Land for Ukrainians or the story of a moratorium

On 28 April 2020, President of Ukraine Volodymyr Zelensky signed the Law on the Circulation of Agricultural Land, which was adopted by Ukraine’s parliament, the Verkhovna Rada, following late-night debate on 31 March 2020, and which had been long-awaited since the declaration of independence.

“This is a historic moment for all Ukrainians and for me personally. Ukraine has been waiting for this law since independence. It was a difficult struggle. But we knew we were doing it for Ukrainians,” commented Volodymyr Zelensky on this historical moment. According to the President’s official press release, now we will have to form legislation for land market, and the law will enable the realization of citizens’ constitutional rights to dispose of their property freely and to create transparent conditions for the acquisition of agricultural land by Ukrainian citizens.

However, are Ukrainians ready for a new “moratorium-free” reality?

Have the issues related to the reform – such as the complexity of the land situation, the existing owners of the land, transparency of existing and future land registers, and the attitude of the farmers themselves – been resolved? These are still burning questions. Until the very moment the law was adopted and signed, mass protests of agrarians and public activists took place all over Ukraine, including the Government Quarter in Kyiv. Fierce controversy, doubts, and negative opinions about the reforms were expressed in social networks. The path to the law’s adoption has been quite eventful.

At the same time, given the traditionalism and paternalism of the major part of society, manipulations of politicians and a certain stability of the land market, land reform in Ukraine will be very painful.

In general, the land reform for Ukraine is a litmus test of the complexity of the entire reform process in the country. In spite of the new government’s declarations about total digitisation, we remain an agricultural country.

Land arithmetic

 Ukrainian land arithmetic is quite simple. We have almost 60 million hectares of land. Of these, nearly 43 million hectares – or more than two-thirds (70 percent) of the country’s total area – are agricultural lands. However, land arithmetic is about more than just the quantity of the land, but about the land’s quality, and fertile soils, of which 40 percent is black soil. Of these, 28 million hectares are privately owned plots. At present, over 10 million hectares remain in state and communal property. During the land moratorium, landowners (currently there are about 7 million, or every sixth Ukrainian) could only do two things with their land. They could either cultivate it themselves (one third of the land) or lease it (56 percent of private plots) at a non-market price, as well as on conditions of natural exchange (obtaining wheat, flour and other grain from the tenant). In addition to leasing and cultivation, the land circulation was conducted by way of inheritance, purchase and sale, donation, emphysevis (the right to use someone else’s land plot for agricultural purposes), and mortgages. After all, 76.1 percent of agricultural land transactions fell on lease during this period. The average rent for one hectare of agricultural land amounted to 8218 UAH, and 4631 UAH for agricultural commodity production.

The ban (moratorium) on the sale and alienation of agricultural land (enacted by paragraphs 14-15 of section 10  of the Transitional Provisions of the Land Code of Ukraine) meant that landowners could not freely dispose of it. In this case, the only way to land could practically be transferred was by concluding a lease agreement. The reason for the ban was the lack of infrastructure required to introduce an agricultural land market. The moratorium covered 96 percent of agricultural land, with 68% percent (27.7 million hectares) of privately owned plots. In total, 66 percent of Ukrainian territory was captured by the land moratorium.

The history of the moratorium

The moratorium was first introduced in the amended Land Code of March 1992. After the collapse of the USSR in 1991, most of the agricultural land in Ukraine belonged to the former state farms and collective farms (renamed as “collective agricultural enterprises” or collective enterprises). The gradual reform of the collective agricultural enterprises by granting their current and former members land rights in the form of land plots started in 1995, after Presidential Decree № 720/95 was signed in August of that year. Although the Decree gave collective agricultural enterprise members the opportunity to leave the enterprises while retaining their land plots, the large-scale process of collective agricultural enterprise elimination by granting land plots actually began only in 1999. The new Decree of the President of Ukraine dated 3 December 1999 finally stipulated the requirement to eliminate all collective agricultural enterprises by April 2000 by distributing land plots and other property among their members. During the elimination process a large part of the rural population acquired the right to own land plots. At about the same time, a mass process of plot allocation was organised. As a result, millions of new owners obtained title acts for specific land plots.

