Issue 2

Land Market Investing Mriya Tractors Smart Farming Riverways Railways Exports and Trade Adding Value Cooperatives Dairy Poultry Food Processing Snails

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Ukraine’s Path to World Food Power by Aisha Down

Walk winding roads between villages in the Carpathians of western Ukraine, and you travel back through centuries: cherry orchards, tinned bulbs of country churches, and roadside vendors selling honey, traditional cheeses and forest mushrooms.

Head to fields outside of Kharkiv or Poltava and you leap forward years. Drones hum over fields of swelling wheat, monitoring ripeness. GPS- equipped tractors (combines) on autopilot harvest grain.

The constant is the land and the land’s richness. Ukraine’s agriculture is not a new story. Its 40 million hectares of farm land were a breadbasket for the Soviet Union. Before then, its black earth fed the Tsars. and the fears of their constituents, Its 40 million whose hectares and livelihoods lie in But the geopolitics are new. Twenty- the balance. hectares of farm five years after independence, Ukraine’s agricultural future, for once, World forces reach into rural Ukraine land were a belongs entirely to Ukraine. After As politicians, bankers and farmers a 16-year moratorium, the country weigh the future, the invisible breadbasket for stands poised to open a market for currents of today’s world exercise its agricultural land, a market extinct their forces on the land. the Soviet Union. for nearly a century except for a brief period of privatization in the 1990s. To the south and east, far beyond Before then, its Ukraine’s horizons, other continents Analysts predict Ukrainian hectares are growing larger and hungrier. black earth fed will be bought and sold after the next Africa and Asia are buying more and election. more wheat and meat, milk and eggs. the Tsars

Bankers are scrambling to develop To the north and west, Europe financial instruments to make such and America develop as promising transactions possible. Entrepreneurs destinations for organic and small- from China to Saudi Arabia to Canada scale goods -- raspberries and snails, are weighing the market, considering Carpathian floral honey. the possibilities of the nation’s black soil, the most fertile on earth. And Everywhere, climate change alters Ukrainian politicians are caught winters and summers, often between the hunger of the market unpredictably, bringing new blights on old crops, raising summer 2

The question temperatures, and drying out fields in interviewed snail collectors and Ukraine’s south. raspberry collectives, bankers and is not whether drone-makers. We’re here to tell you The question is not whether Ukraine’s the story of how Ukraine can become Ukraine’s agriculture will be crucial to the world a world food power -- and how you, of the next 50 years. Experts predict with time and judgment, could be a agriculture will Ukraine could feed 800 million. Its part of it. grain production is to reach 100 be crucial to the million tons annually in the 2020s. Catch a ride on farm boom with The question is how the forces at logistics world of the next work today on Ukraine’s land will play There are serious obstacles to out. producing food in Ukraine today. 50 years. Experts The land moratorium is one. Another Will the patchwork balance of is logistics. Ukraine, in the past two predict Ukraine futuristic megafarms and Carpathian years, has exported just over 40 smallholdings remain? Is there room million tons of grain. For now, this could feed 800 in one country for artisanal honey seems the limit of what the country’s producers and grain growers with silos, roads and rail cars can handle. million over 100,000 hectares? To enable the country to 100 million Or: who will Ukraine feed, with what, tons of grain annually will take serious and how? investment—in highways, railways, and the Dnipro river waterway, In your hands is the second issue Ukraine’s Mississippi. Investment is of The Ukraine Business Journal’s coming – from China, the EBRD, and Opportunity Reports, a monthly private entrepreneurs. supplement focused on the promises and challenges of this crossroad of In fact, says a senior banker in Kyiv, continents. investing in logistics—transportation companies and infrastructure—is We can’t answer these questions for a sure ways to invest in Ukraine’s you. But we can give you the tools to agriculture. make your best guess. Our journalists Opportunity Reports 3

After logistics, comes the thorny issue Late into an interview with a major The largest of financing agricultural investment tractor dealer, the head of sales told in Ukraine. Over a decade has passed the UBJ about landmines wrecking multinational with no land market. This means that, a newly-sold machine worth tens of for over a decade, Ukrainian farmers thousands of dollars, somewhere in players in who wanted to invest in equipment east Ukraine. Anyone can get burned, or seeds had to use crop receipts as and badly. But Ukraine’s agricultural Ukraine’s collateral, rather than their hectares. potential also offers a truth, perhaps one more compelling. agriculture never For this reason, many foreign investors—except very large The same senior banker who stopped investing players—skipped working in Ukraine recommends investing in logistics also altogether. Now, with the land market remarks that the largest multinational in the country, opening and interest in Ukraine’s players in Ukraine’s agriculture never black earth growing, it is becoming stopped investing in the country, even even during the clear that there must be more during the 2014 crisis. To them, the accessible instruments to finance richness of the land is a more durable 2014 crisis Ukraine’s farmers. story than the wars and crises on top of it. Ukraine’s government is discussing partnerships with the world’s major They might be right. After all, the mortgage banks, offering state land saying goes of Ukraine’s black earth, as equity. Meanwhile, banks already “Plant a stick in it, and a tree will in Ukraine are refining offerings and grow.” For those who can afford to lowering thresholds for farmers to wait and weather the years, there take out loans. are few better bets than Ukrainian agriculture. Rich farm land outshines war and crisis Finally, there is war and corruption—a perennial truth of doing business here. YOUR TRUSTED SERVICE PROVIDER IN UKRAINE !

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Sven Henniger, Partner HWC LC [email protected] 04205 Kuiv, Ukraine www.hwc.com.ua O-R Business Center, Obolonskyi Ave 26 Contents The Team 5

Editor in Chief Page 1 Ukraine’s Path to World Food Power Aisha Down Aisha Down Page 6 Muddy prophecy: a market for Ukraine’s farm land Editorial Director Aisha Down James Brooke Page 10 How to Invest in a Rising Food Power James Brooke Journalists Jack Laurenson Page 14 Investments into Black Earth: Trends and Opportunities Natalya Datskevych AEQUO Antonina Tsymbaliuk Page 17 Mriya Awakes from Investor Nightmare Jack Laurenson Art Direction Page 20 Foreign Tractors Dig Ukraine Martin Nunn Aisha Down Design and layout Page 24 Space-Age Drones Meet Post-Soviet Farmers: Agritech in Ukraine Whites Communication LLC Aisha Down Page 28 Rebuilding Ukraine’s Mississippi Photo-research Aisha Down and Natalya Datskevych Elvira Garaninav Page 32 Investors Needed: Shift Ag from Volume to Value Administration James Brooke Elena Nunn Page 35 State Railroad Invests to Get Grain to Ports James Brooke Production Page 38 China Invests Billions to Modernize Ukraine’s Ports and Highways Alexander Bugay James Brooke Advertising sales Page 43 Ukraine Becomes Poultry Power UBJ Publications LLC Jack Laurenson and Natalya Datskevych Page 46 Farming in Ukraine: More Co-ops Ahead? Jack Laurenson Page 49 Ukrainian Dairy: Big Dreams, Dwindling Cows Aisha Down Page 52 Adventures in Aquaculture: Ukraine’s Black Sea Dream Jack Laurenson and Antonina Tsymbaliuk This report is published in cooperation with Page 55 Food Processing Adds Value in Ukraine Ukraine’s investment promotion office, Jack Laurenson and Natalya Datskevych UkraineInvest.

Page 58 Slithering to a Big Market: Ukraine’s Snail Trade Copyright © 2018 Frontier Markets Media Aisha Down Limited. All rights reserved. To republish any material please refer to / link to the Ukraine Business Journal (www.theubj.com).

For editorial comment or contribution please contact James Brooke: [email protected] For advertising in future Opportunity Reports or any UBJ product please contact: [email protected]

Disclaimer Nothing contained within this publication should be regarded as any form of recommendation to invest or divest. This publication may contain personal views, which are not the views of Ukraine Business Journal, UkraineInvest or its subsidiaries or associates unless specifically stated. The publisher does not carry any responsibility for views expressed in the publication.

Ukranian Business Journal 6

Muddy prophecy: a market for Ukraine’s farm land by Aisha Down

It’s not a stretch to say that Ukraine’s These fears aren’t unfounded, says that land ownership should still be 40 million hectares of farmland is one Leonid Kozachenko, former vice restricted to Ukrainians for at least of the world’s biggest opportunities minister of Agriculture and now a 10 years after. “The question is the in agriculture. Spreading from the member of Ukraine’s parliament. period of time,” he says. “Some of the grassy steppe of the nation’s east to He’s worried about rich foreigners. associations are proposing more than the Carpathian forests in the west, “Agriculture today, at the global level, 10 years.” Europe’s ancient breadbasket could is a very serious issue,” he says. “With feed one billion people—if used well. global warming, every year, we’re Who can buy? losing about 1.5 million hectares The question for many is: which Ukraine now sends wheat to Egypt, of land. Population is growing. The Ukrainians will be able to buy? corn to China, snails to France and deficit of foodstuffs becomes very “Most associations and specialists say ice cream to Israel. But there’s a serious.” priority should be given to the local complication standing between farmer,” says Kozachenko. the country and the investments “Second priority should be given to it needs to become a world food Businesses and a farm that’s already using the land power. That is, the moratorium on the investors need the on a leasing basis. Number three: any sale of private land. entity or person in Ukraine, no matter confidence and where they’re located.” For 16 years, this law has meant that security of being no one could buy or sell 96 percent Finding out who really is local isn’t of Ukraine’s farmland. Now, attitudes able to make long- straightforward, however. Kozachenko are changing and talk of lifting the says about 35 percent of Ukraine’s ban stirs in Kyiv. Many bet that it will term plans that farmland remains untitled. That’s happen after the 2019 elections. only come from something that has to be sorted It’s a scenario with almost no global before a market can proceed. precedent. As politicians lay plans, owning the land Kozachenko isn’t the only one to raise corporations and farmers try to that you farm and transparency concerns. figure out exactly what a market will mean—and how to make it serve produce on Larysa Bondarieva, head of the CIB their own ends. branch of Credit Agricole, in Kyiv, says that a proper land register is of Protecting Ukrainians This deficit, says Kozachenko, makes concern to the bank as it discusses The law was designed, in part, Ukraine’s earth a hot commodity. outcomes of lifting the moratorium. to avoid a repeat of post-USSR “That’s why some countries—China, Bondarieva, however, is hesitant to privatization property grabs. It was the Middle East—countries where say priority should be given entirely passed in 2001 as a temporary there’s money, but no way to increase to local farmers. Corporations, she measure. Since, it has been extended production—of course they’d come to says, are efficient and a source of five times, surviving three presidential Ukraine if they could,” he says. “They innovation. “Corporates are much administrations and two revolutions. know that Ukraine can feed no less more visible and successful,” she says. Fears of catastrophe haven’t than 800 million people.” “To exclude all corporates from such diminished. Farmers in rural areas, a possibility—it’s a question mark for already struggling to make a living, Kozachenko says discussion of this me.” are buffeted by propaganda whipping issue is heated in Parliament. While up fears. Oligarchs and foreigners it’s likely the moratorium will be lifted Others say that a free market for will buy Ukraine’s fabled black earth. in the near future (there was talk all—foreigners included—will They will go hungry after losing their of it being lifted this year), he says best guarantee transparency. ancestral fields. most agricultural associations agree Opportunity Reports The land fund Agricultural land On the territory of Ukraine amounts to constitutes of Ukraine 7

5,7% 70,8% 28%

of the territory of Ukrainian of the world’s reserve of Europe territory of chernozem (black soil) is located “Restrictions on who can own the Source: Infographic land, and how much they can own? Report «Ukrainian It would play directly into hands of Agribusiness». large Ukrainian companies now on Authors: Top Lead, the land,” says Peter Thompson, Arable Latifundist. head of the agricultural brokerage at Expert partner: Cushman and Wakefield, a real estate AEQUO. and property brokerage. 32,5 Attracting Investment Weighed against protecting Ukrainian small farmers is the question of how best to use the country’s farmland. It’s an issue of investment: Other Ukraine needs money to bring its Pasture 2,3 productivity on par with Europe and the US. Kozachenko puts that figure Hayfields Structure of at $75 billion in mid and long-term 5,4 agricultural investments. Larger players aren’t 2,4 lands of Ukraine, willing to invest in land they don’t million ha own.

