Not for sale

Ukraine extends its moratorium on the sale of agricultural land. What effect is this likely to have on the activities of international investors?

 

On 28th December 2007, the Ukrainian Parliament approved the state budget for 2008, which extends the moratorium on the sale of agricultural land until the introduction of a land cadastre and land market laws. Thus, the moratorium, which was first introduced in 2001 as a temporary and short-term measure, is about to survive the fourth parliament and sixth government. President Yushchenko, Prime-Minister Tymoshenko, the ruling coalition in parliament and even the major opposition party – the ‘Party of the Regions’ – agree that all the steps necessary for lifting the moratorium, including the adoption of the above-mentioned laws, should be taken in 2008. However, experts, who have been hearing such declarations for years, wryly observe that there is nothing that lasts longer than temporary measures.

A little bit of history

Land reform in Ukraine began in the middle of the 1990s when land share certificates were issued to members of the Soviet-style collective farms which were collapsing. Such certificates gave to each member the right to an un-demarcated plot of land of an equal value. Later, at the end of the 90s, the state began the process of demarcating land plots and issuing titles to the land owners, who, however, were not allowed to sell their land due to the ban introduced by the Law # 2242-III of 18th January 2001. This ban was replaced by a moratorium introduced by Ukrainian legislators into the Transitional Provisions of the new Land Code adopted on 25th October 2001. The moratorium prohibited any transfer of agricultural land, other than by way of barter, inheritance or expropriation of land for public use, until 1st January 2005. However, in December 2004 the Parliament prolonged the moratorium until 1st January 2007 and extended its scope by prohibiting barter operations, which were frequently used as a smokescreen for actual sales of land. In January 2007, the Parliament overturned President Yushchenko’s veto and again extended the moratorium until 1st January 2008. The last extension of the moratorium is not limited by a given date but conditional upon the adoption of two laws: ‘On State Land Cadastre’ (incidentally, Ukraine is the only CIS country which has not introduced a law on land cadastre) and ‘On the Land Market’, so the optimistic scenario is that the moratorium could be lifted even before 2009, but the long history of the moratorium leaves little room for optimism.

What\'s it all about?

So, what is the moratorium all about, and how does its extension affect the Ukrainian land market? Amendments introduced by the state budget for 2008 into Articles 14 and 15 of the Transitional Provisions of Ukrainian Land Code prohibit (before the introduction of the above-mentioned laws) the following transactions on the land market:

• the contribution of a title to a plot of land to a company’s statutory capital;

• the purchase and sale of state or municipal agricultural land;

• the purchase and sale, as well as any other form of alienation, or change of designated use of privately-owned (i.e. by legal entities and/or individuals) agricultural land, both for commodity and non-commodity production. The latter limitation does not apply to the transfer of agricultural land in case of inheritance, barter for another plot of land and expropriation of land for public use.

All agreements that provide for the purchase and sale or any alienation of agricultural land plots either for present or in future are considered to be null and void, and Ukrainian notaries are not allowed to certify such agreements.

Going, going… gone!

Thus, the moratorium limits the right of 6.8 mln landowners to effectively dispose of their private property. Protagonists of the moratorium claim that it is a necessary measure to protect the naïve landowners from domestic and foreign land speculators. But their opponents rightly observe that the moratorium leaves many legal loopholes to boost the development of the black market for agricultural land. For instance, the ban on contributing titles to land to the statutory capital of companies is frequently circumvented by the mechanism of so-called ‘joint activity’ or ‘joint investment project’, which does not provide for the establishment of a separate legal entity. The actual purchase and sale of state or municipal agricultural land plots is effected through the change of the designated use of such land. Therefore, it may well be that by the time the legal framework for the functioning of the Ukrainian agricultural land market is established and the moratorium is lifted, there will little land left to sell.

Dos and don’ts for foreign investors

The moratorium does not directly affect foreign investors, since the Land Code in Articles 22, 81 and 82 explicitly stipulates that foreign citizens and legal entities are not allowed to own agricultural land in Ukraine. For instance, in a case where a foreign citizen or company inherits a plot of agricultural land in Ukraine, such a citizen or company is obliged to sell this plot within a year. To date, foreign companies and individuals may own only non-agricultural land lying within city limits – in the case of property purchases or for construction purposes, and land outside city limits – in the case of property purchases. It should be added that it is very unlikely that the introduction of new laws and the lifting of the moratorium would give foreign investors the right to own Ukrainian farmlands. However, turning agricultural land into an economic commodity and a legal agricultural land market should open up fresh prospects for foreign investors due to increased demand for foreign financing, advanced food processing technologies, modern agricultural equipment and know-how.

Ukraine was once the breadbasket of the Soviet Union and many believe that once its farmland is in good hands, it may become a major player on the world’s agricultural market.

Alexey Kostromov, senior associate, head of the Ukrainian Desk
at the Salans law firm in Warsaw