After the first six years of the moratorium, fixed in the 1992 Land Code, the process of land purchase and sale commenced.

Sales volumes were not significant, but in 2001 a temporary moratorium was lobbied, first for one year and then for four years. The moratorium continued until 2008, when a new provision to the Land Code was introduced: the moratorium could only be terminated subject to two laws coming into force – the land cadastre law and the land market law. At the beginning of 2010, before the presidential election, the Verkhovna Rada created a legislative framework according to which the moratorium would be valid until the adoption of the land market law, but would not expire until 1 January 2012. The Verkhovna Rada overcame Viktor Yushchenko’s presidential veto on this law on the second attempt. The moratorium was prolonged: in 2011 for one year, in 2012 for four years, and then annually in 2015-2018.

One step forward, two steps back – how the land market started

The moratorium could easily have lasted forever if not for the requirements of the European Union (EU) and the International Monetary Fund (IMF).

Therefore, in 2017, a large-scale, intense and professional public discussion on the agriculture development direction, on the land reform format, and the role of the moratorium on agricultural land sales was initiated. Supporters of the moratorium were considered to be representatives of the older generation, which lived in the Soviet era. At the same time, opponents of the moratorium were viewed as belonging to the younger generations who wish to witness the impact of a market economy on the rich fertile lands of their native country. This is nothing more than a battle of worldviews. Furthermore, assessments of the possible economic benefits of lifting the moratorium were added. Oleg Nivievskyi of the Kyiv School of Economics provided the following figures: USD $35.8 billion of generated added value instead of the actual USD $13.3 billion in 2018, if not for the moratorium. And in that case, GDP could be 17 percent higher. According to the European Bank for Reconstruction and Development (EBRD), the lack of a land market reduced Ukraine’s GDP by about 1 percent in each year of the moratorium. As at 2018, the Ministry of Agrarian Policy and Food estimated that the normal functioning of the market for both rent and sale of land could provide revenue from USD $700 million to USD $1.5 billion each year, in addition to GDP growth of at least 1.5 percent. The World Bank’s estimate was 2 percent.

Expert discussions in 2019 were often accompanied by manipulations of Ukrainian politicians and the spread of various myths. In the media, the biggest lies of Ukrainian politicians related to the opening of the land market. The main myths were: the land would be sold for nothing; foreigners would buy large volumes of land; rich landowners would buy all the land; the lack of affordable credits for farmers; and the lack of fair judicial and law enforcement systems. Proponents of the land market tried to prove the following: a ban on disposing of your own property was a sign of a non-democratic state; the land market implementation would not affect the property rights of citizens, in particular plots’ owners (given that most of them had died while awaiting the reform and did not pass down their land plots); the low rent level on the land prevented farmers from making money if they did not want to cultivate it; and that without the moratorium being lifted, investors would not put funds in Ukraine and create jobs.

In addition, the state has never been an effective land owner and manager: on average per hectare in 2018, state-owned agricultural enterprises generated less than USD $106 in added value compared to private enterprises, less than USD $55 in net profit, and less than USD $218 in revenue.

The moratorium prevented farmers and large agrarian producers from purchasing land, and therefore deprived them of the opportunity to make long-term financial business plans. Local communities and the state budget experienced a shortage of funds. The Centre for Economic Strategy estimates that about 2.8 billion UAH in tax revenue is lost each year due to impossibility of legal land purchase-sale deals. Not to forget the numerous raider seizures of land under circumstances of legal uncertainty. There were other ways to circumvent the moratorium: various schemes for leasing land plots, their exchange for other land, passing down, the change of purpose and further sale, and bogus debts of the plot owner resulting in further confiscation via court orders, among others.

A May 2018 decision of the European Court of Human Rights (ECtHR) in the case of Zelenchuk and Tsytsyura v. Ukraine[Details available here: http://hudoc.echr.coe.int/eng/?i=002-11941] contributed to the first changes to the land ownership situation. The Court found the land moratorium was a violation of the human right to dispose of its property, guaranteed by Article 1 of the Protocol to the European Convention for the Protection of Human Rights, and by Article 41 of Ukraine’s Constitution, in the absence of an effective agricultural land market. Thus, Europe highlighted to Ukraine the unlawfulness of the moratorium and recommended that a fair balance be struck between the interests of agricultural land owners on the one hand and the general interests of the community on the other hand as soon as possible.