“There’s incredible potential, under- valued assets and an inexpensive, highly-educated labor-force here,” says Simon Cherniavsky, CEO of Structure of Mriya Agro Holding. “But businesses owners of land and investors need the confidence under the and security of being able to make moratorium, long-term plans that only come from Land (units) million ha owning the land that you farm and produce on.” 27,7 Cherniavsky’s view is echoed across Ukraine’s agricultural landscape, mostly by larger corporate entities— Unclaimed units dairy processors, tractor dealers and 0,02 agro holdings. In a country plagued by war in the east and shaky rule For agricultural of law, investors don’t want to fund State and communal commodity production (except for units) projects without land as collateral. agricultural land 1,5 Kozachenko’s vision of lifting the moratorium does provide for Other state and Ukrainian corporations to purchase 10,5 communal lands farmland. But his priority is for 1,3 Ukraine’s small farmers to make their 8

own investments. Supporting this— million hectares—at least 4 million economy without the injection of allowing farmers to take out loans to would be available as collateral.” foreign investment. purchase land—will require cash, and Bondarieva says Credit Agricole has a lot of it. discussed similar schemes. She Many believe change will be gradual. says: “The idea is to create a special Markian Malskyy, who heads the Lviv “We need to set up a financial fund—a fund that will finance this branch of the independent law firm institution in Ukraine able to provide acquisition or partially guarantee, if Arzinger, says he receives frequent mid and long-term financing,” says commercial banks are involved.” inquiries about whether Ukraine’s Kozachenko. “I am talking about a land law will change in the next mortgage bank, as a second-level Cloudy prophecy few years. He notes that large agro financial institution, that could move Predictions of what might happen holdings have much of Ukraine’s land financing through local banks.” when the moratorium lifts remain a tied up under long leases already— His idea is to partner with one of the mix of fortune-telling, analysis, and leases that likely won’t change if the 20 largest banks in the world—he wishful thinking. Some prophesy moratorium lifts. names J.P. Morgan and CitiBank—to doom if it doesn’t lift. “If the provide credit to Ukrainian small privatization plan of 2018 is not The main problem, he adds, is that farmers. The government would offer implemented, and this year the most leases in Ukraine are negotiated double collateral—the land on lease, land market doesn’t open, then without a provision to give the and state land. in 2019 and 2020 we can expect leaseholder the right to buy the land, a crisis similar to 2009,” said if it goes on the market. Meanwhile, “If we set up such an institution, we Anatoly Drobyazko, a member of politicians like Kozachenko and can provide very good collateral— the Ukrainian Society of Financial bankers like Bondarieva make state-owned agricultural land,” this Analysts—prophesying dramatic cautious models about what land Rada member says. “We have 11 currency inflation and a collapsing market could look like.

Opportunity Reports 9

Kozachenko imagines an initial price per hectare at around $800 per hectare, with the market driving it up to $2000 to $3000 over the first few years. He says: “The maximum would be the same as Europe’s average, in 10 years.” It could be a valuable investment. He says: “If the legislation allows foreign buyers, then the price would be flying up very fast: more than $10,000 per hectare.”

(Additional reporting by James Brooke, Natalya Datskevych and Jack Laurenson)

Grain silos in southwestern Ukraine (Mriya) 10

How to Invest in a Rising Food Power By James Brooke

You have read the reports: Ukraine Next year, New York’s NCH Capital, There is some has the world’s largest reserves of Inc. plans to open its fourth Ukraine black earth farmland. Over the last farm fund to investors. Starting in discount for decade, farming has returned to all of 2005, NCH has invested $700 million Ukraine’s fallow agricultural land in Ukraine agriculture through three Ukraine – maybe – 5 million hectares. By 2020, Ukraine funds, successfully running 50 farms. 50 percent – could grow enough grain to feed 800 “A US investor can buy on the Warsaw million people. exchange,” says Alexander Paraschiy, compared to peers So, how does an investor catch head of research at Concorde Capital in Europe and a ride on the rise of Ukraine, investment bank. From Kyiv, he food power of the future? follows five agricultural stocks traded South America in Warsaw. “Investors are mostly The simplest way is through Polish funds, some British, some geopolitical issues in Ukraine. Ukraine’s publicly traded agricultural Americans.” They are very close. They are afraid of companies. Most are traded on what is going down.” the Warsaw Stock Exchange. “There is some discount for Ukraine AgroGeneration is traded on the –maybe 50% – compared to peers You can rent Black Earth –but not Alternext exchange in Paris. MHP in Europe and South America,” he own it and Avangard are traded on the said, comparing to publicly traded Like all frontier markets, Ukraine London Stock Exchange’s Alternative farm companies elsewhere. “Polish has its peculiarities. Here is the big Investment Market, or AIM. investors are usually very sensitive to one: in Ukraine, farm companies

Production Production Export of of sunflowers of sunflower oil sunflower oil Export Export of Export of of barley rapeseed corn 1 3

Source: Infographic Report «Ukrainian Agribusiness». Authors: Top Lead, Latifundist. Expert partner: AEQUO.

Opportunity Reports 11

cannot buy title to the lands they to ensure that any shift to a private Over the last century, Russians and farm. Instead, big companies land market would be gradual. Direct then Germans coveted Ukraine’s rich maintain platoons of lawyers to foreign ownership of land is expected farmland. Now, there seems to be no manage thousands of leases. to be impossible for a decade. real threat of foreign tanks grinding “This is a rental market, not a land once again across the black earth. In market,” OlehBakhmatiuk, owner of “All our companies consider free trade 2014, the Kremlin wanted 33 percent Ukrlandfarming, recently told Interfax. in agricultural land as a risk for them,” of Ukraine. But since then, Russia To work total holdings of 570,000 said Paraschiy, the analyst. “They and its separatist allies have been hectares, he said: “I have 220,000 are afraid they will have to buy a big forced to settle for three percent, a contracts and 500 people, who work portion of land – and have to pay for southeast industrial rust belt. with them every day. Rent rates have it. Some of them are doing their best recently risen on average by 2.5 times to prevent this land reform. They are Modern, world-beating companies in Ukraine.” paying tiny lease fees to landlords, In the other 97 percent of Ukraine, so land reform, in the short term, is several publicly traded agro Partly due to rising rents, partly a bit risky for them to preserve their companies merit watching. due to the bureaucratic hurdles, land banks.” In a country where the “We like Astarta, we like IMC, and we Ukrlandfarming reduced its land bank main agro-business magazine is called like Kernel,” said Paraschiy. Astarta last year by six percent. Despite the “Latifundist,” the status quo is not Holding, the nation’s largest sugar complaining, large publicly traded expected to change greatly in the next producer, has been listed on the farm companies have made their 5-10 years. Warsaw Exchange since 2006. IMC, peace with the system. They lobby a grain, oilseeds and dairy giant,

Ukraine’s agricultural export rankings

Export of corn

Production of barley Export of Production wheat of corn

4 Production Export of honey of soy 6 Production 7 of wheat 8 12

conducted its IPO on the Warsaw Larysa Bondarieva, board member Stock Exchange in 2008, Mriya was Exchange in 2011. Kernel, the world’s of Credit Agricole Bank in Ukraine, delisted in fall 2014, after a massive largest producer and exporter of agrees. “The easiest way to invest is fraud came to light. sunflower oil, exports its products to to buy shares of publicly traded big “Mriya was publicly traded on 60 countries. It has been traded on and good Ukrainian holdings working financial statements audited and the Warsaw Exchange since 2007. in agriculture,” she said, citing MHP signed by Ernst and Young,” recounts and Kernel. Based in Myronivka, 100 Michael Bertram, Ukraine director of Other Ukrainian farm companies km south of Kyiv, MHP produces well NCH. But Mriya had a second, secret traded on the Warsaw Exchange are over half of Ukraine’s industrially set of books. Agroton and Milkiland. After tripling produced poultry and is a major its land during the 2000s to 151,000 exporter. “Mirya was completely over leveraged hectares, Agrotonnow operates – 300,000 hectares and $1.5 billion 285,000 tons of storage capacity and The dream that became an investor debt – it had $500 a hectare in debt,” is the sixth largest producer in Europe nightmare says Bertram, a German with an MBA by harvested land among publicly On European stock exchanges, the from Harvard Business School. “At traded agribusinesses. Milkiland big price discount for Ukrainian farm one point, Mriya could not pay the Ukraine accounts for about half of the shares is largely because of past, debt. Then, [Western] creditors took one million tons of milk the parent hair-raising corporate governance over the company and tried to find company, Milkland NV, produces in problems. The whopper was Mriya, or where the $1.5 billion went. Poland, Russia and Ukraine. ‘Dream.’ Launched on the Frankfurt The problem in Ukraine, is you cannot

Opportunity Reports Left: grain silos are growing feature The Ukraine ag in Ukraine’s agricultural landscape. 13 Bottom: Multi-combine harvesters sector has, with only harvesting the wheat fields of Mriya. (Mriya) a couple exceptions, been a case study in corporate governance minefields for foreign investors trust audited financial statements,” Western management: Bankable? decade ago, AgroGeneration now he continued. “Mriya happened, Western company managers say farms commodity crops on 120,000 and investors said, ‘We cannot trust Western management reduces hectares in five regions of Ukraine. financial statements, and so we have Ukraine risk. “AgroGeneration no collateral.’ It became more difficult is Western-managed,” said John Bertram, the German director of to get capital for agribusiness.” Shmorhun, the American CEO. A NCH Ukraine, say investors miss An American investor with 20 years former US Navy pilot, Shmorhun ran opportunities if they spend too much of Russia-Ukraine experience, also DuPont’s agricultural investments time looking in the rear view mirror. warned of a history of poor corporate in Russia and Ukraine for 18 years. “The operating environment in governance in Ukrainian corporate Referring to the market where Ukraine was never as good as today,” farming. “The Ukraine ag sector has, AgroGeneration’s shares are listed, said Bertram, a Russian-speaker with only a couple exceptions, been he said: “AgroGeneration is publicly who has been with NCH in Ukraine a case study in corporate governance traded on Alternext in Paris. This is for 15 years. “At the same time, the minefields for foreign investors,” one of the strictest exchanges.” perception of Ukraine was never as he wrote in an email. Still invested “SigmaBleyzer has been investing bad as today.” in Avangard, a major egg producer, in Ukraine for over 25 years with he asked for anonymity. “Too many great success,” he said, referring corporate leaders have proven to to a Houston-based private equity show they are not worthy of foreign firm that is majority investor in investment.” AgroGeneration. Established a Advertorial 14

Investments into Black Earth: Trends and Opportunities

Over the last three years, Ukraine’s Although, the nation’s land bank is agricultural industry has been divided into small plots of several growing rapidly. hectares, the average Ukrainian farm cultivates 132 hectares. At least 10 In particular, 42.7 million hectares of agricultural holdings in Ukraine have agricultural land about 28% of the assembled large land banks, from world’s thick black soil, or chornozem, 100,000 to 600,000 hectares. Such and a moderate climate provide a land consolidation is possible through unique natural basis for growing either land lease or emphyteusis a wide range of crops with high agreements. yields. Combined with convenient Yulia Kyrpa, location and adequate infrastructure, Agricultural companies lease land Partner, AEQUO investments into Ukrainian agriculture plots on a long-term basis. A long- present tremendous opportunities. term lease – with statutory restriction Last year, Ukrainian agrocompanies up to 50 years — is a second-best exported almost $18 billion of food. option to bypass the ban on purchase. Asia and the European Union were Emphyteusis is an option to evade the the main importers. Corn, wheat, and moratorium. As opposed to a lease, it barley represent the largest exports. allows using agricultural land without Sunflower oil traditionally brings the any limitations to the term of the highest export income to Ukraine’s agreement. economy. For international agricultural groups, For a long time, however, the it is advisable to structure their agricultural sector of Ukraine Ukrainian business and assets based on the aim/focus of each company Mykhailo Soroka, remained unattractive to foreign Associate, AEQUO investors due to a number of — production, key assets holding, institutional barriers and lack of trade, transportation, storage. This necessary local knowledge required effectively attracts potential investors to start and develop business in the and reduces risks of losing key assets. country, the bread basket of Europe. A group presence in Ukraine is Some obstacles are still in place, required to work around a prohibition but the approach to existing barriers on foreign direct investment in has changed. Recent legislative Ukraine’s farm land market. Generally, reforms enable foreign investors to a two-tier company structure is significantly mitigate Ukraine-related required to comply with corporate risks. and land legislation. Agricultural products are distributed via separate One notorious impediment that used Ukrainian trading and distribution to scare off foreign investors was the companies, as well as international Viktor Komziuk, moratorium, or ban, on the purchase trading companies of the Group — Associate, AEQUO or sale of farm land. Most highly primarily Switzerland, Cyprus and fertile agricultural land, owned by 6.9 Hong Kong. million individuals, are out of the free market.

