Ukraine still stuck with land-sales mo­ra­to­rium

Kyiv Post - - Business Focus - BY I LYA TIMTCHENKO [email protected]

With a multi­bil­lion-dol­lar sec­tor at stake, the is­sue of al­most two decades — Ukraine’s mo­ra­to­rium on the sale of agri­cul­ture land — is about to face an­other vote by par­lia­ment this De­cem­ber on whether to be ex­tended or not.

For the past 15 years, the mo­ra­to­rium ex­ten­sion was a given. Most par­lia­men­tar­i­ans didn’t even give it a sec­ond thought. Cor­rup­tion and pop­ulism, which peaks dur­ing elec­tion years, are the rea­son why Ukraine has no func­tion­ing land mar­ket like most demo­cratic na­tions.

But 2019 might be dif­fer­ent as pub­lic aware­ness grows that hav­ing the right to sell land, or bor­row against its value, is a bless­ing and not a curse.

Ukraine's friends in the West, in­cludng the Euro­pean Union, are try­ing to get Ukraine's politi­cians to see the light. Olga Ba­lyt­ska, head of real es­tate prac­tice at PwC Le­gal Ukraine, said grow­ing aware­ness of the eco­nomic con­se­quences has in­creased the chances that the mo­ra­to­rium will be lifted.

But it's still un­cer­tain. Politi­cians "are afraid a lit­tle bit of pub­lic opin- ion but they asked to cre­ate such an at­mos­phere that they will be forced" to lift the mo­ra­to­rium, Ba­lyt­ska said.

Pos­i­tive out­look

Dmytro Lyvch, project man­ager and head of an­a­lyt­ics at EasyBusi­ness, a Ukrainian pol­icy think tank, says that more votes are needed in par­lia­ment to lift the mo­ra­to­rium. The Con­sti­tu­tional Court re­jected re­que­sets to end the mo­ra­to­rium twice, leav­ing it to par­lia­ment.

“The num­ber of mem­bers of par­lia­ment is in­creas­ing be­cause in 2015 there were only three that voted against the ex­ten­sion of the mo­ra­to­rium on land mar­ket sales. In 2016, it was like seven mem­bers of par­lia­ment. And in 2017 it was up to 60 mem­bers of par­lia­ment.”

Lyvch es­ti­mated that up to 100 mem­bers of par­lia­ment will vote against the ex­ten­sion.

Oth­ers, such as Ser­hiy Fursa of Dragon Cap­i­tal, are less op­ti­mistic.

“It is pre-elec­tion pe­riod and when we are look­ing at polls, 70 per­cent

of the pop­u­la­tion is against open­ing the land mar­ket,” Fursa said. "I think we will come back to this idea only in 2020.”

But even if the mo­ra­to­rium is lifted, there is an­other bot­tle­neck. Pass­ing a good draft law will be much more dif­fi­cult in or­der to win a 226-mem­ber ma­jor­ity in the Verkhovna Rada.

Of three draft laws, the one that is most pop­u­lar is sub­mit­ted by Mem­ber of Par­lia­ment Olek­siy Mushak.

“It was a draft law that was pre­sented by Yu­lia Ty­moshenko in 2008 and Mushak re­sub­mit­ted this draft law,” Lyvch said. “It is the most lib­er­al­ized draft law ever that has been pre­sented… for­eign­ers can buy land, le­gal en­ti­ties can buy land.”

But Ty­moshenko, a lead­ing can­di­date for pres­i­dent in March, has made a 180-de­gree turn and is now against lib­er­al­iz­ing the land mar­ket.

Eco­nomic con­se­quences

For­eign busi­nesses are hun­gry for Ukraine’s fer­tile soil and 40 mil­lion hectares. The World Bank es­ti­mates that Ukraine’s an­nual gross do­mes­tic prod­uct will in­crease up to 1.7 per­cent an­nu­ally with a free land mar­ket. That's bil­lions of dol­lars more each year that are pumped into the econ­omy.

More cor­rup­tion

There are two com­mon cor­rup­tion schemes re­lated to Ukrainian agri­cul­tural land.

One is when a pri­vate en­tity un­of­fi­cially sells its land to an­other party at a low price. Once the pur­chase is done, this gives greater in­cen­tive for the seller to at­tempt to steal it back in a raider at­tack since no of­fi­cial doc­u­ments of the sale ex­ist.

The other scheme in­volves govern­ment-owned land — or roughly one fourth of Ukraine’s arable land. A pri­vate en­tity pays bribes to the govern­ment en­tity to use the land and doesn’t pay taxes.

“Rental price in Ukraine is enor­mously low. It is like $50-$70 per hectare on av­er­age com­pared to Cen­tral Euro­pean coun­tries at the level of $200-$250 hectares per hectare, and com­pared to Western Euro­pean coun­tries where rental prices could be up to $700,” Lyvch said.

Be­cause the mar­ket has been so reg­u­lated, lit­tle data ex­ists on Ukraine’s arable land. For ex­am­ple: ex­perts can­not say what per­cent­age of its land is owned by small farm­ers ver­sus big agro­hold­ings, and ex­perts even find it dif­fi­cult to name Ukraine’s mar­ket price since tech­ni­cally the mar­ket doesn’t ex­ist.

