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Economic News

22 Jul 2010
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Ukraine is currently experiencing another hiccup regarding its economic future, as the current government reverts to old school policies.

In what will be seen as a blow to advocates of free market policies and to international businesses trading with Ukraine, the government has acted in a protectionist fashion this week with the imposition of export licences on grain and a resolution proposing export quotas under consideration.

The move has caused concern among grain traders, including international traders such as Topfer of Germany, US Company Cargill and Bunge of the Netherlands, that the government is reverting to former soviet methodologies of price fixing. Grain exports from the country have come to a standstill with the signing of the order making wheat and wheat-rye exports subject to the new licensing system.

Traders have accused the government of blocking exports, and have warned that the move could cripple the agricultural sector and increase prices on the world market, where supplies have suffered a near 20 year low. Wheat harvests across the world have been affected by drought and heat waves. In addition to this, Ukrainian wheat this year suffered an infestation from the Eurygaster Beetle, which feeds on the leaves, stems and grains of wheat.

Ukraine is the world's sixth largest grain exporter. The agricultural sector generates 13% of GDP, one fifth of employment, and is a major source of foreign exchange earnings. Around 95% of Ukrainian wheat is winter wheat, planted in autumn and harvested during July and August the following year. Most exports of Ukrainian grain go to the Middle East, North Africa and Europe, with Spain, the largest importer in 2005.

The agriculture ministry lowered the forecast for the 2006 wheat harvest to 14.4m tonnes, a fall of 24% from 2005, leaving potential for a shortfall in domestic supply if export contracts were honoured. The directive followed the refusal of grain exporting companies to sell 300,000 tonnes of wheat to the strategic reserve at a discount of about $15 to the market rate which was then $168 a tonne. The licensing order is initially in place until the end of 2006.

Further concern is being caused by the resolution from the agriculture ministry for the imposition of export quotas for grain. On October 11 this was returned to the agriculture ministry by the Council of Ministers who requested it be redrafted and it is unclear what the outcome will be. Officials at the ministry have described the motivation for quota introduction as the decrease in the gross wheat harvest and the corresponding risk of a food crisis in Ukraine due to active rates of export.

The main wheat growing areas in the Ukraine are the less developed central and south central regions, which also form the main bastion of support for the government of Viktor Yanukovich. Having already passed gas price rises on to domestic consumers in recent months, the government is reluctant to allow similar rises in staple foods. The move has caused concern that Ukraine could be moving back towards protectionist attitudes that have been common to the country in the recent past. Mr Yanukovich attempted to allay these fears, telling international press "We will uphold the principles of the market economy. These problems which now exist are linked with domestic procedures which exist in every country."

The order, effective from October 3, requires grain exporters to apply for a licence from the economy ministry. As of October 9, no licences had been issued despite most traders having applied. Volodymyr Klimenko, president of the Ukrainian Grain Association noted that 11 ships are currently standing idle in Ukraine's Black Sea ports with more reported to be on their way to the country - though in the absence of export licences they will be unable to load any wheat cargo upon arrival. The ships currently in port cannot depart with their grain cargos and are accumulating charges of $30,000 per vessel per day.

Following the investiture of Yanukovich as the prime minister it is still unclear what direction the government will move in on the formation of business policy. President Viktor Yushchenko is known as an economic liberal whilst Yanukovich has strong ties with major Ukrainian business. The speed with which export licences are issued will be read as an indicator of the attitude of the government towards protectionism and the prospects for WTO membership.

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