Agricultural Land Market in Ukraine: Prospects and Expected Outcomes
MyLand - 28/10/2011:
Nowadays the most portion of agricultural land in Ukraine is privately owned by citizens (about 30 million ha). The state owns about 12-13 million ha.
Nearly simultaneously with introduction of private ownership to farmland (1992) and mass privatization of such land (2003-2004) there was imposed a ban on any form of alienation of private agricultural land (moratorium).
Later on this ban was further strengthened and any contracts with agricultural land entered into during moratorium were declared null and void. Moreover, the ban was extended to state-owned agricultural land.
Conditions for lifting of moratorium are the following:
- entering into force of the law of Ukraine on state land cadastre;
- entering into force of the law of Ukraine on circulation of agricultural land which shall define specifics of circulation of public land;
- coming of January 1, 2012.
Law of Ukraine "On State Land Cadastre" was passed by the Parliament of Ukraine in July 2012 and it enters into force on January 1, 2012. At the same date the Law of Ukraine "On State Registration of Real Rights to Immovable Property" is coming into force; the said law regulates recognition of rights to land, their recording and protection (land registry). We would also add that carrying out of the land cadastre and land registry in Ukraine is expected to be performed by two institutions; the cadastre is to be managed by the State Agency of Land Resources and the land registry – by the Ministry of Justice.
Draft law on land market is available in three versions; all of them have been registered in the Parliament. One of the drafts was submitted by the Government; it has been publicly promoted and "marketed" for half a year. Formally this draft has no status as "main draft". It is an alternative to the draft submitted by People's Deputy Smityukh. Nevertheless, we think that Governmental draft shall be considered the one and the only. The third draft submitted by People's Deputy Lyashko has no chances to become law as soon as it winds up private property to land, contrary to the Constitution.
So, with closing in of H-hour – January 1, 2012, - the probability of introduction of agricultural land market in Ukraine looks very high (though it may not be excluded that some rules on market will become effective in 2013 or even later). What influence it will have on agribusiness and foreign investments therein?
Firs of all, we have to stress that despite formal readiness for the lifting of moratorium, Ukraine in fact is fairly far from fulfilling all conditions necessary for doing so.
The first aspect – technical readiness. Despite the fact that the law on state land cadastre was passed, the cadastre as such, as it is described in this law, does not exist as yet. The said cadastre is operational in 2 out of 490 Rayons. And this is hardly an achievement: the law sets up only basic legal framework of the cadastre. The Government shall approve a procedure for carrying out the cadastre; this procedure will answer most questions. Thus that thing functioning in 2 out of 490 Rayons is missing a proper legal basis.
Nevertheless, the prospects of Government passing the said procedure are quite dubious. The struggle over the right to handle land cadastre and land registry has been smoldering in Ukraine for several years already. Ministry of Justice and State Agency on Land Resources are attempting to concentrate both functions under one roof. Despite the fact that this issue had been already settled by the law (in favor of land department), practical implementation of respective laws stumbled upon actual sabotage (on the part of Ministry of Justice, allegedly). Later on the law was changed, and the right to handle land registry was granted to lawyers. But we may not exclude that the Ministry of Justice will continue with blocking of approval of the procedure for carrying out land cadastre, in order to prove the inability of land agency to fulfill its tasks in the field and to take over the cadastre as well, along with already controlled land registry.
In any case, even if we assume that all necessary laws and by-laws are in place by January 1, 2012, the system of land cadastre as well as land registry will not be ready for full-fledged functioning by the said date.
Second – despite active Governmental propaganda of land market (in fact, of Governmental draft law on land market), sociology surveys prove that majority of Ukrainian citizens cherishes negative attitude towards land market. It was discovered that citizens are not even aware of the fact that agricultural land has long ago been privatized. In any case, citizens are afraid of the land market. Negative attitude is observed even among landowners; their fear are explained by their opinion about the court system as corrupt and about executive authorities - as associated with large capital.
