Over the last year, Rinat Akhmetov’s agricultural holding HarvEast, which is one of the biggest latifundia owners in the east of Ukraine, has lost one third of its agricultural lands as a result of hostilities. The company’s management has also changed. The former HarvEast CEO Simon Cherniavsky is in charge of Mriya agricultural holding now.
In February 2015, the CFO and Operations Director Dmytro Skorniakov was appointed the CEO of HarvEast. In the interview to LIGA.net he spoke about the company’s performance, plans and prospects for 2016.
– Dmytro, do you have any problems working in Ukraine because of your Russian citizenship? Earlier you told us that you had been detained many times when entering Mariupol. Have you ever thought of leaving Ukraine? Why haven’t you done it yet?
– I do not have any problems now. My citizenship is never an issue in business relations. Normal people judge a person and not his passport. I abandoned the idea of leaving Ukraine as I did not wish to leave the company in the middle of the HarvEast season. I wanted to see the results of my work and harvest the crops. Once the crops were harvested the situation changed a little and the dust settled. In addition, I was offered to head the company. I was attracted by the idea to try the role of the CEO and I can say now that I really love what I do.
ABOUNT THE LAND BANK AND HARVEST
– What areas are under your control now and what about the land plots controlled by DNR? Do you plan to renew the lease agreements for 2016?
– Our land bank in Donetsk Oblast is 163,000 ha, including more than 148,000 ha of tillage. This includes 56,000 ha of farmland (with 51,000 ha of tillage) beyond the contact line and 107,000 ha (with 97,000 ha of tillage) in the government-controlled area, with one-fifth of them not cultivated because of the proximity to the hostilities area and field fortifications built there. These areas are a part of the so-called “grey area” on both sides of the contact line and have gone out of use. Some of the fields are mined.
All agricultural works in the non-government controlled areas are done by the local workers’ association. The managing company is not engaged in management. We are operating as normal in the areas under Ukraine’s control. We work on both sides of the contact line solely within the legal framework of Ukraine. HarvEast has long-term contracts with stockholders and does not need to renew them.
– In 2015, you have harvested 63% less winter crops than a year before. Has the situation changed today? What about the grain crops?
– We have already harvested summer crops. The overall yield has dropped nearly twofold year on year. We harvested 152,000 tonnes of grain and oil crops, including 101,700 tonnes of early grains, 46,100 tonnes of sunflower and 4,400 tonnes of corn. This is because the company lost lands in the Crimea and in the NGCAs of Donetsk Oblast.
We have managed to arrive at the profitability of the last year’s level thanks to the cost efficiency and effective sales policy. Given the last year’s developments, we have delivered good performance.
This year has been an ordeal for everyone. The company and our employees have endured the challenges. The situation in the eastern Ukraine made us change production processes and do seasonal agricultural works in a severe or sometimes even hazardous environment.
– What about the autumn seeding? What are the plans for 2016?
– To secure a harvest in 2016, HarvEast has already sown winter crops in the area of over 33,000 ha. As for the cropping plan, the holding has sown winter crops in compliance with all the technological standards.
In 2016, we plan to plant more legumes. In 2015, the legumes cultivated area was 2,800 ha and next year we hope to increase it by more than 200%, up to 8,800 ha. The reason is better crop rotation. Legumes are very good for soil as they are nitrogen fixing plants.
Also, we might have to write off some winter crops that suffered from lack of rain needed at a certain period of plant development. Instead, we will sow summer crops such as corn, sorghum, etc.
– You have mentioned that the previous year crops were sold at a big discount due to logistics problems. Is your system functioning well now? Who do you sell your crops to and what are the sales volumes?
– We have a well-functioning logistics and sales process in place now. Our key buyers are Cargill, Noble and other international traders, for example, Glencore, which has bought all our rape. Since the beginning of the marketing season (July 2015 – Editor’s note) we have sold about 85,000 tonnes of crops. We worked mostly under CPT and DAP terms (delivered at port) and we plan to enter FOB market (deliver the cargo to the port and ship it to the vessel specified by the buyer).
