Ukraine has started the reform that will fundamentally change its agricultural landscape and increase its food exports. Even war did not stop it. For Poland it’s a challange.
The economic policies of Ukraine before the war could be described as pro-market. Liberalization of agricultural land trade was one of the biggest challenges and also an opportunity to encourage more capital inflows to Ukraine thus allowing for faster economic growth. The reform has been launched on July 01, 2021 and since then has entered its final implementation stage: lifting the moratorium on the sale of land.
Then the war broke out. It slowed down but did not stop the reform. In particular, it led to the freezing of investment funds and reducing the attractiveness of the territories bordering Russia and Belarus for further investment It is worth noting that the land reform in Ukraine is phased. According to the current changes, citizens of Ukraine will be able to buy agricultural plots, but no more than 100 hectares on one hand. The second stage of opening the land market will begin on January 1, 2024. The successful implementation of the reform will possibly lead to an increase in food exports from Ukraine which could have serious implications for the Polish agricultural sector.
Let’s consider the current situation from a legal point of view and forecasts of post-war reconstruction. The way the reform is being implemented prevents immediate foreign capital inflows. Also, the willingness of Ukrainian society to provide access to the land market to foreign citizens will be determined by holding a referendum. Regardless of the results of the referendum, foreigners will not be able to buy agricultural land located at a distance of less than 50 km from the state border.
Under current conditions in addition to natural persons, legal entities created and registered under the legislation of Ukraine, whose participants are citizens of Ukraine, the state, or territorial communities, can acquire the right of ownership of agricultural land plots. The total area of land plots owned by a citizen of Ukraine or a legal entity cannot exceed 10,000 hectares.
Legal entities are prohibited from buying land until 2024, even if they have exclusively Ukrainian owners. They are also prohibited from making purchases through such tools as:
- previous contracts;
- power of attorney for an individual.
It is also worth noting that even after 2024, the following restrictions will remain for legal entities, such as:
- their lack of foreign participants;
- absence of other legal entities among the participants.
In terms of land leases, existing tenants will be able to buy back the land they occupy by paying a fee over a 10-year period at prices determined as a result of the assessment. They have the opportunity, after notifying the land owner, to transfer the right to purchase the leased object to third parties. Banks will be able to become landowners only if the land is transferred to them as collateral for the loan. Such land plots must be sold by financial institutions within two years after obtaining the right of ownership at land auctions.
Is that coherent with the main goal of the reform, which is to ensure the implementation of the constitutional rights of citizens to freely dispose of their property? Or to ensure the formation of capable territorial communities by transferring state-owned agricultural lands to their disposal as the primary means of production and economic development of territories? Or to transparent and effective management of land resources?
According to Ukrainian economists, in particular, the provision on the possibility of transfer by tenants of the preferential right to agricultural land can be used by legal entities and individuals for concentration or speculation in agricultural land. To avoid situations of increased speculation, Ukraine should adopt a full package of “accompanying” laws. Retention of current leases by large industry players, combined with allowing them to purchase leased land in 2024, is another opportunity to “own” large, vertically concentrated land holdings.
Yet one has to keep in mind that modern agriculture can not function in a fragmented market with thousands of small farms. Market consolidation and concentration is a natural process leading to higher efficiency and returns.
The task of the reform
The key tasks at the stage of launching the market, in particular, are the transfer of agricultural land from the state to the communal ownership of territorial communities; transfer of land management powers to the local level; land inventory, their digitization, entering information about them into the State Land Cadastre, ensuring publicity of information about land and resources, as well as countering raiding. According to the State Geocadastre, 88,950 land purchase and sale agreements were concluded during the year of the reform.
In the years preceding the liberalization of the land market in Ukraine, international investors focused primarily on expanding the storage and transportation capacities of agricultural products. According to experts of the industry portal “Ports of Ukraine”, over the past five years, private investments in the development of transshipment and storage infrastructure have reached the level of one billion dollars. Over the past three years, 15 large projects have been implemented, which increased Ukrainian export capacity by 17 million tons. In 2018, Ukrainian ports loaded 42 million tons of grain, which made it possible to fill 68 million tons of holds.
During the war
After the Russian invasion of Ukraine, the land market stopped because the Ministry of Justice blocked the registers. This is logical given the lack of access to the registry. From the middle of May, in some regions not occupied by the Russians, which did not become an arena of hostilities, a gradual revitalization of market processes began. In particular, people started to sell land, had not done it before, and did not plan or were waiting for a better price. At the moment, you can see a significant imbalance between supply and demand, but it is caused by hostilities. Where investors are ready to buy, there is a low supply, and vice versa.
The number of people willing to sell land is increasing in the border regions: Chernihiv, Sumy, Zhytomyr, and Kyiv regions in the north. People have lost a lot and want to sell the land for additional financial opportunities.
