Corruption Inc.

Agricultural products are one Ukraine’s main exports to China. In recent years, this sector has
attracted a lot of potential investors, including the Chinese.

In the hast, Beijing has made several attempts to gain a foothold on the Ukrainian agricultural
market. Its investments amounted to billions of dollars, so the game was big and long-term. But
China’s hopes that large-scale projects and top-level arrangements guarantee success proved futile.
In Ukraine, any strategic plans and state interests traditionally stumble across an impossible barrier – local corruption.

The so-called „Grain Corporation” case is a symbol of the fiasco of the Chinese in Ukraine.
The State Food and Grain Corporation of Ukraine (SFGCU) was created by the government in
August 2010. It is basically a large grain trader. But unlike the others, this trader is state-owned
and… unprofitable.

The State Food and Grain Corporation of Ukraine logo. Source: pzcu.gov.ua

Just 10 years ago, SFGCU had a promising future. The corporation owns 10% of Ukraine's certified grain capacity, dozens of facilities, and its port terminal capabilities allow up to 12% of the average annual volume of grain export (3.77 million tons). The company receives tens of billions of UAH in export earnings. But now its management is openly saying that the Corporation, formerly a leading player in the agrarian market, is on the brink of bankruptcy, and one of the main reasons for this is its long-time partnership with the Chinese.

In fact, SFGCU’s financial backbone is a Chinese loan. In 2012, under Ukrainian President Viktor Yanukovych, the Corporation, which was granted the right to act as a counterparty on behalf of the country, agreed to a loan from the Export-Import Bank of China. The agreement was personally lobbied by Mykola Prysyazhnyuk, Ukraine’s Minister of Agrarian Policy and Food at the time. He is now facing corruption charges and hiding abroad.

The China National Complete Engineering Corporation (CCEC) became Ukraine’s partner. Ukraine was to receive $ 3 billion from China for a period of 15 years under extremely favorable conditions: Libor +4.5% and a five-year grace period. The Ukrainian side announced that the money would be spent on developing the country’s agriculture. The loan was obtained under state guarantees.
According to the agreement, SFGCU has to annually supply 5 million tons of grain to the Chinese, mainly corn, which is why the transaction was jokingly called „the corn loan”.
The joke was over when Ukraine received the first tranche of $ 1.5 billion. Where did the money go to? The Corporation allegedly still keeps $ 1 billion in a deposit account with the state-owned
Ukreximbank. The other $ 500 million was supposedly spent on operational activities. The results are utterly disappointing.

Fortunately, Kyiv didn’t use the second $ 1.5 billion technical assistance tranche (to purchase
Chinese-made agricultural equipment, spare parts, etc.).

SFGCU has never once fulfilled its contractual obligations. For example, in the first year it had to deliver 4 million tons of products to China, in the second year 4,5 million tons, in the third year no less than 5,2 million tons, but actual deliveries ranged from 10 to 23% of the agreed volumes.
Instead, the Corporation’s activities were constantly accompanied by corruption scandals. There have been several reshuffles in management, and the number of cases opened by law enforcement against Corporation officials has reached 150, said its latest acting chairman, Simon Cherniavsky.

Here is just one example: according to former SFGCU Chairman Valery Tomilenko, the
Corporation actively used shell intermediaries in its activities. „Real goods were funneled through these companies: wheat, barley, corn. The corporation bought the produce with the money from the Chinese contract. Ships were loaded, goods were transported, and the buyers made payments to shell companies. But not a single dollar went to SFGCU accounts. $ 132 million were stolen.”, says Tomilenko.

At the end of 2019, the National Anti-Corruption Bureau of Ukraine (NABU) reported the detention of another former SFGCU chairman in Lithuania. Since March 2017, he has been a suspect in the embezzlement of more than $ 60 million from the company. Also in December last year, the Cabinet of Ministers returned 14 illegally sold facilities to SFGCU.
The corporation could also sell its goods to other countries, but only through their Chinese partner CCEC for a margin of $ 5 per ton on an exclusive partnership basis. SFGCU and CCEC signed a corresponding Appendix # 3 to the initial loan agreement in 2015.

This dealt another blow to the Corporation’s finances, but did not put an end to the scams. In
various years, SFGCU sold its grain to firms in Egypt, Monaco, Saudi Arabia, Kenya, the
Philippines, Ethiopia, Iran, and Switzerland, but „forgot” to share the profits with the Chinese side.
Such actions caused a negative reaction from the Chinese. In 2014, Hennady Moskal, first deputy chairman of the Verkhovna Rada (Ukrainian Parliament) Committee on Combating Organized Crime and Corruption, reported that China allegedly filed a lawsuit against Ukraine for $ 3 billion in the London International Arbitration Court.

This information has not been verified. However, it is a fact that SFGCU had lost a $ 4 million lawsuit to the Chinese from CCEC in an international arbitration tribunal at the GAFTA (International Grain and Feed Trade Association).

According to Chernyavsky, „the amount of CCEC’s claims is nearly $ 82 million, but if you add 2018 and 2019, which have not yet been included in the specified amount, the potential claim could total $ 126 million.”.
On January 17, 2020, the Corporation paid $ 115.9 million to the Chinese Eximbank. SFGCU still owes over $ 1 billion. The corporation’s accounts have less than $ 387 million of the $ 1.5 billion in loans received. SFGCU faces bankruptcy, and Ukraine’s budget is under threat of losing $ 900 million under state guarantees.

Nevertheless, the Corporation remains one of the largest grain exporters in the country. In 2019, the volume of transhipment through its port terminals amounted to 2.5 million tons. According to the company, in the first 9 months of 2019 its consolidated income increased
from UAH 7.3 billion to UAH 11.6 billion, its gross profit increased to UAH 453 million, and the
operating result for the current year is UAH 62 million. This sunny picture is spoiled by the need to service its debt, which in the same period amounted to UAH 1.8 billion.

At the moment, SFGCU is searching for a strategic investor/partner. The government handed over the Corporation for privatization. “It is the largest grain exporter in Ukraine and the largest flour producer in the country. On paper, for some reason, it is unprofitable and inefficient. Through privatization, the company will be able to modernize its facilities, create new jobs and pay more taxes to Ukraine’s state budget,” said former Ukrainian Prime Minister Oleksiy Honcharuk.
However, without resolving its debt dispute with China, SFGCU’s bright future is highly unlikely.

 

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