding UkrLandFarming.
An employee works inside a grain elevator belonging to Kernel, one of Ukraine’s largest, most influential, and most politically connected agricultural holdings.
Among the charges is a crime of connections: In 2015–2016, employees of the agroholding Avangard, part of UkrLandFarming, allegedly embezzled Hr 1.5 billion ($54 million) from the state budget with the help of State Fiscal Service officials.
‘Lesser evil’
The danger of large agroholdings maintaining close ties with the Rada and state agencies is that it increases their already sizeable advantage over small and medium-sized agricultural producers. That was the central fear of the VAT refund showdown earlier this year.
Many international firms involved in oilseed processing and oil production did not support ending VAT reimbursement for soy and rapeseed exports on principle, Miroshnychenko says. The European Business Association also opposed the move for placing soy and rapeseed producers “in unequal competition conditions,” Irina Dushnik, the association’s grain and oilseed committee executive director, told the Kyiv Post.
She believes experience demonstrates that this is a bad idea. Four years ago, a similar VAT system limited reimbursement to only around 500 companies — or roughly 1 percent of all farm producers.
“It’s unsurprising that the largest Ukrainian agroholdings became the receivers of VAT,” she told the Kyiv Post in a message. “And a large portion of farmers and international grain traders wound up on the sidelines, incurring significant losses due to their inability to get VAT reimbursements.”
In response to the 2018 budget law, a group of 27 deputies — including Miroshnychenko and Vadatursky, who owns 20 percent of Nibulon — tried to pass another bill reestablishing VAT returns for soy and rapeseed. And they had the backing of farmers.
However, tax committee head Nina Yuzhanina proffered a compromise bill that would allow VAT refunds only for those producers of soy and rapeseed who export their production themselves. Such an arrangement would still be a loss for small and even medium producers, who often lack that capability.
Miroshnychenko opposed this bill.
Ultimately, however, he says that he and many others were forced to vote for the compromise bill as a “lesser evil.” They feared that without even a partial restoration of VAT reimbursement, the prices on soy and rapeseed would fall significantly, harming farmers even further.
Now their goal is to return to the issue and chip away at the “discrimination” in the law “to the point where everyone can reimburse VAT,” Miroshnychenko says.
But Big Crush is a formidable opponent: Because they are strong, he says, they have “shifted the profits through VAT returns from the pocket of the producer to the pocket of the processor.”
