Complex of counteractions to allow Kazakh miller to live though the difficult times with the minimum losses — Eugeniy Gan




Now the grain processing industry in Kazakhstan is going through a hard time. There are several reasons for this, but the significant reduction of the export deliveries of Kazakh wheat flour is the main one, which in general negatively affects the operation of the industry. More detailed information about the market, the measures, which could change it, drastically You can find in our interview with the president of the Union of Grain Processors and Bakers of Kazakhstan, Eugeniy Gan.


Eugeniy, in the beginning of our conversation we’d like You to give a short characteristic of the current condition of the milling industry of Kazakhstan.

In short, I can say that the segment of the grain processing in Kazakhstan stagnates for several years already. There are several objective reasons, but first of all, it is because of the decrease of the flour wheat export markets potential. In conditions when Kazakhstan delivers both grain and flour to the countries of Middle Asia, the business importer prefers the import of grain, for fair reasons. And in order the formation of the own grain processing industry to be more intense, the countries implement the measures of the none-tariff restrictions while exporting four.

Nevertheless, for the last 3 years (2016-2018) the total figures of the industry were stable. Kazakhstan having the market potential at 1.8 mln tonnes exported nearly 2.3 mln tonnes annually.


How did the dynamics of the production and export of Kazakh flour change in 2018/19 MY?

In the current season, the total figures of the industry worsened drastically. In particular, by the end of the FH of 2019 the export of Kazakh flour decreased by more than 20% compared to the same period last year.

According to estimations, in 2019/20 MY the stagnation will preserve. The losses in terms of the export markets this year can total not less than 30 thsd tonnes per season, according to our estimates.



The Central Asia is traditionally the main market of distribution of Kazakh flour. What are the positions this season?

Indeed, the export market of Kazakh flour is oriented mostly to the Middle Asia countries and Afghanistan. But in recent years there is a severe decrease of the flour export market potential in Uzbekistan and Tajikistan. Together with this, these countries actively increase the import of Kazakh wheat.

Afghanistan which is 3 years in a row was increasing the purchases of Kazakh flour today also develops the import of grain from Kazakhstan intensively, trying to develop own grain processing industry. Only for the 4 recent years Afghanistan increase the export of the grain by more the 10 (!!!) times — from 36 thsd tonnes in 2014 to 380 thsd tonnes in 2018. Moreover, during this period Uzbekistan increased the grain export volumes by 2.4 times — from 915 thsd tonnes to 2.284 mln tonnes.



Is it possible to explain more detailed, what is the reason of the decrease of flour deliveries to Uzbekistan?

The decrease of the deliveries in the FH of 2019 was caused, firs if all by the development of the grain processing industry in Uzbekistan and the measures of the systematic state support of the industry.

I should remind that last year Uzbekistan canceled the VAT for grain import. As a consequence, the drastic rise of the wheat deliveries to this country from Kazakhstan in 2018 – from 1678.5 thsd tonnes in 2017 to 2284.3 thsd tonnes in 2018.

The second, but no the last import factors is the differentiation of the transit and domestic tariffs in Uzbekistan. The transportation of flour via Uzbekistan for Kazakh millers is nearly $20 more expensive than for Uzbekistan millers, who transport the flour to the border point “Gabala-Hairatan” paying the internal tariffs. The math is quite simple.


How much the reduction of the export to this country is influenced by such factors as tariffs policy and logistics (rolling stocks availability)?

Well, I have already told about the tariffs. But we can say more about the rolling stocks availability. The prices for grains and the processing production are seasonal: the prices are minimal usually during the harvest and after it for 3-4 months, later the prices gradually rise and the trading activity falls. When the prices are minimal the demand to the rolling stocks is maximal, and as a consequence there are not enough of wagons. But, in my opinion, this problem has the other side. In particular, in January 2018 Kazakhstan delivered the record volumes of flour to the export markets — 270 thsd tonnes (while the 50 year average is 130 thsd tonnes). In February the export totaled 173 thsd tonnes, which was also much higher than average in February. And as a result, we had too much goods on hand and the prices for flour stopped…


To what extent the price for Kazakh flour is competitive in this region?

