Control of agri exports takes center stage in Ukraine’s foreign revenue power struggle

Since the beginning of the all-out war, agricultural products have become the main export commodity. Before the Russian attack, the foreign exchange earnings of agricultural companies hovered around 30-40% of Ukraine's total exports.

In 2022, it crossed the 50% mark for the first time, and in 2023 it exceeded 60%. This increase in the weight of agricultural exports was due to the fact that, amid a decline in foreign exchange revenue of metallurgical companies, farmers have been steadily maintaining sales at $23 billion.

It was at this time that the fiscal lobby and the National Bank began to change the export rules – exclusively for those companies that supply grain abroad. Officially, this selectivity is explained by the fact that there is a lot of smuggling in agricultural exports. That is, grain is exported, but only part of the money for it comes to Ukraine.

How big is the "black" export

According to Ukraine’s Economic Security Bureau (ESBU), which has become a gathering place for former tax police officers, in 2023, 20% of grain exports were smuggled. That is, about $5 billion in the shadows. The head of the central bank, Andriy Pyshnyy, estimated agricultural smuggling at $8 billion. Danil Getmantsev, chairman of the Verkhovna Rada Committee on Finance, Taxation, and Customs Policy, went further, saying that the volume of "gray" grain reaches 50% of total agricultural exports ($10 billion).

The ESBU stated their estimate of contraband grain exports is based on analysis by their analysts of export operations. The quality of this analysis is demonstrated by the Bureau's results in addressing agro-export activities. In 2023, the ESBU sent over 4,500 orders to the State Customs Service to inspect suspicious cargo. This work led to 71 searches and 22 criminal cases opened as a result of their efforts. Of those cases, 12 have been sent to court so far, resulting in 8 indictments to date. The ESBU is yet to unveil the monetary value associated with these legal actions.

It seems that in order to correct the depressing statistics, the Bureau is pushing for the introduction of criminal liability for smuggling and the granting of authority to ESBU detectives to conduct their own pre-trial investigations in criminal proceedings.

As for the information from Andriy Pyshnyy, the NBU governor took his figures – $8 billion – from the data on total revenue that agricultural companies have yet to receive. In fact, $3 billion of this amount is overdue. That is, Pyshnyy's "error" is 2.6 times higher.

Against this backdrop, Danil Getmantsev's $10 billion figure looks not like a dramatic exaggeration, but simply like a fantasy. What is behind such exaggerations?

Simple solutions

In early November, there was a wave of articles in the media about "black" grain, "black" exporters, "black" farmers with intricate schemes involving misdirection and gambling companies. The general conclusion of such pieces is that it is necessary to put things in order.

It was at this time that the head of the local regional administration, Oleh Kiper (a former prosecutor), started checking grain exports in Odesa Oblast. He signed Order No. 19 of the Odesa Oblast State Administration, according to which exporters had to submit tax invoices along with customs declarations ten days before loading grain onto a ship.

During these ten days, the controlling authorities had to check the route of the grain from the farmer to the exporter. It's a fairly simple solution, but there are two drawbacks. The first is that exporters have to pay for grain storage during these ten days. The second is that the requirements of Order No. 19 go beyond the powers of the regional administrations. The shortcomings of the Kiper order are corrected by Cabinet of Ministers Resolution No. 1132 "On the Implementation of a Pilot Project on the Verification of Agricultural Entities under Martial Law" of October 2023. The document was promoted by the Ministry of Agrarian Policy.

According to Resolution No. 1132, grain exporters must register with the State Agrarian Register (SAR).

In order to become a verified exporter of agricultural products, one must:

• be a registered value added tax payer;
• export goods worth at least 40 million hryvnias ($1.1 million) in the period from February 23, 2022 to October 27, 2023 inclusive;
• have completed currency control for 40 million hryvnias ($1.1 million) of exports, which is confirmed by a letter from the bank;
• not to have a tax debt on the payment 21081000 "Penalty for violation of the terms of payments in the field of foreign economic activity (FEA)";
• not to have an act of the State Tax Service (STS) on absence at the place of legal registration during the audit of compliance with currency legislation.

Overall, almost all exporters are satisfied with these conditions.

"All members of our association support the version of grain export control prepared by the Ministry of Agrarian Policy. These are simple and transparent rules that do not require exporters to spend extra money on administration," Andriy Dykun, head of the Ukrainian Agri Council (UAC), which includes more than 1,100 small and medium-sized agricultural enterprises, told LIGA.net.

Although the new rules cut off new players from entering this market. But if a company has been working with other non-agricultural goods for export, the door is open for it. On December 28, Rinat Akhmetov's D.Trading announced that it had started working with grain. Prior to that, the company mainly traded in electricity, in particular in the field of foreign trade.

"The first thousand tons of grain have been shipped to a customer. This is the company's first step in a new trading direction," said D.Trading CEO Dmytro Malyar.

Difficult or murky decisions

In October, along with prosecutors and the Ministry of Agrarian Policy, fiscal authorities started moving towards controlling grain exports. The head of the relevant committee, Danil Getmantsev, developed and began to promote bills No. 10168-2 and No. 10169-2 for approval in parliament.

It is expected that the proposals of these draft laws grant new powers to the fiscal authorities without imposing responsibility on them. Companies that are members of the American Chamber of Commerce in Ukraine (AmCham Ukraine) have systematized the risks posed by Getmantsev's proposals.

First, exporters "with a positive history and no intention of violating the law" are forced to "undergo discretionary tax and customs procedures." Tax authorities will be able to block exports by making a sole decision to recognize real trade transactions as fictitious.

"This shifts the responsibility for violating the law from the real offenders to the exporters," the AmCham noted.

Secondly, the proposal to introduce an export duty to regulate exports will lead to additional costs for exporters.

Thirdly, fiscal authorities are demanding the establishment of minimum export prices for grain. This trick has a long history of negative consequences when tax and customs officials manipulate price indicators to manually regulate exports. Given the logistical constraints on grain exports, creating additional administrative barriers looks like sabotage.

Fourth, the draft laws limit VAT refunds for exporters. VAT refunds are tied to the fact of returning foreign currency earnings, which means that the settlement period is actually extended. Even if the exporter has received an advance payment, the VAT refund will be made only in the month following the shipment of the goods.

According to Yuriy Haidai, senior economist at the Center for Economic Strategy, it was the problems with VAT refunds to exporters' accounts from the budget, involving tax authorities, that led to an increase in black grain exports starting in 2022.

"The tax authorities often considered the tax invoices of prudent companies that legally bought grain and paid taxes to be risky and did not register them. This encouraged cash payments," the economist said.

According to Nina Yuzhanina, a member of the Verkhovna Rada Committee on Finance, Taxation, and Customs Policy, in 2022-2023, the tax authorities rejected 3,800 taxpayers' declarations and applications for VAT refunds worth 23 billion hryvnias ($612.7 million).

According to Haidai, the first thing to do to reduce the volume of black grain is to put things in order with VAT administration. Blocking of invoices by the State Tax Service encourages many people to buy goods for cash and avoid paying taxes.

Secondly, Ukraine needs the ESBU and other law enforcement agencies to work properly, looking for organizers of smuggling schemes among customs and tax officials. No smuggling as a systemic phenomenon can survive without the involvement of fiscal authorities.