Wheat prices are on the rise on international markets. Despite very high stocks in the 2009/10 marketing year of 193 million tons (USDA estimate from July 2010), various factors including an unexpected reduction in the wheat acreage in Canada, a lower than expected crop in the EU and the severe drought in Russia has led to a downward revision in crop estimates. The announcement of export restrictions in Russia and Tajikistan as well as the administrative measures taken in Ukraine has led markets to increase dramatically in the first weeks of August.
These actions by government agencies will hurt the Ukrainian State in the form of lost taxes and problems with foreign credits, failures for Ukrainian companies seeking IPOs and foreign partnerships, lost revenues for Ukrainian farmers etc.
The American Chamber of Commerce in Ukraine (Chamber) and the U.S.-Business Council (USUBC) understand that the Ukrainian government is concerned about increasing grain and bread prices. Bread is an important staple food in Ukraine, and it is even more important for the diet of the most vulnerable groups in the population, such as pensioners or many families with low income. There are several policy tools available to ensure the population has affordable food.
International experience has shown that a targeted approach is the most advantageous, i.e. providing income support to the most vulnerable people, so that they can afford to buy bread. Any form of trade restriction or price control is less favorable and ultimately backfires as it reduces prices for agricultural producers and pushes them to grow other crops. Furthermore, it is not targeted. Thus, high income people benefit from lower bread prices in the same way as low income people do.
The Ukrainian government is using another set of measures to restrict exports in the 2010 harvest. These can perhaps best be described as Non-Tariff Trade Barriers:
1. The State Customs of Ukraine recently sent three letters, the latest dating back to August 2, 2010, in which they informed trading houses that the quality control procedure during export will change.According to Ukrainian legislation, the State Grain Inspection had been the only State body entitled to define the quality parameters and classes of grain. But under the new instructions, State Customs have now become responsible for quality control, and the analysis is done by the forensic institute in Kyiv, Ukraine. The aim of this measure was becoming clear on August 9, 2010, when an international trading house was blamed for having feed wheat declared as milling wheat. As the price of milling wheat is higher, the company allegedly has benefited from higher VAT reimbursements. This supposed discrepancy is, however, unlikely as both quality control analyses were done by State authorities, which are contradicting each other. Nevertheless, the vessel was detained and the General Prosecutor was instructed by the President of Ukraine to investigate.
Regional governments are threatening traders that they should expect severe measures if they do not cooperate
A number of companies also have vessels fully loaded in ports waiting for the quality control of State customs. Such quality control can be done by any equipped laboratory within two hours maximum, but this is not happening.
2. For a period of time the Ukrainian Railway company was not providing railcars for grain exports. Forwarders and trading houses only received the information on this verbally. However, the measure was nevertheless effective in stopping any grain shipments to the ports for some days.
3. In addition, we have been informed that regional governments are approaching grain trading companies strongly encouraging immediate action on grain purchases at below market prices. They also threaten traders that they should expect severe measures if they do not cooperate.
Most trading companies in Ukraine are now refusing to undertake any wheat purchases, and it can be assumed that this is the intention behind all these new measures. By threatening companies or even individual persons within the companies, or by introducing nontransparent measures and arbitrary new procedures without proper justification, the wheat exports out of Ukraine have practically stopped.
These actions by government agencies will hurt the Ukrainian State in the form of lost taxes and problems with foreign credits, failures for Ukrainian companies seeking IPOs and foreign partnerships, lost revenues for Ukrainian farmers etc.It should not be forgotten that the growing role of Ukraine as Eurasia’s grain basket is bringing substantial benefits to this country and supporting its international and investment profile. Unjustified and restrictive actions by Government authorities will damage the reputation of Ukraine as a reliable international trading partner and as a country in which to invest.
The Chamber and business council are confident that this issue can be resolved as a matter of urgency and are willing to work with the Government to find a satisfactory solution.
Sincerely,
Jorge Zukoski, President, American Chamber of Commerce in Ukraine
Morgan Williams, President, U.S.-Ukraine Business Council
