The agricultural sector of Ukraine during the Russian aggression

14 août 2022

Source: Program #Know More, a special project of the Kharkiv Press Club

Host: Oleksandr Shvets, Chairman of the Board of Kharkiv Press Club, Merited Journalist of Ukraine

Direct link to the interview:

Written version of the interview and its translation into English was prepared by AgroGeneration


Shvets: Welcome to the Kharkiv Press Club. This is another meeting within our "#Know more" project. Today we would like to talk about a topic that is extremely important for Ukraine, it is also called the “second front”. It is the agricultural sector, the supply of Ukrainian grain abroad, that is called the “second front”. I would like to talk about this topic with Valeriy Dema, an economic expert, investment expert, and vice president of the SigmaBleyzer Ukraine investment company. I welcome you, Valeriy Ivanovich!

Dema: Good day!

Shvets: Valeriy Ivanovich, the harvest has already begun and it continues. The President of Ukraine said that this year we will harvest significantly less grain than in previous years, probably two times less. In your opinion, will we actually harvest 2 times less, and what is the situation in the fields of Ukraine in general?

Dema: We will know in October the amount that we will harvest, but according to the indicators that we have today, and according to the area on which we have the physical ability to harvest, and considering the crop yield, the situation is such that the losses compared to last year will be at around 40%. If we take the indicators for wheat and winter crops, which are now being harvested, then last year 35 million tons were harvested, and this year it looks like about 18-19 million tons. But it is important to understand that not only the total weight must be taken into account. There is also such an indicator as grain quality. If last year food wheat, for example, was at the level of 40% of the total harvest, then this year it is about 20-25%.

Shvets: If we talk about the fact that there is a global food crisis and, of course, grain will increase in price, will this be enough, given the 40% drop in grain production that you mentioned, so that farms and agricultural companies have the possibility to survive?

Dema: From the point of view of those companies and farms that are located in the Ukrainian zone and in the zone controlled by Ukraine, this is enough. It all depends on prices, and on what will be the sale of grain. For those enterprises that are on the front line or in the occupied zones, unfortunately, no harvest will help them survive. There will be a crisis, and we must understand this.

Shvets: If we talk about your business, in which you work, in which you participate, SigmaBleyzer is an important investor in the Ukrainian economy, including the agricultural sector. We know the AgroGeneration company, which operates in many regions of Ukraine. If we talk about the situation in this company, as an indicative situation for Ukraine, and for large agricultural companies, to what extent did the war and Russian aggression affect your agricultural business?

Dema: The proportion is approximately the same as in Ukraine as a whole. In terms of assets that were directly affected by the military activities, these are our agricultural lands in the Kharkiv region. Of the 55 000 hectares that we had in cultivation before the war, in Kharkiv we have lost 26 000 hectares to date, the same 40% as Ukraine as a whole. In this case, we are demonstrative, because our parameters fully correspond to the general situation in Ukraine. Some of our assets are in the zone of occupation, where we don't even know what is going on. We have no way of finding out. Another part of our assets is located directly on the front line, these are Balakliia and Barvinkove (note: towns in the Kharkiv region), where there is simply no physical opportunity to carry out any field work. We plan to harvest in those fields where there is such an opportunity. We work and people work. Of course, we work differently than last year, because the workers now wear helmets and vests, and miners go in front of the combine harvesters, but we still work.

Shvets: After such a difficult situation, such a complicated harvest, and a hard agricultural year, what do agricultural companies and Ukrainian farmers expect? Will they have the money to procure fuel and other materials for the next season? Will there be finances to buy grain to sow in the spring?

Dema: Of course, I communicate with many colleagues and with large farmers, those who cultivate 100-200 hectares. On the one hand, they are all optimists. But you need to understand that, for example, the cost of spending on field work has almost doubled compared to last year and will continue to grow until next year. But everything will depend on grain prices. If logistics work as everyone expects, and prices reach the world level as they were before the war, then the prospect, although not entirely good, is at least bearable for such a period as the war. Everything will depend on logistics.

Shvets: Today we received information (note: the interview took place on August 12, 2022), that as of yesterday, 375,000 tons of grain have already been exported from Ukraine through the grain corridor. This is reported by the General Staff. Transportation takes place through the ports of Chornomorsk, Odesa and Pivdennyi.

Dema: There is also hope that transportation will be launched from Mykolaiv as well.

Shvets: Yes. Today, the Minister of Foreign Affairs of Ukraine, Dmytro Kuleba, said that probably, if Russia does not interfere, then Mykolaiv port will also work in this regard. Are these volumes of grain that we are talking about already a significant part of the volumes we are counting on?

