Fighting for its future, Ukraine is now relying on its agriculture more than ever to support its struggle. Platts’ Thomas Houghton goes to Kiev to discuss politics, production, and transfer pricing with Oleksiy Pavlenko, Ukraine’s minister for food and agrarian policy.
It is impossible to talk about the political situation in Ukraine right now without balking at the size of the task facing the country. Some 25 years of corruption, theft and mismanagement left the country in a difficult place. Now, revolution, political in-fighting and the threat of economic collapse have added to the mix. And all of this as a proxy war against Russia drags along in the east. While stable for now, Ukraine’s economic situation remains precarious. And overall, Ukraine’s recent history has, unfortunately, been a series of missed opportunities and false starts.
Oleksiy Pavlenko, Ukraine’s minister of food and agrarian policy, is determined to change that. He is forcing the issue through modernization programs, simplifying and streamlining bureaucratic procedures, and making (sometimes unpopular) changes. His goal, in the wake of 2014’s Euromaidan revolution, is to stop the rot and drag Ukraine forward.
The softly-spoken Pavlenko, who started his career at KPMG and ABN Amro before moving on to senior roles at Ukrainian food and agricultural companies, talks all the talk of a westward-looking reformer. And since taking office in December 2014, Pavlenko has walked the walk too, presiding over a mini-renaissance for Ukrainian agriculture. Foreign investors are lining up to get a slice of the action in Ukraine’s agriculture industry. Grain output, meanwhile, increased 6% during the first year of his tenure, while exports were up 8% to an estimated 34.8 million mt. This figure is forecast to increase another 1% for the 2015-16 marketing year, despite production falling 2.5%.
Agriculture now accounts for 38% of total exports, Pavlenko says, which when combined with logistical and port facilities, as well as foreign direct investment, accounts for an $11.1 billion net inflow — accounting for as much as 20% of GDP.
But it has not all been plain sailing. The precarious situation of the government is probably highest on the list of obstacles he faces. Pushing through changes in a polarized parliament — you have possibly seen the videos of brawls breaking out at the speaker’s box — is a challenge, to say the least. President Petro Poroshenko, meanwhile, seems content to use Prime Minister Arseniy Yatsenyuk as a lightning rod for dissatisfaction in parliament and among the population, making the cabinet’s task even tougher.
The situation came to a head last month, as Pavlenko tendered his resignation before retracting it several days later and opting to stay in the cabinet. The coalition party which endorsed him — Samopomich, Ukrainian for Self Reliance — was less than pleased with his decision. But the minister seems to think that there are more pressing issues at stake than party politics and jockeying for position in the new Ukraine, perhaps taking his former party’s name to heart as he goes about his work as one of only two independent members of the cabinet.
This work has seen Pavlenko implementing free market oriented reforms and breaking up networks of patronage. This has certainly earned him some detractors, but Pavlenko remains stoic and defiant in the face of criticism of the changes his ministry is implementing in the sector.
“We are sure that the right time is now to make unpopular [reforms],” he says. “The next election will be in three years, and now is the time to clean up all the stuff that was not done over the last 24 years.”
Indeed, the cuts and reforms Pavlenko has to make seem somewhat less though than those in other departments closer to the day-to-day lives of Ukrainians. Chief among them is a vast privatization program which will see 400 state-owned enterprises shut down or sold off to the highest bidder. He has also earmarked 3.6 million hectares of state-owned arable land for sale, having successfully pushed through legislation on the assessment and sale of agriculture land, which the minister says can easily be used to start pilot sales to foreign investors.
However, Pavlenko is guarded on providing guarantees that private investors looking to secure agricultural land have been seeking. This seems to be a real break with the past, relying on developing the rule of law instead of the favoritism that many foreign investors in the former Soviet Union sought and found to be worth no more than the paper it was written on.
Instead, he points to two factors that could sway braver investors to make a calculated risk: first, the ministry’s record to date in passing reforms and commitment to push through further changes. And second, the low cost of doing business in Ukraine — at least in terms of day-to-day expenses — with some of the lowest wages in Europe and a currency which has slumped from 8 to 26 against the US dollar since the change of government.
