Ukraine Agri Business - The cat is out of the bag.

From Business New Europe.

One of the best-kept secrets in Ukrainian politics is the identity of the private shareholders of Ukraine's newly formed state grain trader, Hlib Investbud. The cat is now out of the bag, as recent comments by the country's agriculture minister imply that Russian interests are involved.

Hlib Investbud, created in August 2010, has been the object of howls of protests at home and abroad since it took the lion's share of grain quotas in government tenders in late 2010 and early 2011, sidelining global companies such as Cargill and Bunge, and in doing so acquired grain export quota rights potentially worth billions of dollars.

The company aroused even more controversy when Ukrainian officials admitted that unidentified private interests participated in the company, and then even declared that those private interests held a majority stake. At the same time, both Prime Minister Mykola Azarov and Agriculture Minister Mykola Prisyazhnyuk said they simply did not know who the private interests were; Azarov even claimed he had never even heard of the company.

The absurdity reached a new peak on April 15 when, in an interview with local English-language paper Kyiv Post, Prisyazhnyuk in one breath said he did not know who the private owners of the company were, in the next said "of course" he knew, and then seemed to confirm "press reports" that among the private owners is Russian state-owned bank VTB (known to many Russian speakers by its old name of Vneshtorgbank). But this only further muddied the waters: Ukrainian journalists had in fact previously convincingly traced the company's shareholders not to VTB, but to another Russian state-owned bank with a similar name and initials called Vnesheconombank, or VEB, as well as to companies possibly linked to Ukrainian officials.

Not content with that, Prisyazhnyuk later apparently demanded that the newspaper's owners pull the interview, under threat of closure of the newspaper, according to owner Mohammad Zahoor. Zahoor ordered the article removed, but the editor, Brian Bonner, on point of principle refused to bend to the owner's wishes. Zahoor then sacked Bonner, which led to the journalists at the paper going on strike. The owners claimed in a statement that Bonner’s firing was not due to the publication of the interview with the agriculture minister, but due to differences of opinion – as if there were a difference. To round off the absurd episode, Prisyazhnyuk now claims he had no problems with the article, which is still online, and Bonner has now triumphantly been reinstated as editor.

The secrecy and contortions over who owns Hlib Investbud are all reminiscent of official behavior in 2010 regarding an alleged $2 billion credit to Ukraine from Russia's VTB. Officials in 2010 hemmed and hawed for weeks over the origins of $2 billion on the central bank's books – alternatively denying, confirming and refusing to confirm or deny the existence of such a loan. Later it transpired that Ukraine had signed a confidentiality agreement with the Russian bank, preventing officials from disclosing the deal. "The strange situation with Hlib Investbud might very well all be the result of a confidentiality agreement with the Russian side," reckons Mariya Kolesnik of the Ukrainian agriculture consultancy AAA Consulting.

In comments to BNE, Hlib Investbud CEO Robert Brovdi characteristically refused to comment on ownership of the company, beyond saying that Ukrainian laws require it to have at least 51 percent private ownership to avoid having to hold obligatory procurement tenders. But he confirmed that some of Hlib Investbud's new financial clout came from loans from international financial institutions. According to Brovdi, the company needs considerable financial resources to fund its ambitious forward-purchase program for grain producers, which is intended to help Ukrainian farmers expand the area under cultivation and intensify production.

In an April 19 interview given by Oleksandr Lavrinchuk, head of Ukraine's State Food and Grain with which Hlib Investbud is merging to become its trading wing, Lavrinchuk said he would need to raise "several billion dollars" in investments and credit over the next two to three years. When the reorganization is completed, the new national champion aims to become Ukraine’s largest vertically integrated agriculture holding, according to Lavrinchuk, with a planned land bank of 1 million hectares and extensive processing and port facilities.

With a Russian presence behind the new grain market player accused of monopolizing the market, and draft laws moving rapidly through the Ukrainian parliament which would, if passed, largely restrict grain export rights to state-controlled companies or direct producers of grain and exclude foreign traders, the question is how these plans tie in with broader Kremlin plans to create a grain cartel, or a "grain Opec," uniting Russia, Ukraine and Kazakhstan.

On a visit to China, Ukrainian Prime Minister Mykola Azarov was quoted as saying that talks were underway with Russia, Kazakhstan and Ukraine on creating a grain pool. The three countries together account for 30 percent of the world's grain-export market, and some form of export coordination has long been mooted.