AGRICULTURE

Ukraine prepares for farmland sales breakthrough with big questions still unanswered

Ukrainian society remains deeply divided over the end of the country’s farmland sale moratorium despite the potential for major economic benefits

Ukraine prepares for farmland sales breakthrough with big questions still unanswered
About the author: Ihor Kravtsov is managing partner and head of the dispute resolution practice at Evris Law Firm
Ihor Kravtsov
Wednesday, 08 January 2020 19:26

Efforts to end the 18-year moratorium on the sale of agricultural land are sparking heated debate within Ukrainian society and proving to be among the most controversial policy initiatives since the new government took office in late August 2019. In a country with some of the world’s richest agricultural land and deep cultural connections to the soil, this is not surprising. While many agree that a land market is both inevitable and beneficial, much will depend on the details of the finalized legislation and the manner of its implementation.

 

A Constitutional Right

The Constitution of Ukraine stipulates that land is the main source of national wealth and belongs to the Ukrainian people. In other words, the use of land should enrich the population. Unlike other natural resources, land offers the possibility of long-term undiminished returns. However, high-quality processing and significant financial investments are necessary in order to unlock the potential of Ukraine’s fabled black earth.

The moratorium on agricultural land sales has removed this resource from the market, which significantly restricts the ability of agribusinesses to attract financing. Political sensitivities surrounding the issue have prevented previous governments from ending the moratorium, but Ukraine’s new President Volodymyr Zelenskyy promised to lift the ban as part of his vision for energizing the Ukrainian economy. The country’s parliament, which is dominated by Zelenskyy’s Servant of the People party, voted through the first reading of legislation to create a land market in autumn 2019. Preparations for a second reading are ongoing. To put the potential impact of this legislation into context, the government has already announced ambitious plans to attract around USD 50 billion in land investments by 2028.

The economic arguments for the opening of Ukraine’s agricultural land market are strong. On paper, there is reason to believe it will result in significant gains for Ukrainian society and the national economy. Nevertheless, there are still widespread concerns over the nature of the process and the impact it will have on the future ownership of what many Ukrainians continue to regard as the country’s greatest and most sacred asset.  

 

Restrictions and Referendums

The moratorium may be on its way out, but a range of restrictions look set to remain in place. These will likely include limitations on the amount of land any single owner is able to acquire. Debate continues over the volumes involved, with limits of between 50,000 hectares and 200,000 hectares under discussion. It is assumed that the owner will be defined as the ultimate beneficiary, rather than the person or entity who appears on the title itself. Restrictions on concentrations of land are also envisaged, with this currently determined as 35% of any single territorial community, 8% of an administrative region, or 0.5% of the country.

Of all the problematic moments within the wider land sale debate, the issue that is causing the greatest wave of populism and political engagement is the potential sale of Ukrainian farmland to foreigners. In its present form, the Land Code does not permit the transfer of agricultural land to foreigners or foreign legal entities. However, this could change. MPs and government officials including President Zelenskyy have committed themselves to holding a national referendum on the issue of sales to foreigners. This has led to allegations of political manipulation, with the government accused of seeking to open up the land market while at the same time also maintaining support among an electorate which is broadly hostile to the idea of foreigners purchasing Ukrainian farmland.

 

Market Evolution

The opening of the land market could lead to concentrations of money as existing market players buy out areas they are already cultivating, typically on a rental basis. This may then lead to a growth in rental rates, leading to rising agricultural production costs. Naturally, manufacturers will shift their costs to the end user, creating the potential for rises in the cost of the average food basket for Ukrainian consumers.

Removal of the moratorium will also mean a redistribution of resources between current market players. Due to the rising cost of rent and the ability to attract additional financing secured by land, less efficient agricultural producers will have to give way to more efficient competitors. In the long term, it is reasonable to assume that agricultural holdings will be divided. World practice demonstrates that the kind of large agricultural holdings that exist in today’s Ukraine are less efficient than medium and small-scale operations, where transaction costs are typically much lower.

A key issue in the implementation of the government’s farmland sale policy will be the scale of state support for agribusinesses as they grapple with the challenges of financing land purchases. The 2020 state budget already provides for the allocation of UAH 4.4 billion to compensate the high costs Ukrainian agribusinesses will encounter when seeking loans to buy agricultural land. This is clearly a necessary step and will reduce the financial burden on domestic farmers, but there remain questions over whether it will prove sufficient to maintain the international competitiveness of the sector. The average rate for hryvnia-denominated business loans in Ukraine is currently around 23% per annum, whereas German banks issue similar loans to local clients at 2% to 3% per year, or around one-tenth of the rate in Ukraine.

 

Selling Ukraine’s State-Owned Land

Huge public skepticism also surrounds the issue of selling off the Ukrainian state’s vast land bank. Much of this land is currently being utilized extremely inefficiently, sometimes in violation of the law. This strengthens the argument for selling these state-owned plots, but also raises concerns over the potential for corruption. Many fear the process could be subject to manipulations regarding land valuations, purchasing procedures and other factors, with state bodies seeking to derive improper benefits. This pessimism is fueled by ample negative past experience of state selloffs. With the Ukrainian state currently the largest single landowner in the country, this issue is central to the success or failure of plans to create a farmland market that benefits ordinary Ukrainians. To a large extent, the sale of public land will serve as the decisive test for land reform in general.

 

Symbolic Significance

Anyone wishing to understand the passions aroused in Ukrainian society by the issue of farmland sales must first appreciate that Ukrainians have always endowed the land with a special spiritual value. This is reflected in the country’s ancient agrarian folklore, and can also be seen in the protections included in the modern Ukrainian Constitution. Efforts to address the land moratorium issue via Ukraine’s Constitutional Court have previously been rejected on technical grounds, leading to an appeal to the European Court of Human Rights in May 2018.

The issue is now at the top to the Ukrainian domestic political agenda and will likely remain so during the coming year. This is to be welcomed. The 18-year moratorium has led to a wide range of losses and opportunity costs for Ukrainian society as a whole. While there is much disagreement over the details of land reform, there is a clear need to create a market for the country’s farmland. 

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