In the grain economy of the state, the main structural element of which is State Food and Grain Corporation of Ukraine (hereinafter – SFGCU), a trouble is brewing. Due to the impossibility of fulfilling the obligations under the Loan Agreement with the Chinese State Eximbank for 1.5 bln. USD, concluded in 2012 to finance the supply of grain to China National Complete Engineering Corporation, the government will have to open the state guarantees stipulated in the agreement.
Unfortunately, SFGCU has long been synonymous with inefficient state governance and dirty political exchange. Over 11 years, it has changed 14 heads. The company’s activities are burdened with numerous criminal cases for embezzlement of property. The register of court decisions includes almost 2.5 thousand cases, which involve its employees and leaders of different years. According to open sources, SFGCU had a net loss of almost 6 billion UAH in 2020. So, if you do not clean these “Augean stables” now – one can shut the door on one of the largest operators in the agricultural market of Ukraine. Acting Chairman of the Board of SFGCU, Vasyl Kovalenko, who, despite all the reputational risk, agreed to head the corporation, is convinced that the worst-case scenario can still be prevented. He outlined his vision in a conversation with Ukrinform correspondent immediately after the first meeting of the government working group to decide on the fate of the loan and, in fact, the fate of the entire corporation.
– Let’s record what we have today. What is the financial condition of SFGCU?
– The company has almost no working capital left – we now have about 25.5 million USD in our accounts. At the same time, over the last 10 months we have generated unpaid foreign exchange earnings of almost 29 million USD, which is a non-return for contracts left to us by the old team. And also today we have a loan payment of 96 million USD.
For the past year, many events have taken place around SFGCU that have undermined its reputation in the market. Therefore, our team is tasked to restore it.
I have the impression that during the last 10 months the company was being frankly “ransacked”. As part of the criminal proceedings against actions of the previous management,
54.3 thousand tons of barley were seized at the “Transservice 2008” terminal. Of these,
32.6 thousand tons are on board for more than 2 weeks. There isn’t even the slightest chance that the grain won’t spoil. It was established by law enforcement officers that the previous management of the corporation conducted grain export operations with non-resident companies controlled by them in the period from November 2020 to August 2021. At the same time, the cost of goods was understated, and payment was significantly stretched over time. A preliminary analysis of the commercial activity shows that since the beginning of the year, losses from the purchase and sale of grains at “non-market” prices may amount to about 1 billion hryvnias. Purchases of grain crops in 2021 were mostly made at an inflated cost of 300-500 UAH per ton through companies that use the VAT carousel fraud.
– Please explain the reasons for the corporation’s unprofitability over the past three years. Today it reaches 5.8 billion UAH. And that is given the record harvests.
– Since taking out a loan in 2012 from China Eximbank to supply grain to China National Complete Engineering Corporation (hereinafter — CCEC), the corporation has become unprofitable. The corporation received a loan of 1.5 billion USD at a commercial rate of 4.5% plus LIBOR.
Of this amount, a third part – 450 million USD – was received directly for the corporation’s operating use. The remaining amount was placed in an account with the state-owned Ukreximbank. The interest accrued by the Ukrainian bank on this deposit was to cover the interest on the Chinese loan. But in 2015, the market and political situation changed and the loan and deposit rates changed as well. The state offered us a maximum of 3%, and the rate on the Chinese loan was already almost 7%. Therefore, it became impossible to maintain it at the expense of deposit interest.
At the same time, in the contract for the supply of grain, which was planned to be purchased for loan funds, a mandatory discount appeared (the so-called preferential margin) – 5 USD per ton for the sale of grain to CCEC.
Moreover, the Chinese loan consisted of two parts. One part was for grain purchase. Another – for purchase of Chinese plant protection products and agricultural machinery (the corporation operates a land-bank of 6 thousand hectares. – Ed.). We do not use the second part of the loan funds, although we pay 90,000 USD for maintaining of the account. That is, in 10 years we have already paid 800 thousand USD, in fact, threw money away. In other words, if initially the financial terms of this loan and terms of delivery were favorable to Ukraine, since 2015 they have changed for us in the opposite direction, which results in permanent losses.
The financial burden for the company is also the non-return of foreign exchange earnings of about 200 million USD in 2014/15. The corporation is fighting for these funds in the courts. So far to no avail.
– How did the loan conditions for us deteriorate?
