There was no private ownership in most of these “blank sheets of paper,” where tracts of land belonged to state enterprises and cooperatives. The first stage of land reform was reduced to the transfer of land to villagers. The Countries in the Baltic region and central Europe went through restitution. There was no talk about restricting the rights of descendants of previous land owners to freely dispose of their land. They key restriction — prohibition of sales to non-residents — was actively supported by the newly created class of domestic farmers and land owners.
A different scenario was chosen in Ukraine, Russia and Kazakhstan, where collective farm lands were split up within the collective. All stages of denationalization of agricultural land were in the free market, and the first moratorium on sales transactions was established only in 2002. “Liberalism by oversight” characterized the agricultural industry, with average land prices set at $1,500–$2,000 per hectare, an enormous amount of money at the time.
In 2002, 6.9 Ukrainian million citizens (owners of farmland plots) were forbidden to freely dispose of their property. The total land bank, which fell under the moratorium, amounted to 27.7 out of 41.4 million hectares of agricultural land in Ukraine. State lands also fell under the moratorium — another 10.5 million hectares. As a result, the land turnover was completely blocked: if someone wanted to engage in agriculture, he had to go and look for vacant land to lease. Ukraine’s Communist Party in 2002 established the largest development barrier in the history of the Ukrainian agro-industrial complex. The scale of the obstacle can only be estimated today when juxtaposed with the belt of Eastern European countries, which provided their citizens with the opportunity to freely buy and sell land.
How far has Ukraine lagged behind its potential during the 17 years of the moratorium?
Farmers found themselves in a stalemate because the land they needed could only be rented. The purchase of land and 100% ownership are a prerequisite for certain types of farming with with a long investment horizon (gardening, berries, flowers, and others). Under Ukraine’s legal system any lease can be easily broken, leaving farmers to face losing their investment and incurring significant. More than 50% of the cultivated land bank of Ukraine is currently leased, with some 65% are in short-term leases up to seven years. Accordingly, the Ukrainian agricultural sector has been degraded to crops with minimal added value and a high level of land depletion — rape, soy, and sunflower.
Soils as a resource are subject to significant depletion, as tenants are not interested in the long-term preservation of land productivity. Seed shifts are disrupted, and the average level of 56 kg/ ha fertilizer is 130% lower than standards in eastern Europe.
The second most important artificial barrier is blocking access of farmers to credit resources. The main asset of farmers — land — cannot be used as collateral. Thus, only well-established large farms can get a loan, leaving the rest of the market participants completely cut off from loan resources. As a result, the agro-industrial complex, the locomotive of the Ukrainian economy, today accounts for only 8% of the corporate loan portfolio.
For large companies with more than 50,000 ha there is no problem in attracting much cheaper resources on world capital markets through the issue of Eurobonds or access to IPO. This inequality of opportunity has already led to a significant oligopolization of the Ukrainian agricultural sector. In addition to the agri holdings with the largest land banks in the world (Kernel — 550,000 ha, Ukrlandfarming — 500,000 ha and NCH — 400,000 ha), it is important to pay attention to industry-wide indicators. During 2009–2017 all three categories of farming grew substantially: 18% large (with more than 10,000 ha under cultivation), 17% small (up to 1,000 ha) and 11% — medium (from 1,000 to 10,000 ha). There are increasing barriers to starting farming and weakening competition between current market operators.
How did these imbalances appear in the Ukrainian agricultural sector?
The cumulative increase in land prices in the east European countries reflecting its profitability as a business unit compared to 2003 amounted to 208%. At the same time, in contrast to the “old Europe,” the main factor in the increase in prices was an increase in productivity (by an average of 53%) and an improvement in the structure of production towards complex and expensive crops. The land where first-grade wheat grows is much more expensive than land cultivated with fodder species, not to mention the high-margin sub-sectors of crop production.
In Ukraine the land with the best starting opportunities, today yields an average of 41 centners of grain per hectare, which is 11% lower than in the post-Soviet countries of eastern Europe. If we discard the Baltic countries, where the quality of arable land is incomparably worse, the yield gap will increase to 21%.
It is precisely the indicated gap in average productivity between Ukraine and the post-Soviet countries where the land market is functioning that can be used as a tool for quantifying the losses due to the moratorium. So, according to my calculations, we are talking about estimated losses of $30 billion during 2004–2018. And this is without taking into account the degradation of soils.
Therefore, we can continue a discussion for a long time about the advisability of opening a land market from next year. Many opponents will find dozens of irrelevant reasons to leave the moratorium in place. Among them are those whose business models are based on cheap rent, and those who are not interested in increasing Ukraine’s share in the global food market. But each such year will cost Ukraine a few more percent of GDP and increase the gap with farmers in Poland, Romania, the Czech Republic and other countries we are trying so hard to catch up with.