Currently, the investor dictates the prices. The size of the plots is not as important as it used to be. The main thing is the fastest possible payback and the lowest price for the plot and notary services. Investors are now looking at where they can pick up 10-20 plots in one region so that they can then have a better opportunity to control and manage the plots.
In wartime, it’s hard to say what constitutes a reliable asset. However, the land, even if it comes under fire, will not go anywhere and will remain an asset. Now we have a favorable price – the lowest possible. It is obvious that over the next two to three years, the land will become more expensive as Ukraine’s economy recovers. For investors, this is one of the arguments. What else motivates them to invest in land? First, they believe in the victory of Ukraine. Secondly, they have free financial resources that they cannot take abroad.
For many of them, agricultural land remains the only more or less reliable asset in Ukraine. Agricultural companies continue to pay rent, remaining a reliable partner for them. And the gradual unblocking of the export of agricultural products from Ukraine instills faith in the fact that this will continue to be the case.
According to forecasts, in the next 3-5 years, foreign investments, concentrated in the agricultural and food sectors, will begin to flow into Ukraine. Private agricultural holdings, which dominate in Ukraine, will be able to become owners of cultivated land, which will increase their financial reliability and the possibility of receiving external financing.
The importance of reform in the post-war reconstruction of Ukraine
The topic of reconstruction is quite complex and has many technical issues. For example, how to record and assess all the consequences of destruction and equally compensate for the damage caused. There are also many questions to assess the effectiveness of the use of allocated funds. The first problem is that practically no country in modern history has faced such a scale of destruction, which means the need for a perfect and effective mechanism for assessing and identifying events and objects. The second problem is to create transparency in reconstruction investment projects to avoid money laundering.
The principle of open data can help with this. All information: from the identification of the fact of the assignment of damages to the completion of the process of compensation for these damages, must be public.
The significance of the Ukrainian reform for the Polish market
Under the conditions of a free land market, Ukraine will be able to become a serious competitor of Poland in the food market. Mainly, the policy of the European Union regarding import quotas will contribute to the negative price pressure on grain and oil crops in the European market. Over time, this may lead to a weakening of Poland’s competitiveness in the poultry and dairy sectors. The growth of the Ukrainian agricultural sector will be most strongly felt in those regions of Poland where agriculture is the least developed, fragmented, and low for subsistence – such as the Lublin region and Subcarpathia. Thus, to preserve their market positions, the Polish authorities must prepare strategies for the presence of agricultural producers and processors in Ukraine. In the context of changes in the Common Agrarian Policy, it is necessary to develop a comprehensive national program for the modernization of Polish agriculture and the tasks of the state authorities. In addition, it is necessary to make changes in the policy of distribution of direct and modernization payments by ensuring the principle of receiving subsidies only by agricultural producers; exclusion of the smallest farms with an area of up to 5 hectares from the group of beneficiaries; removal of discriminatory provisions regarding the economic size of beneficiary farms. In addition, liberalization in terms of trade regulation and disposal of agricultural land from the agricultural property fund of the State Treasury will have a positive impact.
Ukraine is accelerating the reconstruction of Ukraine by attracting private investments. The country wants to create the most comfortable procedural conditions for investors to implement investment projects. The Law on Rapid Investments foresees such changes in the legislation so that in Ukraine it is possible to build industrial enterprises from scratch as quickly as possible and without excessive bureaucracy. The goal after the end of hostilities is to return to the pre-war state of the economy as quickly as possible.
Is there a risk of the emergence of potential land oligarchs and are the analogies with voucher privatization correct? Ukrainian government denies this possibilty, arguing that state enterprises are already privatized, and now we are talking about allowing private owners to sell their land. This is a very fundamental difference.
Ukrainian oligarchs arose when there was an opportunity to obtain monopoly profits. They could influence the regulators and get favorable tariffs. Oligarchs arose when there was an opportunity to take ownership of state-owned enterprises and earn from them, or the opportunity to control certain budget flows. In the land market, we have neither budget flows nor monopoly rent.
Summing up, it’s safe to say that the land reform in Ukraine will be finalized, as well as the adoption and implementation of a number of laws that will directly regulate the relevant links of these relations – on land management, land protection, on the land market, land cadastre and land valuation, on state land bank and some others. It is one of the most ambitious reforms ever undertaken in Ukraine and if managed well it could contribute to the faster and more efficient reconstruction of the country. Obviously, it will create pressure on Polish agricultural producers who will face more competition, but since it is designed to be a slow-phased reform, Polish companies and authorities have a chance to adjust. Finally, the reform and the right adjustment on the Polish side taken together may even serve to strengthen economic ties between the countries to the benefit of both of them.