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January 19, 2007

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Reference ID Created Released Classification Origin
07KYIV123 2007-01-19 05:02 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

DE RUEHKV #0123/01 0190502
R 190502Z JAN 07

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000123 
E.O. 12958: DECL: 01/18/2017 
Classified By: Ambassador, Reasons 1.4 (B) and (D) 
1. (SBU) Summary: Exports of wheat, barley, corn, and rye 
from Ukraine remain completely blocked as the GOU has not yet 
implemented the export quota system it authorized on December 
8, 2006.  Traders estimate that there are over 1.5 million 
tons of grain in storage at ports, where it is beginning to 
rot.  The GOU is expected to begin issuing export licenses 
around January 22, but even then, the meager size of the 
quotas (a total of 1.1 million tons of barley and corn, and 
only 3000 tons of wheat) will severely limit trade and 
compound the millions of dollars in losses already suffered 
by grain traders and by Ukraine's farmers.  Speculation on 
the GOU's motives runs from a desire to create more 
opportunities for corruption, to an intention to restore a 
state monopoly over the grain market in Ukraine.  Major grain 
traders met with the AmCham and U.S. and European diplomats 
on January 16 to discuss coordinating approaches to get the 
GOU to change its policies.  They noted that Ukrainian 
farmers were difficult to mobilize because they were poorly 
organized and most had cashed in their crops before the 
restrictions were in place.  Post is aggressively urging key 
GOU officials to reverse this policy and is looking for new 
ways to approach the issue, but the Government appears to be 
dug-in.  End Summary. 
Rotting Away in the Ports 
3. (U) At a meeting with U.S., German, and EU diplomats at 
the American Chamber of Commerce, representatives of Cargill, 
Bunge Ukraine, and Toepfer (80% owned by Archer Daniels 
Midland) discussed the grave situation the GOU has created by 
restricting grain exports.  The GOU has not issued any export 
licenses since November and the grain trade has ceased 
entirely.  Industry representatives estimate that there are 
1.6 to 1.7 million tons of grain in temporary storage at 
Ukraine's major ports (Yuzhniy, Odesa, Mykolayev, Mariupol, 
and Sevastapol).  About half of this grain consists of 
barley, and wheat accounts for between 200 and 300 thousand 
4. (U) The grain, in facilities unsuitable for long-term 
storage, is suffering from rot and insect damage. 
Temperature of grain stored at Yuzhniy port has exceeded 110 
degrees.  A surveyor hired jointly by several traders has so 
far inspected 20 to 30 thousand tons of stored grain at 
Yuzhniy, and has already separated out over 7000 tons in such 
poor condition that it can no longer be sold.  Since the port 
storage facilities can be used only to load ships, and not 
trucks or trains, returning the grain to suitable grain 
elevators was not an option.  One company, Nibulon, had 
reportedly already resorted to dumping rotting grain into the 
water.  Bunge had alerted its insurers of the likelihood of 
filing a claim for losses of $6-8 million at Yuzhniy port 
alone.  Insurance companies had jointly sent a representative 
to the port to keep tabs on the situation.  AIG was 
reportedly in discussions with EU officials on the situation. 
Quotas Not Yet Operational... 
5. (U) The quota amounts that the Cabinet of Ministers 
established by decree on December 8 permit export of 3000 
tons of wheat, 600,000 tons of barley, and 500,000 tons of 
corn.  Companies seeking a share of this 1.1 million tons of 
exports submitted applications for licenses totaling 3.9 
million tons they were already prepared to export.  On 
December 28, an interagency committee proposed a schedule of 
allocation of licenses and began to verify that companies 
actually controlled their claimed quantities of grain.  It 
expects to complete that task by January 19, allowing the 
Ministry of Economy to begin issuing licenses on January 22. 
6. (SBU) In accordance with the CabMin decree, 80% of the 
quota allocation was apparently based on the historical 
market share of traders.  The proposed allocation of the 
other 20%, reserved for new entrants, however, caused concern 
among grain traders.  A small Donetsk firm called Reider 
Trade, for example, received rights to export over 95,000 
tons of corn and barley.  (Note: Although Reider Trade is 
believed to be a nominally independent company, its founder 
has links to Ukraine's leading oligarch Rinat Akhmetov.)  The 
grain traders at the AmCham meeting said they doubted small 
firms receiving quotas actually controlled the grain, but had 
falsified warehouse receipts to gain the quotas.  Cargill's 
KYIV 00000123  002 OF 003 
representative told us separately that it had checked on one 
silo receipt Reider had submitted for 20,000 tons of corn. 
In fact, according to Cargill, there was no corn in the silo, 
and the receipt was a forgery. 
...And They're Too Small Anyway 
7. (SBU) The amount of grain that Ukraine could potentially 
export before June 30 likely well exceeds even the 3.9 
million tons that firms sought to export under this quota 
allocation.  Ukrainian farmers have not yet sold 40% of the 
crop.  Toepfer estimates that Ukraine has an exportable 
surplus of around 4 million tons of grain beyond that 
permitted by the quotas. 
GOU Motives: Corruption, Statism, or Saving Face? 
--------------------------------------------- ---- 
8. (SBU) Grain traders dismissed out of hand the idea that 
the export quotas stemmed from a concern for bread prices or 
a wheat shortage.  The fact that Ukraine was placing severe 
limits on corn and barley was a prima facie refutation of 
that argument.  Another theory was that Ukraine had stumbled 
into this policy without realizing the consequences, and now 
needed a face-saving way out.  GOU officials have repeatedly 
cited the experience of the bad harvest of 2003, when Ukraine 
was caught unprepared and had to import grain.  Grain traders 
said they had proposed face-saving solutions to Deputy Prime 
Minister Klyuyev repeatedly, and had handed proposals to 
