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22 May 2022



Brussels is negotiating with Kyiv to avoid a trade battle over fertilizers after Ukraine fired the first salvo – POLITICO

Ukraine notified the World Trade Organization last month that it would impose so-called safeguards to limit imports of nitrogen and complex fertilizers as of June 25 for three years — arguing it’s necessary to combat a spike in imports causing “material injury” to domestic producers, according to internal documents seen by POLITICO.

The safeguards are set to deal a major blow to European fertilizer producers, who have become increasingly dependent on the Ukrainian market, sending around €310 million worth of products to the country each year. Ukrainian farmers, in turn, have also become reliant on EU chemicals.

Kyiv denies that the safeguards are intended to completely block imports, insisting it’s about balancing the market.

But EU producers argue that the import data doesn’t justify this move and it could violate World Trade Organization rules, while Ukrainian farmers fear it may only strengthen the monopolistic position of the country’s largest fertilizer producer.

Brussels is currently in talks on the matter with Kyiv but the European Commission declined to give further comment.

Fertilizing ‘Europe’s breadbasket’

Ukraine is often referred to as Europe’s breadbasket due to its 41.5 million hectares of agricultural land — an area roughly equivalent to the size of Germany and Denmark combined.

Its increased demand for EU products to fertilize that land began in 2014 when the war with Russia erupted. Its neighbor has been increasing the price of gas — the main ingredient needed to produce nitrates — for Ukraine since 2015, thereby pushing up prices for Ukrainian fertilizers. Local companies weren’t able to supply the country’s huge agri-business with enough products, leaving a big hole on the market for EU companies to fill.

Kyiv says the safeguard measures are needed to “stabilize” the domestic market after this “extremely volatile period,” according to Taras Kachka, Ukraine’s deputy minister of economic development, trade and agriculture.

“We don’t want to block importation, it’s otherwise; we just want to ensure that producers have predictable circumstances of development,” Kachka said. “It’s an attempt to ensure balancing on the market.”

Jacek Zaborowski, a sales manager at Poland’s state-owned fertilizer producer Grupa Azoty, said the company was “surprised” when Ukrainian businesses started to show interest in Polish products in 2016 — before that time, the company hadn’t exported to Ukraine at all. He said that since then, around 250-300 agri-businesses have reached out to them to buy fertilizers.

“It was the Ukrainian companies that initiated those business contacts, who were actively looking for fertilizers,” he said, stressing that Grupa Azoty has never been an “aggressive” seller. “We’ve never swamped the Ukrainian market with fertilizers.”

Now, he says, Ukrainian farmers are major buyers for the company and “an important source of diversification of sales.” Any potential restrictions would have “negative consequences” for business.

Whether the amount of imports increased sharply enough for Ukraine to justify safeguards under WTO rules is the question, EU fertilizer makers argue. The trade body allows for the temporary imposition of tariffs or quotas if there’s a sudden spike in imports, or severe harm caused to the domestic market, for example.

Kyiv said in its WTO notification that imports of nitrate fertilizer had risen by some 37 percent from 2016 to June 2019, naming Bulgaria, Lithuania and Poland as the main exporters, along with Russia, Turkey and Belarus.

Under the new measures, EU exports of ammonium nitrates will be capped at 105,116 tons for the year starting June 2020. That quota will increase by 2 percent in 2021 and 2022. EU exports of urea nitrates will be capped at 216,422 tons with a similar 2 percent yearly increase of the quota level.

EU fertilizer makers argue Ukraine hasn’t fulfilled WTO criteria to merit these measures.

“We don’t have a sudden increase of imports, we don’t have a serious injury [to the domestic industry], and if there’s any injury, it definitely hasn’t been caused by the imports,” said Tomasz Włostowski, a Brussels-based trade lawyer representing a number of EU fertilizer exporters in the talks between Brussels and Kyiv.

“The increase of imports has to be recent, sudden, sharp and significant,” he added, saying Ukraine’s data doesn’t show this.

Włostowski said the data he obtained from the Ukrainian customs service shows an increase in overall imports in 2017, but since then the volumes have been similar to pre-2016 levels. Imports from the EU are growing but not rapidly, essentially replacing Russian imports. The Ukrainian government declined to disclose its own data.

Kachka argued that the definition of “sudden” growth in imports is “really flexible.” He added that Ukraine also followed the example of the European Commission, which slapped its own safeguard restrictions on steel importers in 2018, citing a diversion of trade flows into the EU caused by U.S. steel tariffs.

“If we compare with the findings of the European Commission on safeguard measures of steel, I think that the tempo of growth of importation of fertilizers is higher than the tempo of steel,” Kachka said. “It’s absolutely a comparable tempo and we decided that if the European Commission decided that this is a legitimate interpretation, why shouldn’t we do this as well?”

Kyiv also acknowledged in its WTO notification that the domestic fertilizer industry hasn’t been “severely injured” in recent years, which is another circumstance that allows for the use of safeguards.

Ukrainian production of complex fertilizers increased by 65.4 percent from 2016 to 2019, while its sales on the domestic market rose by almost 61 percent. The financial data for the nitrate industry in fact decreased during that period, but not significantly: production fell by 16 percent and sales by 5 percent.

Włostowski argues that there’s no direct link between the domestic industry’s performance and imports.

“National producers in Ukraine have been in a difficult situation for many, many years … Even if they’re in a bad situation now, it’s not caused by imports,” he added.

Farmers’ fears

European producers are not the only ones protesting the safeguards. The decision also enraged Ukrainian farmers, who have repeatedly demonstrated in front of Kachka’s economic development, trade and agriculture ministry.

Alex Lissitsa, the president of the Ukrainian Agribusiness Club, said the new measures will only make the price of fertilizers rise and will strengthen the monopoly of the country’s largest producer, Ostchem, owned by the Ukrainian oligarch Dmitry Firtash, which currently controls a vast majority of the nitrates market.

Last year, the Ukrainian Antimonopoly Committee declared that Ostchem is a monopoly and instructed the company to sell one of its five factories. The decision hasn’t been implemented yet.

Kachka says he doesn’t think the planned restrictions of imports will further entrench the company’s monopoly position.

“Together these decisions … go hand in hand,” he said, adding that once the Antimonopoly Committee’s decision is implemented and the factories are sold, the process of acquisition will create volatility on the market, which the government will want to prevent.

Ostchem did not respond to a request for comment by the time of publication.

Kachka said the discussions between Brussels and Kyiv to find a solution on the safeguards have been “constructive” so far and that he’s ready to find a compromise.

If they don’t, the EU could decide to challenge Kyiv at the WTO. What’s more, under the WTO’s safeguard agreement, the EU could decide to retaliate, imposing tariffs on other import sectors, for example poultry or eggs.

But for now, Kachka calls such a possibility “speculation.”

“We need to be aware that we … might retaliate on safeguard measures on steel as well. And it will just [lead to another] wave of retaliation.”

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