In view of forthcoming Parliamentary elections to be held in 2012, there is a chance that People's Deputies will restrain from voting in favor of the law which attracts strong negative attitude of citizens. This assumption may be additionally supported by the fact that the President of Ukraine has already twice sent his request to the Parliament to consider the draft law on land market, and the Parliament twice ignored this request, although majority of votes belongs to the Presidential party. In turn, President was "pushing" this issue very cautiously. In our opinion, that points at a risk that draft law on land market could have failed to raise the necessary number of votes (226).
Thus technical as well as political conditions for introduction of land market in Ukraine from January 1, 2012 have not been fully established.
Even if we assume that the market is open as expected, on January 1, 2012, what does it look like? What will it bring about for agrarian business? What prospects will have national and foreign investors?
First of all we would note that even governmental vision of the land market plays as major factor of destabilization and uncertainty in the business environment. Over the last year governmental officials have been making statements on land market which conflicted with one another as well as with the current Land Code. Government started with quite liberal approach toward market, but gradually it ended up with numerous restrictions. In any case, due to stable flow of conflicting statements the situation in the land sphere after January 1, 2012 looked less and less predictable.
Finally, by mid 2012, the Government presented its draft to the Parliament. As it was expected, the draft comprised of very many restrictions and prohibitions. It eliminated from the market the majority of investors associated with agriculture, including foreigners in any disguise and with any share. In fact, the draft creates the best conditions only for one market player – for the state. The state will have unlimited opportunities for concentrating agricultural land in its hands, including those tracts which are currently privately owned and leased out to different farm structures.
This situation shall be taken against the background of active governmental attempts upon establishment on the market of a sate corporation with a land bank of 1 million ha. This super latifundist may be created only on the account of re-distribution of those land resources which are currently utilized by private agribusiness. So, redistribution of the market is not only possible, it is inevitable.
Governmental draft law is also in conflict with declared goals and aims, in particular, it misses such targets as support of investments into agriculture and development of rural areas.
It is natural that such approach does not add any certainty and confidence among investors. Moreover, currently officials are continuing with statements on the changes to be introduced into the draft while the latter is still the same. Therefore the situation gets less and less predictable and risks are aggravating.
Respectively, Governmental vision of land market is yet to be disclosed; one may not exclude that elaboration of the draft law on land market will bring about new rules aiming at further reinforcement of the position of the state (as well as of the structures associated with the Government) on the market of land sales as well as on land lease market.
If we assume that draft law on land market will keep the reading it currently has, what may be the outcomes for the business?
We would expect the following:
1) state will become the most active market player, it will start with concentration of land through purchase, including forced acquisition within the framework of so-called land consolidation. It shall not be excluded that during the first one or two years of market functioning the state will be the only market player (maybe that is what President of Ukraine meant under "stage-by-stage introduction of land market during 2012");
2) some citizens of Ukraine, first of all those associated with state and local authorities, will be buying land from peasants, maybe even with application of illegal pressure upon the least protected landowners (lonely, sick and old);
3) contracts for sale and lease will be under constant threat of termination as soon as draft la on land market and Law of Ukraine “On State Land Cadastre” provide for very special conditions for declaring contracts null and void;
4) the cost of agricultural land use will considerably grow as soon as it is expected that normative appraisal of land (being the basis for calculation of the rent and fixed agricultural tax) will by administratively multiplied by 1.7 and the minimum rent will be set up at the level of 3% in the law.
In view of elimination of potential investors from the market, private businesses, including foreign investors, will have recourse to the only way of access to land, the lease. Therefore, in these terms the lifting of moratorium does not make any difference. But in view of the outcomes described above, we would note that lease relations will be under ever strong influence of corruption factor; the access to land will become more dependent upon the affiliation of business with the authorities; probability of renewal of existing lease contracts will become less certain. The cost of agricultural land use will grow by approximately 2 times (although review of normative land appraisal is only a measure of the Government to make landowners like the land market).
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