This July Ukraine will open an agricultural land market for the first time in its 30 years of independence. But the transition to a truly free land market may take time.
The 20-year moratorium on farmland sales meant that more than seven million Ukrainians couldn’t freely buy and sell the land they own, which is about 40 million hectares.
Ukraine passed a law to lift the ban in 2020 and the changes are coming into force this summer. There’s a problem though — the partial steps are unlikely to bring swift economic growth.
Instead of giving every person and company the right to trade the land right away, the law will allow only individual Ukrainian citizens to buy land. They can buy no more than 100 hectares if the land isn’t government-owned.
Ukrainian companies, in turn, can start trading farmland only in 2023, limited to purchasing no more than 100,000 hectares. Foreigners will be able to purchase land only after a national referendum and no earlier than in 2024.
All these restrictions are meant to give priority to small local farmers over large agribusiness, so they can obtain enough land to start their own businesses; they will help avoid the excessive concentration of land in the hands of a few.
At the same time, the limitations mean Ukraine won’t see the benefits of the land reform right away.
Before it opens
Before the land market opens on July 1, Ilona Sologoub, CEO of VoxUkraine, says there are several laws that Ukraine’s parliament has yet to adopt that are necessary to avoid abuses.
Among them are laws that ensure transparency in land auctions, empower local communities by transferring state land to local authorities, and protect landowners from predatory landlords.
These laws are also necessary conditions for receiving further financial support from the World Bank. Ukraine’s parliament was scheduled to vote on these laws by March 19.
There are concerns, however, that opposing political forces may prevent the market from opening in July.
Political opposition has been fierce. Yulia Tymoshenko’s 24-member Batkivshchyna and Vadim Rabinovich’s pro-Kremlin, 44-member Opposition Bloc — For Life parties have already said that they’ll be challenging the law in the Constitutional Court.
Yaroslav Zhelezniak, a lawmaker with the 20-member Holos party, is afraid those who are against land reform may try to extend the moratorium. It is unlikely that the opposition has enough votes in parliament to do so, but it is a risk, he says.
Their opposition has already drastically shaped public opinion about the opening of the land market.
When the Kyiv International Institute of Sociology asked respondents in a survey in 2018, if they believe that Ukrainian citizens should have the right to freely sell their land, 66.3% responded yes.
But when they asked respondents in another survey how they would vote today on a referendum regarding the question of a land market in Ukraine, 72% of the respondents said they would vote against.
Zhelezniak believes that once people understand there’s nothing bad in trading the land, more of them will support the reform. When moratorium is gone and if nothing extremely bad happens, “it will be a huge argument against politicians who were (criticizing) the moratorium,” Zhelezniak says.
Protecting small farmers
Despite these political hurdles, Oleg Nivievskyi, assistant professor at the Kyiv School of Economics, isn’t worried about the market opening in July.
Five million hectares of land are already traded in Ukraine and the parliament adopted a law to make the work of State Geo Cadastre more transparent. Thus, the existing infrastructure makes it possible for the land market to open without any technical obstacles, Nivievskyi says.
At the same time, with the current version of the law, small farmers may find it difficult to access the necessary financing to compete with the medium and large-sized farmers that have more capital to buy and invest in land.
Ukraine’s parliament has created an Agricultural Loan Partial Guarantee Fund to provide affordable financing to small and medium-sized farmers, but even optimistically, the government won’t be able to launch the fund until 2022, Nivievskyi says.
In Ukraine, small farmers generally cultivate their own land, whereas medium and large farmers lease several plots of land from different landowners.
Small farmers have been largely neglected from agricultural policymaking in Ukraine. Under the moratorium, they could not use their land as collateral to take out loans and increase production, opposed to medium and large farmers who have had other ways of attracting finance.
Anders Aslund, senior resident fellow at the Atlantic Council, also wonders about who exactly will benefit from land sales in the future, when big corporations and foreigners are allowed to buy it, too. There’s a risk big investors will buy the land to accumulate more assets but won’t invest in it, Aslund says.
No land for foreigners
Of the several restrictions under the current version of the law, the exclusion of foreigners buying land has been the source of much debate.
A chief economic adviser to Ukraine’s prime minister, Alexander Rodnyansky, has said that the government’s decision to ban foreigners from participating in the market will slow investment, help Ukraine’s oligarchs and hurt growth.
Considering how opposition rhetoric has shaped public opinion on the land market, the outcome of any national referendum is practically a foregone conclusion.
Lawmaker Zhelezniak is sure there will never be a referendum on foreigners buying land and that someday a future parliament will change this provision. Sologoub agrees that while the current parliament never will, “perhaps a future one will”.
Nivievskyi says that even if a referendum proved victorious for the foreign purchase of land, under the current version of the law, foreigners will never be able to own land within 50 kilometers of the border. This, Nivievskyi says, knocks out about a third of Ukraine’s territory available for foreign investment.
Instead, foreigners will own land through legal entities with various capital structures, which, according to Nivievskyi, makes it really easy to conceal the ultimate beneficiary. “Good for foreigners, a nightmare for Ukraine’s administration of tracking down these transactions.”
But foreign investment is “a good thing” anyway, Nivievskyi added.
‘Start small’
Ukraine’s government has boasted that lifting the ban on land sales will add two-three percentage points of GDP growth in the first year.
Given the restrictions in the law and various challenges, it is unlikely that major changes in the ownership structure of agricultural land will happen on a large scale in the next few years.
Aslund guesses there will be little movement right away. “People will be suspicious,” of the market, being afraid of being cheated, he said. Besides, Ukrainian may not want to sell their land because its price is too low.
The law freezes the price of land until 2030, and sets it at $900–$1,100 per hectare, which is a few thousand dollars below what it should be, according to Aslund.
Nivievskyi, on the other hand, thinks “people will jump at the opportunity to buy land.”
He noted that intensive discussions surrounding land reform have been going on for the past five years, during which agribusinesses have been accumulating resources. Now it is ready to use them.
He noted there has been a lot of enthusiasm, evidenced particularly by the Ukrainian Agricultural Business Club’s recent creation of a “land club” with the specific purpose of getting everyone ready.
But experts agree that a slow transition to a land market is actually a good thing.
“When you’re starting a new market, you should start small to see what works and what doesn’t, what legal changes will arise and how to respond to them,” Nivievskyi says. “I hope that the first year will be a showcase for the future.”
