"Black Grain": How billions of dollars are withdrawn from Ukraine and evade taxes

BusinessCensor continues its series of materials about shadow schemes that cause the budget to lose hundreds of billions of hryvnias.

Read the previous article about where three annual budgets for drone production are hidden here.

Today, we are talking about a scheme with the export of "black grain" worth billions of dollars.

Between 20% and 50% of Ukrainian grain exports can be used to withdraw currency abroad and launder money. At the same time, the laws that should stop such schemes either do not work properly or are " frozen" in the Verkhovna Rada.

Business Censor has been looking into why this is happening and who might be interested in preserving the schemes.

What are "black" and "gray" grain exports?

The "black grain" scheme is used to evade taxation and withdraw currency from the country. Unaccounted-for grain is bought from farmers for cash and registered to fictitious one-day companies that export it abroad.

Along the way, the cargo can change hands several times and is eventually sold to the final buyer. However, the money received remains with one of the intermediary companies and does not return to Ukraine.

"The farmer took this grain, it was black, it had no origin, registered it with a fictitious company, loaded it on a ship, the ship sailed, then he re-signed the grain to the same fictitious company several times abroad, they assigned the grain several times, the money did not return to the country, not a single penny of taxes was paid," explained Danylo Hetmantsev, chairman of the Parliamentary Committee on Finance, Taxation and Customs Policy.

The gray grain scheme is usually used by legal exporters. They buy grain from intermediaries who buy it from farmers for cash. Then it is exported abroad along with "white" grain. In this case, at least a part of the currency received from the final buyer returns to Ukraine. At the same time, such an exporter can claim a VAT refund.

Both schemes have been in place for years, but with severe restrictions on the withdrawal of foreign currency from Ukraine during martial law, their use has increased significantly.

Moreover, black grain exports have become an important component of the shadow economy, which drains state budget revenues in times of war.

For example, there is a scheme in which the currency is withdrawn through the export of "black grain" or a part of it is spent on the purchase of goods abroad, imported to Ukraine and sold for cash, which is used to buy grain again.

In doing so, the importing company can sell the tax credit to other companies.

The Bureau of Economic Security (BES) illustrated this scheme as follows:

Thus, the export of "black grain" allows the laundering and withdrawal of proceeds from other shadowy schemes involving the sale of goods or services for cash. In particular, according to the SSU, this is how the organizers of illegal gambling schemes withdrew funds from Ukraine.

How much does Ukraine lose from the export of "black grain"?

It is difficult to estimate the direct losses to the state budget from "black grain" export schemes due to their scale and the large number of participants involved.

The BES roughly estimated the losses to the state budget in 2022 due to non-payment of taxes on the sale of such grain at UAH 5.2 billion.

Assuming that the losses in 2023 were the same, the state budget lost UAH 10.4 billion in total over the past two years. This is more than ordinary Ukrainians have donated since the beginning of the full-scale war to the largest non-governmental charity foundation, "Come Back Alive," which helps the Armed Forces of Ukraine.

For comparison, this money could buy 650,000 fpv drones for the Ukrainian military or 76,000 scarce 155 mm shells for artillery.

However, the main danger of the "black grain" export scheme is the withdrawal of billions of dollars worth of foreign currency from Ukraine at a time when the amount of financial assistance from international partners is decreasing.

"The losses to the state budget are only a small part of the damage these schemes cause to Ukraine's economy. The grain market has now turned into a key point through which currency is withdrawn from Ukraine, not brought in," says Marian Zablotskyi, chairman of the subcommittee of the Parliamentary Committee on Finance, Taxation and Customs Policy, which is investigating the problem of black grain exports.

According to him, grain is widely used to withdraw currency abroad under the strict restrictions imposed during martial law.

"How does it work? You have, for example, cash on hand and need to exchange it for an asset abroad - cash currency or put it on a non-cash account. You find people who provide such a service: they buy grain for your money for cash, receive payment abroad, and transfer the funds to you," the deputy explains.

Billions of dollars may be withdrawn from Ukraine in this way, while the country is losing foreign currency from agricultural exports.

According to the Bureau of Economic Security (BES), in January-September 2023 alone, risky enterprises exported grain of unknown origin for UAH 133.9 billion ($3.66 billion), or more than 20% of the total.

According to the NBU, the total amount of non-returned foreign exchange earnings to Ukraine since the start of the full-scale war exceeds $8 billion, which has a significant impact on the balance of payments.

"Unreturned export earnings have almost doubled during the war. This is a problem, and we need to talk about it," NBU Governor Andrii Pyshnyi emphasized at a meeting with business in February this year.

Ukraine is losing $5-6 billion in foreign exchange earnings because of grain export schemes, said Danylo Hetmantsev, chairman of the parliamentary tax committee.

At the same time, all exports of agricultural products last year amounted to $22.9 billion, including grain exported by Ukraine for $8.3 billion.

