Inside Zelenskyy’s land sales bill and Ukraine’s land reform controversy

Collage by Andriy Kolistratenko // Ekonomichna Pravda  

Reforms

Article by: Olena Makarenko

Editor’s Note

Ukraine has edged closer to a long-awaited land market reform. President Zelenskyy has put his popularity on the line in lifting a moratorium on land sales and pushing through legislature to create a land market that was unsupported by all other parties. The idea of creating a land market is highly unpopular with Ukrainian society but seen as many experts as being a major incentive for Ukraine’s economic development. However, other experts criticize the recently-adopted law on the land market, claiming it is premature and carries risks for monopolization. Why is land such a controversial issue in Ukraine? And what has the new bill changed?

The team of President Volodymyr Zelenskyy has awoken Ukraine’s sleeping volcano: the land market. There is no other reform in the country which is more controversial. Every politician knows that attempts to change the current land laws will invariably lead to a “zugzwang” — any step will make matters all the worse, and that certainly will not help their ratings.

The issue at the core of the conflict is a moratorium on the sale of agricultural land – essentially a prohibition – which has been in place in Ukraine for the last 18 years. On 13 November, Ukraine came one step closer to lifting it, as a bill on opening the land market was adopted in the first reading.

The dispute is not simple. Many stakeholders are involved, and opinions are divided on the future of the market. During the presidency of Petro Poroshenko, the previous government promised a solution would be implemented. Yet they took no action at all, not daring to light the fire of smoking-hot controversy.

However, where there’s smoke there’s lava, and the rumblings of the volcano can no longer be ignored. To stave off an epic eruption, the Parliament had moved full-speed ahead on new legislation.

In September 2019, Zelenskyy’s team proffered a clear message — the topic of land reform would no longer be avoided. The president set the date of 1 October 2020 as a deadline allowing the sale of land. To meet this challenge, he called upon Parliament to begin working on legislation, without delay.

After the first month, the results were disappointing. Zelenskyy’s team had made compromises to try and pacify the battle among stakeholders. Unfortunately, neither the supporters nor the opponents of the reform are satisfied.

The land topic is so sensitive for Ukraine that even the EU-Ukraine Association Agreement has steered clear of a cancellation of the moratorium.

However, in 2018, the European Court of Human Rights (ECHR), in the case of Zelenchuk and Tsytsyura versus Ukraine, required the country to address the issue of the land market, and adopt more balanced legislation on the sale of agricultural land. The ruling stated that the land moratorium in Ukraine violates landowners’ rights to peaceful possession of their property. Nevertheless, even the ECHR decision did not prevent Ukraine’s Parliament from extending the moratorium to 2020.

Apart from the moratorium itself, another argument is whether foreigners can buy land in Ukraine and, if so, under what conditions.

Ukrainian NGOs focused on agricultural reform have been advocating for an open market. Their main argument is that nothing else could escalate the growth of Ukraine’s economy as an open land market. Yet, the majority of Ukraine’s agrarians stand against foreigners buying Ukrainian land, fearing they would not be able to compete.

Among the potential buyers are foreign investors and, even more menacing, the oligarchs. Oligarchs pose the biggest threat, because they have the power and influence to undermine positive reform in any market segment.

Before delving further into the current controversy, understanding why land acquisition is so critical for Ukrainians, and why the moratorium was introduced in the first place, is key.

The national treasure

A snapshot from Zemlia. Photo: Wikipedia

Zemlia (Earth) is the title of the milestone Ukrainian film by Oleksandr Dovzhenko, the renowned writer and filmmaker of the early 20th century. The movie was released in 1930, during the early years of the Soviet regime.

UNESCO has ranked the film among the world’s five greatest masterpieces. The film depicts the land as a metaphor for the very existence of Ukrainians … as a philosophy. The word “zemlia” is actually synonymous with the word “nation,” and the theme is a common one in all forms of Ukrainian creative works.

