Land reform in Ukraine: to be or not to be

Land reform in Ukraine has already been lasting for 28 years. However, despite a number of completed measures (a huge area transferred to private ownership, unshared), the reform till recent times was far from being complete: the market of agricultural land does not exist, a significant portion of the rental market is “in the shadows”, and several categories of land do not have a clear legal status, or they are used in opaque ways.  However, the new government set out to lift the moratorium and to launch the land market. It is expected to start in 2020. However, polls show that most citizens are negative about the liberalization of the land market and fear that Ukrainian land will be sold to foreigners.

 

Over the past 18 years in Ukraine there is a moratorium on turnover of agricultural lands, despite significant international pressure on the legislative consolidation of the possibility of treatment of agricultural land.

Imperfect land policy, in particular the existence of the moratorium, worsens the investment climate, can create obstacles for the functioning of markets, creating new businesses and jobs, as well as for the functioning of local government. From the position of land management and urban planning moratorium is detrimental to the effective and rational use of land resources of Ukraine, and from the political position the moratorium has become a cover for the populists in the election campaigning and party propaganda.

At the same time, according to the World Bank researches, the best land and agricultural policies can enhance agricultural productivity by 30% and add about 12.5% of GDP over the next 10 years.

Ukraine is one of the largest exporters of agricultural products in the  world, the quality of land administration in the country affects the state of global food security. However, an inefficient land administration stands in the way of the realization of competitive advantages of Ukraine and reduces its attractiveness for foreign investment in agriculture and other sectors of the economy.

The total land area of Ukraine is 60.4 million hectares. Agricultural lands occupy 41.5 million hectares, including: arable land – 32.5 million hectares, perennial plantings – 0.9, hay fields 2,4, pastures – 5.4, deposits – 0.2 million ha.

More than 10 million hectares of these lands are owned by the state, which is about 25% of the total agricultural land in Ukraine. Ukraine has about 23 million of private landowners and land users (about 90% of them are individuals), and about 4.9 million users of public lands.

Nearly 21.5 million hectares of agricultural land is treated approximately by 45,000 commercial producers (36000 of whom treated plots with an area less than 200 ha). Today the people who own shares are actually in the feudal position – they have assets that cannot be disposed of in full. Therefore, currently in Ukraine there is the situation when the farmer essentially has four options to dispose his land. First: give for use for a very reasonable cost the land, which he himself does not use, lease it to the company or the farmer. The second method is to pass the share as inheritance mostly to children and grandchildren, who have little interest in processing this land. There is also the opportunity to exchange his share to another land, or to sell his share informally.

The moratorium prohibits the legal sale of land, as well as to change of purpose of land, the introduction of rights to a share in the authorized capital of economic communities and the transfer unit as collateral.

Moratorium influences not the wealthiest segments of the population: 68% of the land (or 27.7 million hectares) are owned by farmers-stockholders. At the same time, 1.6 million of unit-holders of pension age who are unable to cultivate the land, live in poverty because of the impossibility to lease with profit, to sell or mortgage your own share.

Against this background, the shadow land market has been existing for 17 years. There is a minimum of 5 “gray” schemes that allow you to sell the land to bypass the moratorium :

  1. Change of its purpose, and the sale of land after the transfer as a reward for the benefit of the state or local communities
  2. Sale of corporate rights of enterprises, which previously, concluded leases of 49 years
  3. Sale of land after changes in purpose of public or communal land for “assistance” of corrupted officials.
  4. The creation of “bogus” debt, for which the court takes away the land
  5. The transfer of a share in the annuity contract.

At the same time, the market sale of land (for lands that are not subject to the moratorium on sale of agricultural land) is extremely small, mainly due to the lack of financial instruments and the complexity of the use of land as collateral.

The number of land taxpayers (around 7.3 million) is significantly less than the number of private  landowners and land users.  Rent for agricultural land is one of the lowest in Europe and the CIS countries (about 37 USD in 2015).

Guarantee of the rights of peasants – owners of land shares requires the abolition of the moratorium on alienation of agricultural land. Opponents of abolition of the moratorium insist that in the case of the introduction of free turnover of agricultural land, the shares will be bought up by foreigners and/or large agricultural producers.

Recent polls show that Ukrainians are negative about land sales. It was proved by the results of the survey are from the poll of the sociological group Rating. In particular, they support the opening of the land market 19% of respondents, 73% – against this initiative, 8% – undecided. A relatively high level  of support for the land market is observed among younger and more affluent respondents, as well as shareholders who cultivate it on their own. But even in these categories, the number of opponents of this initiative is at least 60%. 74% of respondents believe that the decision to introduce the sale of agricultural land in Ukraine should be made in an all-Ukrainian referendum, 17% have the opposite opinion.

