Ukraine–Israel Free Trade Area is in the Making: Here's a Risk That Must be Managed

Ukraine is about to sign a Free Trade Area Agreement with Israel after concluding the sixth round of negotiations at the end of July. Now, there's a strong indication that the Free Trade Area Agreement could become a reality before the of this year.

Israel is one of the top twenty countries with which Ukraine conduct trades, especially in the areas of Agricultural goods. In 2016, Israel imported $292 million dollars worth of agricultural goods from Ukraine. As at the end of June 2017, Israel has already imported an equal volume of agricultural goods from Ukraine with the possibility of doubling the trade volume this year. .

Ukrainian seed oil exports making headlines for the wrong reasons

Sunflower oil is one of the top products that Ukraine exports to Israel. Economists believe that the developing Free Trade Area agreement could cause an increase in the volume of sunflower oil exports to Israel. However, we can't afford to lose sight of the risks posed by exportation of fake products, the recent scandal on the exportation of fake products in Europe is still fresh in our minds because of the public outcry and media attention that it garnered.

One of the factors that could potentially increase the risks of fake exports to Israel is that the competition to process oil seeds, especially soy and sunflower seeds is getting tougher in Ukraine. Hence, some producers who are eager to get their oils into foreign markets such as Israel might become inclined to pay less attention to the quality of their products.

News about fake adulterated sunflower oil from Ukraine first hit the newsstands in 2015 when importers from the Netherlands raised an alarm about high content of cholesterol in some batches of oil imported from Ukraine. The Ukrainian Institute for Consumer Product Testing has also raised the alarm on the possibility that Ukrainian oil extracting factories are producing fake sunflower oil. The institute notes that such unscrupulous acts are unhealthy for the Ukrainian economy because international standards organizations could sanction Ukrainian exports of sunflower oil.

Two years after the first outcry, the Institute of Consumer Product Testing believe that the problem of adulterated seed oils is becoming more acute. For one, there's a noticeable increase in the demand for chicken fat in the country. Brokers have offered a logical explanation that the increased demand for chicken fat can be traced to its use in producing bio-fuel. However, there's a tacit understanding in the industry that most of the chicken oil bought will end up as an admixture in sunflower oil.  

Yurii Chernobrivets, the Director of the Institute of Consumer Product Testing  notes that "chicken fat added to sunflower oil even in small amounts can cause an exponential increase in the cholesterol  levels of the oil. The worst part is that nobody seems to know the origin of such chicken fats. It can be waste from grill, which could be highly carcinogenic."

Some potential culprits of sunflower oil adulteration in Ukraine

One of the Ukrainian firms fingered in the purchase of chicken fat for the adulteration of seed oils is Allseeds, which as an oil-extraction factory in the Ukrainian port of Yuzhniy. In addition to oil-extraction facilities, the firm also has a decent storage capacity.

The scandal about sunflower oil diluted with chicken fat had earlier broken out in Egypt last spring. It is worthy of note that Egypt is another major importer of agricultural goods from Ukraine. When the news of the scandal broke in Egypt, the main Ukrainian firm fingered as supplier of the adulterated oil was Allseeds.

Israel must be proactive in managing risks in bilateral trade

Ukrainians understand the risks associated with diluted sunflower oil and relevant stakeholders are taking proactive actions to curtail the malaise. However, the more pertinent question is to ask is if Israeli importers of Ukrainian agricultural produce know the risks associated with such oils. It would be a shame if oils diluted with chicken fats and other by-products are already on the tables of Israeli people because it many kids and adults who are naturally hypersensitive to cholesterol might have been fed with such adulterated oils.

Interestingly, Allseeds appears to be largely unperturbed despite all the accusations about its involvement in fake oil scandals. The firm has announced that it wants to expand its production facility and its currently trying to court foreign investors for its expansion plans. However, the sentiment about Allseed in the Ukrainian financial landscape is that potential investors and creditors should conduct due diligence on Allseeds because of the mention of its name in fake oil scandals and because of rumors that the firm might be on the path to financial insolvency.

For what it's worth, the company can't seem to pay of  its $68M debt to state owned “Oshchadbank" in Ukraine. Many financial experts believe that $68M should be a relatively small loan for a big oil seeds processor company. Hence, the fact that Allseed is having difficulties repaying the loans suggests that the firm is in serious financial trouble.

Yulia Harkavenko, a leading expert of the Ukrainian consulting company UkrArgroConsult notes that Allseeds' plan to expand its production facility is a futile effort because there are far too many sunflower and soy processing facilities in Ukraine.

Hence, any investment to expand Allseeds' oil processing plant or build a new factory will most likely be a waste of resources because the factory will be mostly idle. Ukraine is already seeing a borderline supply glut in its oil processing industries (not just sunflower oil). Harkavenko observes that "before building something, it is necessary to think first if it will be profitable. Perhaps in three or four years the situation will change. Then maybe there will be need to build something new. But now, there are no reasons for this."

Final words…

Finally, it should be noted a company should not be reckless in its bid to increase revenue and expand profit margins to the point that it would endanger the health of the consumers of its products. More so, the principles of corporate social responsibilities dictates that companies should be patriotic – exporting fake or adulterated oils to Israel is not good for Ukraine's reputation and it could sour bilateral relations between Ukraine and Israel.