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Russian sugar industry after january one, 2007: "The Day After"

14 июля 2005 года

Somehow couple of noisy market news, such as increase of domestic seasonal demand on sugar and grown raws import, as well as hot debates about EC sugar reform proposal has fall in shadow another potentially important event. On June 2 the Russian Prime Minister issued an order on signing of the > "> Protocol on staged lifting limits in mutual trade among the CIS member states> "> . What does it mean for sugar industry in translation from the bureaucratic language? The two-sided Russian-Ukrainian sugar agreement is to be lifted not later than January 1, 2007. There will be no import tariffs, quotas or other barriers for mutual trade in white and other sugars of domestic origin beet between the two states. Up until today the prohibitive Russian customs duty (USD340/MT, the same as for the rest of countries) practically bans legal import of Ukrainian sugar to Russia.

Russian sugar industry players have traditionally considered open frontier with Ukraine as worse than nightmare type of scenario. To comprehend the importance of June 2 decision one should remind what Ukraine meant for FSU sugar industry. It had been largest FSU sugar producer and processor and used to > "> export> "> to the rest of FSU republics more than 4MMT of white sugar (1987/88-90/91 average, USDA), or about 2/5 of total supply. By the level of sugar > "> export> "> Ukraine was the world> '> s second after EU. But over 90-es two parallel processes had taken place: dramatic deterioration of economic environment and technical performance of Ukrainian sugar industry and gradual raising import barriers on the Russian side. To protect domestic sugar market Russia initially introduced VAT, then established import quotas for trade with Ukraine and finally practically banned legal white sugar import through prohibitive import tariffs.

Does the lifting of trade barriers between two countries give a chance for reincarnation of Ukrainian sugar beet industry? Does it represent a real threat to Russian sugar producers, as most of Russian industry players tend to traditionally believe? In theory yes, but in practice we are doubtful, at least for the foreseeable future. More in-depth analysis is necessary, but briefly to say, the reasons are as follows.

Ukrainian sugar beet and processing industry has basically been in quite desperate condition. Ukrainian beet sugar production has shrank to about 1.4 MMT in 2002 and 2003, while marginally increased to 1.7MMT in 2004. Current yields are at 23 MT/ha. The industry is mostly represented by small processing plants (to the best of our knowledge only 12 out of 115 functioning plants have 5TMT and more daily processing capacity) with extraction rate at slightly higher than 70% (in comparison with more than 80% and up to 100% taking in mind molasses desugaring in developed countries). Huge investments are necessary to make the industry more competitive, although there exist a good bunch of relatively strong 30-40 plants in the country.

Being protected by high import tariffs and other trade barriers, Russian sugar beet production has substantially increased from 1.3MMT in 1998 to 2.3 MMT in 2004, while yields have constantly increased from 13MT/ha to 26MT/ha during the same period. Not to overestimate, since 2000 hundred millions dollars have been invested in sugar beet production zones.

The immediate paradoxical result of orange revolution was that Ukrainian government took the course towards agricultural trade protection. Even the decision regarding modest amount of raw sugar import quota (200-260 TMT) is pending, while import tariffs have been kept at prohibitively high level (EUR300/MT). As the result, internal wholesale prices have jumped two weeks ago to abnormally high level of USD650/MT, and couple of days ago to USD780/MT in comparis> on with USD540 at neighboring Central Black Soil Russian plants. So currently there are more reasons for Russian sugar to flow Ukraine than vice versa. In reality Ukrainian market has been feverish of smuggling of sugars from neighboring countries and official measures against smuggling.

Both Ukraine and Russia are knocking the WTO door. Russia currently looks a little ahead of its neighbor both in negotiation and internal adjustments process, but due to a number of reasons we believe the joining WTO for both countries would be rather simultaneous. In the framework of WTO accession process Ukraine is definitely to open its internal sugar market at least for TRQ system (reportedly, 260TMT of raws). It may cool down the internal price situation, improve competitiveness and in theory free the space for raw/beet sugar replacement schemes (duty free export of 260TMT of beet sugar to Russia). But it looks Ukraine must drop internal price to be competitive in Russia, that to affect producers> '> margins. One should also take in mind very unclear Ukrainian internal gas price situation. Current hot debate between Gasprom and Ukrainian counterpart on shifting to world market price for Russian gas (USD160 per unit in comparison with current USD60, still higher than in Russia) may be just a prelude to further developments. It would be difficult for Ukrainian industry to offset much higher energy prices with potential increase in sugar beet productivity.

"Net result" of above given and some other factors: currently we consider June 2 decision rather as strong challenge, but not a critical threat to the Russian sugar industry. What really necessary is urgent steps towards coordination of both countries WTO accession conditions (including fixing auction form of Ukrainian import quota distribution, etc.) in the field of sugar industry. It is in mutual interests of both countries industry players. Finally, one open question to our governments is hanging without an answer: is it viable to create an open agricultural and food market space among the states without parallel harmonization of foreign trade regimes towards the third countries?

Dmitri Rylko General Director IKAR

http://www.isco-i.ru/ paper was published in the ISCO-IKAR July 2005 survey

Source: ISCO-IKAR  |  #sugar   |  Comments: 8   Views: 132

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