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May 9, 2017 Eastern Europe bne IntelliNews Daily 7 Tapping the potential of Ukraine’s “black earth”
Ben Aris in London
Ukraine’s parliament is supposed to pass a crucial law by the end of May that would allow the buying and selling of land. If the market were totally liberalised, according to one estimate the government could earn an extra $1.5bn to $2bn in just the first year and billions of dollars of investment would be unlocked. But if the reform were mishan- dled, it could cause a “civil war”, says one of the very few foreign investors into Ukraine’s agricultural sector.
Ukraine, with its famous “black earth” soil, could be an agricultural superpower. Agricul- ture accounts for about 8% of Ukraine’s GDP, and the country is second only to Russia in the amount of acreage of farmland in Europe. It has a total of 41.5mn hectares of agricultural land – about 70% of the total area of the coun- try – of which two thirds (32mn ha) is arable land. But also about 7mn are still employed in agriculture, or 40% of the rural population, so any reform is highly sensitive.
The sector is currently un-investible for foreigners, because of the muddle surround- ing the issue of land. Expectations of the lat- est reform are low.
“The land reform concept that Prime Min- ister Volodymyr Groysman has proposed, however, is unlikely to gain support from either the agricultural sector or from par- liament. Due to its limitations, it will have a very narrow effect on the economy, and a good opportunity will once again be wasted,” wrote Aivaras Abromavicius, Ukraine’s Lith- uania-born former minister of economy and trade, who quit in early 2016, claiming en- trenched corruption in the government made his job impossible, and Alexey Mushak, a member of the parliamentary Petro Poro- shenko Bloc, in a recent blog.
Without a freehold of land or outright ownership of land (something Russia already has) it is next to impossible for foreign inves- tors to get any exposure to Ukraine’s agri- cultural sector other than buying the bonds issued by the leading companies. But every single one of those – with the exception of one company – has lost investors money, partly because of frauds.
“Don’t get me wrong: I love the Ukrain- ian agricultural sector story,” said a fund manager from Ashmore Capital at Strate- gic Council’s Ukraine Investment Roadshow conference in London in March, “but if there
is a new bond and I go to my investment com- mittee, they just say no.”
Foreign investors can currently only lease the land from individuals, local councils and other private people, rather than buying land outright. Typically, the terms of the lease provide for rents to be reassessed every year and lease payments may be indexed in accordance with the official inflation rate on the day of payment.
Saudi-owned Continental Farmers Group, which manages 44,000ha near Lviv, is a very rare example of a foreign investor that has
operate and the new land law is desperately needed if his company is really going to be able to capitalise on its investment.
“The main issue is that if you don’t own the land then there is little incentive to invest into it,” says Stewart. “You can use things like fertilisers to improve the yields, but its not worth doing things like drainage or building irrigation – making investments that will add to the long-term value of the land.”
In March, Prime Minister Volodymyr Groysman reported that in its latest memo- randum the IMF had made it clear that pen-
“Earlier this month, Groysman presented the government’s plan that allows only in- dividuals to buy land, and only up to 200 hectares per person. Parliament will likely reject this concept, since it ignores the fact that Ukraine’s agricultural sector cannot be globally competitive with land holdings lim- ited to 200 hectares per person that cannot be used as bank collateral,” Abromavicius and Mushak said in their blog. “While Groys- man’s initiative is an important and much- awaited step in the right direction, it must be bolder in order to succeed.”
The IMF is watching closely. It released another $1bn tranche from the $17.5bn standby programme in early April, but at- tached a scathing comment to the disburse- ment, singling out the need to liberalise the land market, which “remains underdevel- oped due to a moratorium on the sale of land, limiting the expansion of this key sector and leaving the rural population poor”.
“Ukraine has the best soil in the world,” says Stewart. “But they have to get the re- form right. The people need to get some- thing from the value of the land, but the big companies need to survive too. And this has to be done without letting the oligarchic groups dominate, otherwise you will end with a civil war.”
“This has to be done without letting the oligarchic groups dominate”
ploughed money into Ukrainian agriculture – and made a success of the venture. But even the group’s CFO Alistair Stewart told bne IntelliNews that it is extremely difficult to
sion reforms and laws to launch an agricul- tural land market on the Rada’s docket were the key demands, but the plan on the table falls short of the mark, say critics.
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