Zemlia portrays the land, not only as a way of life but the very means of life — the eternal source of peace and healing. Soulful.

From time immemorial, our ancestors have cultivated it — but more importantly, they have honored it.

In Zemlia, Dovzhenko portrays the land as being assaulted by the unnatural process of collectivization. The collective farm, which was forced upon villagers by the Communist Party, virtually left it violated.

Even though the trend is for people — especially the young — to move to cities, land remains meaningful both for rural and urban dwellers. However, not only sensitive feelings are at stake.

Chernozems, a type of highly fertile soil, are one of Ukraine’s greatest natural resources. Opening land title registries for all types of investors — honest or dishonest — will diminish the value of this national treasure.

Ukraine accounts for 25% of global chernozem (black soil). It covers about 40% of the country. When cultivated properly, chernozem will produce a bountiful harvest for almost all varieties of crops. It’s no wonder that Ukraine is rated first in Europe for arable lands (32.2 mn hectares).

The moratorium

The collapse of the Soviet Union in 1991 brought enormous political change to previously shackled countries. They became independent of Soviet oppression literally overnight. All spheres of organized society were suddenly transformed, facing an unknown future.

The upheaval was welcomed by the populace — it translated into freedom. Hope was the spirit of the day. However, the goodwill of reformers was twisted in many of the remaining Soviet elite. Already powerful, with many holding privileged positions in government, this already corrupt cadre saw the opportunity to amass huge personal wealth, by exploiting a nascent market economy.

The major economic transformation was privatization — the policy of giving over previous state or collective property to private investors at prices far below market levels. This reckless policy resulted in the creation of oligarchs. In effect, oligarchs acquired their assets by “appropriating” — stealing — the greatest national holdings inherited from the Soviet Union, large enterprises.

The situation with land was different, although early reforms were attempted in 1992, soon after independence, when the first Land Code was launched. Up to then, the largest swaths of land were held by agricultural enterprises that had evolved out of the Soviet state and collective farms. The processes of denationalization, providing parcels of land to current and former members of collective enterprises and to some social workers, and privatization of land in agricultural enterprises, were launched. However, by the end of the decade, these initial steps did not renew either agricultural production or any other land-connected processes.

In 2001, a new Land Code was adopted, introducing the terms of the land-sale moratorium. The moratorium should have expired at the beginning of 2005. Up till today, the Verkhovna Rada had extended it nine more times.

The situation now

In 2001, 74% of Ukraine’s arable land was held among seven million landowners. As of now, according to data provided by the EasyBusiness think tank, 80% of this land is controlled by small agricultural enterprises or farms, with land banks holding up to 10,000 hectares. The top 100 of the largest companies cover 20% (6.3 mn hectares) of the total area of arable land. Of these, the largest 12 control a total of 3.2 mn hectares.

In Ukraine, the regulatory monetary assessment for one hectare of land is estimated at $1,200. For comparison, in neighboring Poland, the assessment is $10,101; in Hungary $4,642; and in Romania $2,173.

The land moratorium does not mean there is no market for land; there is, but it is all in the shadow.

“Go to OLX [purchase and sales online platform] now and look for land parcels,” Vladyslava Magaletska, vice president of the SigmaBleyzer Investment Group, challenged the participants of the forum “LIFE AFTER: Key Aspects of the Land Market Launch in Ukraine.”

Euromaidan Press did exactly that and discovered several advertisements for land parcels.

There are numerous schemes which allow the shadow market to exist. Among the most popular is “emphyteusis” — translating into a very-long-term lease. The scheme allows any number of years for the lease, but payment for the whole term is required in advance. Also, land is being de-facto sold through an exchange procedure for land parcels. For it, an owner can exchange his parcel for a much smaller one and receive money for the difference. Another scheme includes providing a parcel to the state or local community, changing its official purpose, and sale afterward.

