In the Ternopil Oblast city of Kremenets, 417 kilometers west of Kyiv, agrochemical company EuroChem produces a treated nitrogen fertilizer known as UTEC46. The company says UTEC can increase crop yields while inflicting less damage on the environment than other fertilizers.
But that enterprise — and EuroChem’s other business in Ukraine — is now under threat. On March 14, the Ukrainian Cabinet of Ministers announced that it would impose an embargo on the import of mineral fertilizer from Russia, which currently provides more than 60 percent of Ukraine’s supply. Despite having its international headquarters in Switzerland and operating globally, EuroChem is 90 percent owned by Russian industrialist Andrei Melnichenko.
Tariffs and restrictions are not new to EuroChem. The company has faced “anti-dumping duties” in the past. And in September 2017, the Ukrainian Economy Ministry sanctioned EuroChem and other Russian companies for allegedly delivering nitrogen fertilizer to parts of the country currently controlled by Russia. (EuroChem strongly denies this.)
But behind all these obstacles, the company sees a singular problem: the Ukrainian domestic mineral fertilizer market is a monopoly.
Dmitry Firtash, the Vienna-based Ukrainian billionaire currently fighting money laundering and bribery charges in Spain and the United States, controls upwards of 80 percent of the domestic market for several varieties of mineral fertilizer with a group of companies known as Ostchem. And he works to protect his interests.
“It’s pretty scandalous really, you’ve got Firtash basically pulling the strings behind the scene and creating an environment for these restrictions to be introduced,” says Guy Dresser, a representative of EuroChem.
Ukrainian oligarch Dmitry Firtash’s agrochemical company Ostchem controls 80 percent or more of the domestic market for several varieties of mineral fertilizer. Farmers have been complaining about the high prices of domestic fertilizers.
Recognized monopoly
Ostchem’s monopoly is no secret in Ukraine. In July 2017, the Ukrainian Anti-Monopoly Committee even ruled that the conglomerate set unreasonably high prices on all types of nitrogen fertilizer in 2015–2016. The committee fined Ostchem the equivalent of 10 percent of its 2016 earnings and required it to set market prices.
But the problem extends far beyond Ostchem’s pricing. According to several agricultural economists interviewed by the Kyiv Post, the country’s mineral fertilizer market is mired in uncompetitiveness.
The key ingredient for producing mineral fertilizer is natural gas. Firtash, an intermediary in gas deals between Russia and Ukraine, knew that industry well and used those connections to dominate the fertilizer business.
Starting in 2010, Russia’s state-owned GazpromBank — connected to the Russian natural gas giant Gazprom — granted a credit line of $815 million to OstChem and subsequent credit lines of $11.5 billion to all of Firtash’s companies, according to an investigation by Reuters. OstChem then rapidly acquired four factories in Ukraine, and became one of the world’s largest producers of mineral fertilizer.
Next, Firtash agreed on lower gas prices with Gazprom: around $250 per 1,000 cubic meters at a time when oil prices were extremely high, says Maryan Zablotsky, deputy director of the Ukrainian Agrarian Association. Then, Firtash’s companies sold gas at a price of $430 to SumyKhimProm and the Odesa Portside Plant — two state fertilizer plants — as well as its own factories, deliberately making losses for all the enterprises while generating profits for Ostchem.
“Currently, the funny thing is that every single fertilizer plant in Ukraine — private and state-owned — actually has net negative equity,” Zablotsky says. “From an economic standpoint, every single fertilizer plant in Ukraine is actually bankrupt because of dubious debts to Firtash and Ostchem.”
Pushing protectionism
The losers in Firtash’s scheme are Ukrainian farmers. Fundamentally, natural gas is cheaper in Russia, meaning that Russian companies can produce fertilizer at a lower cost.
Protecting Ukrainian fertilizer producers requires imposing tariffs on imports. For years, Firtash has supported the imposition of “anti-dumping duties” on Russian fertilizer imports. However, agricultural economists dispute the claim that the companies are actually dumping their production on the Ukrainian market.
“We analyzed the mineral fertilizer prices last year in detail,” says Olha Khodakivska, who heads the Institute of Agrarian Economics’ Department of Land Relations and Nature Management. “Prices on the Ukrainian market were 20 percent higher than on the world market.”
Historically, Russia has been the main source of fertilizer imports. Regulatory and logistical obstacles have made importing from other countries a challenge, agricultural economists say. Often agricultural producers don’t view non-Russian imports as an option.