Prime Minister Yanukovych during his recent U.S. trip.  Their 
proposals would allow the GOU to increase its grain stocks, 
declare victory, and free up exports, but the GOU had shown 
no interest in pursuing such a compromise.  Cargill noted 
that Klyuyev had already begun talking about the size of 
quotas for the 2007-2008 market year. 
9. (C) In a January 15 discussion with Ambassador, Economy 
Minister Makukha implied that the GUO may find export 
restrictions, at least for wheat, necessary in the next 
market year.  He noted that 80% of Ukraine's wheat crop was 
winter wheat, and that the current mild winter was 
encouraging unseasonably fast growth of the crop.  This meant 
it was highly vulnerable to a late winter frost, which could 
cause a disastrous 2007 harvest, according to Makukha. 
10. (SBU) Whether the GOU initiated the quotas out of a 
sincere concern over shortages, or in order to help 
politically powerful bakers and millers, they have allegedly 
created opportunities for corruption.  Without citing any 
specific allegations, the industry reps were convinced that 
Klyuyev was the chief beneficiary of this corruption. 
11. (SBU) Another theory gaining currency is that the GOU 
intends to reintroduce a monopoly on Ukraine's domestic grain 
market under the state trading company "Khlib Ukrainy" (Bread 
of Ukraine).  Leonid Kozachenko, President of the Ukrainian 
Agrarian Federation, told Ambassador of this theory in late 
December and added that the GOU also intended to set up a 
state-owned commodity exchange run by the Ministry of 
Agriculture.  Cargill's Ukrainian vice president noted that, 
though Khlib Ukrainy now lacked the funding to take on this 
role, its representatives were meeting regularly with 
Yanukovych to find a way to overcome that obstacle. 
12. (C) Comment: While we believe that some officials may 
advocate such a plan, we are skeptical that it is a serious 
option for the GOU.  It is likely that the GOU ill-advisedly 
launched the export restrictions, and that a powerful 
constituency of venal stakeholders has evolved hoping to 
perpetuate arbitrary state control over exports.  Some 
traders believe the objective is to force foreign traders out 
of the market and place the export trade in the hands of 
local cronies.  End Comment. 
PR Message: Quotas Hurt Ukraine, Not Just Traders 
--------------------------------------------- ---- 
13. (SBU) Cargill, Bunge, and Toepfer agreed to undertake a 
public relations effort with the goal of creating a political 
problem for the GOU.  There was no sympathy in the population 
for the big international grain traders.  The GOU had 
convinced Ukrainians that the traders themselves, by 
exporting "too much" grain early in the market year, had made 
the quotas necessary.  To counter this, it would be necessary 
to recruit the farmers to take an active role.  This would be 
KYIV 00000123  003 OF 003 
a challenge, since small farmers were unorganized, and most 
had already cashed in their crops by selling to the traders 
early.  Although the traders estimated that 40% of the crop 
was still unsold, most of that was in the hands of the 500 to 
1000 large agricultural enterprises, who were capable of 
storing grain until prices recover.  If exports do not free 
up, however, farmers will face serious losses in the next 
harvest, beginning in June.  With the huge carryover from 
this year, the domestic market will be oversaturated and 
storage space very scarce.  Moreover, if the gap between 
world and Ukrainian prices remains at the current $30-$45 per 
ton, Ukrainian farmers could lose hundreds of millions. 
Diplomatic Approach 
14. (SBU) Grain traders welcomed our offer to lend a 
diplomatic hand.  They said, however, a reprise of the 
November press conference that the Ambassador held together 
with his German and Dutch counterparts could reinforce the 
impression that this was a foreign, not a Ukrainian problem. 
One effective approach might be to appeal to national pride 
by showing "Ukraine's gold" rotting in the portside storage, 
they suggested.  A visit by Ambassador to such a site could 
attract press coverage.  They encouraged high level 
U.S-Ukrainian meetings and offered to accompany the 
Ambassador if appropriate.  (Embassy note:  The Ambassador 
has consistently raised this issue with PM Yanukovych, DPM 
Kluyev and other key GOU officials, and in spite of their 
assurances, the issue has not been resolved.  End Note.) 
Companies said they thought the quotas would be a barrier to 
WTO accession and suggested the USG make that point to the 
EC Cautious 
15. (SBU) EC Mission Econ Chief Luis Portero took a 
conservative line at the meeting, saying that there could be 
no expectation of getting the GOU to eliminate the quotas. 
The goal therefore should be to ensure that licensing 
procedures were transparent.  To that end, the EU was sending 
technical experts to Ukraine the week of January 22 to advise 
the GOU on licensing.  He said the Commission had also 
decided to hold meetings with Ukrainian officials on January 
31.  European Commission head representative Ian Boag 
admitted to the Ambassador January 17 that talking to the GOU 
about improving licensing procedures could easily be 
construed as accepting the quotas.  However, Boag said that 
the EU would look for next steps after their January 31 
meetings.  The EC had not discussed whether the quotas 
constituted a barrier to WTO accession.  German agricultural 
attache, Stefan Kresse, who personally advocates more 
aggressive action, said he doubted Brussels would make that 
link explicit. 

16. (C) These costly quotas undermine the Yanukovych 
government's efforts to appear pro-market.  In combination 
with the return to a corrupt system of securing VAT refund 
payments from the GOU, the quotas confirm the business 
community's fears about the direction of Ukraine under 
Yanukovych.  Since Post's aggressive private and public 
diplomacy has not yet produced tangible results, we continue 
to look for new ways to raise the profile of the issue and 
are considering a February 1 visit to a grain port facility 
for the Ambassador. 




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