Opportunity Reports Advertorial 15

Also used are intermediate holdings — usually in Cyprus or UK — and ultimate holding companies. The latter are established in reputable jurisdictions to attract foreign investors or to make a public offering on leading European stock exchanges, e.g. London, Luxembourg, Netherlands. These corporate structure provide the best risk allocation options, allowing use of instruments and benefits existing in several jurisdictions and are viewed as the optimal way for fundraising in the international capital markets.

An agricultural company’s choice of financial instrument to raise funds depends on the objectives and the amount of funding needed. Companies may issue Eurobonds, conduct IPOs, or receive syndicated loans for large-scale financing. Such instruments allow for raising hundreds of millions of dollars, but they require proper preparation. They can be time-consuming and are technically complicated. For smaller scale projects, bilateral loans, export financing, and agricultural receipts normally are used.

Finally, it is worth noting that setting up a business in Ukraine – not only agricultural – has become easier and safer. The optimism is based on legislative trends started with new laws on LLCs, shareholders agreements, and new consistent and clear procedures for disputes resolution. Rise above the noise

International Public Relations Telephone: +38044 536 1508 Email: [email protected] Web: www.whites.com.ua 17

Mriya Awakes from Investor Nightmare by Jack Laurenson

Since 2014, Mriya, or ‘Dream,’ has “But the most important takeaway been a nightmarish tale told to spook lesson for me is: it’s very important foreign investors about Ukrainian to pay close attention to your agriculture. The shares of the investments. In a country like Ukraine, massive agroholding were sold on a hands-off approach will never the Frankfurt Stock Exchange. Its two work.”Cherniavsky believes his team Eurobonds were listed on the Irish is starting to turn things around. But, Stock Exchange. Ernst & Young signed with a huge pile of debt, it’s a long off on its financial statements—for way up for Mriya. five years running. Million-dollar Theft Then, in the summer of 2014, Bankers first suspected that the billion-dollar house of cards something was wrong at Mriya Agro collapsed. Creditors discovered that Holding in 2014, when numbers the controlling family, the Gutas, kept provided by the Gutas—the founding State of the art seed drills at Myria two sets of books. One Guta was family— seemed too good to be true. overheard, exclaiming partly in glee, Analysts warned that a default on the partly in amazement: “We ripped company’s $1.1 billion in foreign off the Rothschilds!” The impact of debt was coming. It did, and Mriya’s collapse was so great that brothers Andriy and Mykola Guta In a country like even today Ukraine agro executives fled Ukraine to Switzerland. Ukraine, a hands- look at depressed prices on the Warsaw Stock Exchange and bemoan In advance, they allegedly stripped off off approach will the “Mriya discount.” millions of dollars in company assets, after embezzling hundreds of millions never work Moving past disaster of dollars in foreign investment. They In early 2015, after Mriya’s collapse, left Mriya bankrupt in late 2014. control flipped to creditors. They “The sheer scale of the fraud that decided to preserve the holding— was revealed was staggering,” says which had, by then, defaulted on $1.1 Cherniavsky. “There’s evidence that billion of debt payments to American, they sold off stockpiles of equipment, British and French creditors. reassigned land leases, had been overstating construction costs and They appointed Simon Cherniavsky, using fake purchasing agreements to an American executive with now 12 siphon away money for years.” years of experience farming in Russia and Ukraine, to serve as Mriya’s The Gutas fled, but their lieutenants turnaround man. From a base in remained in Ternopil, haunting Mriya. Ternopil, the company grows wheat, As investors took over, armed men corn and sunflower spread over raided company property, stealing 250,00 hectares in central Ukraine. even more machinery—including “The lessons to be learned from helicopters—and beating company this whole story are numerous,” employees. Local police helped Mriya Cherniavsky, CEO of Mriya Agro take back control. But they seemed to Holding, says in an interview in drag their feet to protect the Gutas, Mriya’s Kyiv office. says Cherniavsky. 18

Criminal Investigation unit works on the case. He also is Mykola Guta, Mykola Guta, the former CEO, was investigating dozens of other crimes. placed on an INTERPOL wanted NABU didn’t respond to multiple the former CEO, list. Since then, investigations have requests for an interview with UBJ, stalled. To date, no one has been but said in an email that investigation was placed on prosecuted. Some imply: corruption. was ongoing. “There’s a lot of frustration with how an INTERPOL the criminal case has proceeded,” Ukraine’s government has offered says one man close to the Mriya reassurances. In September 2016, the wanted list. saga. “This is low-hanging fruit for UBJ asked Prosecutor General Yuriy investigators and the prosecutor’s Lutsenko about Mriya. He said that he Since then, office here in Kyiv.” was personally looking into it. Other Cherniavsky chooses his words officials last year assured reporters investigations more carefully: “I don’t want to that President Petro Poroshenko say that there hasn’t been any was ‘engaged’ in the case and was have stalled. To progress. Because there has been. pressing law enforcement officials to But investigators are dragging their take action. date, no one has feet and don’t seem to have enough been prosecuted resources to properly handle this One source at Mriya alleges the Guta case.” family’s close political connections in Ternopil and Kyiv have blocked The National Anti-Corruption Bureau prosecution. Cherniavsky does not of Ukraine, or NABU, heads the believe the alleged fraudsters will investigation into fraud at Mriya. be prosecuted. “I think there will be Company sources say that only one a settlement with the Gutas before investigator at the understaffed there is any conviction,” he says. Opportunity Reports 19

Left: Mriya’s fields near Ternopil, Ukraine. Below: Mriya’s grain silos and elevators onsite to store harvest. (Mriya)

Turning around the company billion debt. The goal is to cut the I think there will Mriya’s shareholders seem amount to $300 million. The rest is encouraged by the turnaround that to become equity for creditors. be a settlement Cherniavsky and his team have Soon the business will be for sale. begun. With several injections of cash Mriya values current assets at $150 with the Gutas in 2015—an initial $25 million and a million, with the potential to grow further $46 million—the nearly-broke to $350 million in the near future. before there is any company has started farming again. After years of turmoil, Mriya is back The financing was used to replace in business. But the company stands conviction stolen equipment and buy seed, as a warning signal for potential allowing the company to modernize agricultural investors to be careful operations and boost production. and vigilant. Despite losing some of its leases (Additional reporting by James Brooke) to fraud, Mriya still operates a 180,000-hectare land bank. They’ve had limited successes in reacquiring stolen hectares. Police have helped them to recover 150 units of “lost” machinery. It’s helped. “Last year, we had a good season and things are looking much better,” says Cherniavsky. “Our yields are up by as much as 30 percent, we produced about 600,000 tons in total.” Now the company is restructuring its $1.1 20

Opportunity Reports 21

Foreign Tractors Dig Ukraine by Aisha Down

From his dealership in Concordia, of AgCo’s office in Ukraine. Last Kansas, in the heart of America’s year, some 3000 imported models grain country, Harley Adams, CEO were sold in Ukraine. For some of CTI, has a bright idea. CTI has agribusinesses, there are just no been dealing John Deere tractors alternatives. “I did a calculation, and and farm machinery in Kansas one Horsch Maestro is more efficient for half a century. The company than 10 XTZ tractors,” says Kostiantyn sells and services both new and Ilchenko, PR manager of Agricom used machines: combines, tillage Group. equipment and tractors. Horsch Maestro is a high speed, But a widening divide in his US German-made seeder. XTZ, customer base has made some meanwhile, stands for Kharkiv products harder to move. His high-end customers always If you have 100,000 want the newest models. After putting a year on a piece of hectares versus equipment, he says, most sell it straight back to CTI. His less-wealthy 10,000 hectares, you customers rarely can afford to spring for a machine. If they do, they want have to make your something cheap—not a top-model John Deere with just a year on it. business effective,”

With lightly-used tractors piling Palamar says. “You up, Adams got an idea. His target? buy a bigger, more Ukraine’s farmers. “We’re trying to develop a new marketplace for high- powerful machine quality used equipment,” he says of Left: Case New Holland industrial Ukraine, the Argentina of Eastern Tractor Factory, Ukraine’s Soviet- tractors tilling soil. Above: Sunflower Europe. era manufacturer of agricultural seeds flowing through high-speed machinery. Kharkiv makes far cheaper loading systems. (Mriya) Combines Follow the Crops machines than John Deere and AgCo. Adams isn’t alone in eyeing the But Kostyrko says many Ukrainian tractor needs of Europe’s age- farmers are ready to upgrade. “They old breadbasket. The world’s travel to Europe—they try to be more major agricultural equipment and more professional,” he says. For manufacturers—CLAAS, AgCo and North American equipment suppliers, John Deere—all have offices in Kyiv. a big challenge is figuring out what With a third of the world’s black specifications of equipment will sell in soil, and grain yields increasing Ukraine. significantly over the past decade, Ukraine is a hard market to miss. Big Fields, Powerful Equipment Adams says North American Tractor demand increased after equipment sells well. Ukrainian the Euromaidan revolution, says agriholdings often have tens of Anton Kostyrko, Marketing Manager thousands of hectares, dwarfing 22

those in the rest of Europe. Palamar recalls a potential client them to the client because the area “Some Ukrainian producers say who approached him at a major had been mined.” The dealer sent him directly they’d rather use high-quality agricultural equipment conference pictures of half-exploded tractors. used North American equipment,” he last year. “He said, ‘Oh, if only you says. Ivan Palamar, Head of Market could sell me this tractor with an A bigger issue is Ukraine’s moratorium Development in Ukraine for CLAAS, operator!’” on selling private land. Farmers agrees. Ukrainian holdings have a lot who don’t own their farmland are of land. Dealers Train New Operators hard-pressed to get a loan. Banks Lack of training is an issue that that will loan against future are “If you have 100,000 hectares versus dealers try to remedy. When a client few. Equipment suppliers says 10,000 hectares, you have to make buys a new machine, AgCo offers two it hits their business. “If we had your business effective,” Palamar says. to four day workshops to the tractor sufficient financial instruments for “You buy a bigger, more powerful operator, says Kostyrko. It’s enough our products, we’d have sold more machine.” for a driver who already knows the machines,” says Palamar. Kostyrko, on the other hand, says basics of operation. Meanwhile, AgCo focuses on the company’s Palamar says that CLAAS takes some This concern reached Adams, European brands—Fendt and operators back to Germany for in north-central Kansas. “The Massey-Ferguson. Large holdings buy special winter workshops in machine overwhelming obstacle is going to big tractors, he says, but mid-sized operation. “We don’t take empty be the availability of credit,” he says. Ukrainian farmers are looking into guys for training,” he says. “We train “Everyone in Ukraine would like to more manageable machines. “We operators who have licenses to drive have credit.” But he’s not giving up. still have interest in tractors that are machines.” 300-plus horsepower machines,” he Looking ahead, he concludes: “It’s says. “But 150 to 200 horsepower The cost of not training drivers— very apparent to me that Ukrainians machines, the sector traditionally in damaged machinery and lost are about to explode with growth, occupied by Belarusian tractors, that harvests—is too high for suppliers to compared to the rest of the world.” sector is also growing.” do otherwise. Petro Melnyk, CEO of Agricom, says his security guards It’s very apparent to Needed: Training to Maintain make sure only the trained driver Computerized Tractors operates his tractors. “It’s like for an me that Ukrainians A big question for agroholdings is aircraft,” he says. servicing an imported tractor. Tractors are about to explode have gotten more complicated, more Needed: Tractor Loans computerized. Kostyrko admits that Sales figures are improving. But with growth, newer machines can intimidate. agricultural equipment remains an “Have you been inside the newest uneasy market. War and corruption can compared to the rest model of tractor?” he asks. “The make long-term investments chancy. latest Lexus and Mercedes cars are “We had a dealer who sold two of the world simpler. There are many buttons. harvesters, two to three years ago,” There are many screens.” says Palamar. “He couldn’t deliver Opportunity Reports 23 24

