Land Moratorium

Agriculture is in the list of top prioritized industries in Ukraine. It might become a solid base for long-term development for the country if the land is used effectively and sustainably.

The issue is related to the quality of land governance and functionality of the land market.

Land market performs two main functions: distribution of the land among the most productive users and distribution of the land rent among the owners. How well are these functions performed in Ukraine?

Ukraine is one of the few countries in the world with abundant resources of fertile agricultural land. With about 65% of its population living in urban areas, urban settlements and industrial cites occupy only about 4% of Ukrainian territory, while agricultural land corresponds to about 70% of the country’s land resources.

Furthermore, according to the State Statistic Committee of Ukraine, nowadays, households and agricultural enterprises currently cultivate more than 36 million hectares out of 41.5 million hectares of agricultural lands. About 22 million hectares are used by agricultural enterprises, of which about 95% (19.2 million hectares) is rented primarily from individual smallholders. Most of such smallholders received land parcels free of charge (about 2-5 hectares depending on the region) during the privatization period as shares (pai) of former state or collective farms during the 1990s.

However, the property rights of Ukrainian landowners are considered to be limited as far as they cannot buy or sell their land parcels. Since 2001, Ukraine has a ban on sales of agricultural land (moratorium), in force up to January 1, 2016.

Peculiar features of the ban and its impact on agricultural sector are discussed below.

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The ban on the land sales preserves the fragmentation of ownership that followed after land privatization. As a result, the land market is facing relatively high transaction cost.

According to the State Statistics Committee of Ukraine, about 75% of land is cultivated by farms above the size of 1,000 hectares. That means that each relatively large farm has to process at least 200 land lease agreements and extend them on a regular basis. If we assume that all parties in public and in private sectors spend jointly one working day per rental contract and we evaluate this time with the average wage, Ukraine is wasting more than 90 million USD every year on rental market transactions. This transaction cost is paid for both by private sector that has to employ staff for managing hundreds or thousands of rental agreements, and by the public sector that maintains an army of registry officers.

This cost can be reduced considerably if the average size of land parcels would be increased and could match closer to the cultivation unit (land area of about 10 to 50 hectares).

Another issue related to the fragmentation of ownership and high transaction cost is that landowners possess a relatively low bargaining power when negotiating the rental.

This causes a relatively low rental (about 75 USD per hectare in 2013 according to the State Agency of Land Resources), which is way below the marginal contribution of land to the value of output.

State Statistics Committee estimated that rental in Ukraine in 2013 in average was equivalent to 13% of output value, while the marginal contribution of land was above 50%

(250-300 USD per hectare). However, low rental could be also interpreted as an advantage, which might stimulate agricultural producers to expand their cultivated area and to produce more crops or animal produce.

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On the other hand, rental is also considered to be an important contribution to the welfare of rural residents. According to the State Statistic Committee of Ukraine, the share of rental contracts issued by retirees among the local residents in 2013 was the highest and equaled almost 53% of all issued rental contracts.

Average annual rental received by retiree was about 300 USD per land plot, which was close to three-month pension in rural areas. Thus, improvements in bargaining power of landowners and higher land rental would contribute to rural development and poverty reduction in Ukraine.

Furthermore, because of the moratorium on land sale and purchase, privately owned land plot cannot be used as collateral. This is considered to be a limiting factor for the access to capital for small agricultural producers.

In addition, the moratorium creates obstacles for investors, especially for foreign investors (ban on the acquisition of agricultural land by non-residents of Ukraine) to invest in Ukrainian agriculture.

According to the Ministry of Agricultural Policy in Ukraine, the optimal investment cost in Ukraine’s agricultural land in 2013 was one of the lowest at USD 600-800 per hectare compared to the United States at USD 4,000 per hectare, and Western European level of USD 12,000 per hectare. Moreover, the only problem with investing in this profitable business of agriculture was considered to be high risk and insecurity of foreign investors due to the artificial legislative barrier of the moratorium.

At the same time, the current harvest yields in Ukraine suggest that the agro-ecological potential of 6.2 metric tons per hectare could be easily obtained under proper farm management and with the use of optimal organic technologies.

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Historically, land in Ukraine was viewed as a key factor of national security and sovereignty. Nowadays, it remains one of the hottest issues in Ukraine and could trigger major confrontations both within the current government and market participants, while prompting unpredictable reactions from millions of land-owning farmers.

Since the Land Code was passed in 2001, the idea has been to make land a commodity, but up to today the issue of opening an agricultural land market is still contentious.

According to comments made in Parliament, the moratorium has been extended because of the need to pass further legislation concerning the development of an agricultural land market in Ukraine. This means that the precondition of the moratorium to be lifted is the existence of the full-fledged functioning land market in Ukraine.

The Moratorium can only be lifted if two laws are passed by Parliament: the Law on the Land Market and the Law on the Land Cadaster.

The Land Market Law will delegate how the land market will function – the rules, the regulations. The Law on Land Cadaster will focus on organizational functioning of the land cadaster, including the meters and bounds and also the single register of all land in Ukraine.

So currently, land lease is the only viable option for performing farming operations for investors and for expanding agricultural producers in Ukrainian.

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