Coordinates of Land Market of Ukraine

    Why?

    Land reform has been plodding ahead in Ukraine for nearly 18 years. As strange as it is, the only policy document which we have today, in 2009, is the Presidential Decree of 2001 – On Main Directions of Land Reform for 2001-2005. According to the Decree, the final goal of land reform is “economically effective and ecologically friendly land use”. Among the primary principles of land reform there was declared “inclusion of land into market circulation”, and “development of land market” has number 4 among top priorities of the state land policy. 

    Thus our land policy provides for the creation of land market in Ukraine. 

    One has to ask whether it is possible for Ukraine – a country with market economy according to WTO standards – to reach the goal of “economically effective land use” without inclusion of land into market circulation. 

    Europeans have little doubts that “land markets are mechanisms that, provided there are appropriate institutional checks and balances, allocate ownership and use rights in a manner that allows land and its associated assets to be used in the most economic way”; the absence of effective land market is typical for “less economically developed societies”.¹ 

    This conclusion was made on European grounds empirically, drawn from European historical experience and current practice. We in Ukraine, having declared our course towards market economy, are still contemplating and debating whether we could dispense with land market. And opponents of the land market ignore another lesson which our Western neighbors drew from their history: the absence of land market significantly limits the capability of the country to produce wealth.² 

    Well, the lack of consensus in the society and in the politics on the point of land market is one of the principal reasons for slow development of the land market – and a major obstacle for land reform as a whole. All sociologic surveys make evidence that there is no pro-market majority in the society. Without embarking upon the reasons for such an attitude, one may easily find evidences that political parties of Ukraine follow the public opinion on the question of land market.³ 

    Except for electoral dividends, such policy brings to its supporters tangible economic benefits. If there is no market for any resource, then it is impossible to make any bankable conclusion about the price and value of that resource. If the absence of land market in Ukraine is additionally complicated with legal possibility to get land for free, within the framework of non-transparent procedures, without an effective judicial control, plans for use of land and spatial planning, then it is clear that transparent effective land market will not appear till completion of “out of market” re-distribution of the “main national treasure”.⁴ In one of his recent interviews President of Ukraine Victor Yushchenko said: “There are already legends circulating about certain People’s Deputies who owns a thousand, two thousand and even nine thousand hectares. Naturally, those guys need another couple of years of moratorium, and we will face the fact that people do not own any land anymore”.⁵ 

    It is a vicious circle: politicians are hesitating to take important decisions because there is no social demand for such decisions. The social demand is not being forged, because open market circulation of land is detrimental for latifundistas from the politics – because market brings about competition, growth of prices, transparency and control. 

    So, until the society does not recognize an acute necessity of the land market, the situation will not change. The coordinate “Why” will remain unknown. Politicians will continue with convincing people that its “unnecessary” and “dangerous”⁶, and businessmen and corrupt officials – with silent extraction from this uncertainty of very certain profit.⁷ And the society will be indifferently looking at a potential of land to enrich the whole nation while distribution of the national wealth will be missing signs of social responsibility, transparency and accountability. 

    But without the inclusion of land into market circulation the final goal of land reform – economically effective use of land – is barely attainable. This means that Ukraine will be more and more lagging behind in its economical development, and in a certain moment national politics will have to make a choice: to preserve control over deteriorating economy by means of self-isolation or to capitalize remnants of its influence by means of fast and cheap sale of national resources to our partners from the West and the East. 

    When?

    Analysis of our land legislation allows for a conclusion that the government was planning to complete the preparation for starting full-scale market circulation of land before January 1, 2005. Prior this date land market had been operating on a limited scale in settlements and only agricultural and forest land was off the market. Such separation, by the way, is another feature of the state land policy – the Presidential Decree of 2001 provided for the “functional separation of agricultural land market from market of land of other uses”. 

    The closer the date, the clearer it was that organizational preparation for the market⁸ was far from completion. Besides, social demand for the market was still low. Thus the date for opening the market was shifted for the first time – till January 1, 2007. 

    At the same time the operational segment of the market – urban land – was also lagging behind governmental plans and ideas; since 2004 almost nothing has changed. In fact, urban land market of 2009 is barely different form urban land market 2002, because it is still lacking major, fundamental feature of market circulation – competitiveness. If market is missing competition, it is not a market, it is fully Soviet, Socialist system for distribution of resources. And within the framework of such a system it is impossible to secure use of land in “in the most economic way”. 

    Full-fledged introduction of competitive foundations into acquisition of land rights (which was provided for by the Land Code of 2001) nowadays is stumbling upon the same organizational and legal problems as it used to stumble 7 years ago. These are absence of a special law on procedure of land auctions, lack of license conditions for auctioneers as well as licensed auctioneers themselves. Independent analyses of these problems made in 2005, 2006 and 2008⁹ impress with similarities and prove very slow (if any) development of land auction legislation and practice. 

