Email This Post - Print This Post Print This Post

eu_donkey

By John Helmer, Moscow

The European Union’s emergency trade assistance package for Ukraine provides duty-free entry into the European market if you are a Ukrainian exporter of asses, mules, and hinnies. If the regions of the Ukraine are to have a say in the trade terms, the enterprises of the southern and eastern regions aren’t likely to approve, because most of the new trade advantages have been granted by Brussels to farmers and foodstuff enterprises in the west.

One of the largest single beneficiaries, according to the European Trade Commissioner’s office, is the Roshen confectionery group owned by Petro Poroshenko (image, right). He is also the front-running candidate in the Ukrainian presidential election due on May 25. “Chocolate and cocoa products will benefit from a substantial preferential treatment,” says John Clancy, spokesman for Karel De Gucht, the EU trade commissioner, “as the large majority of them falls under the category that will be immediately liberalised (zero duty). For a few specific products, and for some confectionery, the liberalisation will apply within the quantitative limits established by the tariff quotas, as indicated in the annex to the schedule.”

These import duty and volume quota measures are part of the association agreement with the EU, which has been at the heart of the political conflict in Ukraine since the ousted President Victor Yanukovich refused to sign the pact last November. When instead Yanukovich agreed to the Russian aid proposals in December, one of the reasons was that the EU had weighted its trade scheme in favour of the agro-industrial sector established to the west of Kiev. The trade elements of the Russian agreement proposed to remove trade barriers for the mines, steel and pipemills, and heavy industry of the Ukrainian east. That scheme was abandoned when Yanukovich was replaced on February 24.

Trade Commissioner Gucht’s office provides this link to the official text of the EU-Ukraine Association Agreement, and the Annexes of Title IV: Trade and Trade-related Matters. Poroshenko’s chocolates aren’t the only new trade benefit. The Bogdan auto assembly and auto parts group, also owned by Poroshenko, stands to benefit from Annex XI, which covers export to the EU of Ukrainian vehicle parts and used cars.

The EC announcements claim the benefits of the new scheme will flow to all of Ukraine’s sectors. “Existing EU tariffs for industrial goods exported from Ukraine will be removed immediately for 94.7% of products. For the remaining handful of products (some chemical products, etc.) the tariffs will be reduced… For agricultural goods, the EU has taken important but more limited action to open up its market to Ukrainian agriculture. This will ensure the European agricultural sector is not harmed by this unilateral trade action. In concrete terms, the EU will grant immediate and unlimited preferences to 82.2% of Ukraine’s exports.”

The announcement acknowledges that this measure is temporary, allowing seven months until November for the EU and the Ukrainians to negotiate terms for a free-trade area. For the time being, though, Commissioner Gucht has said: “I would expect a positive impact for Ukrainian businesses and workers to be felt just weeks after this system comes into force. The expected annual benefits for Ukraine through tariff reductions of the original, as yet unsigned trade deal is in the region of half a billion euros per year, to be precise 483 million euros. So, even a few months of this unilateral arrangement would be expected to bring gains in the hundreds of millions of euros for Ukraine.”

Just how much cash this benefit will generate until November 1, and who will be the Ukrainian beneficiaries, Gucht’s spokesman John Clancy is reluctant to say. “The annual value of the EU’s autonomous trade measures,” he claims, “will be nearly €500 million in tariff reductions, of which almost €400m accrue to the agricultural sector. The €500 million does indeed refer to the foregone duties collected on imports from Ukraine. It is a rough indicator of the economic value of the tariff preference.”

In other words, the EU will be collecting this much less in import duty. How much money that will turn out to be on the revenue line for Ukrainian exporters has been calculated hypothetically by the EC, with assumptions about European demand and Ukrainian supply which haven’t been revealed. According to Clancy, “the estimates based on an economy-wide modelling framework suggest that the removal of import duties is expected to boost Ukraine’s income by around €1.2 billion per year…As a result of the removal of tariffs, Ukrainian exports to the EU are expected to increase by €1 billion per year. Sectors that would benefit the most are wearing apparel and textiles, food products, vegetable oil and non-ferrous metals.”

