VZCZCXRO9705
PP RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHKV #1790/01 2040935
ZNR UUUUU ZZH
P 230935Z JUL 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 3140
INFO RUEHRC/USDA WASHDC
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 001790 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR ALIKONIS 
DEPT PLS PASS USTR FOR CKLEIN/LMOLNAR/ROWEN 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
USDA/FAS/OCRA FOR JFLEMINGS/ATHOMAS 
USDA/FAS/OGA FOR JLABOR/JTAYLOR 
USDA/FAS/PECAD FOR MLINDEMAN 
 
E.O. 12958: N/A 
TAGS: EAGR ETRD PGOV UP
SUBJECT: UKRAINE: POLITICS AND MONEY BEHIND GRAIN EXPORT 
RESTRICTIONS 
 
REF: A) KYIV 1522, B) KYIV 1422 
 
Treat as Sensitive but Unclassified.  Not for Internet. 
 
¶1. (SBU) Summary: Fear of rising bread prices was the driving force 
behind the GOU's decision to reintroduce grain export restrictions 
as of July 1.  Bread prices are very politically sensitive in 
Ukraine, and a number of government officials also have a financial 
stake in the quotas through business interests that rely on cheap 
grains.  The GOU is therefore unlikely to significantly revise the 
export restrictions before the September elections.  Farmers will 
suffer more than the grain trading companies in this incarnation of 
export restrictions, as advance warning allowed grain traders to 
delay their purchasing, yet Ukrainian farmers have not managed a 
vigorous or effective protest.  With high world prices for grain 
expected to persist, Ukraine needs to develop a more market-friendly 
policy in its quest to keep bread prices low.  The GOU has some 
options:  it could move towards direct price subsidies and develop a 
grain futures market; a special intervention fund could also be 
helpful.  End Summary. 
 
¶2. (U) As reported reftel A, 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 
has authorized an export quota of only 3,000 tons, a mere token 
amount, for each of the following types of grain: wheat (and a 
wheat/rye mix), barley, corn, and rye. 
 
The Politics of Bread 
--------------------- 
 
¶3. (U) The GOU cited concerns for rising bread prices in defending 
the reintroduction of export restrictions, although bread prices had 
remained rather stable (see ref A).  Yet because domestic wheat 
prices were significantly lower than world prices -- in June wheat 
sold for approximately $170/ton in Ukraine compared to $300/ton for 
wheat futures in the United States -- wheat prices, and eventually 
bread prices, were destined to rise in the absence of a government 
intervention.  Analysts from the Ukrainian Grain Association and the 
Ukrainian Agrarian Confederation said they lacked firm data but 
estimated that in the absence of export quotas, prices would rise 
anywhere from 8% to 40% 
 
¶4. (U) Rising bread prices have become a kind of bogeyman in 
Ukrainian politics.  In 2003 former Deputy Prime Minister Leonid 
Kozachenko was put under criminal investigation for lifting grain 
export quotas after a low harvest.  Current Deputy Prime Minister 
Viktor Slauta and Minister of Agriculture Yuriy Melnyk found 
themselves in a similar position when, on June 6, Prime Minister 
Yanukovich publicly threatened their dismissal should bread prices 
rise (see also reftel A).  The GOU is clearly keeping a close eye on 
bread prices in the run-up to parliamentary elections, scheduled for 
September 30. 
 