– Is the SCM trading structure of any help to you?
– The SCM policy is that all companies of the group work on an arm’s length basis. We work with UMG on this particular basis. This year we have sold 5,000 metric tonnes of wheat to UMG. The share of sales inside the SCM Group made only 5.88% of the total sales since the beginning of this marketing year.
In addition, we have formed a pool of buyers. If UMG offers a better price compared to the competitors then we sell to UMG. So far I cannot say that we have increased the sales volumes due to our cooperation. UMG is just one of our buyers. We’ll see how the situation will unfold.
ABOUT RESTRUCTURING AND LOSSES
– In summer, direct losses inflicted by the war were estimated at $10 million. Has the amount changed today?
– Our direct losses have increased since then. We cannot fully use our assets such as the seed plant based in the non-government controlled area. The holding’s direct losses run into millions of dollars in lost profits. It is impossible to calculate the exact amount of losses now.
– HarvEast decided to sell its Crimea-based assets. What assets do you still have in the Crimea? Did you take anything with you? Have you found a buyer? Are you ready to sell these assets to Russia?
– We have about 20,000 ha of land in the Crimea. The asset is for sale now. We cannot comment on the deal as it has not been closed yet.
– In late 2014, for obvious reasons the holding said that it was necessary to restructure its debt to the amount of $73 million. Have you reached the agreement and what are the terms?
– We have reached the agreement for 2015. Our debt was more than $80 million in early 2015, including the portion in the national currency, and most of it was restructured before 2016. The key conditions we negotiated with our creditors include the extension of financing contracts, interest rate reduction and a seasonal payment schedule given the specificity of the production cycle in agriculture. I cannot give any numbers for confidentiality reasons. Every case in the market is individual and depends on the position of the borrower and the general state of the market, a pool of creditors, financing facilities, mortgages, etc.
– What is the current amount of debt?
– The total debt is about $70 million. We are currently in talks on debt restructuring for 2016 and subsequent years. We hope to sign all the papers in the near future.
– Did HarvEast make any investments in 2015? What are your outlooks for 2016-2017?
– We have curtailed our investment programme and continue to invest in the most important projects only. For example, water treatment for plant-protecting agents. Water is very hard in Donetsk Oblast, so we have to use more chemicals. We have installed a modern reverse osmosis system to reduce the use of chemicals. It was our key investment project in 2015. We have also bought some bulk material spreaders and modern grain analysers. Overall, we have invested about $150,000 this year.
In 2016, we are going to replace about five to ten harvesters.
ABOUT LAND AND TAX REFORMS
– If we talk about the system of doing business in Ukraine, how do you assess the work of agricultural lobbyists? Today the Parliament has many experienced agrarians.
– The current leadership of Ukraine, both in the legislative and executive government, has a lot of professionals in agriculture, and many of them have modern views of the industry. We are having some positive changes now but we certainly want more than that. We wish the reforms were implemented faster. I believe that the government needs to offer for privatisation as many state-run companies as possible and start selling the state-owned agricultural land.
– Do you think that the introduction of the land market would facilitate the operations of your company?
– It would not affect our operations because we have long-term lease agreements for agricultural land. However, this market would lead to redistribution of the land resources. It would be a good thing for someone who has money, and for someone who has none – vice versa. Personally, I am for the free market as it is a self-regulating system. Therefore, the government should introduce the land market and start with the state-owned land. This reform should be as liberal as possible.
– What’s your view on the tax reform as regards the land?
– There are some attempts to cancel the VAT benefit for agricultural producers. It is not optimal, but if you cancel it and give nothing in return, the whole sectors will cease to exist. For example, milk production is unprofitable even now, and if you cancel the benefit, it will be totally unprofitable. In fact, the benefit can be cancelled, but there should be other compensation tools. For example, it can be replaced with something like European subsidies when expenses on capital investments are compensated for every hectare of cultivated area. It is not right just to cancel them – something must be given in return. Of course, the subsidies should be transparent, be beyond the control of officials and provide incentives to the companies operating officially. It is no secret that today, unfortunately, we have a big illegal market of agricultural land.