The agricultural sector after the agreement with the EU: what are the threats and how the association will affect small business
By Thomas Otten, Director Otten Consulting
Signing an agreement with the EU has been postponed indefinitely, but sooner or later an agreement will be signed. How to prepare for it? We offer practical tips prepared by Otten Consulting specialists who will help you adapt to new market conditions and get a new impetus for development.
Otten Consulting is one of the leading Ukrainian consulting companies, which has extensive experience of working with small and medium enterprises in the agricultural sector of Germany, Austria, France, the UK, the USA and Ukraine. This experience allows us to assess the risks and opportunities for agricultural enterprises of Ukraine in the event of associated membership in the EU signing.
The draft Association Agreement with the European Union contains a paragraph on the creation of free trade zones (DCFTA Agreement), which means that new horizons are expanding for small and medium-sized businesses in Ukraine, but also requirements arise that one should be prepared in advance.
One of the key points will be the elimination of the so-called non-tariff barriers in trade. Since product standards in Ukraine are outdated and not internationally recognized, EU rules and regulations will be decisive. The current contradictory regulation and access to certification of products in Ukraine create favorable opportunities for corruption, as well as significantly impede trade and contain it.
In order for Ukrainian enterprises to be able to export their products, they must comply with both Ukrainian and international standards. Regarding imports, for example, products certified in Germany will have to be re-checked in Ukraine, which will lead to significant costs of time and money. Thus, the elimination of non-tariff barriers after signing an agreement with the EU will make international trade for Ukrainian enterprises in all areas, including in agribusiness, easier and faster.
In Europe, agriculture is largely subsidized by the state. The rate of these subsidies is significantly higher than in Ukraine, therefore European manufacturers have more opportunities to provide high quality at a reasonable price. This means that after Ukraine joins the Association with the EU, competitive requirements in the agricultural market will become tougher.
In the protocol of approving the Strategy for the Development of the Agricultural Sector until 2020, which was approved by the Cabinet of Ministers, our state declared its intention to prolong the preferential tax regime for the period of Ukrainian agricultural sector adaptation to the requirements of the European Union. One of the main tasks, in accordance with the indicated Strategy, is also to create conditions for increasing the inflow of investments into the agricultural sector and the entry of Ukrainian agricultural manufacturers into foreign markets.
Value added tax
The Ukrainian VAT system is generally consistent with the European one, and the Association Agreement will not affect it in any way. The European VAT system from the inside is very far from perfect and is also one of the main points for possible fraud. Therefore, in the near future, one should not expect changes in the VAT system, at least as initiatives from the EU.
The signing of the DCFTA will not lead to any formal changes in the accounting of agricultural enterprises. Ukrainian accounting standards were introduced in 1999, therefore they are based on IFRS (international financial reporting standards). The latest changes in them for agricultural enterprises were adopted in 2006. Ukrainian standards enable all enterprises, starting in 2012, including agricultural ones, to prepare and submit statistical reports in accordance with IFRS.
But this is precisely an opportunity, not an obligation for agribusiness. Although, of course, the practice of IFRS can significantly facilitate the conduct of joint projects, receiving funding from European banks and special programs. Many progressive companies already experience these benefits.
The company Otten Consulting checked a lot of financial reports, company specialists saw the results of the accounting departments work of many agricultural enterprises. And, unfortunately, we must note that the quality of accounting, especially in small and medium-sized agricultural enterprises, is often very poor. Local accountants are mainly focused on meeting the requirements of tax inspectorates and other authorities. Unfortunately, they are very often failing to ensure that the figures provided reflect the real situation in the company.
Negative counter balances and work-in-progress accounts (which is practically impossible), non-existent assets in the balance sheet of an enterprise, and the like — this is what actually occurs in practice. And this approach to accounting, of course, is not acceptable. The help of outsourcing companies is needed in this matter to implement a competent management accounting system, in particular, accounting policies, as well as to increase the level of knowledge of local staff members.
With the help of accounting professionals the company can not only save money and optimize costs, but also significantly expand its capabilities. In conditions of increased competition with European suppliers, the need for these opportunities will be felt especially urgently
Many agricultural enterprises lack financing, and interest rates in Ukraine are much higher than in Western Europe. For example, for a loan in US dollars it is necessary to pay an annual interest rate of about 10% to a Ukrainian bank, and a loan from the European Bank for financing imported equipment can be obtained at 6.5% per annum. Besides, the interest on compulsory credit insurance has already been included in these 6.5%!
In addition, it has been practically impossible to obtain a loan in foreign currency in Ukraine in recent years, and lending rates in hryvnias range from 20-28%. In order to get a loan from the European Bank, we need to return to the IFRS issue: since foreign financial institutions do not understand Ukrainian accounting standards, they require certified financial statements (official audit) in accordance with IFRS for at least the last two years for providing financing. Without this they will not even consider the application for funding.
Companies that want to develop will be forced to switch to IFRS, especially if increasing of the ability to involve cheap money to finance the Ukrainian agricultural sector is expected.
We expect exclusively additional opportunities for agribusiness and improving the quality of products from the Association Agreement with the EU. In fact, both the market and the final consumer of agricultural products will benefit from improved product quality and healthy competition based on market laws, rather than manual regulation and corruption. One no longer has to hope for further use of such mechanisms as friendly relations with politics and government.
There will be no influx of European products, because the Agreement provides a timeline for a transition to reducing duties for Ukraine, so that Ukrainian enterprises have the opportunity to increase the competitiveness of their products. Many enterprises are protected by dubious means from competition and can thus demand higher prices for their goods. Increased competition will reduce this profit and lead to lower prices, from which, first of all, the population will benefit, as well as small and medium-sized business.
The Agreement with the EU does not oblige to implement international accounting standards in the agribusiness of Ukraine. This is only an additional opportunity that can be used or not. Only the business owner can decide how important it is for him to apply such standards for accounting transparency or involving cheap financing