A smartphone app calculates the area Artem Belenkov, the founder of of growing leaves. A sensor monitors Smart Farming, a Kyiv-based agritech Space-Age grapes ripening on the vine. Drones company. Several buyers were fly over fields of grain, determining burned. Drones optimal fertilizer distribution. “Three to four years ago, people were From a Kyiv’s-eye view, there are few just selling good ideas,” he recalls. Meet Post- Ukrainian industries more promising “You sold the idea of a better life to than smart farming. Just take the owner of a company—he’d at Soviet agriculture, the nation’s largest sector, least try it. Now, if you’re trying to sell and combine it with IT, its third-largest something, you’re trying to sell it to Farmers: sector, and you can’t make a surer someone who’s already tried it, and bet. Ukrainian agritech has been 90 percent of the time it didn’t work.” elbowing its way onto the world stage Many people who’ve spent time Agritech in over the past few years—sending farming in Ukraine have favorite startups like Agrieye to prestigious examples of cloud-castle purchases. Ukraine European accelerators. Bohdan Kupych, director of by Aisha Down Borsch Ventures, describes a large But, outside of Kyiv, progress isn’t agribusiness with a “NASA-style so straightforward. Ukrainian small control center. I don’t know that it farmers, often over 50 years old, did them much good,” he says with a are suspicious of innovation—at laugh. least, according to smartphone- toting startup owners. And as Yuriy Petruk, CEO of AgTech Ukraine, agribusinesses develop impressive describes an agriholding that bought IT departments and buy fleets of “a fleet of drone planes,” but didn’t drones, integrating new technology have a way to properly analyze the into their sprawling businesses is not resulting data, gigabytes of pictures. easy. That set them back $200,000.

Cloud-Castle Purchases Belenkov says the waste is significant. Agritech solutions are harder to “For most companies—80 percent sell now than three years ago, says of all the money invested in new Opportunity Reports 25

technologies, in agriculture in Ukraine problems—an app to calculate the More and more is completely lost, or at least is not area of a leaf, for example, says effective as it could be, or changes Kupych. They don’t offer a framework data is being nothing,” he summarizes from that integrates them in the larger experience. process of operating the farm. collected—but data But, though money has been lost, the “More and more data is being is not being used problem is not with the technology collected—but data is not being itself. Ukrainian tech companies often used very well,” says Kupych. Or, as very well are at the cutting edge of innovation, Belenkov put it, you can buy a drone producing ideas, apps, and equipment to take hundreds of thousands of that attract attention and investors pictures of your field. But, without from Norway to San Francisco. good image-processing software, Instead, say Belenkov and Kupych, the these pictures will remain pictures— problems come when farmers try to an inefficient, unusable source of data put flashy technologies to use. about your ripening wheat.

Too Much Data, Too Little Expertise Integrating Innovation One facet of the issue is the farmers It’s a problem that’s getting notice. themselves. They operate differently At a recent conference, AgriEye than today’s IT professionals. “There’s CEO Victor Lazorenko described the a post-Soviet era business culture,” problem of developing systems to says Smart Farming’s Belenkov. “IT integrate and use agricultural data people are young, agriculture—50-60 as “a whole field for innovations.” years old. They’ve got poor human Unlike finance or telecom, agriculture resources, poor management styles, now lacks such systems, as well as an poor management skills.” integrated software platform in which innovations can be used, Kupych says. But even large agribusinesses well “Agritech lags other industries by 10 supplied with IT professionals struggle to 15 years,” he adds. “There’s a lot of to effectively use new technology. progressive technologies there, but The problem is that most agritech still no holistic approach.” innovations are solutions to specific 26

Newcomers to the market-they’re like a blind kitten

Ukrainian villagers, he affirms, don’t The Future of (Smart) Farming flock to buy soil sensors displayed To those in the business today, in the town square. Communication agritech is the future of farming. skills, and connections, are key. “If But it’s a subtler question than you try to sell ‘innovations’—they whether to buy a fleet of drones. won’t know what you’re talking Belenkov’s consultancy works with about,” he says. “Newcomers to the large agriholdings. Instead of offering market—they’re like a blind kitten.” drones or smartphone apps, his company helps clients integrate new Olga Afanasyeva, executive director of technologies with their operations. Ukraine Venture Capital Association, Petruk, of AgTech, says the farmer is largely agrees. “There are a lot of best situated to decide how best to students, engineers, who are doing apply agritech. things,” she says. “But they don’t see business. They think they will make “The average farmer in Ukraine has something great and the customers 300 hectares,” he says. “For him, will come.” it’s ok to have GPS steering (on his tractor), but he doesn’t need precision farming. It wouldn’t pay back.” Petruk lists useful innovations to help smaller farmers: aids to decision-making, like field journals and software that tracks cash flow, and weather stations for fruit and vegetable growers to monitor pest threats.

Kupych agrees, concluding: “There’s a huge range of technologies—sensors, robotics. It’s cool, but that doesn’t mean it’s for everyone.”

Opportunity Reports

28

Rebuilding Ukraine’s Mississippi by Aisha Down and Natalya Datskevych

From company headquarters overlooking the Southern Bug River, 65 km from the Black Sea, Oleksii Vadaturskyy, general director of the logistics company Nibulon, is hatching plans.

To his north are the plains and lowlands surrounding the Dniproriver, the fourth-longest in Europe. Ukraine’s breadbasket lies here, stretching to the northeast. These fertile plains make Ukraine a growing world food power. The nation’s grain production could swell to 100 million tons by 2022.

To his south is the Black Sea, the gates to the hungry markets of North Africa, the Mideast and Asia—the main destinations for Ukraine’s grain. But, between land and sea, there’s a river takes about a third of the fuel as problem: logistics. Grain production moving the same distance overland. Mykolaiv Terminal might be improving, but Ukraine’s 100 km capacity to move truckloads and The USSR was well aware of this. trainloads to the Black Sea ports is In Soviet times, a cascade of ship near its limit, agribusiness executives locks made the Dnipro a busy warn. artery for cargo. The river once carried 20 percent of the country’s Roads can be potholed, narrow and grain downriver to sea, says Victor Dovhan, Ukraine’s Deputy Minister of unsuited for constant flows of heavy Gola Prystan Terminal trucks. There’s a shortage of rail Infrastructure. cars, exacerbated by a lack of grain silos and seaport elevators. Grain Most locks were built in the 1950s wagons sit on rail tracks near port and 60s, when Ukraine was the elevators for days. To Vadaturskyy, breadbasket of the Soviet Union. to the Infrastructure Ministry, and to There are six on the Dnipro, the planners from Holland, a great canal nation’s main river. Dovhan says the country, there’s a solution: the rivers. trouble is that the locks have barely been renovated in half a century. Soviet Legacy Without the repairs, he says, a barge The potential of Ukraine’s rivers is not carrying grain south is playing a game just a question of bad roads and few of Ukrainian roulette. rail cars. “They’re usable now,” he says. “But One barge can carry as much grain as the shape of them is very bad. We can 200 trucks. Moving a ton of grain by expect accidents anytime.”

Opportunity Reports 29

Ternovka Terminal It’s not just a question of danger, but of convenience. It can take hours for a unit of grain barges to pass one of the locks. Even Ukraine’s pitted highways might be better. As a result, the river is ignored as a transportation artery. Bilenke Terminal Today, says Dovhan, the Dnipro river carries only 3 percent of Ukraine’s Mykolaiv Terminal grain exports—45 million tons in the 2016-2017 market year. Rivers carry about 5 percent of Ukraine’s total grain exports, according to data from the Ukraine Grain Association. In Europe, the number is closer to 50 Kozatske Terminal percent.

Investment and Construction Gola Prystan Terminal Repairing the Dnipro river locks would cost about 25 million euros, Dovhan estimates. The number approximates Henichesk Terminal from the results of a 2016 study by the US Army Corps of Engineers. The list of necessary repairs is formidable. It includes million-dollar operations to dredge a reservoir, replace downstream gates, and overhaul old machinery.

Thankfully, Ukraine has found potential partners. In 2017, the European Commission gave EUR 5 million for lock repairs. This year, Ukraine will sign a loan for an 30

They’re usable additional EUR 50 million from the The Dutch government has given European Investment Bank, dedicated technical aid for the Dnipro’s now,” he says. “But to developing the Dnipro waterway. development through the Dnipro Of the money, EUR 20 million will Development Initiative—a joint the shape of them go to the locks. The rest will be for project with the Ministry, the EBRD, dredging the river and repairing port and the EIB. is very bad. We can infrastructure. Partly at sea level, Holland deals expect accidents Then there’s been investment in with water with dikes and canals. private-sector initiatives to improve It has many experienced civil anytime river logistics. The European Bank of engineers. The EBRD loans represent Reconstruction and Development, or a prime opportunity for any foreign EBRD, has loaned over $100 million to infrastructure contractor, he says. Nibulon over the past several years, Recognizing Dutch expertise, he adds: the most recent $50 million loan to “Dutch companies will get priorities.” increase its cargo transport on inland waterways by millions of tons a year. Paying the Toll Loans are encouraging, but repaying Meanwhile, the International Finance them another question. Dovhan says Corporation and the European that barges that use the river locks Investment Bank have together should pay a fee—up to $500. It’s a loaned Nibulon nearly $200 million. fraction of the fee ships pay to use Nibulon isn’t involved in lock repair Ukraine’s seaports. His Ministry is and renovation, says Vadaturskyy. lobbying for the Rada to pass a draft That’s the job of the state. Instead, law to impose this user fee. Nibulon has built four transshipment terminals, an elevator complex, and Nibulon’s Vadaturskyy argues that eight barges—vital infrastructure to a user fee will kill commerce. The get grain to sea. law is “the main threat to the full development of both cargo and Other partners offer expertise. The US passenger transportation along the Army Corps of Engineers authored a Dnipro River,” he says. He asserts it 175-page study on the locks. will decrease the competitiveness Opportunity Reports 31

of Ukrainian exports. Now Nibulon Petro Melnyk, CEO of Agricom It’s not about taking uses the river for free. Dovhan says Group, says that the Dnipro is 800 there are no other options. “We need km from most of his land. Logistics away [grain] from to still maintain the locks, get them are a headache, but new river locks repaired,” he says. “We’re ready won’t solve his problem. “It’s an rail and trucks. It’s for compromise. But there must be interesting question,” he says of the money.” proposal to renovate river transport. just about adding Mykola Gorbachov, head of the Ukraine’s Mississippi? Ukrainian Grain Association, says he a new possibility. I There’s no agreement on how much expects 10 percent of Ukraine’s grain grain could be moved down the to go down the Dnipro in 2022—at don’t think we’ll cut Dnipro to the Black Sea. Nibulon most. Trains are here to stay. aims high. In the 2016-2017 market down rail traffic to year, Nibulon moved about 2.1 At the Infrastructure Ministry, Dovhan million tons of grain down the sets his sights higher. “We hope that 10 percent Dnipro and Southern Buh rivers, says there’ll be 20 to 30 million tons of Vadaturskyy. Short term, without lock grain going down the river,” says renovation, Nibulon’s goal is to move Dovhan who has studied the river 4 million tons of grain down Ukraine’s system that drains harvests from the waterways, he says. Long term? American Midwest. “It’s not about taking away [grain] from rail and “One hundred million tons of cargo trucks,” he says, forecasting a steady can potentially be transported growth in Ukraine’s harvests. “It’s just annually along the Dnipro river,” about adding a new possibility. I don’t Vadaturskyy, citing a figure equal think we’ll cut down rail traffic to 10 to double Ukraine’s forecast grain percent.” exports of 2020. Many experts don’t share his optimism. While it’s a low- But a renovated lock system is carbon, efficient alternative to trucks essential as Ukraine becomes a world and train wagons, many farms are too food power in the 2020s. Referring far from the Dnipro and its tributaries back to the US, he says: “The Dnipro to find river transport economical. could be our Mississippi. It once was.” 32

