Substantial Debt to China by Ukraine’s Largest State-Owned Grain Exporter Creates Strategic Vulnerability, Complicating Company’s Privatization Plan

On March 3, 2020, the Ukrainian government moved its shares in the Ukraine State and Food Grain Corporation (DPZKU) to the State Property Fund for privatization, with the intention of modernizing the unprofitable company through private investment.  The hope is this will improve the company’s capacity to pay taxes and contribute to the state budget.  DPZKU is one of the principal companies involved in storing, processing, shipping and exporting Ukrainian grain.

The effort might be complicated, however, by the fact that the company is in a legal dispute with China National Complete Engineering Corporation (CCEC) and is trying to cancel an agreement, Annex No. 3, which was signed in 2015 and that allegedly includes restrictive terms that apply to a $1.5 billion loan taken from Exim Bank of China in 2012. 

CCEC claims that DPZKU failed to pay $5 dollars in commission for every ton of grain that was exported, as stipulated under their contract.  This interpretation is contested by DPZKU, however, which claims that the commission applied only to exports to China, not globally.  Based on Annex No. 3, the Grain and Feed Trade Association (GAFTA) recently ruled that DPZKU’s obligation to pay CCEC is around $4 million; however, that amount could grow to $126 million if 2018 and 2019 are included.

The leadership of DPZKU said that, based on the company’s current financial situation, it could only make regular loan payments until July 2021, and that any additional request from the Chinese borrower would lead to bankruptcy.  Such a scenario would reportedly activate a guarantee of $900 million plus legal fines from the Ukrainian State budget.  To avoid this scenario, DPZKU has asked Verkhovna Rada (Parliament) for a restructuring of its debt, which puts the privatization at risk.

Given the company’s outstanding debt to China and Ukraine’s efforts to privatize the company, it will be worth watching what requests are made in the course of any negotiation over this strategically important national asset.