While the adoption of the Law on the Circulation of Agricultural Land seems to be a constant trouble, another component of normal agrarian life is quite successful. The Law on the State Land Cadastre was adopted in 2011. Prior to its adoption, land plots were not identified, the acts indicated only the size, area and location. In 2013, the electronic state land Cadastre was launched, and electronic services on the basis of the state land Cadastre followed in 2015. In 2017, the World Bank recognised the Ukrainian land Cadastre as one of the most advanced in the world.

Expert assessments of the land market by late 2019 

In early September 2019, President Zelensky instructed the government to prepare, and the parliament to approve, a draft law on the agricultural land market by 1 December 2019. Such a draft law would include the lifting of the moratorium on land sales. On 13 November 2019, the Verkhovna Rada voted for the draft law 2178-10, which repealed the ban on the agricultural land sale, in the first reading.

On 3 January 2020, a draft law on Amendments to Certain Legislative Acts of Ukraine on the Conditions of Circulation of Agricultural Land (№2278-10), with amendments, was submitted to the Verkhovna Rada for the second reading. On 6 February, the Verkhovna Rada commenced voting for the draft law №2178-10 in the second reading. As the deputies of Ukraine submitted over 4,000 amendments to the draft law, it was estimated that reviewing and voting on the bill could take between two and four months. At the same time public discussions of the land issue were held. Some matters caused heated discussions between various political and economic groups. However, experts of the agricultural sector were quite unequivocal in their comments on matters of land ownership and the free disposal of land.

Ellina Yurchenko, a land expert at the Ukrainian Club of Agrarian Business (UCAB), observed that “[f]or almost 20 years, various political forces have been speculating on the subject of opening the land market that have generated public opinion that the land sale is evil. Therefore, the statements of agricultural land owners that they are against the land market because they do not wish to sell their land sound very absurd. But when the market opens no one will be forced to sell the land. Landowners will only be granted their constitutional right to dispose of land, and they will manage it on their own discretion. Agrarian associations have also agreed that it is necessary to open the agricultural land market, but the terms are being discussed.

The main points of confrontation remain the issue whether foreigners and foreign companies will get an access to the land market, as well as the volume of agricultural land owned by one entity and related persons. Only the opposition parties raise the issue of the all-Ukrainian referendum regarding the land market. The issue of the land market opening has been urgent and its removal from the priorities is inappropriate.”

That is, despite the “combating all” image in the media, agrarians insisted on a stage-by-stage introduction of the land market, which would help to increase the efficiency of agricultural production and consolidate the rights of the main market participants, in particular farmers as the main landowners. The first stage includes the adoption of legislative preconditions for the functioning of the land market, encompassing a constitutional ban on direct or indirect ownership of agricultural land in Ukraine by foreigners and foreign legal entities, as well as persons without citizenship. Other legislative reforms envisioned in the first stage are the allocation of state enterprises’ and institutions’ land (NAAS) among former and current employees, the transfer of farmers’ agricultural land for their permanent use, establishing a priority right to purchase land plots by current land tenants and/or their owners, filling in, making corrections in the State Land Cadastre and the State Register of Real Property Rights, and laws against the shadow cultivation of land, among other reforms. At the second stage, agrarians propose the implementation of a pilot project of land sale, which at this stage is restricted to the acquisition of up to 500 hectares per person exclusively by private entrepreneurs who are citizens of Ukraine. After the second stage and an evaluation of its results, the third stage foresees the lifting of the moratorium on the agricultural land sale to all Ukrainian citizens. The fourth stage should presuppose the lifting of the moratorium on agricultural companies founded exclusively by Ukrainian citizens. Restrictions on the maximum amount of land that can be owned by a legal entity (including related parties or antitrust restrictions) should be imposed and capped at 5,000 hectares per entity.