Political Connections 
--------------------- 
 
¶5. (SBU) Many government officials also have a financial interest in 
keeping bread prices low.  According to Korrespondent, a Ukrainian 
weekly newspaper, 26 MPs from the Party of Regions alone own a stake 
in Ukrainian bakeries.  For example, MPs Volodymyr Ivanov and Vasil 
Khmelnitsky, both recent converts to the Party of Regions, control 
Khleb Kieva, one of the larger regional bakeries.  Deputy Prime 
Minister Slauta has long had ties to Khlib Ukrainy, the state-owned 
bread giant; he ran their office in Donetsk during the mid-1990s. 
Minister of Agriculture Melnyk, meanwhile, is a member of the board 
of the Poultry Union of Ukraine, which benefits from low feed grain 
prices.  Grain producers, exporters, and other businesses that would 
benefit from higher grain prices, meanwhile, lack these significant 
political connections.  Representatives from both the Ukrainian 
Grain Association and Agrarian Confederation told Econoff on July 4 
that the political connections of the bakery industry had played a 
key role in grain policy, although they declined to name specific 
government officials benefiting financially from the quotas. 
 
Farmers to be Hit Hard 
---------------------- 
 
¶6. (U) Analysts agree that this time the restrictions will hit 
farmers harder than the grain traders, since the traders were given 
adequate lead-time and adjusted purchasing accordingly.  Cargill, 
 
KYIV 00001790  002 OF 002 
 
 
for example, told Econoff that they had purchased next-to-nothing, 
and would play a game of wait and see.  At an American Chamber of 
Commerce meeting July 16, other traders said their firms would 
largely follow similar strategies.  Deputy Agricultural Minister 
Yuriy Luzan said on July 11 that farmers had only half the funds 
necessary to carry out harvesting and sowing campaigns, which 
generally occur in August.  Additionally, price uncertainty makes it 
difficult for farmers to plan in advance or invest in improvements 
that would increase their yield.  Exporters have said they expect 
most farmers to hold onto their stocks until August or September. 
 
¶7. (SBU) Despite this gloomy state of affairs, farmers have not 
voiced strong opposition to the export restrictions.  Although they 
are well below international levels, domestic prices are actually 
higher than they were a few years back, and many farmers are 
therefore still in the black.  Traders told us this means many 
farmers are satisfied to make a profit, even if it is less than they 
might earn if they could have exported.  Farmers are also hesitant 
to rock the boat for fear of upsetting their relationship with the 
government, including subsidies in some cases.  German Embassy 
Agricultural Attache Stefan Kresse commented that some of the larger 
agricultural producers, anxious to swallow up some smaller 
enterprises, actually appeared to be supportive of the quotas in 
that they may serve to bankrupt smaller producers. 
 
Long Term Solutions Needed 
-------------------------- 
 
¶8. (U) At the July 16 American Chamber meeting, all agreed that the 
GOU was unlikely to eliminate the export restrictions prior to 
September elections and with the development of biofuels, Ukraine 
would likely face high world grain prices for some time to come. 
Several grain trader reps argued that pressuring the GOU in the near 
term would be counterproductive, although there might be some chance 
of getting the GOU to back off its export bans on feed grains, which 
have no impact on bread prices.  (Note:  Minister of Agrarian Policy 
Melnyk told the press July 20 he expected the export ban would be 
lifted October 1, without specifying whether this would be a full or 
partial lifting of the ban.) 
 
¶9. (U) Bunge and Cargill reps suggested a mechanism whereby 
exporters could sell 1 million tons of grain to a reserve or 
intervention fund at a fixed price for every 4-5 million tons they 
were allowed to export.  Dmitriy Gorshunov, country manager at Bunge 
Ukraine, noted that for example that Russia uses direct subsidies 
and already has an intervention fund of 1.5 million tons in place. 
Econ Counselor suggested to the group we needed to develop 
alternative policy mechanisms to suggest to the GOU for the longer 
term, such as futures markets or direct payments to the needy, that 
would be more market-friendly and cheaper than export controls.  The 
group agreed to draft policy proposals. 
 
¶10. (SBU) Comment: Ukraine has reflexively used export restrictions 
as its "go-to" method for restraining rising grain prices.  While 
this policy works in the short term, it places high costs on the 
economy.  The differential between domestic prices and world prices 
will be hard to sustain in the long run, so the GOU needs to develop 
a more market-friendly and less trade-distorting mechanism to 
achieve its goals. 
 
TAYLOR