Opportunity Reports 33

Investors Needed: Shift Ag from Volume to Value By James Brooke

When it comes to volumes of food growth will come from higher In Asian and exports, Ukraine plays with the big productivity and investments in kids: world’s fourth-largest exporter food processing. In particular, says African countries— of corn and world’s sixth-largest Trofimsteva, who comes from a exporter of wheat. But when it farming background in Sumy, foreign the fast-growing comes dollar value of food exports, investors can help Ukraine add value Ukraine tumbles down the ladder in: organic food; meat processing; middle class wants to 24th place—between Russia and wheat flour, beef, semi-processed Turkey. meat products; and processing of more dairy, more fruits and berries into jams, juices, Helping Ukraine climb up the and purees for infants. meat products, the value ladder, from grain power to food power, is the challenge that “Ukraine exports to EU are still EU and the US will preoccupies Olha Trofimtseva, Deputy Agricultural Policy and We need to change want vegetarian and Food Minister of Ukraine for European integration. the model of our organic products. Food Processing Adds Value economy—from the its market to Ukrainian produce, Although the country saw a healthy Ukraine’s farm sector is adapting to 37-percent jump in its food sales to raw material type world food ‘mega trends.’ the EU in 2017, Trofimtseva is not satisfied. “We want to attract more to the creation of “In the regions with growing European companies to Ukraine to populations—Asian countries and create joint ventures for production added value within African countries—the fast-growing and processing,” Trofimtseva said, middle class wants more dairy, more the country meat products,” she said of one We want to attract trend. “In the other direction, the EU dominated by raw commodities, and the US will want vegetarian and more European with the exception of sunflower organic production.” Milk cows and oil,” she said in an interview in the beef cattle represent a step up the companies to Agriculture Ministry. Support for value chain— products more valuable food processing comes from the top. than the raw inputs, grain and hay. Ukraine to create Prime Minister Volodymyr Groysman recently lectured his Cabinet about Upgrade Farm Workers joint ventures for agriculture: “We need to change the Food processing isn’t just about model of our economy—from the raw adding value—it also means adjusting production and material type to the creation of added to the needs of the workforce. value within the country.” Ukraine’s vast rural expanses are processing emptier than usual. In addition to Global Mega Trends Touch Ukraine’s urbanization, there is a flow of farm painting a path to add value to Fields workers to Poland, where they can Ukraine’s agriculture in the 2020s. While some foreigners see Ukraine’s earn three to four times their wages rural landscapes as timeless, in Ukraine. With almost all of Ukraine’s arable Trofimtseva sees large, hidden forces land under cultivation and its at work. Just as agricultural exports “When you talk to the larger ag population stable, she says export turned on a dime after Russia closed companies in Ukraine, you hear the 34

Left: Olha Trofimtseva, Deputy Agricultural Policy and Food Minister of Ukraine for European Integration. (supplied)

Modern Ukraine trying out a German agricultural It will be possible education system, alternating is shifting to the classroom days with apprenticeship that, in 15 years, days. The goal? Students will have Western model “not just theoretical, but a strong Ukraine will be practical basis.” of better-trained, among the world’s top A Private Land Market? Not Soon better-paid farm Another megatrend that is hard to five ag exporters quantify is the feeling that Ukraine’s workers working climate is getting warmer and dryer. Instead, she says, “we will use 2018 This may necessitate shifting crops for technical issues— preparing with more and irrigating southeastern regions, the land cadaster, preparing rules notably Mykolaiv, Kherson and connected to cadaster, conducting the sophisticated Zaporizhia. proper social discussion.” Trofimtseva says farmers’ views toward a land machinery While foreign investors can put market are evolving. But she was money into food-processing factories, same complaint: it is very hard to surprised on a recent visit to Sumy land is another story. One of the National Agrarian University. find qualified middle level workers,” thorniest issues in Ukraine: the still- Trofimtseva recounts. “This problem existing moratorium on the sale of the will get bigger.” This is another “A lot of hands were raised against argument in favor of adding value We will use 2018 land reform,” she said, referring to by processing commodities inside student opposition to creating a free Ukraine. Processors earn. market for farmland in Ukraine. “They for technical could not explain their reasons. They The Ukraine operation of Lactalis, the issues— preparing just got their reasons from populist French multinational dairy products deputies on TV.” While Ukraine’s corporation, gives one example. It the land cadaster, path toward a modern, Western-style produces more milk—with one third agricultural economy may look like a of the workforce of a decade ago. preparing rules zigzag, Trofimtseva is confident that And that workforce is better paid. the overall trend line is upward. In the Soviet days, the government connected to assigned people to jobs and restricted Looking forward, to the 2030s, she their movement. Modern Ukraine cadaster, conducting said: “If we keep on track with ag is shifting to the Western model tech, developing efficient agricultural of better-trained, better-paid the proper social production with proper financing, farm workers working with more it will be possible that, in 15 years, sophisticated machinery. discussion Ukraine will be among the world’s top five ag exporters.” Foreseeing a “We don’t need 18 agricultural country’s private farmland. There’s steady shift toward value, she was universities in Ukraine, we need little incentive for investors to fund talking in terms of dollars. agricultural colleges producing irrigation if they can’t own their land. veterinarians, agro technicians, With presidential and parliamentary agronomists,” said Trofimtseva, elections in 2019, Trofimtseva does referring to the legacy of the Soviet not see the moratorium on the land educational system. Ukraine is market ending soon.

Opportunity Reports 35

State Railroad Invests to Get Grain to Ports by James Brooke

Between Ukraine’s state-of-the- For many farmers, there aren’t sidelined for repairs. He immediately art privately owned grain silos and alternatives. Trucking is only launched an emergency repair Ukraine’s state-of-the-art privately economical if a farm is less than program. owned grain terminals, stands 200 km from a Black Sea port. River Ukrainian Railways. It is not state-of- transportation only works if a farm Then in February, he signed a the-art. It is state-owned. Once the is less than 100 km from a river $1 billion deal with General Electric pride of Brezhnev’s Soviet Union, Transportation to replace or repair Ukraine’s railroad is now the bane Ukraine’s entire diesel locomotive of private farmers. Hostage to the fleet over the next decade. Diesel creaking rail monopoly, they struggle traction is key to moving Ukraine’s to meet export contract deadlines, grain. About half of Ukraine’s always one step ahead of Mother 22,000 kilometers of track is Nature. electrified. But many of its farms are on the lesser used other half, “Corn is a critical crop—you have to necessitating diesel-powered dry it immediately in 24 hours,” says locomotives. Michael Bertram, Ukraine director of NCH Capital Inc., a New York-based For the 2018 peak harvest season, venture capital firm that invests in 50 Kravtsov is negotiating to temporarily farms in Ukraine. “If your elevator is import idle locomotives from the full because the train did not come to Baltic nations, about 1,000 km to the take your earlier crop, you have real port. This monopoly situation can north. They have extra locomotives problems.” Farmers and railroaders empower lower-level rail managers due to dwindling trade with Russia. are at odds the world over. to pinch the hose and create artificial Ukraine’s Cabinet of Ministers is on shortages. “They have a big problem his side. In February, they approved Shortages and bottlenecks with asset utilization. There is no a $1 billion capital spending program In Ukraine, state control means incentive,” Bertram says, choosing for the railroad, the biggest in a a bottleneck. Ukrzaliznytsia, or his words diplomatically. “Some decade. The plan calls not only for If your elevator is people have an interest in a deficit.” In February, they Yevgen Kravtsov, acting CEO of full because the Ukrainian Railways, recognizes the approved a $1 billion problem. As head of Ukraine’s largest train did not come employer, he oversees 400,000 capital spending workers. “In a number of regions, to take your earlier local management—not only in the program for the railways—people on lower levels crop, you have real make problems to resolve them with railroad, the biggest problems bribes,” he said in an interview. in a decade Replacing and Repairing new locomotives, but 9,000 new Ukrainian Railways, carries 82 percent Kravtsov, who worked for seven years freight cars. Meanwhile, 10,000 cars of Ukraine’s cargo. It’s a heavy load. in Kyiv with the law firm Asters, was will be renovated, and 10,000 sold for In terms of cargo volumes, Ukraine’s brought in last summer as part of scrap. New hopper wagons, key to railroad ranks fourth in Eurasia—after the solution. He entered 2017’s peak moving grain, are only to be acquired the railways of China, Russia and harvest season with 20 percent of next year. About one third of the new India. the railroad’s 300 diesel locomotives 36

cars will be financed by loans from “We have 300 grain cars, but we We know the European Bank for Reconstruction need 800 total for the November- and Development. December peak period,” said forecasts of the Bertram, of NCH. “We told the Ambitious budget, little trust railroad we will buy locomotives. We agricultural sector At the same time, the railway buy, and you operate them. They say operator may try to raise as much that is not allowed by Ukrainian law.” reaching 100 as $1 billion on international debt markets this year to refinance its Changing Grain Map million tons of dollar-denominated debt and replace In another challenge to the railroad, rolling stock and train equipment, the nation’s grain map is changing. grain to be produced Kravtsov tells Bloomberg. Some Production is falling in the arid regions are worried about the new budget near the Black Sea and expanding in by 2022 being put to good use. “We remain the west, growing in such regions as skeptical about the company’s ability Lutsk and Ternopil. “Some regions to meet its CapEx plan for the year,” that were not historically producing writes Alexander Paraschiy, head grain have significantly increased grain of research for Concorde Capital production,” Kravtsov says. “We do investment bank. not have efficient rail infrastructure to meet the requirements.” He remarks that the company has never spent this much, and its less- ambitious plan for 2017 was only partially fulfilled. Kyiv traders and executives complain that there’s not always transparency behind Ukrzaliznytsia’s budget allocations and charges. In the countryside, farmers are happy to hear that investment is finally flowing to the cash-starved company.

But they are not about to lay off their in-house welding teams that repair Ukrainian Railways grain cars that roll up to their elevators. The market Looking ahead, this railroad executive Looking at his present rolling stock of isn’t trustful. Almost weekly, there is realizes he is in a race against time. grain wagons, he predicts: “We will news of an agribusiness or industrial Productivity increases in Ukraine’s have a demand over the next four company buying their own cars farming country means the national years for 6,000 more grain hoppers— for use on state tracks. Metinvest, grain harvest could increase by or more.” Ukraine’s largest steelmaker, is 50 percent in five years. With no buying 1,800 rail cars. Industrial and population growth expected, this Construction Group will buy 360 excess will have to be moved to the wagons to move gravel from their Black Sea ports for export. “We know quarries. And, of the national fleet of the forecasts of the agricultural sector 18,000 grain wagons, only about two- reaching 100 million tons of grain to thirds are owned by the state railroad. be produced by 2022,” says Kravtsov. Opportunity Reports 37 1. Ukraine’s grain belt moving north as the effects of global warming bite

2. Ukraines extensive rail network currently being modernised and electrified

3. Ukraine’s dated road network now being upgraded to European standards

4. Ukraines arterial river network being upgraded to ease the road and rail congestion 38

Ukraine’s farmer has a friend in China. project, the Belt and Road initiative, a To guarantee future food supplies myriad of land and sea links between China Invests for its hungry population, China is China, Europe, South Asia, and the investing billions of dollars to upgrade Middle East. For Ukrainian farmers, Billions to Ukraine’s ports and highways. This efficient Black Sea ports and highways transportation infrastructure has been translate into lower shipping costs and starved of investment since the collapse more competitive products on world Modernize of the Soviet Union. 2019 is officially food markets. Ukraine’s ‘Year of China.’ But projects Ukraine’s underway this year will have an impact Improve Highways for decades. From a food trader’s point of view, transportation transformation starts Ports and China’s long game inland, near the farm gate. Individual China sees transportation infrastructure Chinese state-controlled company Highways in Ukraine as a two-way street. On highway contracts paint a larger picture the import side, it wants ironclad of China’s vision: commitment to by James Brooke guarantees that it will be able import cutting highway bottlenecks. Starting the food necessary to feed their this spring, Chinese companies will population of 1.4 billion in 2030. begin building multi-lane bypasses On the export side, it wants to use around Zhytomyr, Poltava, and, Ukraine, with its free-trade pact with eventually, Kyiv. Total road work is the EU, as a transportation route for valued at $340 million. The new Cofco sea port facilities in Chinese goods to Europe’s $17 trillion Yuzhny loading ever larger Panamax economy. To drain grain from Poltava, China Road ship (Nibulon) and Bridge Company is to build a new Chinese goods passing through Ukraine $330 million bridge over the Dnipro are still subject to existing EU quotas at Kremenchuk. The four-lane bridge and tariffs. However, Ukraine’s free outside of the city will be an alternative trade agreement with EU makes for to the frequently clogged two-lane faster processing and information bridge through its center, allowing exchange. The EU is China’s top export trucks to cross the Dnipro without market, larger than the US. delays. Both initiatives are related to China’s Near the Black Sea coast, China Road flagship 21st-century infrastructure and Bridge is building a ‘betonka.’ Opportunity Reports 39