There has been no shortage of foreign investors over the years, with all of the biggest names in the grain trade established in-country since the early days of independence. This shows little sign of slowing down, with Cargill announcing last month that it will invest $100 million in a new port terminal at Yuzhniy. Other big announcements will be in the offering over the coming year, Pavlenko says.
What else has he been able to achieve? At an operational level, simplifications to the quarantine certification system have removed bureaucratic steps which necessitate “facilitation payments” — that is, backhanders — to get things done. It would be naïve (and wrong) to say that corruption has disappeared completely. But when asked about a scandal last year involving offshore companies circumventing payments to the Ukrainian state using false paperwork, smuggled currency and deceased directors, Pavlenko was able to put a positive spin on the story. The seizure of several thousand tonnes of grain, in the context of 35 million mt of exports, is a sign that the system is working in its detection of evasion rather than proof that circumvention is still ongoing.
Pavlenko points to the removal of 56 different licenses and certificates under his tenure, simplifying procedures and reducing the interaction between private and public institutions — reducing the possibility for graft. In the last year as much as 12 billion hryvnia’s worth of hidden schemes were prevented by the reduction of red tape, Pavlenko says. “It’s simple — no certificates, no corruption!” he said.
More contentiously, a VAT rebate system has attracted criticism from a number of Ukrainian traders, who speak of unclear processes and additional burden that it puts on their business. Some even go so far as to suggest that favoritism in the system has jeopardized the business of some and contradicts the government’s claims that it is clearing up graft. It should be noted that such allegations remain unproven, while generating VAT income is a burden that may have been deemed a necessary evil in order to raise much-needed government revenue as other sources of income have dissipated.
Ultimately, Pavlenko is defiant in his assessment of the VAT reform situation, and incredulous that some would even question it.
“Now in Ukraine we have the lowest taxation in Europe — come on! We cut our social taxes twice. We also have lower income taxes than the rest [of Europe]. It is now an issue of social responsibility of businesses. … Guys, we are decreasing the taxes, but you should pay them! We are decreasing salary taxes tremendously, but you should also actually pay them,” he said.
It is this demand for social responsibility — as well as stress on the symbiotic relationship between the state, the government, and business — which has acted as a cornerstone for Pavlenko’s work and won the ministry approval outside the country. The European Bank of Reconstruction and Development has thrown some $300 million at Ukrainian agriculture in the past year, with more likely to come after a series of ministry-sponsored roadshows and investor forums for the sector.
As for the future, Pavlenko remains cautiously optimistic about the prospects for the new grain crop. Despite an autumn drought causing damage to early development, a relatively mild winter has held out and things look to be heading towards a positive end. The minister puts his agronomists’ office projections on lost wheat acreage at “no more than 20%” — notably even more conservative than those in the private sector, which (some, admittedly, unscientific surveying suggests) are estimating in the region of 10-18%.
Ukraine is also targeting new markets and looking to expand its export volumes further still. It has improved phytosanitary arrangements, opening new markets for Ukrainian producers, as well as signing bilateral agreements on trade relations with a number of different countries. China has been targeted for more additional grain exports on top of the 2 million mt already sold this marketing year, while efforts are to be redoubled on winning new business in the Middle East (in particular the UAE and Iran). As for the EU, Pavlenko did not seem to hold out much hope for an increase in grain export quotas for Ukrainian producers, but seemed content with the current relationship with economic bloc and stressed its importance as a destination market for meat and dairy products.
But where Pavlenko — and indeed, Ukraine — goes from here really remains to be seen. While positive strides have been made and the early signs of improvement can be seen, there is a fragility that pervades everything in Ukrainian politics. At the time of writing, Prime Minister Arseniy Yatsenyuk again appears to hang by a thread, with much of the coalition cabinet at risk of being swept away with him. The minister does not appear fazed by the situation. Instead he is content to play his role in a bigger process of state-building as Ukraine struggles to overcome past failures, foster a national identity, and find an independent voice and role for itself in the world.