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Cablegate: Ukrainian Govt Relaxes Quotas On Grain Exports

VZCZCXRO2792
PP RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHKV #2500/01 2740235
ZNR UUUUU ZZH
P 010235Z OCT 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 3935
INFO RUEHRC/USDA WASHDC
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 002500

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR ALIKONIS
DEPT PLS PASS USTR FOR CKLEIN/PBURKHEAD/EPORTER
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK
USDA/FAS/OCRA FOR JFLEMINGS/DADAMS
USDA/FAS/OGA FOR ROMEARA/JLAGOS
USDA/FAS/PECAD FOR MLINDEMAN

E.O. 12958: N/A
TAGS: ETRD EAGR WTRO UP
SUBJECT: UKRAINIAN GOVT RELAXES QUOTAS ON GRAIN EXPORTS

REFS: A) KYIV 1790

B) KYIV 1522

Treat as Sensitive but Unclassified. Not for Internet.

1. (SBU) Summary: A September 26 GOU decision imposes new quota
levels on grain exports as of November 1. The new quotas are
significantly looser than the excessively restrictive ones currently
in place, but still appear to be on the conservative side,
especially since they cover a longer-than-expected period through
March 31, 2008. The GOU considered adding edible oils to the list
of restricted products but did not do so this time as a result of an
informal agreement with industry. Grain traders are unsure how to
proceed, as they do not want to undermine their opposition to export
restrictions, yet want to encourage the GOU to at least use
transparent methods if restrictions continue. The GOU has taken a
relatively uncontroversial and temporizing step, leaving a harder,
longer-term decision for the next government. End Summary.

2. (U) Minister of Economy Anatoliy Kinakh told the press on
September 26 that the Cabinet of Ministers had issued a resolution
revising the country's quotas on grain exports. (Note: As ref B
reported, Cabinet of Ministers Resolution No. 844 reinstated
limitations on grain exports as of July 1, after a drought in
southern Ukraine reduced the 2007 grain harvest. The GOU had at
that time authorized an export quota of only 3,000 tons, a mere
token amount, for each of the principal types of grain. End note.)
Kinakh reported that this latest Cabinet of Minister's resolution
puts new, expanded quotas in place from November 1 to March 31, 2008
at the following levels:

-- Corn - 600,000 tons;
-- Barley - 400,000 tons;
-- Feed Wheat - 200,000 tons; and
-- Rye - 3,000 tons.

(Note: As of September 28, the resolution has not yet been
officially published. End Note.)

Conservative Step in Right Direction
------------------------------------

3. (U) The expansion of the quotas will allow exports to begin
flowing again. Many of the large grain traders had expected these
quota levels to be imposed for three months, not five, however, so
the levels are more conservative than foreseen. Post estimates that
the total quota of 1.2 million tons represents approximately 34
percent of what Ukraine can expect to export during the entire
marketing year. (Note: The marketing year runs from July 1 to June
30. End note.)

Edible Oils Next?
-----------------

4. (SBU) Industry representatives expressed concern during a
September 25 meeting of the American Chamber of Commerce's (ACC)
Agricultural Committee that the GOU was considering imposing quotas
on edible oils as well after GOU officials had publicly announced
that the CabMin was contemplating such a move to combat rising
vegetable oil prices. The September 26 Cabinet of Ministers
Resolution did not add edible oils to the list, however. U.S. firms
Bunge and Cargill, both of which crush edible oils for export, told
us that the Ministry of Agricultural Policy invited the country's
main vegetable oil manufacturers to sign a memorandum of
understanding regarding the short-term prospects of the vegetable
oil market. In the MOU, the GOU promises not to impose export
quotas on oils until at least December 31. In return, the industry
gives vague promises to service the domestic market in a fair and
orderly market. Both Andrzej Rozycki from Cargill and Dexter Frye
from Bunge told us their companies agreed to sign the MOU after
their lawyers confirmed that it imposed no binding commitments on
industry, and in particular did not commit oil crushers not to raise
prices. Rozycki and Frye said they believed the MOU was primarily a
political tool that allowed the GOU to claim that it was taking a
proactive stance against rising edible oil prices. Both also said
their companies felt it would be politically unwise not to sign on
to the MOU when all their major Ukrainian competitors had agreed to
do so.

Grain Traders Unsure How to Proceed
------------------------------------


KYIV 00002500 002 OF 002


5. (SBU) Industry leaders present at the September 25 ACC meeting
agreed that their overarching goal was to encourage Ukraine to shift
from administrative to market measures in its approach to the
agricultural sector. There was some disagreement, however, over how
to respond to the export restrictions. While some continue to
advocate complete elimination of quotas, several industry reps
argued for the need to be practical. The GOU was not going to
repeal export restrictions anytime soon, they said, so industry
should encourage the government to follow international norms in
using export quotas and to make the situation predictable. The
Ukrainian Grain Association, which unites domestic grain traders,
has already taken this approach; back in August it publicly
recognized the need for quotas and urged the GOU to establish quota
levels early on, in order to "guarantee a stable situation on the
market." Ukrainian Agrarian Investments' Peter Thompson, who is
also chairman of the ACC Agricultural Committee, suggested that the
ACC should continue to lobby for elimination of the export
restriction. If restrictions were to be used, however, the GOU
should at least make them as transparent, fair, and predictable as
possible.

6. (U) ACC meeting participants also commented that the GOU needed
to make better use of a grain market intervention fund. The GOU had
previously failed to offer a price above the market price for the
fund's purchases, resorting instead to threats against grain
producers, and the intervention was ineffective. (Note: Ref A
reported on the motivations behind the GOU's policy, and outlined
options for the GOU to develop a more market-friendly and less
trade-distorting mechanism to achieve its goals, including a
reformed intervention fund. End note.)

Comment: The Next Government's Problem
--------------------------------------

7. (SBU) The GOU is seeking to balance a number of interests in its
grain policy, as no Ukrainian politician can bear rising bread
prices in an election year, or images of grain rotting in ports, as
occurred after the initial, surprise introduction of export
restrictions. Deputy Minister of Economy Valeriy Pyatnytskiy in
July told members of Ukraine's WTO Working Party that Ukraine would
eliminate the export restrictions by the time of WTO accession; this
commitment is enshrined in the draft Working Party Report.
Pyatnytskiy reaffirmed the GOU's intention to adhere to this
commitment as recently as September 25 in a conversation with Econ
Counselor. For now the GOU has put in place quotas that, while on
the conservative side, at least placate the grain traders somewhat.
It will be up to the new government that emerges following September
30 elections to determine how to proceed from there, with WTO
commitments, fears of rising food prices, and industry concerns all
playing a role. End comment.

TAYLOR

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