This all-cement, 135 km four-lane ships. These large cargo ships have On the import side highway will connect the ports of Odesa deadweight tonnage of 120,000 tons. and Mykolaiv. It is made to take the By the end of next year, China Harbor China, it wants pounding of trucks loaded with 24 tons is to dredge another approach channel of grain. In 2020, this $160 million and three berths at Yuzhny to Panamax ironclad guarantees highway may be extended 70 km depths. east to Kherson port. Victor Dovhan, that it will be able Ukraine’s Deputy Infrastructure The dredging is part of a $150 million, Minister on European Integration, Cargill-led project to build a 5 million import the food would like to see it stretch the length ton grain terminal at Yuzhny. This of Ukraine’s sea coast, connecting all project alone will increase Ukraine’s necessary to feed ports from Mariupol in the east to grain export capacity by 15 percent, Chornomorsk in the west. or about 6 million tons per year. “The successful implementation of their population of Highways aren’t China’s only onshore this project will not only boost the 1.4 billion in 2030. focus. The railroad is the nation’s capacity of the Yuzhny seaport, but logistics bottleneck. State-owned also support the development of On the export Ukrainian Railways is so short of Ukraine’s agriculture,” Du Wei, China’s locomotives that it may rent some Ambassador to Ukraine, said at a recent side, it wants to from the Baltics this fall. Here, China event marking the completion of the might help. “Chinese are investing in $40 million first phase of dredging. use Ukraine, with electric locomotives,” Dovhan said in an West of Odesa, China Harbor now interview. “We asked them to send a is bidding to dredge the port of its free-trade pact testing locomotive from Belarus.” Chornomorsk. Later this year, the company is expected to bid on a with the EU, as a Yuzhny Port can now handle Panamax separate Chornomorsk tender. This will Cargo Ships be to build an estimated $50 million transportation route At Ukraine’s busiest port—Yuzhny, ferry rail truck terminal at the Black just east of Odesa, China Harbor Sea port that has ferry lines to Bulgaria, for Chinese goods Engineering Company has been hard Georgia, Romania and Turkey. This at work. The world’s second-largest terminal would make viable a non- to Europe’s $17 dredging company has dredged the Russian thread to China’s east-west Belt port’s access channel to the 16-meter and Road Initiative—a China-Central trillion economy depths needed to handle New Panamax Asia-Azerbaijan-Georgia-Ukraine route. 40

In a third dredging project, China delegation representing Ukraine at a announcement ceremony in Kyiv. As Harbor is looking at dredging the Bug- Belt and Road conference. “They want trade ties are negotiated, China is Lyman-Dnipro channel. This 80-km to enter Ukraine, a market that has investing to speed Ukraine’s farm channel guarantees Black Sea shipping great potential.” products to market, by road, sea and access to Mykolaiv and Kherson ports. eventually rail. Some of this potential is to use Ukraine Freight trains from Central China as a transit nation for Chinese goods through Ukraine into Europe. When the Ukrainian Back on land, Beijing’s 21st-century Danube Shipping Company comes infrastructure push to connect with up for privatization, a Chinese Chinese activity in Europe and Central Asia means that bid is expected. Control of this Ukraine can once again play its age-old company would send Chinese goods on Ukraine appears not role as gate to Europe. In early 2018, ‘Ukrainian’ barges from the Black Sea China started running freight trains into southern Germany. to antagonize Russia. central China to Europe, via Central Asia, Russia and Ukraine. Since China Farmers Will Balance Trade with China China wants to profit does not want the freight trains to At present, China-Ukraine trade is return empty, China has quietly won heavily weighted in China’s favor. Last economically, but an exemption from Russia’s restrictions year, it grew by 18 percent to $7.8 on transit of Ukrainian goods through billion. But Chinese exports to Ukraine also to strengthen Russia to Central Asia. accounted for about two thirds of this total. Agricultural exports are the key its political position Indeed, China may be following the to righting the trade balance. Ukraine strategy it has followed over the last is the largest supplier of corn to China, in Eastern Europe, decade in Central Asia. There, working and it is winning approval to supply in Moscow’s traditional sphere of more and more the country’s food which in turn will be influence, China has built billions imports. Last year, China approved the of dollars of east-west highways, import from Ukraine of about 100 new used in its relations railways, gas lines and pipelines—all agricultural items. without getting drawn into a fight with Russia, EU and with its ‘strategic partner,’ Russia. “There is greater access to the Chinese “Chinese activity in Ukraine appears market for Ukrainian food exports— US not to antagonize Russia,” Marcin corn, milk and milk products, frozen Przychodniak, writes in a recent essay beef, sunflower oil, sunflower cake, for the Polish Institute of International dried beet pulp,” says Serhiy Koshovyi, Affairs. “China wants to profit chairman of the board of Ukrainian economically, but also to strengthen Association of Sinologists. “Also under its political position in Eastern Europe, consideration are obtaining certificates which in turn will be used in its relations for perspective Ukrainian products, with Russia, EU and US” such as chicken meat, confectionary, juices, liquors and fresh fruits.” Dovhan, of the Infrastructure Ministry, says Chinese companies are motivated “We have… an extremely large by contracts, often financed by low potential for expanding the range interest Chinese state loans. “The of products traded between our rationale is to make money—not about countries,” Olha Trofimetseva, politics,” asserts Dovhan, who traveled Ukraine’s deputy agricultural minister, to Beijing in May 2017 with a high-level said February at the Import Expo

Opportunity Reports 41 GET CONNECTED WITH THE ODESSA REVIEW! 43

Ukraine Becomes Poultry Power by Jack Laurenson and Natalya Datskevych

As global demand for chicken meat produced over 570,000 tons of their policies of re-investment are rises, Ukraine’s poultry export chicken in 2017, with 220,000 tons vital to success. industry has taken flight. Over the being sent for export,” MHP chairman past three years, the country has Yuriy Melnyk said in an interview. Executives push the company to become a global leader in exporting use revenues to modernize and chicken meat. In Europe, Ukraine has Analysts valued MHP’s 2017 exports expand production bases. Ovostar’s risen to fourth place as a net exporter at near $300 million. Melnyk says reconstructed poultry farm outside of poultry products. Worldwide, that with the construction of new of Kyiv has large new chicken Ukraine is close behind the US, Brazil factories, the holding plans to nearly houses and feed mills, as well as and Thailand as a major international double their current production modernized egg processing facilities exporter of chicken meat. capacity—to 900,000 tons annually that allowed the company to meet by 2023. strict EU standards. MHP say they’ve But the biggest leap is yet to come. spent years diversifying within the By the early 2020s, the Food and agricultural sector. On their 370,000 Agriculture Organization of the United hectares of land they also produce Nations (FAO) expects that Ukraine’s grain, soy and sunflower products, chicken meat exports will surpass which feed their birds and provide Thailand’s—now over 770,000 tons. additional exports. That’s about three times Ukraine’s current exports, which in 2016 Analysts have a more sober surpassed 215,000 tons, according to evaluation of these giants’ success. USDA data. Andriy Perederey, of Concorde Capital—a leading investment bank Big Chicken in Kyiv—says it mostly comes from a Agricultural economist Andriy rise in global chicken prices.“In both Yarmak attributes the sharp rise local currency and USD, that’s the to efficient producers. “Ukraine’s key driver of their improved bottom growth in poultry exports has been line in 2017. We can expect that MHP very consistent over the past ten Income and Investment will continue to have an edge in its years,” he says. “We can thank a very Strong chicken prices worldwide poultry segment, but their farming high level of efficiency from leading have attracted both steady foreign segment shows weaker results.” producers here. They have integrated investment and state subsidies to production across the board. Their Ukraine’s poultry industry. Incomes production costs are lower than have grown faster than even Quality exports and high revenues anywhere else in the world.” production. According to the State A significant destination for Ukrainian Fiscal Service, a record 212,000 chicken meat is the Middle East. Ukraine’s most successful producers tons of chicken meat were exported Strict Halal certification standards in have scale on their side. Data from through September 2017, almost 20 Ukraine allow the country to make the Poultry Union of Ukraine says percent more than during the same inroads into Middle Eastern and the top 20 producers take 95 percent period in 2016. North African markets. About 40 of Ukraine’s poultry market. The percent of Ukrainian chicken goes to holding Myronivsky Hliboproduct, or The income increase was greater. this region, with Iraq standing out as a MHP, controls an 80 percent market Exports in that period were valued particularly hungry customer. share, both domestic and export. It’s at $295 million, 38 percent more clawed its way up from 61 percent of than 2016. Companies like MHP Exports to the EU—especially the the market in 2015. “Our company and Ovostar Union, one of Ukraine’s Netherlands and Germany—also are largest producers of chicken eggs, say 44

steadily increasing. They’re expected leasing land, and the headaches to take a bigger portion as new export associated with extending lease licenses come into effect this year. agreements, it’s very expensive to Ukrainian farmers assert the quality expand the areas in which we farm,” of their meat and eggs has helped said Kosyuk in an interview. them break into a fiercely competitive Instead, for 2018, MHP have set their global marketplace. eyes on buying new properties and land in Poland and elsewhere. “In September last year, we received the official license to begin exporting our chicken eggs to the The top 20 European Union, and they have been graded «A» class by inspectors,” producers take 95 said Alla Goloborodko, brand manager, at Ovostar. In Ukraine, percent of Ukraine’s domestically produced eggs and chicken meat enjoy a good reputation poultry market for quality and taste. Chicken Kyiv— tender breast prepared with garlic butter and breadcrumbs—is one of the country’s most famous dishes.

Right: Yuriy Melnyk, Chairman of MHP Challenges ahead agroholding and chicken producer While strong prices make for a (MHP). positive picture for poultry and egg Below: MHP’s chicken hothouses. exports, the sector is vulnerable. Bad weather conditions last year depressed grain harvests, which affected poultry and egg farmers. Company executives cite Ukraine’s ban on farmland sales as an obstacle to growth.