His colleague on the committee, Marian Zablotskyi, confirms that the amount of non-return of foreign currency to Ukraine through grain schemes has increased significantly during the full-scale war.

"It used to be about $500 million a year. Now it is about two-thirds, even three-quarters of exports. That is, we are fighting for the 'grain corridor', but it is mainly used for money laundering, not for bringing foreign currency into the country," the deputy emphasizes.

What are the authorities doing to stop "black grain" export schemes?

The Ukrainian government has been demonstrating active efforts to address the problem of fraudulent agricultural exports for over a year. However, the problem has not been completely solved.

Back in January 2023, the Verkhovna Rada adopted a law that granted the Cabinet of Ministers the right to introduce an export security regime for the export of major grain crops - wheat, barley, corn, soybeans, rapeseed, sunflower seeds, oil and oilcake.

The law allowed only VAT-paying companies to export grain. At the same time, they had to actually block a part of their funds on the account as a guarantee of return of foreign currency earnings.

This law came into force a year ago, but the export guarantee regime never came into effect because the Cabinet of Ministers failed to adopt the necessary resolution.

The government explained this by the imperfection of the adopted law, EP reported, citing sources.

The authorities actively returned to solving the problem of exporting "black grain" only in November last year, when there were problems with the receipt of foreign currency from the United States:

1. The Cabinet of Ministers has banned agricultural exports by companies that are not VAT payers. In addition, the list of exporters was limited to companies that have registered in the State Agrarian Register administered by the Ministry of Agrarian Policy. This was supposed to exclude fictitious companies from the black grain export scheme.
2. The NBU halved the deadlines for settlements on agricultural exports from 180 to 90 calendar days. This should speed up the return of foreign currency earnings by legal grain exporters.
3. The Verkhovna Rada adopted in the first reading two bills aimed at countering "black exports" of grain.

The measures taken by the government and the National Bank have had some positive impact. Export revenues of the 200 largest agricultural companies increased 1.6 times in December 2023 compared to October, said Yurii Heletii, deputy governor of the NBU.

"Black grain" is not shipping. This is verified information from the SSU," Danylo Hetmantsev assured at the end of last year.

At the same time, Marian Zablotskyi believes that the decisions of the government and the National Bank are not enough to solve the problem.

"It has become more difficult to export shadow grain, but there is a lack of organization and real will to close this scheme. The problem is that everyone knows the scheme, and the Verkhovna Rada has twice passed draft laws in the first reading to address it. I know that law enforcement agencies have asked the National Bank for certain data to cover up these exporters' operations. However, the National Bank does not provide this data. And this story keeps stalling at the level of the National Bank and the Verkhovna Rada," the deputy said.

He emphasizes that the problem of "black" grain exports must be systematically addressed by law. If this process is regulated only by subordinate laws, corruption risks may arise.

"There are companies that agree to these rules, and there are those that agree not to... Each time, such measures have indeed led to restrictions on black grain exports and allegedly filled the budget. But, unfortunately, they also led to the fact that some officials enriched themselves," Zablotskyi explains.

At the same time, the draft laws No. 10168-2 and No. 10169-2, which were adopted by the Verkhovna Rada in the first reading at the end of November last year and were supposed to solve the problem of "black exports" and grain of dubious origin, have not yet been adopted in general.

The mechanism is that every grain must have a history. That is, only a VAT payer will be able to export, the VAT payer must have a VAT input for this grain, and so on up to the first producer. This whole chain must be VAT-paid. If you don't have a document proving the origin of the grain, you are not allowed to export it," Danylo Hetmantsev said about the essence of the proposed draft laws.

The Rada's Tax Committee was supposed to finalize them together with the Ministry of Agrarian Policy and submit them to the parliament for the second reading, but this has not happened yet. Hetmantsev explained the government's responsibility for the delay in preparing the proposals.

There are still no finalized versions of these draft laws, and it is not known when the parliament will consider them in the second reading, says Zablotskyi.

At the same time, the American Chamber of Commerce in Ukraine (AmCham) opposed a number of the provisions envisaged by them. According to AmCham member companies, such changes will complicate tax and customs procedures for legal exporters.

"An exporter should not be responsible for the discipline of its suppliers (producers and/or sellers of agricultural products)... Therefore, violations of the law by previous suppliers of agricultural products or their "risky status" cannot be grounds for blocking exports," AmCham said in a statement.

However, large international companies can also buy "black" grain for export through intermediaries and make money on it, says Marian Zablotskyi.

"The paradox is that most of the shadow grain is exported through international traders, including those represented by the American Chamber of Commerce," the deputy says.

He cites the example that even before the full-scale war, international traders did not return to Ukraine the foreign exchange earnings from 3-16% of their transactions.

" Ironically, the bulk of shadow exports are carried out through international traders," Zablotskyi says.

According to him, the situation has not changed.

"If you ask the grain market who is involved in such operations, it will be the same as in 2020," the deputy adds.