His­tor­i­cal mo­ment

Still, ex­perts like Lyvch and Ba­lyt­ska be­lieve that this year could be a turn­ing point since the Euro­pean Court of Hu­man Rights got in­volved. The court sug­gested in May that the Ukrainian govern­ment should open up its land mar­ket. The court also de­clared that the mo­ra­to­rium on farm­land sales vi­o­lates hu­man rights since Ukrainian farm­ers — an es­ti­mated seven mil­lion of them — are not al­lowed to man­age their prop­erty freely.

“Ac­cord­ing to the con­sti­tu­tion of Ukraine, in­ter­na­tional law has pri­ori- ty over Ukrainian law,” Ba­lyt­ska said.

To raise pub­lic aware­ness, EasyBusi­ness launched the farm­ plat­form so that an av­er­age Ukrainian farmer can ap­ply to the Euro­pean court. “Right now there are two land own­ers that won this case in the Euro­pean Court of Hu­man Rights,” Lyvch said.

Ba­lyt­ska said peo­ple who know their rights "will be more pow­er­ful."

Myths and fears

But myths, stereo­types and fears dom­i­nate.

One fear is that for­eign­ers will buy up all the land. This has not been the case in other na­tions.

“The high­est share of land owned by for­eign com­pa­nies is in Ro­ma­nia and it’s like 11 per­cent,” Lyvch said. “But Ro­ma­nia had some of the high­est com­piled growth rates for farm­land dur­ing the last 10 years at the level of 37.5 per­cent.”

The other fear is that farm­ers will au­to­mat­i­cally lose their prop­erty and will not have the right to rent, which is not true.

Most Cen­tral Euro­pean coun­tries which un­der­went land re­form in the 1990s and joined the EU have reaped ma­jor ben­e­fits and seen land price hikes.

“For ex­am­ple, in Poland the land prices are like $10,300 per hectare; in Ro­ma­nia — $6,500; in Bul­garia, $4,500; and it's much higher than in Ukraine,” Lyvch said.

But Ukraine, with its highly fer­tile soil, could be mak­ing much more.

“There are sig­nif­i­cant pro­duc­tiv­ity gaps be­tween Ukrainian and Euro­pean com­pa­nies. It’s like the level of 25 to 40 per­cent lower than Euro­pean coun­tries if we are talk­ing about yields per hectare for tra­di­tional crops,” Lyvch added.

In ad­di­tion, Ukrainian laws can set cer­tain re­stric­tions on en­ti­ties re­lat- ed to Rus­sia, an ag­gres­sor state, and China, a po­ten­tial ag­gres­sor state.

Oli­garch grab

The other ma­jor fear is that Ukrainian oli­garchs will take over all of Ukraine’s land. But Fursa says this is not the case, as land prices will go up ex­po­nen­tially.

“Gen­er­ally, peo­ple in Ukraine have a lot of myths in their minds, and it's com­pletely not re­lated to what will hap­pen when the mar­ket will be opened,” Fursa said. “When you look at Ukrainian oli­garchs, they never buy some­thing for its real price."

But even Ukraine’s big­gest agrar­i­ans want Ukraine’s farm­land mar­ket to open, at least par­tially, al­beit with pro­tec­tion­ist re­stric­tions against for­eign­ers.

Amer­i­can John Sh­morhun, CEO at AgroGen­er­a­tion, one of Ukraine’s big­gest agri­cul­tural firms with about 120,000 acres of arable land, says that de­spite the rent price hikes that will come with lift­ing the mo­ra­to­rium, his com­pany sup­ports open­ing the mar­ket.

“Ukraine needs in­vest­ment in tech­nol­ogy, in­fra­struc­ture, you name it,” Sh­morhun told the Kyiv Post. Lib­er­al­iz­ing the mar­ket will fix this, the U.S. in­vestor said.

And the Ukrainian Agribusi­ness Club, an as­so­ci­a­tion of around 100 en­ter­prises, has signed a mem­o­ran­dum ad­vo­cat­ing for open­ing the land mar­ket.

“They want to open the mar­ket be­cause they want to know what will be in 5–10 years, they want to think more in the long-term per­spec­tive,” Lyvch said.

The mo­ra­to­rium es­pe­cially puts a plug on the de­vel­op­ment of Ukraine’s value-added sec­tor of high-mar­gin crops like fruits, berries and veg­eta­bles since the ma­jor­ity of the agrar­ian sec­tor con­sists of tra­di­tional crops for ex­port.

“The pres­i­dent and other politi­cians might be scared to lift (the mo­ra­to­rium) be­fore the elec­tions, but it should be done any­way. We can’t wait any longer,” Ba­lyt­ska said.

Ukraine's arable land of 40 mil­lion hectares is one of the most fer­tile in the world, yet the coun­try's es­ti­mated 7 mil­lion land own­ers are not al­lowed to man­age it: they can't sell it or rent it out based on in­ter­na­tional mar­ket prices, or use as col­lat­eral for a bank loan. (Oleg Pe­tra­siuk)

For­eign agri­cul­tural in­vestors such as AgroGen­er­a­tion are in­ter­ested in the end of the land mo­ra­to­rium in Ukraine which will al­low land own­ers to sell their land as well as rent out at higher prices. This will cre­ate a more de­vel­oped sec­tor and ben­e­fit Ukraine’s econ­omy al­to­gether as more trans­par­ent busi­nesses will com­pete against each other, ex­perts say. (AgroGen­er­a­tion)

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