Ukrainian dispute over land trade

Ukraine (Ajith Kumar, CC BY)

The International Monetary Fund is demanding that Ukraine abolish the moratorium on agricultural land trade which has been in force since 2002.

The draft law concerning this issue has already been submitted to the parliament, and the constitutional court is also supposed to examine the matter. The farmers, supported by economists, want the moratorium to be maintained. In February a group of 55 MPs, mainly from the presidential Petro Poroshenko Bloc, submitted an application to the Constitutional Court to declare that the moratorium on trade in agricultural land is unconstitutional (we wrote about the moratorium in January 2016 ). The application was initiated by MP Alexei Mushak. In December last year, along with two other MPs, he submitted a draft law in the parliament which would liberalize the Ukrainian market of agricultural land.

“Ukraine needs to actively attract investment, and the agricultural sector is seen as one of the main sources of revenues to the state budget and local budgets. The liberalization of trade in agricultural land will ensure that agricultural land is put on the market, which will be conducive to the full implementation of the ownership rights of the owners of agricultural lands, the acquisition of investments in Ukraine’s agricultural sector, an increase in the level of prosperity of the owners of agricultural land, and an increase in the availability of finance for agricultural production,” argued the MPs in the justification of the draft act.

According to the Deputy Minister of Agrarian Policy and Food Maxim Martyniuk, the lifting of the moratorium by the Constitutional Court would lead to a situation in which land would be sold without any controls and constraints, which would be dangerous. “This is a pretty risky move, because a sudden change of the status quo without any transitional period could cause chaos in the agricultural sector,” he argued.

In his view, “the main risks associated with the liberalization of the land market include the rapid concentration of land, deprivation of rural populations of agricultural land, and an even greater complication of the [negative] processes that are already occurring in the countryside.” However, he assured that, “there is no risk that cannot be mitigated or prevented.”

Who should get the land?

Anatoliy Miroshnichenko, a professor of agricultural law who is a member of the Higher Council of Justice, the Ukrainian equivalent of the Polish National Council of the Judiciary, believes that the abolition of the moratorium will not adversely affect the situation of land owners. In his opinion, in the initial period the prices of agricultural plots will not be high, but will gradually rise. “We cannot avoid the fact that at the beginning the prices will be low. But after all every land owner will be able to decide for themselves whether to sell or not to sell at that price,” he explains.

According to him, large agricultural holdings will not be interested in buying up land due to the significant fragmentation of agricultural parcels – today the majority of plots range from 2 to 4 hectares. However, currently the leasing of small plots of land is the basis of operation of between ten and twenty thousand Ukrainian agricultural companies, which are able to amass as much as several thousand hectares of agricultural land in this way.

Meanwhile, the President of the Committee of the Agricultural and Food Sector Entrepreneurs of the Ukrainian Chamber of Commerce and Industry, Oleg Yukhnovsky, points out that there is no meaningful justification for a decision to lift the moratorium, which doesn’t in any way hinder the conduct of agricultural activity.

“When it comes to the nearly 10 million hectares of state-owned land, the first question that should be asked is why is such an attractive piece of property put up for sale. In order to receive the next tranche of IMF loans or in order to secure the economic interests of the state and the society? Who will take over these state lands?” he commented.

In his opinion the government has no merit-based or legal grounds to undertake to lift the moratorium, and in Ukraine’s current situation, no foreign companies or foreigners will enter the Ukrainian land market (besides, even the politicians pushing for the abolition of the moratorium admit that they want to close the market to foreign entities). This, in turn, limits the circle of possible buyers to the people associated with the current ruling elite and their questionable fortunes, which they will be able to legalize by investing them in the land market.

Farmers won’t buy the land

The abolition of the moratorium could contribute to the liquidation of thousands of currently operating agricultural companies. They use land leased from the owners; however, according to experts, after the liberalization of the market the farmers will not be able to purchase the land and they could simply lose the currently cultivated land to their competitors – the huge agricultural holdings which have hundreds of millions of dollars available.