– The fact is that our counterparty – the corporation CCEC –- is not a professional accredited grain trader in China. It has nothing to do with grain at all. The name of the company is China National Complete Engineering Corporation. It is possible that this very circumstance allowed Ukraine to initially obtain extremely favorable conditions for itself. There were small volumes of trade in the early years. However, then the Chinese party initiated the signing of several additional agreements, gradually changing the terms of supply and pricing formula to less favorable for us. Today, the terms of supply are completely non-market and in case of performance – unprofitable for SFGCU.
The problem is that China Eximbank issued the loan under state guarantees from the Ukrainian government. If we do not find the way out, we will have to open the state guarantee, i.e. pay from the state budget. There are two possible scenarios, either the state will pay the next payment on the loan, which is 96 million USD, or at the request of the bank, pay the loan balance of 900 million USD, plus interest. Of course, no option suits us, so we must hurry with the decision.
– How much time do you have until H-hour?
– Until January 21, 2022. But, in fact, there is no time. Firstly, our banks are actually going on a “big break” from December 20 – Christmas and New Year holidays, which the country celebrates for a month, and there immediately China enters its New Year’s celebrations. Therefore, the deadlines are very short, and even negotiations have not yet begun. However, it is necessary to discuss the restructuring of the loan, change the rate and time limits and separately agree with the trading partner on prices and terms of supply. CCEC was identified as China’s general trading partner, so we had no choice of whom to trade with.
Under the Contract, we were to supply 5 million tons of grain annually. But obviously, these are some unrealistic commitments, because China does not import so much from all over Ukraine. Not to mention that CCEC has never had such a quota for imports to China. Over all these years, about 6 million tons were delivered. However, we constantly receive claims about non-delivery.
– What are the types of these claims? Are we required to pay a fine for the unsold lot?
– Yes, the contract is concluded on the principle of “take or pay”. Only in our case: cargo or pay. This year, the company has made about 90 offers for a total volume of more than 4 million tons, to which the Chinese have not even responded.
There is another problem. The contract initially provided for the purchase of a list of crops, in particular, barley, wheat, and corn. However, since the signing of the contract, Ukrainian wheat has not yet been certified for supply to China. That is, the supply of wheat from Ukraine is blocked at the state level. And this is the second reason why we cannot fulfill our obligations in full. In fact, we ship mainly corn to China, which reduces our ability to supply other crops there.
– All the problems you mentioned have been going on for years, and no one has dealt with them before. Why is the situation, as they say, pushed over the brink?
Firstly, our Chinese partners require discussing all controversial issues regarding this loan only at the intergovernmental level. That is not always easy to arrange. During 10 years SFGCU saw 14 heads. Each of them, realizing that there wasn’t any H-hour in the short term of the governance, was not willing to deal with controversial issues. If something had to be signed on behalf of the government or the corporation, such as unfavorable amendments to contracts, everyone knew that no one would be responsible for it. Everyone understood that the only person to deal with the problem would be someone left with no choice but to face it during the tenure. So, we and the current government of Denys Shmyhal will have to solve it.
I would like to notice at once. Despite the pre-default condition under oppressive loan liabilities, even with the low level of working capital in the corporation, it is not a question of default before our suppliers and buyers. Indeed there are difficulties in the relationship with our largest creditor, but no one will allow the bankruptcy of the corporation. Although I doubt that the company will survive after one more change of the management team.
– How are you going to fulfill obligations without working capital?
– We have working capital, but with their current level we cannot talk about any leadership in the market. We will provide trade activities, but temporarily leave the TOP-5 domestic exporters, because now the corporation cannot physically provide large volumes of trade. We consciously give up market positions to transform and become more efficient from the business point of view.
– Do you have estimates of the decline in the market reputation of SFGCU in monetary terms or other indicators?
– It is difficult to calculate, but over the past year the circle of our buyers has narrowed very much. Due to constant scandals and criminal cases around the corporation, large transnational partners refuse to cooperate with SFGCU. When it comes to the first echelon of transnational companies and other potential buyers, our losses are almost 90% of counterparties. Therefore, we declare everywhere a complete renewal of the company’s core management and guarantee the integrity of the relationship with our customers and suppliers.
– What is happening now around the problem loan – consultations, negotiations…?
– Recently a special meeting under the chairmanship of the Vice Prime Minister of Ukraine –Lyubchenko was held, to which our Chinese partners were also invited. We presented them our crisis bailout plan and offers regarding restructuring terms and conditions.
In general, the government commission expects from us in the coming month a global restructuring plan with a clear financial model, how we see the fund raising, and how the company will continue to exist.
Critical decision of government: SFGCU should survive and continue operating. It should be transformed into a global state national grain trader with a full cycle of grain production – from cultivation to sale. In fact, the Chinese have also repeatedly stressed that SFGCU should have a land-bank for growing goods required for supply to China.
