Editor’s Note: The Kyiv Post tracks the progress made by Ukraine’s post-EuroMaidan Revolution leaders in making structural changes in the public interest in a broad range of areas, from the defense and energy sectors, to taxation and pensions. Below is the main issue in focus from Dec. 1-8.
Summary
Ukraine’s black soil is famous around the world. The humus-rich chornozem, as it is known in Ukraine, in places up to 1.5 meters deep, provides the country with some of the planet’s best agricultural land. So prized is this soil, that there is even a black market for it — estimated to be worth $900 million a year in 2011.
Ukraine has about 42 million hectares of agricultural land (France, the European Union’s biggest agricultural producer, has 29 million hectares). Yet Ukraine’s farming productivity is among the lowest in Europe. The main reason for that is that there is currently a moratorium on the trade in agricultural land — state or private land may not be bought or sold, and large agricultural businesses can only rent the land they use for production.
As a result of this moratorium, farmers are unable to use their land as collateral against loans, as the banks will not accept collateral that cannot be sold off in the event of default on a loan. Farmers are thus starved of capital to invest in their businesses to improve productivity, by buying modern machinery, irrigation systems, fuel, fertilizer and seed stocks.
Experts estimate that the moratorium is thus costing the country between 3–7 percent of gross domestic product annually in lost productivity, lost efficiencies, and lost investments. The moratorium on the sale of private land has been in place since 2001, and is currently set to expire on Jan. 1, 2018. However, despite land reform — the opening up of the land market — being one of the principle conditions for Ukraine’s Western backers to continue to provide financial aid, parliament on Dec. 7 voted to extend the moratorium for yet another year, to Jan. 1, 2019.
Given all the downsides of the moratorium, why doesn’t Ukraine simply do away with it, as its financial backers in the West want?
Well, it’s complicated.
Populism
Originally, the moratorium on land sales was introduced in order to give Ukraine time to develop the legislation and regulatory conditions required for its land market to function properly. There were fears that the land might be bought up by large landholders and agricultural companies, and small farmers would be squeezed out of the market, and out of their livelihoods. There were also fears that land would be bought up on the cheap and there would be similar abuses to those seen in the first wave of privatization in the country, when state assets were bought up by oligarchs and converted into privately owned business empires.
Over the years, these fears have been played on by populist politicians, and the issue of land has become an emotive, highly politicized one, and not just a purely economic question. As a result, there has been no progress in creating the legislative framework for a functioning land market for 16 years — the last land reform bill, introduced in parliament in 2011, died in committee after passing first reading.
Some also have a commercial interest in keeping the moratorium in place. Because the land market is not functioning, agricultural companies have to lease land for production. In fact, 60 percent of Ukraine’s agricultural land is not farmed by its legal owners, but by leaseholders. For various reasons, including the fragmentation of land holdings in small plots among many owners (a legacy of the break-up of the collective farm system following the collapse of the Soviet Union in 1991), land rent in Ukraine are artificially low — averaging about $37 per hectare in 2015. According to experts, if the land moratorium were to be lifted, and the market was allowed to determine the price of land, rent rates could rise by around 11 times, to over $450 per hectare. Naturally, the large agricultural companies that have managed to build up large land holdings under lease have little interest in seeing their rent payments skyrocket, or suddenly facing massive costs to buy the land they currently farm at an extremely low cost, so they lobby parliament to maintain the moratorium.
Poor climate
However, there are also less self-interested arguments for maintaining the moratorium on land sales.
Even if it were the case that parliament had done all of the required work, and passed the legislation on the land market, land ownership registration regulations, and other rules to ensure that the land market would function properly once the moratorium was lifted, there is no guarantee that the move would be an instant success.
Other sectors of the Ukrainian economy have failed to draw in large amounts of investment from abroad, and there is reason to believe that foreign capital would also not be very wary of the agricultural sector, even if the land market were to function flawlessly.
The reason of course is Ukraine’s poor business climate: weak rule of law and enforcement of ownership rights, a justice system open to manipulation by business and political interests, and corruption combine to make Ukraine unattractive to outside investors at the best of times. Take into account Russia’s ongoing war on Ukraine in the east, increasing political instability in the run-up to presidential and parliamentary elections in 2019, and the continued weakness of the economy, and there is little reason to expect a sudden inflow of investment.
Preparing ground
Meanwhile, a number of issues have to be addressed before any progress can be made on lifting the moratorium on land sales.
Fears stoked by populist politicians will have to be assuaged. One of them — that foreigners or large foreign-owned companies will swoop in and buy up all of Ukraine’s land — is not borne out by the experiences of other countries. However, there are proposals to restrict land ownership rights to Ukrainian citizens for the initial period of the introduction of the land market, so there would be no chance of a “foreign invasion” — at least initially.
Another worry – that land would be monopolized by several large landowners or agricultural companies – would be dealt with by introducing limits on the amounts of land individuals and companies can own. Limits from 100 to 1,200 hectares for individuals, and from 500 to 10,000 hectares for companies have been proposed.
Concerns that small landowners would be tempted to sell out of the market before land prices rose to their optimum market level would be dealt with by imposing a minimum price for agricultural land, while a tax on land resales — up to 50 percent within the first few years of a sale, falling to a much lower level after seven to 10 years — would discourage land price speculation.
Lastly, those who currently lease land, and who are working it productively, should be given first refusal if it is put up for sale. Similarly, those who own adjacent plots should be given preemptive rights to acquire land that comes up for sale, to encourage the consolidation of landholdings.
But until these and other issues are resolved, it is much easier for the politicians to continue extending the moratorium. And with progress on reform in Ukraine grinding to a halt, it looks like the introduction of a land market is simply too difficult a task for the present authorities to cope with.
