Investments on hold as farmland battle intensifies

The enactment of long-awaited laws to permit the selling of agricultural land was touted as key to President Viktor Yanukovych's agenda. But, after more than two years in power, the effort has stalled. Long-awaited changes were supposed to be adopted by parliament in 2011 to create an agricultural land market, stripping Ukraine of another of its socialistic Soviet vestiges.

 Lifting the longstanding moratorium on land sales is hoped to be a way to spark an investment boom in the capital-starved sector.

But the moratorium remains in place. The blame for the stalling hints at graft and overreach, possibly by government and vested private interests.

Leonid Kozachenko, president of the Ukrainian Agrarian Confederation and a former deputy prime minister, said farmers could attract $50 billion in lending by using land as collateral. A $65 billion investment would double Ukraine’s harvests and overall agribusiness and food production by modernizing the sector, Kozachenko estimates.
“But this will only happen if government sanctions the sale of farming land allowing farmers and villagers to use their land as collateral in mortgage lending,” Kozachenko said.

Ukraine’s government still owns vast reserves of top farming land, as do villagers who acquired ownership over small parcels through a policy of privatization that followed independence in 1991. But the villagers have been prevented from selling the land. Many lease it to agriculture companies, but the moratorium on agriculture land sales prevents them from knowing the real market value of their land.

“[But] instead of introducing reforms that would allow for this, the draft legislation that was recently being discussed in parliament as a means of reforming the agriculture land market would, in fact, harm Ukraine’s reputation with investors by destroying the country’s biggest agriculture companies, some of which are listed on foreign stock exchanges. It would also cut off municipal and regional government from crucial budget revenue by moving control over state land that they currently lease out, shifting it to a centralized state agriculture land bank,” Kozachenko said.

The controversial legislation was nearly adopted by pro-presidential lawmakers in recent months until Yanukovych put a hold on the process.

It threatened to damage the country’s largest agricultural companies by capping the amount of land they lease from landowners to 100,000 hectares. If adopted, the draft law would have limited land ownership to individuals – Ukrainian citizens only – with nobody being allowed to own more than a mere 100 hectares.

Posing a potential logistical nightmare, restrictions would also limit how much land any company could farm in a particular region.
Together, these changes would have severely hurt Ukraine’s shining agriculture stars: the 10 biggest and most successful agribusiness, the likes of London-listed MHP and Avangard. Some say they and other companies that are farming hundreds thousands of hectares would be forced to divest, possibly giving up control over farm land to insiders who lobbied for the legislation.

“I guarantee that this legislation won’t be adopted. Thankfully, President Viktor Yanukovych stepped in to stop it. The expectation is now that new and constructive legislation will be adopted this year, taking affect next year,” Kozachenko said.

Mykhaylo Melnyk, a partner at the Ukraine offices of Deloitte, said that there are no economic reasons for restricting the leasing of land, which is the current practice.
“This may disrupt the existing market rules and curtail investment, delivering a strong blow to big agriculture holdings. Meanwhile, small agricultural enterprises, due to a range of systemic problems inherent for Ukraine (low yields, outdated equipment, poor infrastructure and limited access to loans), do not [alone] have a big potential for development,” Melnyk added.

Some government officials defend the proposed changes as necessary to prevent market monopolization.

Serhiy Kvasha, director of the economic development department within the Agriculture Ministry, said: “I am an advocate of small- and medium-sized business, not big business. If the current state of affairs continues evolving, we will by 2020 end up with 15 companies monopolizing 32 million hectares of our farming land.”

But agriculture sector lobbyists question the government’s intentions.

This law would have hit both cash-strapped landowners and big publicly listed farming groups by “limiting buyers and, in turn, leading to a fall in prices for the land,” said Volodymyr Lapa, director general of Agribusiness Club, a sector advocacy.
Restrictions of this scale, Lapa added, would have benefited only companies operating through non-transparent means, using complicated webs of companies registered in offshore zones to consolidate control over Ukraine’s prized farming land, concealing their identity in the process.

Asked who was lobbying for this destructive legislation to be adopted, Kozachenko said: “There were corrupt vested interests at play, attempts to shakedown the biggest agriculture companies and later monopolize Ukraine’s prized land in the hands of insiders.”

Speaking on condition of anonymity out of fear of retribution by some of these unnamed powerful vested interests, four sources in the business community said that some agribusiness representatives say they have been approached by officials who offered to remove the controversial clauses in return for multimillion-dollar payoffs.

Kvasha from the Agriculture Ministry said he had no knowledge of such talk.

Sviatoslav Belei, a lawyer at the Kyiv office of law firm Gide Loyrette Nouel who was a member of the working group that prepared the farming land reform legislation, said the official reason the draft legislation was shelved was to improve it and take public opinion into better consideration. “The unofficial reason is the unpopular nature of the changes at hand – not foremost for average citizens who own land parcels, but for agriculture companies,” Belei said. A new draft may yet be adopted this year, he added.

There are other risks on the horizon for farmers and agribusinesses.
Kozachenko said draft laws are being pushed that would divide up Ukraine’s farming land into six zones and allow the government to dictate to farmers what crops to plant. The official explanation is to “protect national food security and boost efficiency,” according Kozachenko.
“But if adopted, these laws would, in fact, achieve the contrary. This would be a disaster,” Kozachenko said.

“We didn’t even have such strong government control mechanisms in place during Soviet days. It’s faulty logic.”
“You can’t force farmers to sow crops that are not profitable or too risky for them,” Kozachenko said. “One poor person can’t feed another poor person.”

Kyiv Post