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BLOOMBERG: Ukraine’s Ban on Selling Farmland Is Choking the Economy

Kyiv keeps putting off land reforms despite growing pressure from the IMF and investors to create land market

James Gomez and Kateryna Choursina
Tuesday, 02 January 2018 16:09

The 1,400 acres of snowy farmland being churned into thick black mud by grumbling trucks and house-high red harvesters could be a picture of rural prosperity.

Instead, the early winter scene about 250 miles west of Kiev illustrates Ukraine’s failure to drag its most historically significant industry into the 21st century and help its economy recover from the country’s violent conflict.

Mriya Agro Holding Plc, the company hauling away the last of the sugar beet crop, owns none of the wide-open field. Under the snow, it’s a patchwork of 270 individual plots that the company leases for three to five years each. The peasants, who were bequeathed the land after the fall of communism, aren’t allowed to sell, and the company isn’t allowed to buy, so it has little incentive to spend any money to increase the harvest.

“If the company is the owner, it would be possible to invest more,” says Viktor Tarchynskyi, a foreman for Mriya. “Germans put in complex fertilizers every five years. We can’t afford to do that.”

Few things define Ukraine more than farming. Its people have lived, toiled, and starved on the land for centuries, and their economic and political struggles are dug deep into the soil.

It is here that Stalin’s forced collectivization drive exacted its heaviest toll. More than 6 million Ukrainians perished in the 1932-33 famine. One enduring legacy of that painful history is that land reform has been too sensitive for successive governments to tackle.

Ukraine tallied $13 billion in agricultural exports in the January to September period, equal to about 40 percent of total exports. The country is among the world’s top producers of sunflower oil, barley, wheat, and corn. Still, there’s huge untapped potential: While Ukraine boasts one of the world’s richest concentrations of fertile black soil, its crop yields are among the lowest in Europe.

Like so much in the region, it all harks back to the messy transition from communism to capitalism. Following the dissolution of the Soviet Union in 1991, Ukrainians whose forebears had been victims of collectivization were awarded parcels of land averaging four acres and together totaling 166,000 square kilometers (64,000 square miles), or an area almost the size of Florida. In 2001, Kiev passed a law prohibiting the sale and purchase of these plots, a ban that has been extended nine times.

More than 4 million Ukrainians—most of whom are now beyond retirement age—earn an average of $190 a year, or the equivalent in grain, sugar, or other commodities, by leasing out a four-acre plot.

The government has been under pressure from the International Monetary Fund and companies such as Mriya Agro to lift the ban. “This is a huge challenge for all of us,” says Simon Cherniavsky, Mriya’s chief executive officer. “We are all farming on short-term leases, which is not in line with the long-term returns that everyone expects to get in agriculture.”

Ukraine’s parliament voted on Dec. 7 to extend the moratorium through Jan. 1, 2019, while some argued for an extension to 2024. Without it, foreign companies from the European Union or the U.S. would flood into Ukraine, lawmakers say.

“Land will be taken from people for pennies,” said Oleh Lyashko, the leader of the Radical Party, in the debate before the vote. “And the land that is supposed to feed their grandchildren and children will feed large property barons and representatives of power structures.”

Larysa Hrynevych, 42, a Kiev resident, inherited two plots an hour outside of the capital from her grandparents about a decade ago. She says she is happy to lease out the land to a small company that plants sunflower, corn, and soybeans, as she is not about to move to the countryside to become a farmer. The arrangement earned her 11,500 hryvnia ($410) last year. “It’s good support for local people,” she says. “They can choose how they get paid.”

Nevertheless, calls to rescind the moratorium are getting louder as Ukraine’s economy continues to lag such other former communist countries as neighboring Romania and Poland. Gross domestic product contracted by a cumulative 16 percent in 2014 and 2015 because of the conflict in the east with Russian-backed separatists and growth has been tepid since.

Though agriculture is the largest single contributor to goods sold abroad, a World Bank report published on Oct. 3 said that farm productivity and yields in Ukraine are a fraction of what they are in other European countries, blaming the land law. Wheat yields are less than half of those in Germany, it noted.

Agroindustrial companies say they would be able to boost yields and make higher profits if they owned the land they farm. Myronovskiy Hleboproduct SA, a Ukrainian poultry producer that also grows wheat, sunflowers, and other crops, says the cost of having to manage hundreds of individual leases is a drag on investment, particularly at a time when wheat prices are depressed.

“Given the present level of grain prices, the cost of leasing land, and the headache associated with extending lease agreements, it’s very expensive to expand the areas we farm,” says Yuriy Kosyuk, its CEO. As long as the ban remains in place and the wheat market stays depressed, the company is unlikely to expand its farming operations, he says.

Agrotrade Group in Karkhiv lost 120 hectares of arable land in 2017 because of the vagaries of the leasing system, says CEO Vsevolod Kozhemyako. Hired thugs have been known to strong-arm small land owners into switching partners on leasing contracts, giving rival companies and local political officials tied to them an unfair advantage, he says.

“Politicians have fooled people with the myth that an open land market will lead to poverty and destitution,” Kozhemyako says. “But people are not getting the money they are entitled to if they could sell the land.”

Institutional corruption remains a key concern for Ukraine, which fell in the Transparency International’s corruption index to 131, down four notches from 2013.

As the first of the winter’s snow quietly blanketed a farmyard dotted with idled tractors and other equipment, Nazar Terekh, a crop specialist who works for Mriya, sought the warmth of a barracks used to house seasonal workers.

As other workers in dirty overalls filed past, Terekh quickly flipped through multicolored maps on his tablet to show visitors a cluster of sunflower land with blacked out squares, because some local owners decided not to renew their leases.

That complicates issues for Mriya harvesters, which have to be carefully maneuvered to avoid those plots, says Tarchynskyi, the foreman. “We always need large areas of land given our machinery is designed for a wide sweep,” he says. “It’s difficult to work because we have this checkerboard effect.”

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