    One should not be very much surprised by weak and often contradictory development of urban land market and by stagnation of agricultural land market. We think that current situation of the land market was not an accidental “achievement” or by-product of the transition period; we think so because our lawmakers prolong and deepen moratorium and fail auctions with impressive uniformity and unanimity. 

    And finally, in 2006, there was a “revolutionary situation” in the Parliament. A Coalition Agreement and Universal of National Unity for the first time gave evidence of a political consensus – Parliamentary parties agreed upon lifting of moratorium on January 1, 2008. Coordinate “When?” for the very first time became not just legal reality, but an element of the politics and a fruit of political negotiation and agreement.¹⁰ 

    But the end of the promising 2006 was marked with creative development of the agreement by the Parliament. All of a sudden the date “January 1, 2008” was amended with a proviso – and from then on land market became dependent on coming into force of two notorious laws – on land cadastre and land market. Anyone who followed the advance of the draft on land cadastre was sure that moratorium was going to be here for long. 

    President stroke back and vetoed the law on December 31, 2006. The first eleven days of 2007 land market was functioning in a free and unobstructed way – Deputies managed to collect themselves after holidays and to overcome the veto only on January 12, 2007. The Cabinet in that situation acted in accordance with the principles of rule of law – as it understood them – and sent to notaries a nervous letter which prohibited notarization of contracts for sale of agricultural land… 

    From then on the coordinate “when” became blurred and vague, linked not to a date, but to an event the probability of which has always been and still remains very low. The issue of cadastre and land registry raised disputes between the State Committee on Land Resources and Ministry of Justice, between local self-governance and local executive bodies. Land market was still missing the coordinate “why” – for public opinion as well as for the national business which is remarkably represented in the national politics. 

    The only person dedicated to the idea of land market in that situation was the President of Ukraine. He was personally promoting the idea of lifting the moratorium. In full compliance with “Nasha Ukraina” political program, with new reading of the section 15 of Transition Clauses of the Land Code and still valid “Main directions…” he initiated establishment of interdepartmental working group, which by the end of 2007 produced draft laws on land cadastre and agricultural land market.¹¹ Those drafts were not destined to become laws, they were not even submitted to the consideration of the Parliament; and the President himself with the beginning of 2008 unexpectedly stopped his “one man” campaign in support of the market. 

    Since then the moratorium was only gaining in force – and there have always been found good reasons for that. Could there be a land market without a cadastre? – Then we need a law on cadastre (and cadastre itself would be useful as well). Land market is not a circulation of land plots, it is a circulation of rights, so we need a land registry (we have got lucky this time – the law on land registry was passed almost 5 years ago, but not implemented). One cannot start the market if one does not know where is what and what is where – then we need the inventory. One cannot sell state land just like any citizen sells its private land – then we have to define “specifics” of such sale… 

    Counting of these reasons – of very good and sound reasons – reminds of Strugatsky Brothers novel “The Second Invasion of Martians”. A city treasurer regularly misappropriated city budget, but the community could not get hold of him: “He has walked away again! The last time it was rainstorm of unprecedented force, the time before that it was locust, and this time he managed to get Martians – according to the modern times, in spirit of space exploration”. 

    Well, this time it is not Martians of course, but a very good and strong reason for holding and prolonging moratorium, a reason of the world standard – a global financial crisis.¹² On March 4, 2009 the Parliament overcame the veto of the President for the second time and made lifting of moratorium dependent on those two laws and the date, and this date shall come only after January 1, 2010. Vice-Speaker Adam Martynuyk (Communist Party) said that it was never too much of a good thing. 

    So, to the question “when full-scale land market starts working in Ukraine” a lawyer would give the answer: on the date of entering into force of laws on land market and land cadastre, but not earlier than January 1, 2010, provided that the said two laws defines “specifics” of market circulation of state-owned, municipal and agricultural land. And he will be right, because there is no more precise answer to this question. But we have to remember that:

1. misbalanced state institutions will hardly be able to implement measures necessary for smooth opening of the land market;
2. law on cadastre should have been passed in 1992 – and it is still a draft;
3. lawmakers cannot tell difference between legal and organizational aspects. The law on cadastre is not a cadastre, law on zoning is not zoning. A good example – land registry; we have a law on land registry, but not land registration;¹³
4. law on land market is a fiction. Our experience shows that drafts of the law contain nothing but existing rules and norms. This means that all laws on land market are in place, but never applied in full because of moratorium;
5. the law on land auctions is clearly «impassable» and «unwanted» - first of all, experts in land issues have limited knowledge of this specific problem, it is not a question of land policy or land administration – it is a question of trade and exchange. Secondly, there is no effective demand for this law in the Parliament;
6. and finally – the question whether “specifics” of market circulation of agricultural land or state-owned land is fully recognized and defined is a big problem. No one knows what “specifics” mean, thus it is an evaluative concept, capable of different interpretation and understanding. All those who have the right of appeal to the Constitutional Court of Ukraine will be able to challenge laws on land market on the ground that “specifics” were not defined at all or defined only in part.