As the evidence from business practice shows one of our branches in the Kherson region, which cultivates about 6 thousand hectares of land, this option can be quite profitable. Therefore, we have already come up with a proposal to form a land-bank, perhaps this will happen through the provision of state land and lease.
– What if the Chinese party refuses to discuss any options, do you have a “Plan B” in this case?
– Yes, we have. Today we suggest not to stop and look for alternative sources of financing. It is necessary to repay the loan to the Chinese Eximbank and move ahead with a clean slate. We have already presented a detailed plan to the Cabinet of Ministers, now we are at the stage of discussion.
Or if we keep the agreement with the Chinese in operating condition, it is better not to refuse to cooperate with the current trading partner, and to involve him for more specialized task. For example, to the modernization of our elevators, port infrastructure. It seems that he will be more useful here than in grain export.
– What do you offer to establish the effective operation of the corporation? How to pull it out of losses?
– In addition to the land-bank, it is necessary to create a non-resident company on the basis of SFGCU to intensify our trade abroad. The corporation should be able to sell not only from Ukraine, but also act as a transnational trader, trading with different countries.
The non-resident company significantly simplifies commodity and financial transactions with external counterparties. The presence of such a satellite as part of the corporation is a market necessity, which caused by complex domestic legislation, which does not allow state-owned companies to act quickly and efficiently in some situations. Of course, the issue is not that SFGCU should creat any offshore, not at all. It is important to choose the right European jurisdiction, probably Switzerland. In this case, full transparency, legal purity and controllability of the affiliated company will be ensured.
In any case, a non-resident company will provide us with tools and opportunities. We believe that as a result, this will expand our “procurement scope” by 50-60%.
Further. Risk hedging mechanisms on commodity exchanges are not yet available for our company. Therefore, we plan to implement an internal risk management system. It will be based on fundamental market analysis and diversification of price risks due to the distribution of goods items. We plan to develop this area and deepen it by involving specialists.
Today we want to inform the world and domestic consumer about two key points: the company has a new team which understands what it is doing and that returning a good reputation among our contractors is high-priority task.
– Regarding purchases of agricultural goods of unknown origin and problems with VAT refund. What will you do next to avoid such situations?
– When goods are purchased without confirmation of their real origin, thus a fictitious commodity weight is formed, the documents of which are used for illegal VAT refund from the budget. These are the so-called “VAT carousel fraud”. For unknown reasons, the previous management removed from the regulations on the work of the procurement department the requirements for goods inspection – the origin of the grain and the availability of documents confirming this. For example, the requirements to the producer to present a land lease agreement, etc. In 2021, VAT non-refund under such schemes may amount to about 300 million hryvnias. We do not yet know how much grain is in the surplus stock in the elevators, also we have no confirmation of its origin.
That is why we are currently conducting our own inspection; the corporation is also inspected by the Office of Large Taxpayers, the State Audit Service of Ukraine and the Ministry of Economy. Large-scale violations have already been identified, which will soon land on the desk of the leadership of the state and law-enforcement authorities. We will re-initiate the revision of certain regulatory documents before the government and try to return the forward program. Previous management dissolved even this division in the corporation as useless.
– To whom and what exactly will you offer on terms of the forward? Will this tool be interesting for the manufacturer?
– We will meet the needs of a small producer, he needs more money to invest in future harvests. But at the same time we will strictly check our potential partners. Stories with financing and concluding forward contracts with short-lived companies or “empties” are no longer allowed.
Our team is currently developing a number of new competitive tools which we will offer to domestic agricultural producers. I think that the target consumer of our product and partner should be a farm with an asset of at least 2 thousand hectares of land.
Now forward instruments are no longer relevant, so we will wait for the next “gap” of financing of agricultural producers in spring. Until then, we will have a clear understanding of the corporation’s financial position and the potential needs of farmers.
– Tell us, how do you get under control the staff?
– Over the past month, we have completely renewed the management of the corporation, replaced all department directors. Thus a global staff purge was conducted. Some people, who had worked in the corporation before, were involved in the work; some completely new people were invited as well. We plan to change 90% of on-site managers, all elevator directors. Now we are open to accept people for these positions.
– Will not it be a catastrophe waiting to happen due to rapid-dismissals, which will then be appealed against and people will return to office?