The annexes reveal the biggest cuts in current tariffs have been introduced for woven wool, knitted blankets, footwear, rags, and plastic waste. The 10.9% import duty the EU currently charges for Ukrainian mules will be slashed to zero; the 7.7% penalty on asses is also to be eliminated.

In the London, Frankfurt and Warsaw stock markets, where the leading Ukrainian agro-industrial companies are listed and traded, share price movements haven’t demonstrated much confidence that the EU measures will add significantly to their revenue, earnings, profit and dividend lines.

Poroshenko’s payoff is having no market impact, because Poroshenko’s companies are closely and privately held, and do not issue audited financial reports. He isn’t the only Ukrainian oligarch who will benefit from the new measures.

bakhmatyukOleg Bakhmatyuk (right), who owns Avangardco, a leading producer of poultry, shell eggs and egg products, is a westerner in Ukrainian terms, who has regularly appeared on published lists of the Ukrainian oligarchs, at least in terms of his estimated asset wealth. Avangardco listed on the London Stock Exchange with an initial public offering (IPO) in April of 2010. Troika Dialog, the Russian bank now part of state-owned Sberbank, was the arranger. The prospectus, with details of how Bakhmatyuk controls the company through several Cyprus-registered entities, can be read here. The market capitalization of the company is currently $620 million., so Bakhmatyuk’s 77.5% stake is worth $481 million. His share of the annual profit is around $150 million. According to the latest reports for the nine months to September 30, 2013, revenues are growing at 5% per annum; earnings at 6%, and profit at 3%.

Avangardco’s share peaked at $19 in April of 2011, and then hit its historical low of $6 in December of the same year. Since the start of this year, the share has traded downwards between $12 and $7.50. It is currently $9.70. A company presentation last October revealed that export volumes have been growing rapidly, and now comprise about one-third of total sales. But the EU is not a significant market at present, nor a target in the company’s marketing strategy. Russia is also not a significant export destination.

Avangardco’s investment relations office in Kiev, and its London public relations agent, were asked to say what the company calculates to be the benefits for Avangardco’s exports in the new EU scheme in terms of revenues and earnings. The company did not reply.

gutaIvan Guta (Huta, right) and his family control the Mriya Agro Holding, whose assets are concentrated in the western regions of Ternopil, Khmelnytsky, Chernivtsi, Ivano-Frankivsk and Lviv. The main source of revenue is the export of crops – wheat, corn, beets, barley, buckwheat and potatoes. The company doesn’t report its export destinations. Russia is not one of them. It is unknown to what extent Mriya exports to the EU, or competes in third-country markets against EU grains.

Mriya’s peak share price of €8.15 was reached in February 2011. Over the past year it has been priced between €4 and €6, but since January the trajectory has been volatile, mostly downward. The current share price is €4.90. With a market capitalization of €521 million, Guta’s 80% stake in the company is worth €417 million. Mriya’s 9-month profit to September 30 came to $136.7 million, down 1.4% on the previous year. Guta’s nominal profit share would come to $109 million.

Mriya is more heavily indebted than Avangardco, with long-term obligations of about $459 million and short-term debt of $257 million. Its principal creditors include Credit Suisse, Citi, the European Bank for Reconstruction and Development, the International Finance Corporation, and international bondholders with $472 million worth of Mriya paper. Apart from the inclusion of Sberbank as one of the Mriya bond issue managers, there is no sign that Guta is vulnerable to Russian creditors, or to Russian trade restrictions.

Olena Glemba, the investment relations spokesman for Mriya, was asked what financial impact has been calculated for Mriya from the new EU tariff cuts. She did not respond.

