Who really benefits from the creation of a land market in Ukraine?

Farmer protests against the land reform, December 2020. Photo: Oleksiy Frayer

Oakland Institute | 6 August 2021

Who Really Benefits from the Creation of a Land Market in Ukraine?

By: Ben Reicher and Frederic Mousseau

Although Ukraine has large swaths of the most fertile farmland in the world, the wealth of its agriculture sector has long remained largely out of reach of the country’s farmers. In the country known as the “breadbasket of Europe,” agriculture has been dominated by oligarchs and multinational corporations since the privatization of state-owned land following the collapse of the Soviet Union in 1991. For the past thirty years, no government has been able to meaningfully challenge that status quo.

Will this change, now that a controversial law to create a land market entered into effect on July 1, 2021?

Whereas proponents claim that a land market is necessary to attract the foreign investment that Ukrainian agriculture needs to achieve its full economic potential, many Ukrainians believe that agriculture in Ukraine will only become more corrupt and controlled by powerful interests as a result of the new land reform law.

The law, “On Amendments to Certain Laws of Ukraine on the Conditions of Turnover of Agricultural Land” (Law 552-IX), is a crucial plank of the liberalizing agenda championed by President Volodymyr Zelensky and the Western international institutions that support his government. It was passed by the Verkhovna Rada, Ukraine’s unicameral legislature, in March 2020 as a condition for the financially imperiled government to receive a US$5 billion loan from the International Monetary Fund (IMF).

The Troubled History of Land Ownership in Ukraine

When Ukraine was part of the Soviet Union, all land was the property of the state, with farmers working on state and collective farms. In the 1990s, guided and supported by the IMF and other international institutions, the government privatized much of Ukraine’s farmland, and distributed certificates that individual workers could use to obtain ownership of a discrete plot of land. However, amid a nationwide economic collapse, many resold their certificates, beginning a process that resulted in the growing concentration of land in the hands of a new oligarchic class.

In order to stop this process, the government instituted a moratorium in 2001, which halted further privatizations of state-owned land, and prevented almost all transfers of private land, with a few exceptions, such as inheritance. Although the moratorium was meant to be temporary, it was extended multiple times due to the failure of the Verkhovna Rada and multiple presidential administrations to pass and implement legal reforms that would allow for the creation of a more equitable land tenure system.

41 million hectares, or about 96 percent of agricultural land in Ukraine, were subject to the moratorium. Around 68 percent, or 28 million hectares, of that land is privately owned (although not all is demarcated into specific plots), with about seven million small landowners in the country.

While the moratorium prevented further purchases of land, farmland could still be leased, and many small landowners leased their land to both domestic and foreign corporations. The state also auctioned off leases for extensive amounts of the land it owns. President Zelensky’s government has claimed that at least five million of over ten million hectares of state-owned land was illegally privatized under previous administrations.

While reliable data on who is leasing Ukrainian farmland is hard to find (many leases are not registered), the Land Matrix database lists large-scale land deals totaling 3.4 million hectares by both Ukrainian and foreign companies; other estimates place the amount of land leased by the largest corporations operating in Ukraine at over six million hectares. The largest farmland holder is Kernel, owned by a Ukrainian citizen but registered in Luxembourg, with about 570,500 hectares; followed by UkrLandFarming (570,000 hectares), US private equity firm NCH Capital (430,000 hectares), MHP (370,000 hectares), and Astarta (250,000 hectares). Other major players include Saudi conglomerate Continental Farmers Group with 195,000 hectares (a majority shareholder is the Saudi Agricultural and Livestock Investment Company, owned by the sovereign wealth fund of Saudi Arabia), and French agricultural company AgroGeneration with 120,000 hectares.

Opening of the Land Market

Law 552-IX ended the moratorium and allowed individuals to purchase up to 100 hectares of land starting July 1, 2021. Both individuals and legal entities (i.e. companies) will be allowed to purchase up to 10,000 hectares starting January 1, 2024. Banks will be able to seize land for nonpayment of a loan, but will have to auction off the land for agricultural use within two years. Individuals or entities that currently lease a piece of land are supposed to receive priority (“pre-emption rights”) when the land is up for purchase. A longstanding prohibition on foreign individuals and companies buying land in Ukraine will continue, although they retain the ability to lease land.

The government and international institutions promoted land reform as a way to “unlock” the full potential of Ukrainian farmland by making the agricultural sector more attractive to international investors. For Arup Banerji, World Bank Director for Eastern Europe, the reform “will allow Ukraine to capitalize on its economic potential and improve the lives of Ukrainian people.” But this rhetoric flies in the face of wide-ranging opposition from the Ukrainian public, with over 64 percent of the people opposed to the creation of a land market, according to an April 2021 poll.

