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24 February, 2011  ▪  Oleksii Voronych

Betting on buckwhest

Administrative pressure and a higher fiscal load on businesses are driving up inflation

“A better life – today” has become a reality in the field of statistics: for the first time in the past seven years, the annual inflation rate (9.1% in 2010) was below 10%. This ointment has, however, just one fly — higher prices in grocery stores and on the markets, in some cases several times higher than the officially reported ones. Premier Mykola Azarov was even forced to make a public demand that the State Statistics Committee and the State Price Inspection provide him with true information on pain of personal punishment for the chiefs of these agencies. Agriculture Minister Mykola Prysiazhniuk said: “The central and most important thing for the Cabinet of Ministers and consumers is to get accurate statistics.” Here is something especially for the ministers: the issue is not with the official data. Since October 2010, when the prices of dairy products, eggs, and potatoes shot up, Ukrainians have been receiving “accurate statistical data” from trustworthy sources — supermarket shelves and bazaar stands. These sources show that the consumer basket became at least 30–35% more expensive in 2010. Meanwhile, regional price inspection chiefs said their agencies were regularly instructed by authorities higher up to “adjust” monitoring data that would have spoiled the official statistics.

Price truce

The culprits behind this year’s price hike are yet to be identified. “I demand that the State Pricing Policy Inspection, the State Tax Administration, and the State Consumer Protection Service use their legal authority to take stock of the situation in an objective way and take the necessary measures to protect people from unscrupulous merchants,” Mr. Azarov recently said. He cited data that buckwheat costs no more than UAH 4, while it sells at UAH 15 per kilo in grocery stores. “Why? Someone wants to capitalize on feverish demand,” he concluded. Buckwheat has become the inflation story of the season by going from UAH 4.65 to UAH 16–25 per kilo in the retail network in January–February 2011 after the harvest was lost in the country's summer drought. Producers say that the minimum purchasing price of buckwheat is UAH 7–8 and an average wholesale price UAH 12 per kilogram, while higher markups are caused by an increase in fiscal load after the Tax Code took effect.

On February 11, the Agriculture Ministry reported successes in combating inflation: the bureaucrats managed to sign a memorandum of understanding with market participants under which the purchasing price of buckwheat (from producers) should not exceed UAH 8,000 per ton and wholesale prices for retailers UAH 12.6 per kilo in the first six months of 2011. If the deal works, the end price of buckwheat will be UAH 14 or less.

Tamara Levchenko, senior analyst at Dragon Capital, is convinced that the “buckwheat pact” can be efficient only if monitored by controlling agencies. Incidentally, the premier ordered disciplinary punishment to be meted out to deputy heads in a number of oblast state administrations for … higher buckwheat prices. However, we need to understand that price limits and state control themselves drive up prices. The CEO of a buckwheat-producing company who spoke on condition of anonymity said that he was not interested in delivering buckwheat to traders at UAH 13 per kilo. This case seems to be typical. For example, Terra, a company producing buckwheat flakes, confirmed to The Ukrainian Week that it can’t buy buckwheat for production purposes.

The government found a very surprising solution in this situation — importing buckwheat from China. In this case, it will indeed become cheaper on the domestic market for a while but will be economically profitable to grow in Ukraine in 2011, and the country will face the prospect of not only gas but also buckwheat dependency.

Regulation

The reader will know that the food price hike in Ukraine in 2010 was caused by skyrocketing grain prices on the world market. Our government proved completely unable to adequately regulate crop exports. It all began with the customs offices stymieing exporters by doing things like blocking grain-laden ships in port. This was followed by introducing official – and unfair – export quotas which were issued under non-transparent schemes. Manoeuvres like this pushed even the leading companies such as Cargill and Louis Dreyfus out of the market. In 2011, only handpicked companies will be able to export grain from Ukraine. These measures would be justified if they checked inflation on the domestic market, but this is not the case. Agricultural producers that are not linked to the government will suffer from this monopoly on grain export in terms of lost profits, the inability to pay off credit, and a lack of floating assets for sowing. The government’s agricultural policy may result in the final collapse of the national agricultural sector.

The government is setting off its inability to carry out an adequate and well-thought-out economic policy by tightening the screws with, among other things, the help of the tax administration. However, this administrative price-forming factor is backfiring. “Tax officials do not simply monitor prices but also force businesses to make advance VAT payments, refuse to accept income statements showing losses, rather than profits, and, most importantly, delay the reimbursement of VAT. In these conditions, the only way to survive is to add every possible expense into sale prices,” Ukrainian Analytical Centre President Oleksandr Okhrimenkosaid. Some analysts call this factor in inflation the “corruption expense”. Such expenses have risen after the authority of the tax police was expanded. VR Committee on Agricultural Policy and Land Relations member Anatolii Matviienko said that the agro-industrial complex is leading the pack in terms of the bribe component which he says is pushing prices up as much as 30%. Fuel prices are expected to go up, too, making the fire of inflation burn even more.

“Our government, which is supposed to regulate, wants to control everything and everyone,” says Mr. Matviienko. Figuring out what this policy is leading to is a no-brainer: competition in the agro-industrial sector will decline; businesses that are not linked to the government will close; not knowing and being unable to foresee the next step the government will take added to rampant corruption will make the agriculture business completely unattractive. Meanwhile, the Cabinet of Ministers continues to feed us official statistics: it turns out that acreage sown with buckwheat grew in 2011.


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