According to a poll conducted by the Razumkov Centre, 59.3% of Ukrainians are in favor of a referendum on extending the moratorium on the sale of agricultural land. At the same time, most Ukrainians would vote against the introduction of the land market. 57.2% of the Ukrainians polled and 64.4% of those who would vote in the referendum on the introduction of the land market favor the extension of the moratorium on land sales. 21.5% of Ukrainians support the idea of ​​introducing a land market. In September, a survey on attitudes to the land market was conducted by the Democratic Initiatives Fund. According to the survey, 56% of citizens supported the right of Ukrainians to sell land, and 28% were against it.

However, it is the major agricultural producers at the moment that are among the opponents of abolition of the moratorium because the financial costs they to keep the land banks formed by them are now relatively low. In the case of the introduction of free circulation they expect a significant administrative and financial costs of preservation and maintenance of their Bank of Land.

Thanks to the moratorium, agricultural companies were able to accumulate large land banks. Although economic activity in agriculture is held by more than 50,000 companies, the market is monopolized – 100 largest companies lease 6.5 million hectares of arable land (20% of total land bank). Thus, the ten largest companies lease from 125 to 570 thousand hectares. In fact, the existence of the moratorium contributes to the development of agricultural holdings, because only they have access to financial  resources. Farmers cannot take the credit on the security of land, and this hinders the development of their own business.

Completion of land reform does not finish with the formal abolition of the moratorium on land turnover, and should include the introduction of a much wider institutional, legislative and administrative procedures and measures which will allow to create effectively functioning land market in Ukraine.

In general, the abolition of the moratorium on the sale of land is one of the key issues to promote reforms. This is a fairly positive signal for the banking sector and the international community. From the point of view of the banking sector, the abolition of the moratorium on land sales should attract credit resources, because land can be used as collateral. Villagers and farmers can use land as an asset, sell it, and the proceeds will go in their budget to development areas.

The creation of a land market also includes: improvement of the mechanism of cadaster record, the simplification of the mechanism for land sales, improvement of the procedure of registration of contractual sales prices and rental of land in the state register of real rights on real estate, developing methodologies for mass valuation of land based on market prices of simplification and reduction of the cost of state registration of land plots and state registration of real rights to immovable property.

Also, it is necessary to provide a significant increase in land tax for agricultural land. Today, the land tax is a nominal amount and does not encourage the rational use of land. Besides, an adequate amount of land tax will not allow one to speculate on the land, and will make it unprofitable to leave it without treatment.

In the context of land reform, it is important to pay attention to the efficiency of land use, which is in the municipal, state ownership, and in an uncertain legal form. In particular we are talking about using more than 700 thousand hectares granted to the state authorities and local self-government, public organizations, institutions of education and culture, trade unions, housing organization.

In addition, 550 thousand hectares were granted to industrial enterprises, 640 thousand hectares the enterprises of transport, more than 400 thousand hectares – to military units, educational institutions of the Ministry of Defense of 500 thousand hectares of organizations, enterprises, institutions, health, recreational and historical-cultural purpose, 250 thousand hectares – to the water companies, 88 thousand hectares – to joint ventures, international associations and organizations businesses and individuals.

However, in Ukraine there are 800 thousand hectares of land, which has still not been assigned  for ownership or permanent use within the boundaries of settlements, and the so called no man’s field roads between the shares, shelterbelts, filbert and the like.

However, it should be remembered that during the implementation of the previous stages of the land reform 6.9 million citizens of Ukraine acquired the right on a land part (share), of which 6.8 million were awarded certificates.

This implies that about 100 thousand shares (about 400 thousand of hectares) remained unclaimed, and therefore their fate is unknown. It is obvious that such land is used without the relevant title documents, and that is without payment of taxes or rents.

Up to 1 million owners of land shares died, the inheritance was never reissued. Thus, about 1.5  million hectares of agricultural land do not actually have owners, but are used annually, bringing billions of dollars in losses to local budgets.

In order to use public land as a catalyst for the reform of the land market and not as a source of corruption and inefficiency, it is necessary to develop, implement, and monitor the effect of new regulatory and transparent procedures for clear delineation of state land and transfer them from state ownership. Such transfer can occur through auctions to private ownership or transfer to communal property on the basis of clear criteria.

Also it is important to establish the legal framework to identify unclaimed property (unclaimed inheritance, property, closed enterprises) and its transfer to the municipal property, including interim procedures for registration of such land in the inventory, as well as the procedures and the legal framework regarding the definition of the status of collective land ownership (privatization of unclaimed shares – unclaimed shares, field roads, shelterbelts, farm yards).