Yury Kosyuk, the controlling shareholder and chief executive of Myronivsky Hliboproduct (MHP), the largest agricultural holding in the Ukraine, is significantly wealthier in terms of assets, compared to Bakhmatyuk and Guta. According to the boating media, his taste in motor yachts is oligarch-sized:

kosyuk_yacht

Ukrainian sources do not consider him a westerner by ethnic or political orientation. MHP’s crop assets are distributed around the country:

grain_map
Source: MHP

Much of its revenue and earnings is generated by feeding the grain to chickens, and producing poultry meat and sausage. Export volumes are growing fast, but shipments to the EU did not start until last year.

export_sales
Source: MHP

MHP was publicly listed on the London Stock Exchange in 2008. Here is the prospectus. Since then MHP has quadrupled its value. Last month, the market appears to have reacted to the poultry concession in the EU trade scheme, as the MHP share price jumped 11% in the week following the March 11 announcement. The share price has now settled back to $13.15 — well below the historic high of almost $20 at the start of 2011. Over the past year MHP has fallen by 25%. Current market capitalization is $1.4 billion. Kosyuk’s shareholding is about 74%.

Growth of chicken and other meat sales to the European market was explicitly targeted in presentations by MHP last year. But when the head of MHP’s investment relations, Anastasia Sobotyuk, was asked last week to say what benefit MHP believes it will draw from the new EU trade programme, she said the Brussels documents do “not provide details which I can use to calculate any impact; the information is generalized. I doubt that any of the Ukrainian agroindustry companies can give you a detailed answer. Also, please take into account that in order to implement these tariffs, the initiative should be ratified by all EU members. It usually takes time.” She added that the recent trajectory of MP’s share price “is absolutely normal and rather expected.”

verevskyAndrei Verevsky (right) is the last of the Ukrainian agro-oligarchs who stand to gain from the EU trade scheme. The Warsaw-listed Kernel has risen 24% in share value since March 11, and now stands at €6.95, with a market capitalization of €553.8 million. If not for the EU announcement though, the steady decline of Kernel’s value would have continued. It peaked at €18 in August 2012; it hit bottom of €5.55 on the morning of the EU announcement. Verevsky holds 38.8% of the shares; the free float is unusually large for a listed Ukrainian company at 61.2%.

Kernel leases and owns farm land for the production and export of grain (corn, wheat, barley), soybeans, oilseeds, and sunflower oil. It also operates in Russia. According to Kernel’s last financial report for the half-year to December 31, 2013, revenues were down almost 23% to $1.1 billion; earnings fell 61% to $61.1 million; and there was a bottom-line loss of $42.9 million. Net debt was just over $1 billion.

Reporting in February that the company’s principal risks were weather conditions affecting harvest volumes, as well global commodity pricing, Kernel had this to say about the principal political risk the company thought it was facing: “Regulatory initiatives introduced or expected to be introduced by the Ukrainian Government in regard to agricultural commodities, including but not limited to export barriers or quotas, changes in export duties or VAT regime, could have a material adverse impact on the Company’s business and its financial standing.”

Precise data for the destination of Kernel’s seed oil and grain exports are not available in the company’s documents. However, significant volumes of both are being shipped to the Netherlands, Spain, and Portugal. Kernel refuses to say how the new EU trade scheme will affect its revenues or profitability.

The EU trade commissioner’s office acknowledges that four Euros out five of the new trade concessions will go to the Ukrainian agricultural sector. But what benefit will go to the eastern region steelmakers, iron-ore and coal miners, and pipemakers like Victor Pinchuk. According to Clancy for the EC, “virtually all base metals and base metal products already enjoy duty-free access to the European market, and will continue to do so under the autonomous trade measure.” A presentation by Pinchuk’s Interpipe in December indicated that facing substantial cuts in its exports to Russia, the US, and the Middle East, the EU pipe market, dominated by domestic pipemakers, is not a practical alternative for Interpipe.

Asked to clarify whether there has been any change in treatment for Ukrainian steel and pipe exports to the EU, and whether there is a fresh advantage in value for these exporters, Clancy does not say.

In a March 27 interview with a Financial Times supplement advertising affluence, Pinchuk was reported not to “be happy about the governorship of his native Dnipropetrovsk region being handed to his rival [Igor] Kolomoisky… But [Pinchuk] proclaims himself ready to serve Ukraine. ‘It goes without saying that we [the oligarchs] are all ready to defend the unity of the country,’ Pinchuk says. ‘By whatever means it takes.’”

The European Commission’s decision to sacrifice Pinchuk’s interests, and those of the eastern steelmakers he calls “we”, is not the means towards unity of the country Pinchuk has been advocating.

Leave a Reply