Land Reform in Ukraine: A New Chapter in the Never-Ending Story

On 25 September 2019 the Cabinet of Ministers submitted to the Verkhovna Rada Draft Law No. 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 alienation of agricultural land from 1 October 2020 and allowing legal entities (including those with foreign capital) to buy farmland. After heated debate in Parliament and beyond it, legislative spam running into thousands of amendments aimed solely at delaying the procedure, Parliament finally adopted the alternative version of original draft on 31 March 2020, significantly modifying it in the course. The final result is far more conservative than the original version. The moratorium will be lifted on 1 July 2021, and until January 2024 only citizens of Ukraine (with minor exceptions) will be able to buy agricultural land, accumulating up to 100 hectares. And even on 1 January 2024 legal entities with foreign capital will be prevented from buying agricultural land (if not specifically permitted by a national referendum, which is highly unlikely).

The outcome is far more modest in terms of the likely effect on the agricultural sector and economy as a whole, compared to expectations in September 2019. The delay is unnecessary, and even after 1 January 2024 the constraints on the market will go far beyond reasonable limits. Most 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 land through affiliated individuals, 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 enter the market. Taking into account the fact that most land is being leased out, its purchase will be of little immediate benefit for any third party. But even after successful purchase of a vacant land parcel, the small farmer will be in harsh competition with larger enterprises. To win (or rather, survive) this competition, the farmer will have to step up production, which will be very hard without considerable investment. The possibility of investment will, in turn, 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 bill which promised them the prospect of buying land ended with a result which put them into a disadvantageous position.

Any constraint on the market turnover inevitably results in a reduction in price, which means that those owners willing to sell their plots will lose money. Opinion polls show that the number of people who are ready to sell land parcels immediately is relatively low — less than 10%.

Despite all of its drawbacks, the Law of 31 March 2020 was important because it provided for the future of the agricultural land market. Accumulating the land, even if through complicated schemes, allows for intensification of agricultural production, increases competition among the agricultural enterprises and, as a result, ensures more efficient land use and a stronger economy.

Many of the limitations imposed on the market can be by-passed via well-designed legal and business models. For instance, an investor should not necessarily own the land; they can fund accumulation of the farmland by an affiliated individual (a citizen of Ukraine). The risks can be reduced by simultaneous transfer of the land to the 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 an investor (when the law will allow that) by a set of 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 individuals (who can buy the land), and this can strengthen the position of current lessees who will compete for the farmland.

The poor quality of land as 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 buy and sell agricultural land is merely a tool. To use it efficiently, a lot of preparatory work is required. If the potential buyer wants to attract investment and/or state support, the optimization of corporate structure, improve the accounting system and taxation schemes, increasing the value of assets, settling existing conflicts etc. will probably be needed.

One of the biggest challenges falls on the shoulders of small farmers, who often operate in the shadow, without formal registration of their business and proper land lease contracts. They evade paying taxes on income from the sale of crops for cash. Those who wish to buy the land should step out into the light, which means registration, paying taxes, etc. This implies high risks. However, if this is done properly, it offers attractive opportunities. The possibility of accumulating land on the basis of ownership title opens niches which suppose high-productivity farming — like gardening, wineries, greenhouses, berry cultivation, 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 an inventory of existing agreements, finding legal risks and mitigating them where possible. As of July 16 of this year new rules on extension of land leases will come into effect. Thus, in order to make automatic extension possible existing agreements should be modified after this date. In some instances, it will be necessary to formalize informal land leases. With the possibility of selling land the stakes will be higher, and a landlord will have more opportunities to dispose of his or her land.

To sum up, it seems that prospective buyers (including foreigners) of farmland remain more or less on a 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 main event in land reform, which has officially been continuing in Ukraine since 1990 without a clear prospect of a logical finale, we can expect many more events in this sphere. One of the most important is the imminent enactment of Draft Law No. 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 has already been adopted in the first reading, provides for the transfer of most state lands outside settlements into municipal ownership, transfer of many current functions of the State Geodesy and Cadastre Service of Ukraine to bodies of local self-government, simplification, digitalization and transparency of land management procedures. The important novelty contained in the draft is lifting of the ban on the ownership of land parcels outside settlements by foreign legal entities and individuals. It is worth noting that existing laws provide for various opportunities for foreign investors to use land outside settlements, even now. Still, adoption of Draft Law No. 2194 would have important symbolic meaning, showing the readiness of the government to take unpopular steps to attract foreign investment.

Slowly, with setbacks, but with major steps ahead as well, Ukrainian legislation is being developed towards a better and healthier environment for business, including foreign investment. A lot more needs to be done in the seemingly endless endeavor of adoption of land reform in Ukraine. Ukrainian law is still full of unreasonable and harmful restraints on foreign investment, including investment in real estate. Some of them are specific for foreigners (individuals and legal entities), some are of a general nature (like the obsolete and corrupt procedure for land management, overregulated auction procedures, etc.).

However, legislation already provides sufficient tools for structuring businesses and transactions in a sustainable and safe manner as to allow foreign investors to enter the Ukrainian market. Those who will do so at the early stage will face higher risks, but those risks are, in my opinion, worth taking. Ukraine is a land of opportunities now — and not only in agriculture. Despite the ongoing war and COVID-19, the government maintains its ambitious plans to develop road infrastructure (which means unprecedented spending of public funds). Green energy is on the rise, and the unique port infrastructure of Ukraine is available for PPP projects. There is no alternative for Ukraine other than to privatize a large number of inefficient state enterprises, which sometimes possess valuable assets, including land.

I do hope that liberalization of the Ukrainian agricultural land market will be the trigger which will draw foreign investors into Ukraine, which, in turn, will enable us to boost and modernize not only our economy but society as a whole.