Dema: Last year, the monthly volume of transportation through the ports was approximately 4 million tons. 375,000 tons is more than zero, but it is not enough to solve the problem. In general, if we take the entire average monthly volume, last year it was 4 million tons through ports and about 1 million tons through other land routes. Approximately 5 million tons was the usual monthly volume. As of now, it was possible to reach the volume of overland transportation of up to 2-2.5 million tons of grain every month, but today this is a maximum that is unlikely to be increased. If we can achieve, and this is realistic, at least 2 million tons of transportation through the ports, it will not be ideal, but it will already be a significant positive impulse in solving the issue of grain export from Ukraine. The fact that we were able to export almost 300,000 tons of grain in 2 weeks indicates that we will be able to export up to 1 million tons of grain in August and up to 2 million tons of grain in September. This is quite a positive indicator, and it has already started to affect the price in the market. If, for example, three weeks ago the price of wheat was 3,500-4,000 hryvnias (UAH) per ton...

Shvets: Are you talking about the domestic market?

Dema: There is no such thing as a domestic or foreign market. He is the only one. For example, if we consider the price of wheat in Egypt or in Indonesia as a foreign market, it is one thing. And if you take the prices that are in Ukraine, whether at the port or at the elevator, they differ only in the cost of delivery to the port or VAT. But this is one market. There are no external or internal markets in Ukraine, they are all interconnected. But if we can reach at least 2 million tons of grain transportation through the ports, this can bring grain prices up to about 90% of the world price level. In this case, it will be possible to talk about good prospects for the agricultural sector of Ukraine and the country as a whole.

Shvets: In your opinion, how reliable is the agreement on the export of grain from Ukraine, on the transport corridor across the Black Sea, which was guaranteed by Turkey and the UN? Can it happen that all of a sudden the partners who sat down together at the negotiation table and wrote this contract will leave the table, and the corridor will not be there again?

Dema: There are four parties to this agreement, three of which can be said to be capable and interested in fulfilling the agreement. There is a fourth side and this is the aggressor country, and it is not known what is in their head. Today, this agreement is in some ways beneficial for them (note: the Russian side). They will fulfill the terms of this agreement. I don't know what we can predict for the future and how much it protects us from them not fulfilling the terms of the agreement, but I think that I am an optimist and that they have no other choice. Because if they again provoke a bad opinion of themselves, for them it will be almost one of the last blows to their already bad position. I think that the chances that this agreement will work are as follows: approximately 70% - the implementation of the agreement, 30% - its non-implementation.

Shvets: But they (note: Russia) continue to steal our grain. There is information, and our embassy in Lebanon, as well as our experts, says that the theft of Ukrainian grain continues.

Dema: What we see on ships is a small fraction. As of today, almost a third of Ukrainian winter wheat crops are located in the occupied territory. A third of the harvest, even if it is estimated according to the minimum productivity indicators, is almost 4-5 million tons of wheat. What we see on the ships is 100,000-500,000 tons, which is a tenth of the potential harvest of Ukrainian wheat in the occupied zones. Yes, the thefts continue. This is one of their economic factors, why they started this aggression...

Shvets: ...and why they signed this agreement. To some extent, this agreement opens up the possibility of exporting stolen grain...…

Dema: They export not only what they stole in Ukraine, but also their own harvest. Russia is also an important exporter. Sanctions apply to them, so I believe that this agreement will work, because they have no other option than to comply with its terms, since their own harvest will also be blocked.

Shvets: Ukrainian grain is delivered mainly to countries in Africa and the Middle East. At least that was the case in the past years. The Russians have already created several problems for us in the mentioned countries. What should we do in order to defend our interests and our positions in these markets?

Dema: This is a difficult question. The actions of countries and the actions of companies in these countries do not always coincide. We deal mainly with businesses, and the problems are mainly created by governments. It is very difficult to predict what we can do; I do not have an answer to this question, because it is a very complicated task for our diplomats. Apparently, only active cooperation with international structures and the authorities of these countries will be helpful; cooperation in the sense that it is necessary to convey true information about what is happening. As an example, Lebanon, when a ship came there with stolen grain, and it could have moved on, but the work of the Ukrainian embassy with the government of Lebanon led to the fact that this grain was seized. Apparently, this kind of work will allow these issues to be resolved.

Shvets: In your opinion, will there be a global food crisis that will likely affect primarily the countries we are talking about now: African countries, Middle Eastern countries? Is the food crisis a threat to Ukraine in the current conditions, namely in the conditions of war and great tension in the world?