This position is shared by Denis Marchuk, the deputy head of the All-Ukrainian Agrarian Council, who noted: “Although the Verkhovna Rada continues to review the draft law No.2178-10 on the land market in the second reading, and certain changes regarding the participation of foreigners in the land market and decrease of volume in one hand were made between the first and second readings, some key issues suggested by agrarians were not taken into account. First of all, it is a requirement of a transition period when introducing the land market. The main point is that at the first stage, only citizens of Ukraine should have access to the purchase of land with a limit of up to 500 hectares. As for legal entities, the right to buy land to be given them in a while when the agricultural lands are audited, law enforcement and judicial systems are established, the problem of raiding in the agricultural sector is resolved. There should be a certain limit for companies, not 10,000 hectares, but instead a maximum of 5,000 hectares per entity. Such an approach would allow small farmers to enter the land market with as little pain as possible and enable them to compete with large agrarians. After all, small agribusinesses need loans to buy land, like everyone else. Nowadays, many of them are simply not able to do this, even given the promised low interest rates, because they have neither the necessary credit history, nor reporting, nor experience of cooperation with banks. That is why a transition period is required during which small farmers and banks will learn to interact with each other. If the land market launches for both individuals and legal entities at the same time, it could lead to a collapse for small agricultural business resulting in its possible disappearance. Without the ability to get funds to purchase land, it is almost impossible for them to compete with medium and large companies that have access to financial resources.”

Olexii Kushch, an expert of the Growford Institute, airs less optimistic views of the overall reform offered by the new government and possible scenarios. He says that “[t]he law-making mechanisms of the current authority can be called a ‘new scheme’. Among all the indispensable reforms and legislative changes, the most toxic and disturbing issue, the land reform, has been put on the agenda. Moreover, apart from the controversial nature of the land issue for Ukrainians, given our painful history, society was disturbed by the possible changes like ‘200,000 hectares to one person’ and ‘non-residents’ participation in land purchases’. It is quite possible that such controversial questions were put by the authorities before the citizens deliberately so to have a room for compromise in the points of greatest resistance of society in terms of the adoption of the land code.”

With such strategy, any concession by current legislators and their beneficiaries on particularly burning issues seem to be considered as a step towards placating social unease with the reforms. Irritated by the idea of giving land to foreigners and deeply worried about the future of Ukrainian farmers against the backdrop of big landowners’ large holdings , citizens and farmers did not notice other changes available to them. Everyone focused on the subject of “not giving up our native land”. At the same time, the real resistance of the society to these toxic issues has been quite low. Ukrainians appear to be against the offered options, but not to actively resist them. To further pacify society, some compromises have been proposed, such as “reducing the area given to one person to 10,000 hectares” and partially reviewing the participation of non-residents in land purchases.

According to critics of the reforms, well-hidden in public and parliamentary discussions of the first stage of the land reform is the main factor in, and cause of, chaos in the land sector: the possibility of hybrid purchases of Ukrainian land by banks using foreign capital. Banks will allegedly be allowed to purchase land as collateral in instances of mortgage default. It is difficult to imagine the possible volume of land “a reliable bank” might own in the worst-case scenario. It seems like after a while, any bank with foreign capital, actively giving credits for the purchase of land, may become the owner of a large volume of agricultural land in Ukraine. The bank will have two years to sell such land. The mechanisms of bank control and the terms and conditions of their dealings with land are not currently specified, so the prospect for potentially unlawful actions on the part of banks is very realistic. The draft law does not specify either a mortgage control body for banks, nor penalties, nor mechanisms for lands confiscation in case of breach of the land legislation by the banks. Such loopholes could easily lead to fraud with the land, in a manner similar to pawnshops: to get credit without inclination for repayment. In other words, simply selling the land to the bank under the guise of obtaining a loan. The terms of such loan may vary at the discretion of the bank – inadequate timing, inflated interest rates, huge penalties, etc. – and any options for increasing the land price as a collateral can be implied to sell it later or to lease it out. Such uncontrolled processes may see the accumulation of millions of acres of land owned by banks. Unable to buy the land because of an extremely high price inflated by banks, the state (even if it wants to nationalise it) will not even be able to compensate the value of such land, as it would amount to billions of dollars.

Such a situation might be avoided by introducing legislation preventing banks from becoming the owners of land they secured as a mortgage. Such legislation would require banks to sell such land as collateral through state-owned online trading platforms (for example, a special Ministry of Justice platform, etc.). This was the primary purpose of this draft of the current government: to launch land purchases through schemes with banks with foreign capital.