The legislature in transition

11 draft laws on arable land were considered in Parliament. The government drafted its own one at the end of September. It foresaw allowing foreigners to buy land if the company is registered in Ukraine. However, after a negative reaction from society, the Agricultural Committee in Parliament stepped in with their own version of the law, which does not allow foreigners to buy land until 2024. This version was adopted on 13 November.

The adopted law also foresees the following restrictions – no more than 35% of arable land can be owned by one individual within a united territorial community, no more than 8% of the oblast, and not more than 0.5% (200,000 hectares) within the country.

Yuliya Klymenko, an MP from the rock-star Sviatoslav Vakarchuk’s Voice (Holos) party, which supports a liberal model for the market, described the situation with the preparation of the law thus:

“Even I as an MP don’t fully understand which final concept on the land market is going to be suggested to us. Every week we have some new model. Any change in the model leads to dramatic changes reflecting the economic results.”

The MP adds that the final legislation which was put up for a vote contains so many compromises that it will not bring economic growth, but will only launch more procedures.

Supporters of the liberal market

On 30 October, the Forum “LIFE AFTER: Key Aspects of the Land Market Launch in Ukraine” took place. It gathered experts, politicians, and business representatives.

Its moderator Valeriy Pekar discussed models of the future land market, as only supporters of opening the land market were gathered.

The like-minded participants did not dwell much on risks, focusing on the opportunities instead. The majority agreed that Ukraine needs the most liberal market which would attract the maximum of investments.

“From the viewpoint of direct economic calculations, the most liberal market will bring the maximum increase in land prices, maximum increase of the rent prices, and will exert the most impact on the economy. So far, the mono majority [in Parliament] has neither the political will, nor the right explanation of the reform for people. Under these circumstances, our opponents and people who want Ukraine to remain a slave country constantly spread myths,” Klymenko said.

Dan Pasko, the Head of the Supervisory Board of Allseeds and managing partner of Diligent Capital Partners analyzed the history of the capital inflow to the country for 20 years since Ukraine’s independence, until 2010. During this period, he identified three unique events that changed the situation with inflows dramatically. The first one was the privatization of Kryvorizhstal, Ukraine’s largest integrated steel company. When foreigners were allowed to enter the market, $4bn of revenues followed. The second one was visa liberalization for EU citizens in 2005. And the third one was opening the banking sector to foreigners in 2004 which brought tens of billions of dollars to the country. Pasko compares the privatization and banking sector examples to the potential liberalization of the land market. The expert expects a dramatic increase in investments as well and considers the moratorium as a wild provision.

Although Holos and ex-president Poroshenko’s European Solidarity parties did not support the bill adopted on 13 November, they support opening the land market in principle.

Holos said that they “support the lifting of the land sales moratorium and a civilized free land market, the main beneficiary of which should be the Ukrainian farmer and Ukrainian citizens,” but that they can’t vote for a bill while the concept of the land reform is not clear.

European Solidarity also declared they support a land market, but demanded the minimum price of agricultural land be set at no less than 50-75,000 UAH/hectare ($2,050-3,085), that foreigners be barred from buying land, and that the possibilities for concentrating land in one hands be limited.

Supporters of the moratorium

Ukrainian agrarians protesting against opening the land market. Photo: Ukrinform

Traditionally, the main opponents of the cancelation of the moratorium among the political forces were the Fatherland (Batkivshchyna) of Yuliya Tymoshenko and the conservative-nationalist party Freedom (Svoboda) which did not get to Parliament during the last elections. Meanwhile, the pro-Russian Opposition Platform – For Life had played it safe, using populistic references to the majority of Ukrainian society which is against the cancelation, and saying that the launch of the market is only possible after conducting a referendum on the issue. Batkivshchyna had also argued for a referendum.

All three parties took part in protests against the reform. Apart from the parties, other opponents of the reform include Ukrainian agrarians themselves.

The reform supporters label the position of the abovementioned forces as backward and blame their opponents for covering the interests of big landowners. As well, they dismiss the risks voiced by their opponents, the main one being that the reform would not benefit ordinary Ukrainians.