As a result, Ukrainian agriculture is bearing the brunt of higher domestic prices. Farmers pay more for the fertilizer they need, or they use less fertilizer and potentially get a smaller harvest, says Taras Vysotsky, the executive director of the Ukrainian Agribusiness Club.
Occasionally, the consequences can even be more serious. In March 2017, Ostchem’s fertilizer plants halted production after Ukraine’s state-owned Naftogaz company cut off natural gas supplies due to the factories’ unpaid debts. Ostchem blamed the shutdown on unfair competition and dumping by Russian fertilizer producers.
In the end, Ostchem got what it wanted. Ukraine imposed a 31.84-percent anti-dumping duty on Russian fertilizer imports. In July, the Agrarian Fund, a state enterprise for forward contracts in agriculture, ordered Hr 1 billion ($38 million) worth of mineral fertilizer, allowing the Ostchem plants to relaunch their operations.
However, the company’s customers lost out. Before the shutdown, they had been forced to prepay upwards of Hr 1.72 billion ($65 million) for fertilizer. Ostchem remains indebted to them, says Mykhailo Sokolov, the deputy director of the All-Ukrainian Agrarian Council.
Many of the agricultural firms that belong to Sokolov’s organization are currently suing Ostchem. However, they face an uphill battle. Often their contracts stipulated that, should the fertilizer plants halt operations, the company was not obligated to provide them with fertilizer or return their money.
“They couldn’t sign a different contract because, again, there’s a monopoly on the domestic market,” Sokolov says. “As a result, in most cases, the prospects of recovering the debts from Ostchem are zero.”
Sokolov is disappointed with the news that Ukraine will now impose an embargo on Russian mineral fertilizer imports — a move he believes supports the domestic monopoly. The embargo is being partially justified on national security grounds — Russia is, after all, legally recognized as an “aggressor state” fighting in Ukraine’s east — but he finds this logic faulty.
Instead of simply purchasing Russian fertilizer, Ukraine is buying Russian natural gas in order to produce its own fertilizer, and paying more money for it. “That’s a very strange way to fight the aggressor: to ensure that they get more money from us,” Sokolov says.
Met its match
A monopoly like Ostchem generates discontent. Ukrainian agricultural producers are unhappy with inflated fertilizer prices and failures to deliver the product. Agricultural economists recognize the inherent inefficiency in the Ukrainian market. And Russian firms like EuroChem feel that they are being unjustifiably blocked from the market.
Despite agreement that the monopoly is bad, a more complicated question is what to do about it. Without an embargo or tariffs, the Ukrainian mineral fertilizer market will be largely dominated by Russian products.
According to Vysotsky of the Ukrainian Agribusiness Club, the current situation is a catch‑22. The anti-dumping measures were imposed to “equalize the starting price for different producers” — Ukrainian and Russian — “so that they would compete in terms of service and quality.”
But those sanctions are primarily a result of the domestic monopoly, which crushes competition. For that reason, Vysotsky believes that Ukraine must work to create a free market. It must push to demonopolize Ostchem, privatize the Odesa Portside Plant, and, in the longer term, invest in producing mineral fertilizer from coal, not gas. Simultaneously, Ukraine should work to liberalize fertilizer imports, he says.
That’s exactly what Zablotsky’s Ukrainian Agrarian Association is doing. They were successful in lobbying for legislation that simplified the process for importing fertilizer from countries other than Russia. Now, they are helping agricultural firms navigate the import process.
“None of the members of our organization buy fertilizers from Firtash anymore on principle,” Zablotsky says. Mostly, they import from Lithuania.
Meanwhile, EuroChem plans to keep fighting for access to the Ukrainian market. The company hired PwC to carry out an audit of the company’s operations in Ukraine. They say it proves that EuroChem never sold fertilizer to companies in the Russian-occupied part of the Donbas. And the company includes provisions in its contracts forbidding purchasers from transferring its products to the occupied territories, says Igor Shmidt, EuroChem’s head of international relations and communications.
The company is now waiting for a text of the embargo to be released. Then, they will likely attempt to defend their interests in court. Despite the weakness of the Ukrainian judicial system, Shmidt says his company has seen some success in getting tariffs lifted.
But, this time, EuroChem may have met its match.
“Through unofficial channels, we understand who imposed the sanctions,” Shmidt says. “We don’t just ‘think’ it’s Firtash. Many sources have confirmed this.”
