White victims of the fight against black exports

In the spring, after the publication of our text about how exporters sell grain for nothing and do not return money to the country, an interesting conversation took place between a member of the government and an expert who is not indifferent to this issue. The latter literally put in the official's hands the tools needed to restore order in the export sphere. And the official didn't even say thank you. He flatly refused to accept help and said that we cannot involve exporters...

When the amount of foreign exchange earnings that was not returned to Ukraine reached 8 billion dollars (or 20% of our current foreign exchange reserves), confidence in the stable financial support of partners decreased, and problems in foreign trade increased. In addition, it turned out that exporters are not only possible, but must be involved, and quite actively.

Business associations were the first to make a fuss – it seems that the Cabinet of Ministers of Ukraine plans to strengthen control over the activities of exporters of agricultural raw materials. Judging by the details, this is definitely not a rumor.

First, the government wants to register agricultural exporters in the State Agrarian Register of Ukraine. Moreover, government officials want to register only those agricultural exporters who worked until February 23, 2022 and have no debts for the return of foreign exchange earnings. Secondly, the officials want to combine the return of foreign exchange earnings with the value-added tax (VAT) refund and the possibility of closing accounts. Thirdly, the government proposes to shorten the period of return of foreign exchange earnings from 180 to 90 days.

Of course, none of these proposals is from the set of measures that were offered to the mentioned government official in the spring. Therefore, none of them will solve the problems neither with foreign exchange earnings nor with "black" grain trading. And the government, instead of fine-tuning the foreign trade system, decided to simply hit it with a sledgehammer. Traditionally, first of all, white business will suffer, because all shades from gray to black will be aware that a five-year-old LLC company without debts can be bought even on OLX, and it will cost as much as UAH 6-8 thousand.

Since we are talking about discretionary restrictions for a specific industry, the National Bank of Ukraine cannot implement them on its own, so it is waiting for the government's decision on this issue. The Cabinet of Ministers of Ukraine is hesitating because it has not done anything yet, and has already received criticism from all possible business associations and experts. And this is just a public dissatisfaction, a kind of earthquake, which is already being followed by a non-public tsunami from the agrarian sector, business owners and other interested parties. In the end, I won't be surprised if everything ends with an extension of the currency return period and a public apology.

Is it possible to solve problems in another way? Yes, it is quite possible. But to begin with, they must be recognized: our problem is not only "black" exporters with cash in their bags. There are strange market practices in the work of self-confident middle-class businessmen large white exporters, and international traders who work here. And this "strangeness" is a derivative of state policy in foreign trade. More precisely, its total absence.

It's worth noting that with an entire industry ministry as well as a trade representative, everything the government does in response to regular crises is waiting for it to pass. Either dumping when exporting grain, or our violation of transit conditions through the countries of the European Union, or the sale of grain for cash, or the non-return of foreign exchange earnings – all these issues will somehow resolve themselves. That is, there is no need to intervene and take the initiative for their solution.

It is because of this approach that we have some kind of incomprehensible solution to this issue.

According to the results of August 2023, 1.2 million tons of wheat were delivered from Ukraine to foreign markets. The top five importers traditionally included Egypt, where we exported 17% of the total volume of grain, or 204,000 tons. Egypt is one of the largest buyers of wheat in the world and a key importer of our grain for many years, but in August (and not only in August) there was no direct shipment there. All these 204,000 tons went to Egypt through intermediaries, of whom there are at least half a dozen.

So, maybe our trade representatives and relevant ministries will at least think about it, and how did it happen that, having a huge market of a hundred million people with a cult of bread and a state program for its purchases, Ukraine still has not entered into direct contracts with these representatives? Therefore, the money for this grain goes to Hong Kong, China, Switzerland and the Seychelles. And the prices for this grain are already very strange. Because through Switzerland, wheat was sold to Egyptians at 182 dollars/ton compared to the global average price of 241 dollars. But this 30% discount is not disappointing, if you see that at the same time, our wheat was delivered from China to Egypt at a price of 55 dollars/ton.

