When Ukrainians celebrate the end of 2019 on Dec. 31, they will be welcoming a truly “new” year for their country — in agriculture.
Currently, Ukraine is one of six countries worldwide that still lacks a free land market. But starting in October 2020, Ukraine will abolish its moratorium on land sales and open a land market.
Lawmakers passed the land market bill on Nov. 13 in its first reading — a critical development for Ukrainian agriculture. But if the land market legislation isn’t properly finalized, it could cause problems, says Nikolay Gorbachov, 47, one of Ukraine’s top agricultural experts and president of the Ukrainian Grain Association.
He believes the bill is too profit-centric, lacking rules to increase agricultural productivity and instead focusing on land prices to generate investments.
“This approach is wrong,” Gorbachov told the Kyiv Post. “Just adopting the law and the mess afterwards won’t increase investment attractiveness.”
Ukraine vs. France
Ukraine’s proposed land market fails to draw from successful models in other countries, Gorbachov says. For example, in France, land purchases are limited to 2,000 hectares, and the average farm is just 160 hectares. Ukraine’s draft bill proposes a 200,000-hectare limit.
That limitations create incentives for French farmers to maximize land yields, and “the farmer irrigates the land, fertilizes it carefully to harvest more,” Gorbachov said.
It also ensures that French farmers maintain the integrity of their soil. “Once the soil is exhausted, nothing can be returned” for a long time, Gorbachov said. “No one asks such questions in Ukraine.”
French farmers also usually form cooperatives so transnational corporations can’t dictate their operations.
The results are visible. While Ukrainian farms typically harvest four tons of wheat per hectare, France’s yields are twice as high. The tendency is the same for corn. France generates 12 tons per hectare, while Ukraine generates only seven tons.
“The state should check on how efficiently the land as a resource is used,” said Gorbachov.
Before a farmer is approved to buy land in France, the buyer is also interviewed by local farmers. The questions range from logistical (what they will grow and what technologies will be used) to personal (whether they are married, whether their kids will go to the local school).
“In such a way, social issues are solved in France,” said Gorbachov.
Ukraine, in contrast, proposes an auction system, where whoever proposes the highest price can buy the land. It is absolutely the wrong system, the expert believes.
Models vary in other countries. In the U.S., every state has different legislation for the land market, and only some states allow sales to foreigners.
In Paraguay, land can’t be sold within 25 kilometers of the border and is entirely state-owned, so there are no private territorial disputes. That law is a direct result of a 19th century war with Brazil and Argentina, when the country lost 75% of its population.
“There are many approaches here. I think, in our country, there is no critical number of experts who could say to owners and those who operate on the land what the possible risks can be.”
Gorbachov recently travelled to Poltava Oblast, where he met a man who cultivates his family’s 300-hectare land plot, of which 100 hectares have been state-owned for the past 20 years.
The man, who fought in the war against Russia in eastern Ukraine, says the entire farm is his land, and he won’t give it up.
“The guy said he will defend it with a machine gun,” said Gorbachov.
Such issues can precipitate internal conflicts. “It’s a very sensitive question,” Gorbachov said.
Expensive gift, bad treatment
Gorbachov sees Ukraine’s infrastructure, much of which dates back to the Soviet era, as very developed but extremely poorly maintained, placing a limit on Ukraine’s agricultural exports.
“It looks as if we received a Bentley luxury car as a gift but don’t have enough money for proper maintenance, so we start repairing it with scotch tape,” he said.
Railways, currently controlled by the state monopoly Ukrzaliznytsia, are crucial for transporting harvests, and exports in 2019 are expected to be 2-4 million tons larger than a year ago, which Gorbachov says “will create more pressure on the railway infrastructure.”
Ukraine currently operates nearly 2,000 locomotives, which hardly satisfies demand from growing agrarian production.
“We have deficit of locomotives, and Ukrzaliznytsia does not have enough money to buy them,” Gorbachov said.
Efficiency is another issue. Data indicates that grain cars travelling from Ternopil, located some 400 kilometers west of Kyiv, to the sea can take up to 42 days to reach their destination.
“I could walk faster!” Gorbachov said.
While Ukraine purchased 30 locomotives from General Electric in 2018, Gorbachov says this is only a tenth of what the country needs.
“I think Ukraine needs at least 300 locomotives more,” he said. “When we talk about the deficit of locomotives, this deficit touches all Ukrainian industries, not only grain producers.”
For this reason, experts advocate for a railway transportation law that would allow private locomotives to operate in the country, but Ukraine’s parliament has held no discussions on the issue.
Nikolay Gorbachov, president of the Ukrainian Grain Association, shows the Kyiv Post on Nov. 6 where the grain producers have major infrastructure problems using railway transportation of grain freights for export. (Oleg Petrasiuk)
National security question
While river transportation is a necessary supplement to the railways, Gorbachov says a Sept. 24 law on inland waterways favors foreign ships and allows all nationalities — including Russian ships — to sail without restrictions on the Danube and the Dnipro.
“It’s very important to define which ships under foreign flags Ukraine allows to enter and which it doesn’t,” he said.
In the European Union, such relations are defined differently: If Germany accepts French ships, then France must accept German ones, Gorbachov says.
The Ukrainian bill also requires domestic ships to pay excise taxes on fuel, unlike foreigners. Under the draft law’s current provisions, foreign ships would earn $6-7 more per ton for river transportation than domestic ships.
But the worst threat is to national security. “The eastern border (with Russia) is blocked, but in the center of the country it will be open,” said Gorbachev. “How will it look when Russian ships come to Kyiv or Kremenchuk?”
At the same time, Gorbachev still believes that Ukraine needs the law on inland waterways, but in a different form.
If written properly, the law could increase river transportation of grain fivefold, up to 25 million tons annually.
VAT refund issue returns
Gorbachov also calls automatic value-added tax (VAT) refunds for agrarian producers a problem, something that has previously been termed a key step toward tax reform.
In the past, VATs were often delayed for as much as two years. That, combined with fluctuations in the hryvnia, could cause producers to lose money.
While VAT refunds have been well handled in Ukraine for the past several years, Gorbachov says problems returned this summer.
“Members of the [Ukrainian Grain] Association are complaining about delays for one month, two…The tendency is very negative,” said Gorbachov.
Lawmakers even introduced an amendment to the 2020 budget to kill VAT refunds for all grain exports. Fortunately, it was unsuccessful, says Gorbachov.
To Gorbachov, the move was a sign of desperation. “It means that the budget catastrophically lacks money and they are doing anything they can to fill it.”
“Since there is a clear lack of money in the country, authorities are ready to use any tricks and to use business to cover the country’s deficit,” Gorbachov said.
He feels that ending the refunds would be disastrous for the industry. “If there will be no certainty on VAT refund for grain exporters, grain traders will simply deduct 20% from the price.”