“In fact, the sense of this ‘agrarian reform’ is similar to the voucher privatization of the Ukrainian industry. When all Ukrainian citizens who had signed paper vouchers on their hands allegedly became owners, but several oligarchic clans became the actual owners of the industry. With the ‘land market’ it will be similar: de jure, everyone will be co-owners, but de-facto, oligarchs and foreign companies will become the owners of Ukrainian land,” a Svoboda statement says.

On the day the bill was voted for, protests by Svoboda, the National Corps, and “All-Ukrainian agrarian council” were held in front of the Verkhovna Rada. The protesters brought a dead pig in a coffin, claiming that the land market bill will “kill animal husbandry.”

Photo: Novynarnia

According to the interlocutors of Ekonomichna Pravda, the “All-Ukrainian agrarian council” is enjoying support by oligarch Ihor Kolomoiskyi, who is trying to create chaos in any questions related to the IMF and troublemaking in all questions which are important to President Zelenskyy.

But the issue of creating a land market is also highly unpopular among the Ukrainian population – only 20% of Ukrainians supported it, according to a November poll by the Razumkov Center.

Drawbacks of the current bill – a politically non-affiliated view

The provision that stands out is the 0.5% (200,000 hectares) restriction for ownership by one entity. 200,000 hectares is actually way too huge amount which means that de facto there are no restrictions.

“In fact, all the agricultural land might be concentrated in the hands of a few hundreds of people or companies and structures affiliated with them. How it would affect the country’s food security? Will the monopoly of the basic areas of economy teach us something?” Olga Khodakivska, Deputy Director of the Institute of Agricultural Economics wonders.

Ihor Miklaschuk, Chairman of the Association of United Territorial Communities Institute for Co-operation and Local Self-Government, also explained why the provision envisaging that no more than 35% of the land of a united territorial community may be concentrated in one hand. The main question is whether the local governments will be able to retain their independence from the owner of the land who, in fact, would became a monopolist (as 35% is also a too high margin).

“The answer is clear, the local authorities will have to obey such a monopolist. He or she will be the largest and practically the only taxpayer and employer in the community. As a result, the political rights of the residents of such a community will also turn into fiction. It is not the residents of the community who will choose the local government, but its owner.”

Khodakivska also rejects the idea that Ukraine has no investments in agriculture because there is no land market.

“First of all, the investments to the agro-industrial complex now is much higher compared to other sectors of the economy. Second, the land market itself will not lead to inflows of investments. They will come when comprehensive systemic reforms take place, when investors are confident their rights are protected, when law enforcement and judicial systems work effectively, when there is economic and political stability, clear and understandable rules of the game.”

Khodakivska also blames investors for not investing in high-tech areas.

“They are interested in exploiting and super-profits from the raw materials economy only. It will last until the clan-party-oligarchic groups start investing in their own country which was robbed by them.”

Ukrinform questioned some ten participants of the market, scientists, and representatives of medium businesses. They mentioned another drawback of the law: that legal entities are not excluded from the list of potential land buyers. The experts referred to EU legislation which foresees that only individuals who live where the land parcel is located, work in agriculture, and who have the corresponding experience can have a right to buy land. Only in such cases are buyers believed to have responsibility.

Another significant drawback is the lack of an institution that regulates the land market.

Khodakivska names the following main preconditions for a free market:

  1. Finalizing the decentralization reform and allocating land to the united territorial communities;
  2. Creating an inventory of this land;
  3. Resolving the question of farmers’ land. Due to legal loopholes, parcels allocated to farmers for permanent use cannot be inherited and are basically state property – this requires a solution in order for farmers’ rights to not be violated;
  4. Ensuring that agrarians have access to credits at the same interest rate as in the EU;
  5. To create a respected regulator in the country.

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Edited by: Vidan Clube, Alya Shandra

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