And this is also a question for the honorable government officials: why is it not more convenient for the Ukrainian agricultural company "Nibulon", which is the main Egyptian supplier, to work under direct contracts? What kind of working conditions have been created for a strategically important company that prefers to keep money away from Ukraine? Don't we want to solve strategic problems in foreign trade, from investor protection to currency regulation, not only to increase foreign exchange revenue? For a start, for example, we could deal with the prices, which, in fact, determine the volume of this revenue.

Here are some more illustrative comparisons from the same August sales to Egypt (the terms of delivery are the same, the volumes are comparable). Delivery of wheat through Hong Kong is priced at $80/ton, and through Great Britain at $205. Or, for example, the supply of corn to Egypt: again through Hong Kong, the price of a ton turns out to be 70 dollars, and through the United States – 200 dollars. And this is not some Egyptian specificity. In general, if the Ukrainian exporter transports goods through a "decent" country with requirements, regulations and exemplary control, then the price will at least be such that it does not cause much surprise to the customs officials. But if the goods go through, for example, the Seychelles Islands, then there are no limits to reducing the price, you can transport the goods for 70 or 50 dollars per ton.

Thus, the August average price of Ukrainian corn sold through Italy was 222 dollars/ton, through the Netherlands –202 dollars, through Switzerland – 183 dollars, but through Hong Kong – only 84 dollars per ton. It is clear that the volume of foreign exchange earnings will be greater where the selling price was higher. So, maybe it is still necessary to bring order to the price and jurisdiction through which work allows suspicious dumping?

At the beginning of this year, the right of the government to introduce the so-called export support regime, i.e. a special regime for the export of certain goods, was provided by law, from specific requirements to the exporter to the calculation of limits, the calculation of the value-added tax (VAT) and, in fact, the amount of return of foreign exchange earnings. In particular, the law obliged the Cabinet of Ministers of Ukraine to determine the minimum export prices for goods subject to this regime. It was as if a solution had been found, but in a year the export support regime did not work.

However, a new draft law No.10168 was prepared, where the minimum export price also appears (now it must be determined by the Ministry of Agrarian Policy and Food of Ukraine). If the contract price is less than the minimum, then this, according to the project, is a reason to refuse customs clearance of the delivery. I note again, almost a year has passed. And this, again, is currently only a project, the fate of which is unclear, because it was submitted not by the government, but by people's deputies from the tax committee of the parliament. And the latter, by the way, have already reassured business representatives that they will not propose any changes without the approval of the project with market players. And players, as we can see, have very different views on the situation, and those who sell grain at a discount of 50-60%, I am sure, will still fight for their rights.

Instead, the adoption of the announced point restrictions will be fully felt only by white exporters. That is, those who already work according to the rules of normal jurisdictions, sell at acceptable prices and fulfill the requirements of both internal and external jurisdictions.

And those exporters who buy goods for cash and send them to shell companies, then sell these goods through some islands at low prices, then resell them to themselves and then sell them for a lot of money, will continue to work in the same way. In addition, they also manage to stop their work without waiting for the currency to be returned to the country. In general, they do not care what the period of return of foreign exchange earnings will be, they did not plan to adhere to it. And the market of existing debt-free LLC companies is huge. In addition, controlling bodies always keep access to themselves wide open.

Of course, the Ukrainian agricultural company "Nibulon" will survive, this company can survive anything. What about other companies? In recent years, the grain export market has changed. In this market, there are now not only global traders and local big players, there are also medium-sized companies with normal practices, and very small companies, but with a perfect reputation.

The government should do everything to support this absolutely correct vector of the sector's development, help local business, creating healthy, and most importantly, competitive working conditions for it. And these are not some abstractions, this is systematic multi-vector work with the markets to which we sell products, with traders, with major players, with the financial regulator, and also with supervisory bodies. But this, I agree, does not fit into the approach that the issue should somehow resolve itself without special intervention.