Ukraine: Strangling The Golden Goose

What a difference twelve months can make. A year ago Ukraine was looking forward to a bumper grain and oilseeds harvest and cashing in on soaring world commodity prices.

Ukraine reaped a record grain harvest in excess of 53 million tonnes last year, 25.9 million tonnes of it wheat, propelling it to overtake Argentina (who in contrast had a disastrous wheat harvest) into fifth place in the list of the world's largest wheat exporters.

But twelve months down the line things look much different.

The wheat harvest in Ukraine will decline by 29.7% to 18.2mmt in 2009, according to the International Grains Council.

Ukrainian oilseed rape and wheat producing giant Landkom International PLC said today that it had been forced to raise £4.8 million from investors just to see it past this year's harvest.

The company increased it's plantings threefold for the 2008 harvest, increasing it's land bank to 115,000 hectares. This year things are much different, the company is said to be scaling back it's operations, cutting initial plans to sow 54,000 hectares this year down to just 34,000 hectares. Landkom says it has also postponed investments and expansion plans.

So why has it all gone horribly wrong for the Ukraine? Well, of course falling grain and oilseed prices have got something to do with it, but there is much more to it than initially meets the eye.

Businesses, and residents, in the Ukraine have made many painful adjustments in the wake of the global economic downturn. But as 2009 progresses, they are having to endure at least one more headache: aggressive tax collecting from a revenue-starved government.

Ukraine law says that businesses like Landkom can reclaim value added tax paid on grain that was exported and not consumed in the country.

There's just one small problem.

“When a tax officer came to do an inspection, they said to my accountancy team and auditors that they are laughing at us for claiming the refund, because the state simply does not have any money to pay us,” a Landkom representative is quoted as saying.

Tax experts say that the experience of Landkom is becoming increasingly common.

The tax authorities are said to be deliberately targeting medium to larger-sized businesses looking for supposed tax violations in an attempt to try to bridge a gaping budget deficit.

A recent report done by PricewaterhouseCoopers, the International Monetary Fund and the World Bank entitled “Paying Taxes 2009. The global picture,” ranked Ukraine 180th out of 181 countries in terms of the ease of paying taxes. Rampant red tape, corruption and the overall complexity of the tax system are the main problems in Ukraine’s tax system, according to the study.