Ukrainians’ distrust is not without merit. The key argument put forward by promoters of the land reform has been the expected effect on economic growth. According to the International Finance Corporation (IFC), the private sector arm of the World Bank, lifting the moratorium on land sales would add around 1-2 percent to Ukraine’s annual GDP growth rate for five years. However, this increase is expected to mainly come from “the exit of producers with lower value added and the expansion of producers with higher value added, as the price of land rises.” The World Bank thus explicitly expects the land reform law to push poorer, smaller farmers out of agriculture and help grow larger land holdings.

Land Reform Law Undermines Farmers’ Access to Land

Many small-scale farmers won’t be able to buy much land in the period before 2024, because the land is being sold at high prices, and many smaller farmers are already struggling financially and are in debt. While farmers might hope to benefit from the pre-emption rights that the new law grants to current lessees, this clause can actually promote consolidation of land ownership, since many leaseholders are large agribusinesses. Even when the lessees are small or medium-size farmers, the law allows them to transfer their pre-emption rights to other parties — essentially recreating the 1990s dynamic where landowners resold the certificates distributed in the initial wave of privatization to a nascent clique of oligarchs, who thus amassed control over large quantities of land.

Moreover, according to the Ukrainian Rural Development Network, a Kyiv-based civil society and academia organization, “most private agricultural land remains under lease agreements with large commercial farms in coming years,” so that the land may not even be available for individual farmers to purchase before 2024, when they start facing competition from big businesses that will always be able to outbid them.

There are widespread fears that, due to Ukraine’s rampant corruption and weak rule of law, small farmers will have few avenues to assert their rights in the face of increasing competition from agribusiness. For many citizens, the most serious concern with this law is the potential for foreign interests to illegally gain ownership of land, for example through opaque ownership of a Ukrainian company, exploiting the country’s impotent judicial and regulatory systems. Some of the largest land deals in Ukraine in recent years were carried out by foreign corporations that may try to circumvent the new law and obtain title to the land.

Furthermore, according to a legal interpretation of the new law, the prohibition of foreigners owning land does not apply to creditors who acquire land through mortgage foreclosure — so a foreign bank could, potentially, foreclose on a small farmer’s land and sell it at auction, where big businesses would invariably have an advantage.

Support for Agribusiness, Not Small Farmers

The World Bank has justified the creation of the land market as the way for farmers to access financing. However, the institution expects this to happen through farmers using their land as collateral for bank loans rather than by putting in place financing and institutional mechanisms that could effectively finance farmers. The Ukrainian government does offer loans and other aid to small and medium-sized farmers, some of which has been with the financial backing of the World Bank (including a loan of US$150 million to a major state-owned bank in 2017, to be distributed to small and medium-sized enterprises). However, according to the NGO Ukrainian Agrarian Association, support from the government has been highly inadequate. Only about a fifth of earmarked government aid was actually distributed in 2018, for a total amount of 203 million hryvnia, or about US$7.4 million.

By contrast, the largest Ukrainian agribusinesses have each received far more from international lending institutions like the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB), in addition to regular support from the Ukrainian government via tax breaks and subsidies. In recent years, recipients of these loans have included Kernel, MHP, and Astarta, all among the top five largest agribusinesses in Ukraine in terms of overall land holdings. For instance, Kernel has received US$248 million in several loans from the EBRD since 2018, MHP has received about US$235 million from the EBRD since 2010 and about US$100 million from the EIB in 2014, and Astarta has received US$95 million from the EBRD since 2008 and about US$60 million from the EIB in 2014. Foreign financial institutions like the EBRD and EIB are not just financing Ukraine’s most powerful agribusinesses and landholders, but companies owned by some of the richest individuals in the country — MHP founder Yuri Kosyuk was ranked the 11th richest person in Ukraine in 2019, while Kernel founder Andriy Verevskiy was ranked 19th.

Land Reform on Track to Meet the Objectives of its Instigators

Thirty years after the disastrous privatization of land that took place with their support in the 1990s, international financial institutions such as the IMF and World Bank have succeeded in lifting the moratorium that had been established to prevent the takeover of Ukraine’s land by a minority of private interests.

The above analysis makes it clear that imposing the creation of a land market in Ukraine will further concentrate control of land in the hands of oligarchs and large agribusinesses, while favoring the interests of foreign investors and banks. It is unfortunately the vast majority of Ukrainian farmers and citizens who will have to pay the cost.

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