MHP is unlikely to expand farming and production operations while the ban on selling farmland remains in place, says Yuriy Kosyuk, the company’s CEO . “Given the present level of grain prices, the cost of Opportunity Reports 45 46

Opportunity Reports 47

Farming in Ukraine: More Co-ops Ahead? by Jack Laurenson

An economic backbone of rural Rada Sits on Co-op Draft Law Foreign experts are divided on why America, farming cooperatives would Proposed legislation would establish Ukrainian lawmakers hesitate to boost rural incomes, quality of life and agriculture cooperatives as legally approve laws that would enable co- family farms in Ukraine, say experts defined entities. It would allow co- ops. Some suspect that the legislation here. By harnessing from strength ops to produce, process and trade is too western for some “Soviet- in numbers, ‘ag co-ops’ already have goods on their own. “It took us four minded” public servants. Others boosted revenues for Ukrainian years, but in 2017 we submitted a suggest that Ukrainian politicians fear farmers who have tried them, very modern cooperative legislation cooperatives could use loopholes to including rural milk producers and proposal, supported by the avoid tax. As it stands now, co-ops pay fruit growers near Kyiv. But as small Agriculture Ministry, to parliament more in tax than large holdings. “The farmers come around to the idea, here,” says Yarmak. “But there is a lot current system is very dysfunctional old laws hinder efforts to properly of resistance.” and difficult for cooperatives,” says organize co-ops. Yarmak. “They are often paying taxes twice: first as farmers and then again Co-ops Succeed Elsewhere as a company.” Globally, farming cooperatively is a successful model. There are Farmers Benefit from Co-ops estimated to be over 2 million co-ops, While politicians debate, farmers providing employment for 250 million unite for profit. The Ukrainian workers. Agrarian Cooperative says it succeeded in uniting small and “On paper, there are thousands medium-scale commercial farmers of agricultural cooperatives here into an alliance, resulting in a boost in Ukraine,” says Andriy Yarmak, to all incomes. Now it trades 500,000 an economist for the Food and tons of grain annually, making the co- Agriculture Organization of the op a major market player. United Nations, or FAO. “But there One dairy co-op, the Association of are no cooperatives here that are On paper, there Milk Producers, has partnered with functioning properly, because of a Ternopil Dairy Factory, which sells lack of legislation that protects them are thousands milk under the popular Molokiya and enables them to be proper brand. The co-op credits this commercial enterprises.” of agricultural partnership with raising its farmer cooperatives member incomes by 25 percent. Farm co-ops are defined by regulators Yarmak who advised this partnership, as social enterprises, mostly for here in Ukraine. says a co-op can be valuable as a marketing reasons. Ukrainian co- social enterprise—but bottom line op leaders say they find it almost But there are no is a matter of profit. He leads the impossible to win legal recognition cooperatives here FAO’s co-op development project in as commercial enterprises. Instead, Ukraine. “A cooperative should help to produce and trade, they are that are functioning its members make more money,” required by law to partner with a he says. “They’re an important part state-registered business. The FAO properly of dynamically developing Ukraine’s is working with Ukraine and the commercial agriculture.” European Bank for Reconstruction and Development, or EBRD, to change Kyiv Region Co-op Sells Fruit to EU this. Dimitry Zubakha, CEO of the Kyivski 48

fruit farming cooperative, says that all are in high demand. Ukraine is the members of his co-op have seen real world’s fourth largest exporter of increases in their income since they raspberries, with annual export yields formed their association. Farmers having increased from 20,000 tons from this co-op harvest for the Small in 2014, to over 60,000 tons in 2017. Fruits company, which then handles Producing and exporting this much the sales and exports of the produce. would be impossible without coming Kyivski collects 20 percent of the together into cooperatives, farmers farmers’ profits, and invests it into say. next season’s harvest. Some of the money is also put toward “We’ve found that for getting the best training and helping with organic long-term results, bringing small-scale certification, vital for the EU market. farmers together and forming co-ops “Our cooperative of small-scale is the only thing that works,” says berry farmers now has 60 farms in Zubakha. “It’s the best hope we have total, mostly in the Kyiv region,” he of tapping into Ukraine’s remaining says. “Our yields and incomes are all potential for production and export of increasing and next year we expect quality, organic produce.” to export 500 tons of frozen fruit, 99 percent of which is going to the European Union.” Zubakha says it was hard to get The current system is very Ukrainian farmers on board with the project at first. Memories of their dysfunctional and difficult for Soviet past led to skepticism about communal work. But the benefits— cooperatives. They are often paying social and financial—have been clear. “Cooperative farming helps to evolve taxes twice: first as farmers and then local societies and communities,” he again as a company says. “It inducts communities into the business process… while also boosting incomes and providing a structure of support and security for the farmers.” Farmers of the Kyivski cooperative make decisions based on consensus. Clients in Europe advise the cooperative on what to farm that year, but all farms agree what they will grow in the next season. For Kyivski, raspberries and strawberries Opportunity Reports 49

From the outside, it’s an idyllic scene. eyeing the robust EU market, is A small house in a country village, trying to clean up its milk and woo Ukrainian equipped with an industrial-sized customers. refrigerator, fills with chatter and Dairy: Big activity as, every morning, residents But some attempts have blown up bring liters of milk for collection. in its face. Jan. 1 was the deadline Some 73 percent of Ukraine’s annual for new state standards to no longer Dreams, 10.3 million tons of milk comes from accept second-grade milk (a category such sources—private individuals defined by bacteria count). But a Dwindling with a few dairy cows, often deep in public outcry left Prime Minister the countryside. Volodymyr Groysman backtracking. Cows Villagers feared milk processors would Fresh from the cow, the milk is either no longer be allowed to buy their by Aisha Down collected by processors, sold on the goods. (To be clear, not all village- market, or consumed locally. The made milk is second-grade.) share that’s processed goes to ever- hungrier export markets. The Middle Groysman offered reassurances that East and North Africa are the most no such rules would be made. At important. least, not now. “I warn: there should be no such prohibitions,” he told state But, exports aside, the reality of media. “It is necessary to help people Ukraine’s dairy is less than idyllic. The in such a difficult time.” country’s rural population is steadily aging. Its dairy herd is dwindling. Cow Declining Population owners die or grow unable to keep Parliament finds it hard take villagers’ milking their animals. Couple that milk off the market. But, population with legislative and logistical obstacles decline inevitably will—and soon, to setting up larger-scale dairy farms according to Renato Ruszczyk, and Ukraine could become a net milk president of Ukraine’s branch of importer in a decade. French milk giant Lactalis. Ruszczyk’s company, Lactalis, uses some villagers’ Villagers’ Milk milk—pasteurizing it and processing Villagers’ milk is a touchy subject. It’s it to make a line of desserts, smetana not just a market percentage to be and traditional cheeses under a few reckoned with. It’s an income and of its brands. a traditional livelihood for a large population. It can be unsanitary— It maintains 160 collection points in kept at the wrong temperatures, Ukraine, says Ruszczyk, with some milked the wrong way, swarming 5,000 villagers. The population at with bacteria. Ukraine’s government, these collection points diminishes 50

If you look at the next 10 years, the quantity of delivered milk will grow

at 5 percent a year, says Ruszczyk. at the next 10 years, the quantity of declining population. He projects a This is why Ukraine risks being a delivered milk will grow.” decrease of 50,000 tons of production net importer. “There’s a decline of for 2017, compared to 2016. people: they are dying,” he reflects. Ruszczyk disagrees. Better feeding “The young people raised in the has caused the uptick in farm milk Exports Diversify Radically From villages want to go to the big towns. production, he says. But that will Russia The new generation is not attached to flatten out. “The farms are improving Domestic debate aside, Ukraine’s the land.” Data from Ukraine’s State in Ukraine in terms of productivity,” dairy exports are a source of Statistics Service shows the national he agrees. “Every year they keep optimism. Cheese exports topped herd decreased by 5.2 percent last more or less the same number of 63,000 tons last year, up 63 percent year, to 3.69 million head. animals, but each year they produce from 2016. Fasteyev notes that 1, 2, 3 percent more… But they will Ukraine is now the world’s 5th Farms and Processors stabilize. You need more farms.” greatest exporter of butter, after the Not everyone agrees that the decline EU, Belarus, the US, and New Zealand. in rural population will seriously Fearful Investors affect Ukraine’s dairy industry. Maks Building more farms, however, is It’s good progress for a nation Fasteyev, a senior dairy market a hard sell with Ukraine’s thorny that used to depend on one easy analyst and a former employee of moratorium on the sale of land. market: Russia. Fasteyev says the Danone, points out that, although “To invest in a farm, you need a future is diversification. “We will not individuals are Ukraine’s main milk minimum of $7 to $15 million,” concentrate on one market,” he says producers, their milk isn’t the main says Ruszczyk. “This is the capital looking ahead. Remembering the source for the country’s processing investment in the housing, animals. shock of Russia’s ban of Ukrainian industry. How can you put this money if you milk, he says: “Our experience with don’t have the land?” Russia has become a bad one. We Data from Lactalis estimates that have learned to concentrate on many private producers sell only about “I personally brought a lot of places.” 1.23 million tons—16 percent of their investors, from Germany, from production—to milk processors. The Holland, from New Zealand,” he rest is sold on open-air markets, or recalls. “When they cannot buy the Above Ukraine’s declining total milk consumed at home. Meanwhile, land, they just walk away.” The land production (infoagro) larger farms, less than 30 percent of moratorium might be a deal breaker the country’s total milk production, for foreign investors, but Fasteyev send some 2.6 million tons to dairy says it isn’t that bad. A lot of farmers plants. It’s a growing number. In 2013, are Ukrainians—and they aren’t afraid it was less than 2.3 million tons. to put money into their farms.

Fasteyev says this increase in farm- “When the price of raw milk grew, produced milk will compensate for several months ago, farmers got more population decline. “Farm milk is now money, and they started to invest,” 60 to 70 percent of milk delivered he recounts. “They bought more to processing plants—only 30 to cows.” Fasteyev might be right. But 40 percent is milk from the private as it stands, the growth of farm milk sector,” he calculates. “If you look production isn’t compensating the

Opportunity Reports 51 52

Opportunity Reports 53

Adventures in Aquaculture: Ukraine’s Black Sea Dream by Jack Laurenson and Antonina Tsymbaliuk

Andre Pigulevsky wants to export one from Kharkiv, visiting a seafood billion Black Sea oysters over 100,000 wholesaler in Kyiv. ‘‘And they have also tons of the salt-water mollusc-annually, become more affordable too,’’ she says, within 10 years. It is an ambitious goal inspecting shellfish and molluscs from for his small business. But, considering France, Japan and the Netherlands, he has single-handedly resurrected alongside oysters from Skifian’s Black Ukrainian oyster farming, supporters Sea farm. are confident in his mission. She opts for a large batch of the Until recently, Black Sea oysters were Ukrainian oysters, to be prepared, practically extinct. Aquaculture farms chilled and delivered to her restaurant. trying to reintroduce and cultivate Speaking from experience, she says: them were largely failing. The broader ‘‘They’re small, delicate and have a picture for Ukrainian aquaculture and lovely taste. They’re very popular with seafood is one of gradual but difficult our customers.’’ The Black Sea oyster- Fresh oysters from the Black Sea recovery. The Russian annexation of the called mushlya fina, or ‘‘fine seashell’’ Oysters farmed in nets sacks in quiet Crimean peninsula in 2014 nearly killed by Skifian – also doesn’t break the bays around the coast Ukraine’s coastal seafood production. bank. Historically seen as a food for Twenty years ago, Ukraine was a the wealthy, Pigulevsky remembers major player in Black Sea fishing and that only a few years ago imported aquaculture. Annual yields exceeded oysters could only be found in Kyiv’s Ukraine’s coast 400,000 tons. That plunged to a mere poshest eateries. They would cost 90,000 tons last year. up to $7 each. presents a lot of

But small-scale farms – like Pigulevsky’s Now, they can be ordered on ice, with unused potential. company, Skifian Oysters – are starting lemon juice and Worcestershire sauce, to turn that around. They currently ship for as little as $2 each. In supermarkets Lots of people are four million oysters per year. Over the like Le Silpo and Novus, they can be last five years, the company’s revenues found for as little as $1.50 on a good looking into this have grown by 35 percent annually. day. “It’s taken a long time to get where we are now,” says Pigulevsky, right now An oyster rebirth who has been developing small-scale Pigulevsky’s Black Sea farm is in a secret oyster farming and wholesale since a bay near Kherson, 100 km northwest of decade ago, when he discovered his Russia-occupied Crimea. It produces a passion for oysters when traveling in delicate and sweet-tasting oyster that France. “We are starting to see the real has become the darling of restaurants untapped potential of Ukraine’s Black in Kyiv, Kharkiv, Lviv and Odesa. Foreign Sea coast. We seriously believe the exports are modest. But they’re region has the capacity to export one expected to increase significantly in billion oysters per year.” the next few years. Meanwhile, Skifian Oysters is dominating a domestic Ukraine develops a taste for seafood market that is fast acquiring a taste for Seafood consumption has sky-rocketed sweet oyster meat. in Ukraine, a country traditionally associated with beef and pork. To make ‘‘The popularity of oysters has really up for losses in domestic production, exploded here in recent years,’’ the companies here import 320,000 tons owner of an up-scale Italian restaurant of seafood a year, according to official 54

