On September 25, 2019 the Cabinet of Ministers introduced to Verkhovna Rada the draft law # 2178 On Amendments to the Land Code of Ukraine and other Legislative Acts Regarding the Turnover of Lands for Agricultural Purposes, aimed at lifting the moratorium on agricultural lands alienation from October 1, 2020 and allowing legal entities (including those with foreign capital) to buy the farmland. After hot debates in the Parliament and outside it, legislative spam of thousands of amendments aimed solely at delaying the procedure on March 31, 2020 the Parliament finally adopted the alternative version of original draft, significantly modifying it in the course. The final result is far more conservative comparing to the original version. The moratorium will be lifted on July 1, 2021, and until January, 2024 only citizens of Ukraine (with minor exceptions) will be able to buy agricultural land, accumulating up to 100 ha. And even on January 1, 2024 legal entities with foreign capital will be prevented from buying the agricultural land (if not specifically permitted by the referendum, which is highly unlikely).
The outcome is far more modest in terms of the prospective effect on the agricultural sector and economy as a whole, comparing to the expectations in September, 2019. The delay is unnecessary, and even after January 1, 2024 the constrains on the market will go far beyond the reasonable limits. Most of agricultural lands in Ukraine are currently leased to legal entities, which will not be able to buy the land they are cultivating – at least formally. It is obvious that they will try to accumulate lands through affiliated natural persons, but this type of accumulation will inevitably increase transaction costs and legal risks.
Small farmers, who were supposed to be the main beneficiaries of the conservative market design at the “first stage” (01.07.2021-31.12.2023), will in reality face enormous difficulties when trying to access the market. Considering that most lands are leased out, their purchase will be of little immediate benefit for any third party. But even after successful purchase of a free land parcel, small farmer will enter harsh competition with larger enterprises. To win (or rather, survive) this competition, the farmer will have to intensify production, which will be very hard without considerable investment. The possibility of investment, in turn, will be low due to the lack of collateral – considering the limitations on the market, the farmland itself will be of little use for this purpose.
The general feeling of active foreign investors in Ukrainian agriculture can be described as frustration. The draft law which promised them the prospective of buying the land ended with the result which put them in disadvantaged position.
Any constraint on the market turnover inevitably results in reducing the price – so those owners, who are willing to sell their plots, will lose money. The polls show, that the number of those who is ready to sell the land parcels immediately, is relatively low anyway– less than 10 %.
Still, despite of all its drawbacks, the law of March 31, 2020 did the most important thing – provided for the future market of agricultural lands. Accumulating the land, even if through some complicated schemes, allows for intensification of agricultural production, increases the competition among the agricultural enterprises and, as a result, ensures more efficient land use and stronger economy.
Many of the limitations imposed on the market can be by-passed through well designed legal and business models. For instance, investor should not necessarily own the land; they can fund accumulation of the farmland by affiliated natural person (a citizen of Ukraine). The risks can be reduced by simultaneous transfer of the land to investor on the basis of emphyteusis, and the emphyteusis agreement can be drafted in such a way as to ensure its future extension or transfer of ownership to investor (when the law will allow that) by a set monetary incentives and checks.
A new tool available for consolidation projects is the turnover of preemption rights, established by the new version of Article 131 (2) of the Land Code of Ukraine as amended by the Law of 31 March, 2020. This allows for the consolidation already at the initial stage of the market, as preemptive rights can be transferred by lessees (who are not able to buy the land) to affiliated natural persons (who can buy the land), and this can strengthen the position of current lessees who will compete for the farmland.
Poor quality of the land as a collateral, and resulting lack of access to traditional financing schemes can be compensated through modern financing techniques like crowdfunding.
In any case, the possibility to sell and to buy agricultural land is only a tool. To use it efficiently, a lot of preparational work is required. If the potential buyer wants to attract investments and/or state support, the optimization a corporate structure, improving accounting system and taxation schemes, increasing the value of assets, settling existing conflicts etc. will be probably needed.
One of the biggest challenges falls upon the small farmers, who often operate in shadow, without formal registration of business, proper land lease contracts and evading most of the taxes while selling crops for cash. Those who wish to buy the land should step out in the light, which means registration, paying taxes etc. This implies high risks, but, if done properly, offers attractive opportunities. The possibility to accumulate land on the basis of ownership title opens the niches which suppose high-productivity farming – like gardening, wineries, greenhouses, growing berries etc. And here the small farmer can meet a potential investor.
Even those, who just want to maintain their land banks of leased farmland, should do some homework. It includes inventory of existing agreement, finding legal risks, mitigating them, where possible. As of July, 16 of this year new rules on land lease extension will be effective – so, to make automatic extension possible, existing agreements should be modified after this date. In some instances, it will be necessity to formalize informal leases of land. With the possibility of selling the land the stakes will be higher, and a landlord will have more opportunities to dispose his or her land.
To sum it up, it seems that prospective buyers (including foreigners) of farmland remain more or less on the level playing field, where all of the players have to adjust to the new reality of agricultural lands market. All of them are facing hardships and obstacles to overcome, but, at the same time, all of them are gaining access to new opportunities.
Although the Law On Amendments to the Land Code of Ukraine and other Legislative Acts Regarding the Turnover of Lands for Agricultural Purposes of 31 March, 2020 is, of course, the major event in the land reform, which is officially ongoing in Ukraine since 1990 without a clear prospective of a logical final, there are a lot more events in this sphere to expect. One of the most important is the imminent enactment of the draft law # 2194 On Amendments to the Land Code of Ukraine and Other Legislative Acts Regarding the Improvement of Management System and Deregulation in the Field of Land Relationships. The draft which was already adopted in the first reading provides for transferring most of the state lands outside settlements into municipal ownership, transferring many current functions of State Geodesy and Cadastre Service of Ukraine to local self-government, simplification, digitalization and transparency of land management procedures. The important novelty contained in the draft is lifting the ban on the ownership of land parcels outside settlements by foreign natural and legal entities. It is worth noting, that existing laws provide for various opportunities for foreign investors to use the land outside settlements even today. Still, the adoption of the draft law # 2194 would have important symbolic meaning, showing the readiness of the government to make unpopular steps to attract foreign investment.
Slowly, with setbacks, but with major steps ahead as well Ukrainian legislation is being developed towards better and healthier environment for business, including foreign investment. A lot more needs to be done in seemingly endless endeavor of land reform in Ukraine. Ukrainian law is still full of unreasonable and harmful restrains on the foreign investment, including investment in real estate. Some of them are specific for foreigners (individuals and legal entities), some of them are of general nature (like obsolete and corrupt procedure for land management, overregulated auction procedures etc).
However, the legislation already provides enough tools for structuring businesses and transactions in sustainable and safe manner as to allow foreign investor to enter Ukrainian market. Those who will do it at the earlier stage, will face higher risks, but those risks, in my opinion, are worth taking. Ukraine is a land of opportunities now – and not only in agriculture. Despite war and COVID-19, the government maintains its ambitious plans to develop road infrastructure (which means unprecedented spending of public money). Green energy is on the rise, and unique port infrastructure of Ukraine is available for PPP projects. And there is no alternative for Ukraine other than to privatize vast quantity of inefficient state enterprises, which sometimes possess valuable assets, including the land.
I do hope, that liberalization of Ukrainian agricultural land market will be the trigger, which will draw foreign investors in Ukraine, which, in turn, will allow us to boost and modernize not only our economy, but the society as a whole.