Generally speaking, the current government seems to be far from being Ukraine-oriented and is not committed to quality reforms. The land reform itself should have been implemented in a step-by-step and qualitatively different way.

First, there should have been a holistic draft of a new land code, rather than superficial changes or amendments, as the current code does not meet the needs of the modern landowners. The new Land Code should have contained a real system of checks and balances, to prevent, for example, such a popular phenomenon as land grabbing (a raider seizure of land by large corporations). Second, the reform out to have introduced more robust protections of the interests of the state and the Ukrainian farmers in particular, as a major labour element in these lands. As in Poland, changes to Ukraine’s constitution should be made immediately to codify the norm that Ukrainian farmers are the main users of land in the country. However, reforms did not happen as expected. The government has confined itself to writing one of the most important laws just on five pages and continued to introduce chaotic, irrelevant amendments to the existing code. The land market in Ukraine should definitely be opened, but it would be better to do so under a different, more positive scenario. The first stage, 5-10 years, would open the land market for individuals and farmers, to create a real land cadastre, to limit the acquisition of land to 500 hectares, among others. Thus, Ukrainian farmers’ concerns about the inability to cultivate and manage their own land would be dismissed and the state would be able to test how the land market operates (the functioning of the land cadastre, registration of land transactions, etc.). The scenario implemented by the current government may lead to very unfortunate consequences. The redistribution of land capital, expected by the pessimists, may somehow resemble the initial redistribution of capital, assets, and the privatisation of enterprises in the 1990s, with all the negative consequences: raider attacks, general criminality, loss of land by farmers.

What about the IMF?

It is no secret that the opening of the land market is one of the requirements for continued effective cooperation with the IMF. According to some analysts, Ukraine received the last extended funding from the IMF only after adopting the land law and thereby fulfilling the IMF’s land market requirements. Although the IMF generously and unconditionally disburses anti-coronavirus loans to countries to tackle the consequences of the pandemic, these two separate IMF financing programmes – one related to coronavirus, the other to the land market – seem to have merged into one in Ukraine. Therefore, the law was passed in the rush. And its provisions may carry negative consequences. There are those who refer to this law, adopted promptly and without proper professional discussion, as an unfair plundering of Ukrainian land. After the law was signed into force by the Speaker of the Verkhovna Rada, an investment banker, Sergei Fursa, called the legislation “a story about a lost chance” on his Facebook page.

According to Fursa, the new restriction to buy no more than 100 hectares per individual in the period between July 2021 and January 2024 will not create significant demand for land, so prices will not rise and farmers will not earn money. And the fact that state-owned land is prohibited for sale will allow “corrupt officials to continue parasitizing on it.” Fursa further claims that “[t]he last amendments, adopted with little or no consideration, destroyed the whole economic essence of this reform. It will have no economic effect – neither at the macro level nor at the micro level.”

What are the main provisions, and possible consequences, of the Law?

The main provisions of the law are as follows:

• For the first two and a half years, individuals are limited to purchasing a maximum of 100 hectares of land. From 2024, this limit will increase to 10,000 hectares per person, as stipulated by the latest draft law;
• From 1 July 2021 to 2024, only individuals will be allowed to purchase land. Legal entities will be prohibited from buying agricultural land;
• Municipal and state lands are not allowed to be offered for sale;
• The issue of granting foreigners the right to buy land will be resolved in a separate referendum;
• Land within 50 kilometres of Ukraine’s borders cannot be purchased by foreigners, despite the results of the referendum;
• A person currently renting a land plot will be given priority in its purchase. The tenant has the opportunity to transfer this right to purchase the land to another person, but the owner must be notified in writing. Tenants who cultivate the land and have the right to use it granted until 2010, can purchase this land by instalments for a period of up to 10 years at the minimal price of such plots as defined by the state and without holding land auctions. The buyer receives the right of ownership after the first payment;
• The minimum price until 2030 is not less than the minimum price defined by the state; and
• Banks will be able to become owners of the land only if the land was given to them as collateral on a loan. Financial institutions must sell such plots within two years after obtaining ownership.