Ukrainian farmers have limited prospects of buying the agricultural land, because in contrast to the narrow circle of people from the ruling elites, they will not be able to afford it. In addition, their economic power is diminishing with each passing month.

The need to quickly buy land at a price of several thousand dollars per hectare would involve expenditures of several million dollars in cases of planting areas of several hundred or several thousand hectares (which are currently leased for a fraction of that amount, paid annually in the form of rent). Even the farmers from the European Union, supported with a system of subsidies, would not be able to afford that.

At the request of the International Monetary Fund, last year Ukraine eliminated tax benefits for farmers. In return, they were supposed to obtain the right to a VAT refund. As a result, they are now paying taxes in accordance with the general principles, but they never received the promised VAT refunds.

According to a Member of the Ukrainian Parliament, Tetiana Ostrikova, UAH4bn (USD156m) were allocated in the state budget for VAT refunds; however, the government did not adopt the implementing acts necessary for the payouts. At the same time the government also introduced new rules for the calculation of subsidies, which are disadvantageous for the farmers. As a result, in the first half of the year, that is, during the time of increased expenditures on sowing, chemical agents and field works, they may not get any subsidies at all, while in the second half of the year they may only get a part of the funds to which they are entitled.

Meanwhile, Vitalii Nelep and Mykhailo Savluk, professors of Economics from the Kyiv National Economic University, argue in their analysis published by the weekly Dzerkalo Tyzhnia, that in reality Ukraine has long had a land market, which is functioning in a form well adapted to the economic situation of the country, and the condition of Ukraine’s public structures. Consequently its liberalization would be not only unnecessary but even harmful.

“Agricultural land is subjected to market relations in their most basic form – leasing – and its economic utilization is affected by the positive impact of the market. We should not be fighting with the moratorium, but with the factors that led to its introduction. Such enormous amounts of money have been amassed from the black economy and from corruption outside the agricultural farms in Ukraine that if the moratorium was lifted, this capital would flood the land market and lead prices grow to a level unattainable for the vast majority of impoverished farmers (although possibly significantly lower than the real value of the Ukrainian chernozem-“black soil”). In such conditions, the inhabitants of the countryside, and especially the elderly, would willingly selling their shares, but the younger generation of farmers would not be able to buy them. These lands would then be taken over by the oligarchs, who would expand their latifundia. A one-off introduction of a great number of agricultural allotments on the market after the lifting of the moratorium would also lead to a reduction in prices,” assess the professors of the Kyiv National Economic University.

Farmers say “no”

At the end of March, during the Agricultural Congress in Kiev, representatives of agricultural communities announced a nationwide campaign against trade in agricultural land.

“Unfortunately, all of this is reminiscent of the situation with the voucher privatization of industry in the 1990s, which was dominated by nice slogans such as ‘Thanks to the privatization of enterprises every Ukrainian will become wealthy’. In reality we ended up with an impoverished nation and a small group of oligarchs who have become very rich,” commented the economist Vitaliy Skotsyk.

The authors of the draft law liberalizing the land market argue that since the introduction of the moratorium, “a state cadastral system and a system for the registration of property rights in real estate has been almost fully implemented in Ukraine, which in combination with other factors allows us to confirm the existence of the necessary technical conditions for the liberalization of the market of agricultural land.” The opponents, however, present specific data proving otherwise.

“If the trade in land is launched in these conditions, as the authorities are currently planning, chaos will emerge. In 61 districts the cadastral registers contain more land than actually exists in these localities. Several people are identified at the same time as the exclusive owners of a single plot,” commented the economist Vitaliy Skotsyk.

In order to get an idea of the quality of the Ukrainian registers, it is enough to take a look at the official cadastral map, where we can find, for example, agricultural parcels located in the sea.

