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Oleg Nivievskyi: Agroholdings can be considered the outcome of the moratorium on land sales in Ukraine

21 December 2018

The moratorium on land sales is considered as one of the main drivers of the development of large scale agriculture in Ukraine. The moratorium has been in place since 2001 and yesterday the Parliament extended the moratorium for the 10th time since then. It was introduced as a temporary measure to protect landowners in a situation of underdeveloped land market infrastructure. One of the consequences of this protracted land reform is a de facto lease-based accumulation of vast land areas in hands of agroholdings. Dr. Oleg Nivievskyi, Assistant Professor at Kyiv School of Economics and coordinator of the UaFoodTrade Project, tells in an interview to the about the effects the moratorium has on agriculture, land market and society at large.

What are the consequences of the moratorium on land sales for your country? How does it affect agricultural producers, landowners, and the state?

Of more than 42 million hectare of agricultural land (or 70 % of Ukraine’s territory), about 41 million hectares(or 96 % of all agricultural land is affected by the moratorium. Of this land, 68 % (27 million hectare) are land plots, the so-called payi, that were distributed during 1990s to private property of 6.9 million of former workers of Soviet collective farms (or 16.2 % of Ukraine’s population). Under the moratorium, these landowners cannot freely dispose their private property or use the land as collateral to attract investments to rural economy. The majority of these owners live in rural area and are of old age.
Implications of the moratorium are rather well understood and articulated multiple times in various publications. Moratorium deprives public of much needed revenue, undermines long-term investment incentives in agriculture and rural areas, encourages over-use of land, including soil mining, and distorts agricultural production structure by making it impossible for small and medium producers to access credit. According to the World Bank estimations, lifting the moratorium will result in boosting agricultural productivity that could add US$ 15 billion to annual output and increase annual GDP by about 1.5 percentage points. And it would also boost public revenue by up to US $2 billion from the one-time sale of state land and US$ 250 million annually from land leases. This would significantly increase local budgets to develop rural infrastructure.

The question of lifting the moratorium has been increasingly discussed over many years. Nowadays there is a new round of intensive discussions in the Ukrainian society. Do you think that the society is ready for lifting of the moratorium?

I think the society is ready despite a great deal of populism and manipulations. For example, one of the recent polls that aimed to inquire about public opinion regarding the moratoriumshowed that the way the questions are formulated is extremely important. When the respondents wereasked the question ’What is your opinion about lifting the moratorium (prohibition) on purchase or sale of agricultural land in Ukraine in general?’, almost two thirds of respondents replied they wouldnot support lifting the moratorium. But when answering the question ‘What is your attitude to having the right to freely sell your land when you have such a need?’, almost a half of the respondents expressed their willingness to have that right; the rest of the responses were divided into two nearly equal groups – those who were against and those who still did not make up their mind. Unfortunately, politicians in Ukraine exploit much more the responses to the former rather than to the latter formulation.

What about the enabling environment? Are the banking and taxation systems ready for lifting of the moratorium?

I think it will take some time before the banking system will adapt to a new paradigm, that is life after the moratorium. Commercial banks need to develop financial instruments and prepare their staff to operate those instruments. But bankers are eager to use this opportunity and develop land mortgage. Just to give an idea about forgone market opportunities: in the USA the volume of farmland secured loans to agriculture was about US$ 90 billion in 2017, which would beequivalent to about US$ 10 billion in Ukraine if we compared the sizes of two countries.    

How do you think will the abolition of the moratorium affect the structure of land use and agricultural production in Ukraine?

It should bring agriculture onto the new trajectory of development with more investments into the higher value-added agriculture. It might especially be beneficial for the small-scale farmers that are constrained in their access to finance and collateral. Small farmers cultivate mainly their own land but cannot use it as collateral to attract the loans because of the moratorium. I think it would be difficult to break up a concentration trend in the sector, but lifting the moratorium will strengthen small farmers in a competition with the large agroholdings.

Do you think that agroholdings will keep up in terms of both dominatingthe agricultural production and preserving their land areas? Will agroholdings remain an important player on the land market as it is the case in Russia?

I do not think that agroholdings now dominate, they cultivate only about 6 million hectares in Ukraine which only about 30 % of the total agricultural area being cultivated by commercial agricultural enterprises. Another 15 million hectares is cultivated by households and small individual farmers. But I think that agroholdings will try to increase their land banks, although consolidation is taking place within each farmsize group, even within households. Agroholdings will remain an important player.

In general, do you think agroholdings are the outcome or the driver of the moratorium?

I think that agroholdings can be considered the outcome of the moratorium ifwe additionally consider very generous tax benefits for agricultural enterprises that had beenintroduced almost 2 years before the moratorium came into force. Now a certain group of agroholdings (most likely, the inefficient ones, I believe) is in favor of the moratorium because they have not managed to organize efficient production and are afraid of losing it all at once after the moratorium is lifted. The moratorium is a sort of a subsidy to agricultural producers because it redistributes the land rent to their benefits. In other words, land owners receive too little rental payments compared to the profits that agricultural enterprises generate. Lifting of the moratorium will deprive producers from this benefit and will force inefficient companies to leave the market.