The main concerns of representatives of the economic and agrarian communities regarding the chosen land reform direction are as follows:

First, the mechanisms to control the circulation of land are not outlined. In case the tenant gives other persons the priority right to buy the land, this may lead to certain schemes of land concentration. If the owner wishes to sell his land plot and the company does not have the right to buy it, the tenant will transfer the priority right to another person for further repurchase. This will initiate speculations and frauds, as it is likely that tenants will have prior agreements with speculative investors and will become actual sellers of the land plots.

Second, the law provides no restrictions on the concentration of land per person within one region or united territorial community. Although this issue will be given urgency from 2023, the amendment on the concentration of land within a united territorial community (35 percent) has disappeared from the final version of the law. Most agricultural holdings already exceed this norm within a single community. An amendment of 35 percent would destabilise established lease relations. This is the reason why it was removed. According to the Cabinet of Ministers’ Reform Office study, in most regions (except Volyn, Zhytomyr, Zakarpattia, Ivano-Frankivsk, Lviv, Rivne, Ternopil, Kherson, and Chernivtsi), the share of arable land used by the largest landowners exceeds 35 percent, indicative of monopoly power. There is also the possibility that one person will purchase all the land within one united territorial community and this can make the community dependent on one company.

A third concern is that land market reform should have been implemented considering the current economic risks of a pandemic, which developed countries have already encountered. Changes should be implemented only after the crisis is over. Because, under the current conditions, the land may “come under the hammer”, Ukraine may sell the country’s main asset for a pittance and will not obtain any economic benefits. Furthermore, farmers, already feeling the impact of the crisis, simply do not have the funds to purchase land, so there is a high risk that speculators will take over the market. Currently, some banks refuse to give credits to farmers that would allow them to finish the sowing process. Almost no bank gives either affordable or any business loans to agricultural businesses. In such circumstances, it will be difficult to obtain credit for the purchase of land. There is also no budget support program for farmers. Some small farmers say that the scenario foreseen by experts has every chance of becoming a reality and most of them will have to sell their land plots to make ends meet. They will have to deal with the consequences of frozen economic activity and sell their land for nothing.

Except for these land-based doubts, agrarian scientists are alarmed by the lack of provisions that oblige farmers to care for the restoration and conservation of fertility of Ukrainian soils.

The Director-General of the Centre for Agrarian Reforms, Dr. Liubov Moldavan, said that she was currently working to additionally introduce into the Ukrainian legislation seven EU regulations that oblige agricultural producers to care for soil fertility: “With years the land will become even more critical resource, well, we have to learn to look ahead to the future! The population is increasing and land depletes because of constant exploitation. Everyone, not only politicians, should take care of this: a plant is the sun, water and earth from which the plant absorbs the entire spectrum of microelements, phosphorus, calcium, potassium. Microelements should be returned so that the earth could retain its qualities. This is a manual of agriculture. It is obligatory to return microelements and to fertilize the land using organics, and we either do it insufficiently or don’t do it at all.”

Dr. Moldavan and the Centre for Agrarian Reforms, which she heads, is furthermore lobbying for the extension of the Farmers Support Fund authorities, which could become a fund for long-term credits to farmers for the purchase of land during the crisis. According to Dr. Moldavan, “[w]e described how it worked in other countries and insisted on setting up a regulatory agency. I am afraid, due to our recklessness, current issues will prevent further development of the reform in the right direction. All this should be completed by 2023, as long as only the individuals have the right to purchase land.”

However, as Ukrainians say, “wait and see”. The people have sincere hopes that the government will find ways to overcome the economic crisis and will strategically (not in a corrupt way) use the money provided by the IMF for the land law. Therefore, no significant deterioration in the economic situation in the country will occur, and those farmers impoverished as a result of the crisis will not sell the most efficient agricultural lands to large corporations.

Inna Krupnik is a marketer and advertising specialist. She has worked in large companies for more than 15 years and has a high professional reputation. She is regularly published in leading Ukrainian publications as a columnist and columnist on topics such as national revival, reforms, cultural processes, microeconomic processes in Ukraine, gender issues. Participant in conferences, forums, and seminars on economic reform and political processes.