The situation with the protection of property rights, especially in the agricultural sector, is also not good in Ukraine, as evidenced by last year’s wave of protests against the seizures of farms through forgeries committed in the state register.

“We have to solve many problems and then talk about the mechanisms of the land market. The inhabitants of the countryside do not know how to properly conclude a lease contract and under what conditions. The majority of the people who lease out the land have no visual contact with that land, and only some people know where their plot is located specifically and how it can be disposed of. If the land were to be put up for sale, the domestic producers simply do not have the means to buy it, and taking out loans is unrealistic,” commented Vitalyi Dankevych, of the Zhytomyr National Agroecological University.

He presented the results of sociological research carried out in the territory of the Ukrainian Polesia region, which indicate that 62 per cent of the inhabitants of the countryside who would like to purchase land do not have the means to do so.

The plans prepared in Kiev are facing growing opposition in the regions. Local governments are adopting resolutions opposing the abolition of the moratorium and presenting such changes as a threat to the population of the countryside.

In early March the Council of the Kherson Oblast – which is one of the largest agricultural regions of Ukraine – asked the president and the government to maintain the moratorium on trade in agricultural land.

“It is obvious that in the conditions of a lack of protection of property and investments, as well as an acute deficit of financial resources, even in the form of loans, the only consequence of the new land trade law will be that the huge agricultural holdings and corporations will proceed to buy up land. Already at this point the ten biggest agricultural holdings are controlling (on the basis of ownership or lease) millions of hectares and exerting pressure on small agricultural enterprises and family farms to give up their land. The elimination of the special tax regime for agricultural producers from January 1st, 2017 led to an even greater decline and deficit of funds in the farms,” argued the members of the council.

In their opinion, in this situation the liberalization of the land market would lead to a situation where the farmers, unable to cope with the pressure from the agricultural giants, would be forced to sell them their land. This would lead to the liquidation of the fledgling Ukrainian middle class, which has been built from scratch in the countryside.

“This would lead to the ultimate destruction of small agricultural enterprises and family farms, which are the foundation of agriculture throughout the civilized world, and also to mass unemployment and increased emigration,” they conclude.

EU without full liberalization

Many EU countries currently have drastic restrictions concerning trade in agricultural land. In Poland, since May 1st last year a person who is the owner of farmland with an area of 3 thousand square meters or greater, can only sell it to an individual farmer who has no more than 300 hectares of agricultural land, has the appropriate farming qualifications and has been personally running an agricultural farm for five years. The buyer also has to live in the territory of the given borough in which they have at least one agricultural parcel.

The law adopted last year also introduced a moratorium on trade in agricultural land. On the one hand, it banned for five years the sale of farmland constituting the resources of the State Treasury managed by the Agricultural Property Agency. On the other hand, it introduced a principle according to which the buyer of agricultural land will not be able to sell it without the permission of a court for 10 years from the date of purchase. Only relatives will be able to buy land from such a person before the expiry of 10 years, and it will also be possible to inherit such land. In the event of a breach of these prohibitions, the transaction will be invalidated and the land will be taken over by the Agricultural Property Agency, which will pay out monetary compensation.

In Germany in order to purchase agricultural land it is necessary to obtain the permission of the local administration, and farmers who farm for a living are preferred.

In order to acquire agricultural land in France it is necessary to obtain the consent of the local administration and to have a degree from an agricultural school or five years of experience in farm work.

In Lithuania, a natural person must prove their agricultural qualifications, and a legal person and its subsidiaries cannot own more than 500 hectares of land (of which no more than 300 hectares of land can be acquired from the state). The acquisition of land with an area exceeding 10 hectares requires the consent of the administration.

In Romania, the sale of agricultural land is possible through the administration which publicly announces the offers submitted by the owners and approves the buyer. In the case of plots below 30 hectares the approval takes place at a local level, and in the case of larger plots of land the purchase is approved by the Ministry of Agriculture.

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