Archive for April 6th, 2017

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A tale of Firtash fertilizer – Ukrainian agriculture

April 6, 2017

With Dmitry Firtash clearly up against it with regard to a Spanish EAW and continued efforts by the US to extradite him from his Vienna lair (and Ukraine more than happy to action either Spanish or US extradition requests should he return to Ukraine), an out of favour oligarch’s life can become a little problematic.   Even more so when business partners and organisational structures that remain in Ukraine are simply nowhere near as predatory and/or persuasively coercive as the oligarch himself.

It becomes yet more irksome when long sought after assets such as Odessa Port Side go up for auction when relative power is diminished internally of Ukraine, and you also happen to be in debt to Gazprombank for close to $5 billion as The Kremlin starts to watch the kopekee it used to generously dole out to those it favoured largesse.

Nevertheless those strategically acquired assets providing a monopoly on certain sectors of the economy were carefully planned were they not – and deals were made to insure the anti-monopoly committees continued to issue a clean bill of health as those assets were accrued.  Not only did those assets bring oft dubiously sourced wealth, but they bought power and influence too via that monopoly.

And so it is with fertilizer, Dmitry Firtash and several subsidiaries to his Ostchem holding company (the long desired (and still beyond reach) acquisition of Odessa Port Side would have (more or less) completed the set of major fertilizer production industries in Ukraine).

The problem comes when unceremoniously dumped from influence and indeed turned into a target to be squeezed,  is that you are expected to pay your bills like everybody else and not have them subsidised and/or written off by the orchestrating chums/”owned” functionaries  within government.

So it comes to pass that 3 Ostchem subsidiaries, “Nitrogen”, “Rivneazot” and “Severodonetsk Association Nitrogen” cannot pay their gas bill to Naftogaz.  On 7th March, Ukrtransgaz therefore stopped supplying them with gas, which by extension meant production of fertilizers stopped at all 3 industrial premises.

Ho hum!  One of the current and future drivers of the Ukrainian economy is agriculture.  By the State not providing gas to these industrial units to then produce fertilizer for Ukrainian farmers, does that not have a very detrimental effect on agriculture and by extension agricultural exports and the national balance sheet?

Certainly Ostchem would like everybody to think so and prima facie, logic would be on their side – except that farmers are inherently planners as Mother Nature leaves them little choice.  Futures markets first emerged to provide farmers with the financial ability to plan.

To be sure there will be those among the agricultural community that pre-paid the Ostchem subsidiaries for fertilizer that they currently will not receive unless Ukrtransgaz turn the gas tap back on – and by then it will perhaps be too late.

Indeed the head of the Council of Entrepreneurs under the Cabinet, Federation of Employers of Ukraine (FEU), UkrMashBud (UMB), Ukrainian Agrarian Confederation, Agrarian Union of Ukraine, Ukrainian Club of Agrarian Business and the Association of Farmers and Private Landowners of Ukraine appealed to Prime Minister Groisman to cover the deficit of fertilizers, (in short turn Mr Firtash’s gas back on) claiming that imports cannot cover the fertilizer deficit, whilst simultaneously bemoaning the “dumping” of Russian fertilizer on the Ukrainian market at low prices.

For reasons of clarity, Dmitry Firtash has always been very influential within the Federation of Employers of Ukraine, until recently heading the organisation, and is hardly unknown to Dmitro Olinyk who currently (officially) sits atop the management.  The Ukrainian Agrarian Confederation is a member of the Firtash subservient Federation of Employers of Ukraine as, unsurprisingly, are others named above.

Thus a fairly Firtash friendly chorus supporting Firtash company claims that the Ukrainian government should find a way to finance the unpaid Firtash debts to Naftgaz in order to avoid an agrarian and economic disaster due to a lack of fertilizer.  The ever present issues of having oligarchy captured/monoplised economic sectors raise their head once again.

However, while fully acknowledging those agri enterprises that pre-paid the Firtash subsidiaries are now in a somewhat difficult position, how debilitating is this for an agri sector that always plans ahead and is critical to the Ukrainian economy?

Surely a good number of major agricultural concerns will have been prepared prior to the gas getting turned off at the Firtash enterprises (if they had not sourced from Egypt, Russia, the EU or other CIS nations) in preparation for the earliest opportunities in the planting season.

Despite the above claims of Ostchem and Firtash friendly organisations, that indeed appears to be the case.  The “Big 5” Ukrainian agricultural holdings all have made statements stating that they are 100% fertilizer ready, with several other large concerns claiming to be 70% (and above) prepared with regard to fertilizer.

Questions therefore are whether the Ukrainian government will find a way to facilitate Mr Firth’s companies fulfilling their pre-paid obligations – or not?

If they did so would it cover any internal fertilizer demand shortages any swifter than importing it when working against Nature’s clock ?

Who should pay?

It seems doubtful that some smaller agri businesses would or perhaps could pay again, but there is clearly no obligation on the government to do so.  Ergo should the State intervene in the market place or allow the market to function without interference – the net result being many law suits against the Firtash subsidiaries (which may or may not be paid regardless of any eventual court ruling) and perhaps a reduced crop and ultimately State bottom line at year end.

Even if it did so, sending all the wrong messages to the oligarchy and their captured sectors of the economy, it is a short term fix.  What of next year?  Or the year after?  Artificial government support is not the answer.

Naturally the sale (or long term lease, or perhaps give away) to a foreign owner of Odessa Port Side would be a significant step toward market liberalisation when it comes to domestic fertilizer production, but it by no means sufficient.  By hook or by crook, Ukraine will have to insure domestic access to foreign chemical producers and/or products, not only for the benefit of the chemicals industry and by extension for the agricultural sector (among others), but also to both directly and indirectly make the budgeted State revenues from such activities somewhat more predictable and less subject to the fortunes and whims of those such as Mr Firtash.

It remains to be seen what, if anything, the State will do – whether it should do or not.

Meanwhile a reader may ponder perhaps, just how healthy the rest on Mr Firtash’s empire currently is.

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