Dema: It is definitely not a threat to us. Even taking into account the loss of 40% in the volume of production, the actual consumption of Ukraine, if we count wheat, is a maximum of 10-11 million tons. Even with bad indicators, we have a sufficient supply of grain. There won't be a world crisis as such, but there will be certain problems. These problems should not be solved by Ukraine, but by the UN, and by the countries that suffer from these problems. We can help, but only if they help us. Helping others when others do not want to help us is not right. Therefore, I believe that there will be no crisis, but there will be problems that will eventually be solved by the initiative of those who need our wheat or corn.

Shvets: Including the UN?

Dema: Including the UN. The UN is such a structure... If the UN were not pressured by those countries that need it, then the UN would have little influence. This is my personal opinion.

Shvets: As we can see, there is little benefit from the UN in security matters as well.

Dema: The UN today is government officials, not an organization. And government officials primarily care about their positions and salaries, not about the global crisis.

Shvets: Let's return to the issue of Ukraine, the city of Mykolaiv. It turned out that the negotiations on grain, on the creation of this corridor, and the opening of the corridor coincided with the murder of Oleksiy Vadaturskyi, the head of the Nibulon company, which is the largest exporter of grain in Ukraine. Vadaturskyi was called the "king" of southern Ukraine. This murder, high-precision murder, the statements of the family and the beginning of negotiations on the export of grain - are these things related, in your opinion? What do Ukrainian businessmen say about this? The prosecutor's office says that it is probably a murder, and this is one of the main versions. In your opinion, how are these events connected?

Dema: I do not have detailed information about what happened there and the reasons why it happened. But everything happens according to some logic. The fact that this murder is targeted, ordered, is 200%. There is no doubt about this for someone who understands at least something about what a rocket, artillery and everything like that is. This does not happen by chance. It is hardly possible to call this murder highly accurate, but it suggests that someone was targeting, because aiming at a house and precisely at the part where people are located is targeting, and targeting is not accidental. This is definitely murder. But what is it related to, grain negotiations or issues related to the fact that Nibulon has quite a lot of assets in the occupied territory? One of the versions is that the Russians demanded something from Nibulon, but the company refused them, so this is revenge. It is clearly related to intervention, occupation, and war. This is revenge, this is murder. But for what exactly, or for what reasons, I have no information. It will not be entirely correct to use any rumors or unverified data.

Shvets: But there is logic. Vadaturskyi could influence the negotiation process. He was interested in expanding the export of grain...

Dema: If he was interested, he could influence only the activation of these negotiations. It is not entirely logical to take revenge for this. Revenge can be because someone wanted something, but did not get what they wanted. I do not think that this is revenge for his participation in these negotiations, especially since I do not know whether he participated in them or not. He had a certain position, and it was positive from the point of view of activating this process, but what exactly it was, it is very difficult to say today. This mystery will become clear one day. I think that in some time we will know the exact answer.

Shvets: You represent a company that has been investing in the economy of Ukraine for many years, including in the agricultural sector of Ukraine. What are the current sentiments of investors, international investors regarding further investment? The war continues. It seems that international business will probably not make any investments yet. But nevertheless, what is the situation now? What are the plans of international investors? After all, we understand that the war will end and will end with our victory. Not only we, but also international investors and the whole world are convinced of this.

Dema: To confirm this belief, I can cite several examples of our negotiations with investors, with our partners in the West and in the East. There is great optimism and expectation of the end of the war. Everyone is convinced of Ukraine's victory. I was surprised; I did not even expect such optimism from international partners. Everyone is waiting for the end of the war in order to actively continue investing. As of today, in the midst of hostilities, it is difficult to talk about it, especially in the east of Ukraine. But even today, taking into account investments in logistics, in transshipment terminals, in vehicles, we see that investments continue. We cannot say that they are big, but they exist. The fact of the existence of investments is very important, regardless of the volume. This fact indicates that the private investor is confident in the victory of Ukraine and is not afraid to invest even in the midst of the war. Of course, if compared with last year, the amount of investments in the agricultural sector fell, perhaps, by 10 times, or maybe more. A lot of projects are suspended, unfortunately. But the investment market has not ceased to exist. This is a key indicator. Yes, it fell, decreased, but it exists, there are investments. I have not yet seen such a volume of positive expectations for the post-war period in the last 20 years.

Shvets: Currently, dozens of international programs are being created to support Ukraine, namely post-war Ukraine, and post-war reconstruction of cities, as an example, the reconstruction of Kharkiv and many other cities, but all of these are state programs. This is a question of the state budgets of those countries that participate or have undertaken to participate in the reconstruction of Ukraine. But with regard to business, the rules are a little different here. Is there free money on the international market to invest in the economy of Ukraine?

