Ukraine, one of the world’s top 10 grain exporters, is facing increasing international pressure to drop controversial plans to introduce stronger state control over its agricultural exports.

The proposed regulation would create state export monopolies, reduce the income available to Ukrainian farmers, and drive away foreign businesses that have invested heavily in grain processing and export facilities, said a chairman in Ost-Ausschuss, the principal business lobby for German investors in eastern Europe

Ost-Ausschuss yesterday sent a strongly-worded protest to Viktor Yanukovych, the Ukrainian president, objecting to a draft law to enforce effective state control over the grain export business.

The German letter follows weeks of lobbying by the American chamber of commerce in Kiev, seeking to persuade the Ukrainian government to scrap the law, which would restrict companies allowed to export Ukrainian crops to those with a minimum 25 per cent state share-holding.

Eckhard Cordes, chairman of Ost-Ausschuss, warned that the new rules, due to be presented for a first reading in the state parliament in Kiev, would also disrupt the world grain markets.

“Such a step would severely damage the image of Ukraine as a long-term and reliable business partner,” he said in the letter. It was doubtful whether the draft law would be allowed under the guidelines of the World Trade Organisation, he added, while the creation of a new state monopoly would increase opportunities for corruption.

In a February 23 letter to Mr Yanukovych, the American Chamber of Commerce warned that if the legislation being considered in parliament was adopted, it would limit exports of grain and foodstuffs “exclusively by agricultural producers or agent companies selected by the government.”

“These rules … would drive out foreign trading houses that have invested large amounts in building up export facilities,” Mr Cordes said.

The worst losers, however, would be agricultural enterprises in Ukraine, he said. “Farmers will be forced to sell their harvests to the monopolies at lower than market prices. In the end, they will not have the money for essential modernisation.”

Cordes, who is also chairman of Metro, the German retail giant, said that if the modernisation drive in Ukrainian agriculture were stopped, and production increases were not realised, it would “take its toll on the already tense world grain market”.

Ukrainian export quotas imposed last year had already led to a sharp increase in world grain prices, he said, and cost Ukrainian farmers an estimated Euro2bn in lost income.

In joining Russia last autumn to restrict grain exports amidst global shortages, Ukrainian authorities managed to disrupt global commodity markets. Cargill, ADM, Toepfer, Bunge and other global agri-businesses that had invested billions of dollars in the past decade into processing and export facilities in Ukraine have protested to the government in past months.

Speaking on condition of anonymity, the head of one foreign grain trader in Ukraine said:

There is complete uncertainty on the market. In such a situation, who would risk buying grain except murky insider trading companies that seem to be close to the government?

We heard that one of package of legislation that could have introduced more state control and monopolies was dropped due to international pressure. But it seems that another draft law is still under discussion. Ukraine’s authorities have been testing the waters. If they get a chance, they will proceed with these plans because there is big time money to be made for them and their insiders.