statistics. Norway leads the exporters. War brought with to the Black Sea a much potential,” says Pigulevsky. “It’s But Ukraine also imports seafood from voracious, predatory species of mollusc also an extraordinary opportunity for 60 other countries. that decimated populations of wild investment, for risk-taking, patient mussels and clams. “Our indigenous investors.” Producing oysters takes During the summer, popular Black oysters were practically pushed to time. In the Black Sea takes months to Sea beaches are jammed with extinction,” says Pigulevsky. “This grow to an edible size. vendors selling local fish and mussels, predator absolutely ate everything usually pickled in vinegar and spices. along the Black Sea coast.” “Our oysters here take 16-months to Restaurants often feature oysters reach the right size,” says Pigulevsky. on the menu. But only a handful of Soviet neglect did little to help Black “The same one, farmed in Ireland or aquaculture farms operate on the Black Sea farmers and fishermen. The France, can take almost 3-years to Sea coast. Experts say this will be a real industry and a way of life entered into reach the same size.” Pigulevsky plans growth area in the future. They predict a steep decline. According to experts, to expand his farm so it occupies the a Black Sea gold rush. ‘‘Ukraine’s coast now is the right time for a comeback for entire bay. Other farmers are bringing presents a lot of unused potential,’’ Ukraine’s coastal aquaculture. their seafood cages from the open says Andriy Yarmak, an economist for water into the protected, tranquil bays. the Food and Agriculture Organization “The Black Sea, due to its unique With China emerging as a hungry new of the United Nations, or FAO. ‘‘Lots of physical and geographical client, Ukrainian seafood once again will people are looking into this right now,’’ characteristics, is very promising region return to the menus of the world. says Yarmak, noting that Ukraine’s for the development of aquaculture, 1,000 km long Black Sea coast presents especially the farming of mussels, opportunities for foreign investors. oysters and other molluscs,” says Our indigenous With sights set on China as a growth Pavel Kutischev, professor of marine market, Pigulevsky is rapidly increasing resources at Kherson State University. oysters were production of his oysters. “In fact, our marine areas-especially the protected gulfs and coastal bays of practically pushed The golden age of Black Sea oysters the sea-offer one of the best locations Until the Bolshevik revolution, Ukraine’s available in the world right now for to extinction,” says Black Sea coast was the world’sbiggest the cultivation of different molluscs, in exporter of wild oysters. Many went to particular oysters,” Kutischev maintains. Pigulevsky. “This the restaurant tables of Europe, where they were appreciated for their delicate Nutritious black mud and clean, food- predator absolutely and not too salty taste. But political filled water results in a fast growth upheavals resulted in shifts in culinary rate for seafood here. The sea’s many ate everything along habits and changes in agricultural secluded bays and tranquil water priorities. This caused the near collapse inlets with modest levels of salinity are the Black Sea coast of Ukraine’s aquaculture. becoming havens for oyster farmers.

In 1947, a final nail was hammered Black Sea opportunity into the coffin. Ships returning from “The Black Sea coast of Ukraine is still Asian waters after the Second World a hugely under-valued asset with so

Opportunity Reports 55

Food Processing Adds Value in Ukraine By Jack Laurenson and Natalya Datskevych

When it comes to agricultural resources, Ukraine struck black gold. The country is home to roughly 1/3rd of the world’s black earth— fertile, dark soil that yields some of earth’s most bountiful harvests. But maximizing that richness for the country is another story. Ukraine is a major exporter of grains, but it can hardly dictate its prices on the world wheat market.

To add value at home, processing is the way to go. Higher prices earned by selling flour instead of wheat and jams instead of berries translate to higher Ukrainian incomes. While the production raw food dominates agribusiness here, food processing is on the up. Last year, milling of wheat into flour for export rose by 30 percent, according to agriculture economists.

In 2016, the total value of all processed food production in Ukraine was estimated at $15 billion. But Soviet-era infrastructure and shifting markets makes further progress less than straightforward.

Sunflower Success Growers succeeded with sunflowers. The country is the world’s largest producer and exporter of sunflower oil. In 2016, Ukraine produced 4.4 million tons of sunflower oil—more than its milk, cream, sugar, and flour production combined.

Kernel, the world’s largest exporter of sunflower oil, tops Ukraine’s list of exporters. Last year, it crushed 3 million tons of seeds into 1.1 million tons of oil. It’s a success that’s hard to replicate. Agribusiness experts 56

In 2016, Ukraine produced 4.4 million tons of sunflower oil— more than its milk, cream, sugar, and flour production combined

point to other cooking oils, as well ranks after China and Argentina as it won’t reach its potential as an as syrups, jams, sauces, pastes and the world’s third-biggest exporter agricultural powerhouse. The cheeses as potential areas of growth. of honey. Experts say that much of problem is complicated because But none are now produced on a Chinese ‘honey’ is actually corn or most countries that import raw food scale approaching sunflower oil. fructose syrup, concocted in factories. from Ukraine already have adequate Insecticides killed many of China’s facilities to process the products “Ukraine has become very bees. While export volumes for close at home, Martin Schuldt, general competitive on the global market rivals remained steady in recent years, manager of Cargill Ukraine, told a in its production and export of Ukraine’s exports tripled since 2013. recent agricultural conference. high quality, organic, raw goods,” says Andriy Yarmak, an agricultural There is value in It’s—for them—a more lucrative economist with the United Nations option. Wheat importers like Food and Agriculture Organization. Ukrainian food Indonesia, for example, sometimes “In recent years, the country has been won’t buy Ukrainian flour. Milling making important strides forward processing, but we infrastructure already exists there. with processed foods… But we have Politically influential trade unions to remember that Ukraine was highly have not been able often block flour imports to protect reliant on exports to Russia for a long milling jobs. “There is value in time.” to capitalize on it Ukrainian food processing, but we have not been able to capitalize on it,” Yarmak is referring to Ukraine’s legacy Foreign Unions Protect Milling Jobs Schuldt says. of selling to Soviet consumers, a not- Moving from exporting raw goods so-demanding market. Ukraine in the to processed goods has been a Ukrainian Companies Increase process of maneuvering its processed- challenge, not just because of Processing food sector toward other markets, changing markets. Ukraine lacks Much of Ukraine’s food processing he says. But it’s not a quick or easy infrastructure to support food is undertaken by global giants that process. processing on a large scale. Its buyers, control their supply chain, like Nestle, protecting jobs, prefer to process at Coca-Cola, and Carlsberg. Now, Forest Honey home. smaller Ukrainian companies are Production and export of honey investing to move up the value chain. replicates the sunflower success “Ukraine needs to invest in processing story, although on a far smaller scale. and storage facilities,” says Jean- “We’re now exporting processed fruit Last year, Ukraine exported $134 Paul Piotrowski, chairman of Credit and dairy products, namely syrups, million worth of honey. Ukraine now Agricole Bank in Kyiv. Until it does, jams, fillers, toppings and various

Opportunity Reports 57

We’re now exporting processed fruit and dairy products, namely syrups, jams, fillers, toppings and various cheeses to countries in Europe and the Middle East cheeses to countries in Europe and the Middle East,” says Mari Rudomski, an executive with the Schedryk food processing company.

Exports account for 20 percent of the company’s annual sales. Rudomski says the company has big plans for the next few years, including building a second factory dedicated solely to processed milk products, mainly cheeses. They hope to boost their numbers significantly. Evgeniy Radovenyuk, the CEO of the Grain Alliance farming conglomerate, a cooperative that manages around 50,000 hectares of land in central Ukraine, says his organization is preparing to do more of their own processing in coming years.

“Next year, we will begin grinding our own grain and also start processing soybeans,” he says. “We are even ready to handle other people’s grain, too.” With revenue from grain sales shrinking due to weak prices, Radovenyuk says the move to milling will add value to products leaving his company’s farm gates. 58

Slithering to a Big Market: Ukraine’s Snail Trade by Aisha Down

To many people, the best-known exports increased 6-fold in four years, and cleaned, then reassembled. exports of the Carpathian Mountains from 58 tons in 2014 to 344 in last Processed snails fetch higher prices, are the folktales—legends of year. Demand is increasing, says says Dzera, who rented a snail- vampires and werewolves that haunt Dzera. processing plant in past years. But, the damp, forested slopes. But, to now, European regulations stipulate a few enterprising Ukrainians, the Getting Gastropods to Market that a Ukrainian snail plant that region’s most promising product lies Organizing snail collection is pretty processes for export to Europe much closer to the ground—in three easy, says Dzera. Getting snails to must meet a number of finicky species of snails that are slithering Europe is far harder. Ukrainian snails requirements—and get certification slowly, very slowly, east from are usually processed in Romania, from the European Commission. Romania’s Transylvania. Lithuania, and Poland. Hurdles include a stack of EU regulations, This is doable. Turkey and Indonesia Ukraine: Snail Playground slow bureaucracy and the expensive are major suppliers of snails for Snail meat, doused in butter and France’s dining tables. But Dzera garlic, fetches handsome prices in calculates that this would be a the upscale restaurants of Western $500,000 investment. For him, the Europe—more than $10 a kilogram, investment does not make economic says Yuriy Dzera, a Lviv-based sense. consultant and snail exporter. Only two days away by truck is France, Merging With EU Regulations the world’s largest consumer of Volodymyr Lapa, head of Ukraine’s escargot—40,000 tons a year. It used State Service on Food Safety and to be that French snails supplied Consumer Protection, says that the French tables. But wild French situation might change for Ukrainian gastropods have been depleted by snail processors. In the wake of the overcollection. free trade agreement between the EU and Ukraine, there is Though France now has 191 snail a three-step process for farms, sprinkled across humid parts logistics of transporting live snails Ukraine to send to the of the hexagon, gourmet consumers across the border to plants. EU semi-processed prefer wild, “all-natural” snails. These animal products—like feast on forest shrubbery, as opposed First, there’s the $50 annual permit milk and snails. to snail food. Ukraine, says Dzera, is from Ukraine’s Ministry of Ecology just the place to collect these. Wages and Natural Resources. This allows Ukrainian regulation are low. Depending on the year’s snail Dzera to collect the snails. It takes is checked by the price, he pays about $1 per kilogram. months to line up. Then, there’s European Commission, High season is in late spring, where transport. Snails have to arrive alive at amended, and the rain has loosened the soils and processing plants across the border. rechecked. Finally, a the snails come out from their winter This gives Dzera a three-week window European Commission hibernation. after collection to get the gastropods team visits Ukraine into refrigerated trucks and to the and inspects Villagers in the Carpathians leave bags plants. laboratories and of live snails by the side of the road. processing facilities. His trucks come around to fetch them. There is another option: processing The whole procedure Data from the Ukrainian Agribusiness snail meat in Ukraine. It’s an eight- can be as fast as three Club shows total Ukrainian snail month procedure in which snail months, he says. meat and shells are boiled separately Opportunity Reports 59

Generally, it takes longer. Stepping Eco Ulitca, prepares meat for the It used to be that back from snails, the big picture is domestic market only. that Ukrainian food regulations are French snails being standardized to EU norms. As Ukrainians Try Escargot this happens, certification should get Meanwhile, in a blue-painted bistro supplied French faster and cheaper. in downtown Lviv, Andriy Dzuban has found another way around the tables. But wild Dzera isn’t waiting—and neither are logistics problem. The enterprising most other snail merchants. Data restaurateur owns Lviv’s premier— French gastropods from Agriculture Club shows Ukraine and likely only—snail restaurant: has four snail exporters, selling live Tante Sophie, a couple of streets from have been depleted snails—though it doesn’t list Dzera’s Lviv’s old town square. To keep supply company, Helix, among them. steady, he farms the snails himself, on by overcollection The nation’s one snail processor, 30 hectares not far from Lviv city. 60

Villagers in the Most Ukrainians, he says, have never From the eaten snails. But demand is robust. Carpathians leave Tante Sophie sees 3,500 customers beginning, people a month. Restaurant goers were bags of live snails skeptical at first. But his snails, cooked were interested in a slew of French-inspired buttery by the side of the sauces, have a following. “From the and curious,” he beginning, people were interested road. His trucks and curious,” he recalls. “They recalls. “They come around to weren’t afraid.” weren’t afraid While French consumers prefer wild fetch them snails, Dzuban says his farmed snails fetch good prices in Ukraine—10 euros a kilo. “We can’t be sure about wild snails,” said Dzuban, an advocate of ‘heliculture’, or snail farming. “We don’t know what they eat. But in our farm, we know about the quality of the feed.”

Dzuban plans to expand. His operation produces some 10 tons of snails per year. With an investment of 50,000 euros, he plans to double production this year. Meanwhile, he helps interested villagers farm snails on their land. If they can’t sell them on the open market, he will buy them. One day, he says, he, too, might export to Europe. But only if there’s an excess.

“There’s more opportunity in Ukraine,” he said, focusing on the market close at hand. No need to get distracted by the US market: 1 billion snails consumed every year.

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