Dema: I can add positive news. In parallel with interstate negotiations and the creation of plans for post-war reconstruction, the same conversations are being held among private investors. Today, there is a clear understanding that private investors are interested. As it turned out, there is even a whole business line, which is called infrastructure-based development. This policy is precisely aimed at those industries, those countries that are in a state of reconstruction after the war. The structure, directions, and volumes of investment are already being discussed among private business abroad and among investors. It is still too early to talk about specific volumes, but according to the parameters that are being discussed, the activity and volume of investments from a private investor will not be much less than from the state international structures. I have a feeling that we will be able to compensate, restore, and do even better than before the war.

Shvets: What is the reason for such confidence of international investors? Is it the fact that it is necessary to invest in the economy of Ukraine? Is it the result of signals from their own governments? After all, now there is unprecedented support for Ukraine. We all understand, and the whole world understands, that the world is divided into two parts: good and evil. We are on the side of good, and the world supports us because it is also on the side of good.

Dema: This confidence is a combination of various factors. Perhaps one of the first is respect and confidence. If people were able to withstand this war, then any business processes can be built with them. Ukraine has gained respect on the international market: political, military, economic, social, etc. The level of respect increased during these six months, not ten, not even a hundred times, but much more. Secondly, a very large number of large foreign investors did not even pay attention to Ukraine before. Example: Elon Musk. Therefore, an additional factor of confidence is the fact that the world saw us from a positive side and understood what we are. And the fact that Ukraine's economy works, although with support, but it did not collapse, and that people work even in such conditions - all this showed the world that we are reliable partners.

Shvets: I think it is important for us to maintain this high level of informational presence in the world…

Dema: Yes, it's a challenge. We must understand that there is always a phase of adrenaline, there is a phase of fatigue, and the longer this war lasts, the more fatigue can accumulate both in us and in the world. The only way to overcome this fatigue is information, it is attention, and it is informing about what is happening. As of now, we are supported, and the level of support is not decreasing.

Shvets: We have already talked about the fact that infrastructure facilities are the direction in which both individual states and businesses will invest. This is a very attractive investment facility today. What will be the most attractive sectors of Ukraine's economy after the end of the war? And will the structure of Ukraine's economy change?

Dema: I don't see any reasons or factors for the structure of Ukraine's economy to change. It is standard and stable. It is formed due to location, resources and orientation. There is one sector of the economy that will show significant growth. It is engineering and the military industry, which is not surprising. Today, the military industry of Ukraine has surprised the whole world. Yes, we still do not have many of them (note: personnel of the military industry). But what Ukrainian weapons demonstrate on the battlefield has shown that they are no worse than world weapons. Therefore, this industry will develop. All other sectors of the economy will not undergo significant changes, in my opinion. The main investments will be in infrastructure, as the most affected direction and the most important from the point of view of rapid recovery. Social infrastructure will be restored. But the general economic structure and economy of Ukraine will not differ significantly from the pre-war state.

Shvets: Perhaps you will correct me, but it seems to me, although I am not sure about this and I did not check this information, but in one of the interviews that you and I recorded about 5 years ago, we analyzed the economy of Kharkiv, the economy of engineering in Kharkiv, and you were quite skeptical about the development of mechanical engineering. Have you changed your opinion now? This growth in the field of agricultural production, which is expected, will probably require the development of agricultural machinery. Why in Ukraine, where there are scientific personnel, and technology, and there are areas, and there is a consumer, this industry should not be raised dramatically? What do you think about this?

Dema: You see, 5 years ago and now, and even six months ago and now, are two different countries, two different cities of Kharkiv. And you and I are already two different people compared to the time before the war. Of course, my perspective has changed. The new situation in Ukraine after the war will change the status of Kharkiv. Unfortunately, there are also disadvantages. The border with Russia is 40 km, 1-2 minutes of rocket flight, and this is not a very positive factor for the active development of the defense industry in Kharkiv. As a rule, the defense industry should be in the rear, not on the front line. Nevertheless, probably, according to my intuition and experience accumulated over a lifetime, Kharkiv, as an industrial center, will develop in the industrial direction even more actively than it did before the war. Much will depend on the creation of some special conditions. In order to compensate for the threats associated with the geographical proximity of Russia, it is necessary to create some special institutions. What they will be called, whether technoparks, or free zones, etc., it is not important. The main thing is that there will be investments in such special conditions. In general, I am now much more optimistic about Kharkiv's industrial prospects.

Shvets: I will continue your opinion, so you think that Kharkiv can be such a business card on the border with Russia that will show that our state is developed...

V. Dema: We will show everyone such a level of development of Kharkiv that our neighbors will burst with envy. We wish all of us a quick victory!