– I don’t have any illegal dismissals. We say goodbye to people only by agreement between the parties. Believe me, no one has yet left with the legal possibility of a legal claim. The human resources office has also been completely changed. Its involvement in the formation of the state of “ghost employees” in the corporation was proved, when people with salaries of 50-60 thousand hryvnias simply were in the staff and did nothing here. There were almost 30 people whom no one had ever seen. In this way, the fictitious salary fund was inflated, which the corporation still pays.
– What is the average salary for ordinary employees?
– At the level of 15 thousand hryvnias.
– What about directors of elevators?
– On the average 25 thousand hryvnias.
– Don’t you think that this is not enough for a line manager who operates with material values for millions?
-Yes, that’s not enough. But, unfortunately, there are no rapid response mechanisms in this situation. First of all, the owner of SFGCU is the state, so the corporation, like all others, has a large bureaucratic organizational superstructure. In order to change the principles of labour remuneration, you need to go through several rounds of approvals. And, secondly, it is necessary to build a fundamentally different system of motivation in the corporation, so that the salary of line managers was in direct dependence on the results of their production activities. We have 52 elevators, almost all of them are unprofitable. How to pay high salaries? For what? Just for fear of stealing?
– Why are elevators unprofitable?
-The first and most important reason is the total aging of equipment since Soviet times. These are not the technological complexes in which farmers now want to store grain. If competitors who build their elevators on new technologies need 20 workers to serve the equipment, then we need 150 workers. Don’t even get me started about their and our energy efficiency – it’s worlds different. We still have diesel dryers. That is why we insist on modernization.
– How would you comment on the recent acquittal by the Supreme Anti-Corruption Court of Valery Tomilenko, who was accused of conspiracy and stealing of 88 million UAH?
– If the court of such a high instance did not find any guilt in his actions, then either the evidence base was weak, or there really was no crime and criminal intent. The fact that Tomilenko signed oppressive terms with the Chinese on a preferential margin of 5 USD per ton six years ago is true. Probably he was motivated to do this by certain insurmountable circumstances. I heard the version that the corporation at that time could not trade with buyers other than China. And agreeing to that 5 USD gave us a free hand.
I would like to say that during management of Tomilenko we do not find any special irregularities. Andrii Vlasenko, the former head of “Liktravy”, is a different pair of shoes. In just 9 months of his management – it is about non-return of our vessels, the arbitrary inflating of the salary fund, the overestimation of the cost of purchases in everything where possible – fuel, gas, electricity, and so on.
– How can you you explain from the point of view of reputation your work in SFGCU on leading positions – in 2018 you were the adviser to the chairman, and then in 2019 the deputy. Thus, you were here at the time when all these problems were growing. How can you dissociate yourself from them now?
– When I came here, I was a legal adviser and had nothing to do with the company’s business. I can’t say that company did not cope with its duties at that time. I was originally a deputy of Iryna Marchenko, but then she built a personal leadership and deputies were not involved in decision-making. At that time I also can’t say that there were irregularities, imbalances. Then I was a deputy of Simon Chernyavsky. He did not delve into the life of the corporation at all, but this is my personal opinion. Simon had the idea to sell the company as soon as possible, therefore the production processes in it gradually stopped. Although, as it turned out, the state leadership did not support this idea. Moreover, they do not support it even now.
By the way, I was asked a similar question during the interview, when I was invited to head the corporation. I commented on it as now. I am fully aware that I will be asked more than once about this, but I guarantee that I will not have to blush. SFGCU will return to the five grain market operators. But first we have to get rid of all the criminal baggage, resolve the issue with the Chinese loan and put the organization on normal business rails.
– What gives you reason to say that you will do better than your predecessors? And what will keep you from the temptations which will always be in this position?
– My team and I avoid people who put instant enrichment above everything. I believe in moral human qualities and, if you like, in karma. Over the course of my career, no one can accuse me of irregularities. And what is more I have moral obligations to the people who interviewed me.
-Have you received carte blanche?
– You could say that.
– What if people who interviewed you, whom you trust and consider today as your home front, leave tomorrow, are you ready to be a subsidiary political player, as it always happened to the leaders of the SFGCU?
– The corporation is not my property, and I constantly repeat it to my team. And if the moment comes when we have to get up and leave, we will get up and leave. Well then political expediency won over business one again.
– How long will it take you to return the corporation to an effective business environment?
– If all our ambitious plans are fulfilled, it will be realistic to bring it out of decline within two years. But this is subject to the formation of a land-bank, attracting investment and building a new corporate business model. Upon the availability of the liquidity of the grain market and the fact that Ukraine is one of the leaders in the agricultural market, we will get out of the crisis quickly enough.
Recorded by Oksana Polishchuk, Kyiv