Kazakhstan, considering its geographic position, dominates on the market of Middle Asia. At the same time, the situation is absolutely different on market of Afghanistan – there Pakistan is actively present together with Kazakhstan. So, the lower the global prices for wheat grain the more Kazakh flour is present on the market of Afghanistan. The higher prices, the more presence of the Pakistani flour and less Kazakh flour.


Is there any prospects for the export of the product to other countries, in particular, to China?

We consider China to be perspective destination. It is necessary to consider, that Kazakhstan can increase the exports of flour (without the construction of the new mills) by 1-1.5 mln tone. Last year we have delivered officially to China nearly 32 thsd tonnes of flour. And there were more deliveries to China in terms of the border trade.


What measures does the Union of grain processors of Kazakhstan offer to restore the positions on the export market?

In terms of the countries, that for now are traditional importers of our flour, these are mirror measures on countries, which use measures of non-tariff restrictions while trading flour with Kazakhstan.

In terms of the new markets (in particular China) — we hold interstate negotiations to increase the quotas on delivery if flour to the country; we work on the decline of the customs duties. Moreover, we hold the row of measures inside the country to enter the Chinese market (e.g. packaging, standards, etc.).


Is it necessary to make any changed to the taxation policy?

The main problem of the taxation policy — is the VAT refund. In terms of flour export VAT refund the tax administration carries out the inspection in order to find and prevent the risks os non-compliance or (and) partial compliance of the tax liability by the taxpayer. The inspection is provided in accordance with the rules of the System of risk management in order to prove the certainty of the funds exceeding the taxes for added value and the criteria of risks (Rules of URA).

Herewith, the producers of four in these “Rules…” are classified as taxpayers ay risk (along with the producers of coats of cattle and small ruminants, and processors of ferrous and non-ferrous metals scrap). In accordance with this, the exporters of flour are subject to the formation of the analyst report “Pyramid” by suppliers and buyers of second and other levels.

The implementation of the ladder inspection, according to the controlling bodies, allows to find the violations of the tax legislation at all levels of “the Pyramid”, which should help to eliminate the violations found.

At the same time, we are faced with a paradoxical situation when the enterprise-exporter in fact is punished for the tax violations found at the third and further levels. Herewith, a system of the monitoring does not allow the enterprise-exporter to verify the “law-abiding” of the enterprises of the third and further levels.

Moreover, the exporter of flour in accordance with the common law can not be responsible for the acts of third parties. The representatives of the Ministry of Finance of Kazakhstan in private agree that the norm of the responsibility for the acts of third persons contradicts the existing legislation, but it is “convenient to provide the monitoring by the state bodies”.

As a result, the VAT is refunded up to 40% from the stated sum. The sum the non-refunded VAT to the enterprises grows, and for some enterprises this sum reach $1 mln…

Also, in order to be more export-oriented in terms of the processed products, we offer to use the system of the VAT differentiation while exporting the raw materials and products of processing (following Chinese experience). This means no refunding of the VAT while exporting the raw materials (wheat, oilseeds, etc.) and its full returning while exporting the processes products (flour, oils, etc.).

Also, we offered the automatic return of the VAT for the companies, that have clear credit and tax history for 5 recent years.


Does the government share the position of the Union of the Processors?  

Recently the sectoral issues have become so obvious, that they become clear to state bodies. The ministry of Agriculture of Kazakhstan this year did a great job to set up the roster of the milling enterprises, whose products are allowed to export to China. The first phase of the roster included 30 companies, and now there is work progressing over additional lists which includes 40 companies.

The Union of Processors of Kazakhstan has introduced offers to preserve and develop the export potential to the Ministry if National Economy of Kazakhstan.

We hope that the complex of the measures will be timely, which will allow to leave behind the hard times with the minimal losses.


In conclusion of our conversation could You please name the main tendencies which will be common for the Kazakh market of flour in the new season?

It is difficult to say something right now, as it is absolutely unclear how many and what quality will be the grain after the harvest, and what will be the prices. But the year is going to be unusual (it is a tradition now), for sure.


Interviewed by Oleksander Pryadko, APK-Inform Agency