    We think that the coordinate “when” will become more predictable only under conditions of political stability. As we could see, political declarations and agreements are easily compromised in favor of political expediency or current political affairs. 

    The other side of this problem is the willingness of investors to participate in the market. Only functional state, with high level of cooperation between all branches and institutions of power, is capable of attaching solid guaranties to the rights acquired on the market. Investors will not invest into risky assets. And if the state is incapable of providing guaranties to the investor – guaranties which are not “a wink and a nod”, not a personal word and personal grip, but all state institutions and their cooperation – the investor will not come. Rights which are not guarantied by the state are counterfeited money.¹⁴ 

    How?

    To define coordinate “how” is even more complicated then “when”. On the one hand, the laws on market are practically fully in place. But our practice shows that quite often traditional solutions are not the most effective. For example, for years we have been talking about land auctions – but at the beginning of 2008, when all sale and lease of state land became subject to auctions with no exemption, the primary land market was completely blocked for several months. It turned out that the “cavalry attack” solution could not be implemented without a law on procedure of auctions, without license conditions and licensed auctioneers, without certain exemptions from the auction sale (all those things which were discussed at length during 6 years). Attack died, because the horse – even a very good one – cannot run without legs, and one leg (prohibition of sale and lease without an auction) is not enough. 

    In fact, there is more politics to the issue of land auction then technique. Everyone knows what is necessary for starting legal land auction practice – that is, we are lacking only good political will. This will is what we mostly missing for solving major problems of land reform. 

    The question of agricultural land market looks like more complex. We have to understand that there is a certain structure of land ownership and certain structure of agrarian production in Ukraine. Do we want to keep it or to change it when we lift the moratorium and open the market? It is clear that land market as a dynamic system is suggesting changes in the ownership structure, thus such changes will certainly take place; and then we have to understand what will happen to the structure of agrarian production. 

    As a rule, access to the national agricultural land market is a case sensitive for the most modern governments.¹⁵ To regulate the access, governments use 3 main tools: qualification requirements; pre-emptive rights; land use restrictions.¹⁶ Current laws of Ukraine provide that agricultural land may be acquired first of all by tenants, by local citizens (who have appropriate education or experience in agriculture) and local councils. Whose pre-emptive right is of the highest priority the law does not say (in Russia it does). Thus we conclude that the law suggests that tenants shall buy land from landowners, and new investors can enter the market provided tenants waive their pre-emptive right (or investors could enter the market by way of buying tenants themselves as corporate bodies). The access to the market is closed for foreigners, foreign companies and joint ventures. Those who entitled to buy agricultural land cannot own more than 100 ha. 

    At the same time there are draft laws suggesting changes to the current regulatory framework: (1) abolition of qualification requirements; (2) access of foreigners to the market; (3) abolition of limitations on area in ownership; (4) restriction of subject of pre-emptive rights by tenants only. 

    Besides such liberal drafts, there are more restrictive ones. For example, draft by People’s Deputy Ivan Zayats allows agricultural land to be owned by citizens only. This idea comes from the USA (so-called Initiative 300); about 60 years ago in some states corporate land holding was forbidden. The Initiative is backed by the fact that farmer families are very important units of the social fabric of the American society; substitution of farmers with corporations leads to degradation of rural areas, rural communities, undermining of social foundations of economical strength of the country. Therefore it is prohibited for non-farmers corporations to buy and own agricultural land in Northern and Southern Dakota, Oklahoma, Minnesota, Wisconsin, Iowa, Missouri, Kansas and Nebraska (i.e. where 30% of US agricultural land is found).¹⁷ 

    Well, restriction of the potential landowners by citizens makes land ownership structure very transparent and controllable. At the same time we could miss in Ukraine the social motives for imposing such restriction which became decisive in the US. In any case, such a decision is subject to a very important and well-balanced choice of our politicians. 

    Besides the models embodied in laws and drafts, one has also to take into account very special conditions under which the land market starts operating. We are talking about low (often sub-standard) living standards of landowners, total corruption¹⁸ and alleged existence of big underground landowners waiting for the lifting of moratorium to formalize their rights. These factors make market functioning hard to predict and foresee. 

    How much?

    One of the principal functions of the market is to reveal the price of the asset (in case of land – price of land as a factor of production). Therefore the price of agricultural land could be shaped only by the market. We are limiting ourselves only to listing of predictions made by some institutions: 

    State Committee of Ukraine on Land Resources says that market price shall be comparable with normative value.¹⁹

    Ukrainian Club of Agrarian Business²⁰ in 2007 made a research and concluded that the average market price calculated on the basis of capitalized income was UAH 12551 per ha in 2007, UAH 8864 per ha at the beginning of 2008 and UAH 4038 per ha – n November 2008.

    So-called agroholdings measure the price between USD 300 and USD 600 (provided the land subject to sale was in their use for several years). 

    Some figures to compare: in 2007 in Germany the average price of agricultural plots was EUR 9205, and the lowest price (EUR 3024) was reported from Brandenburg and the highest price (EUR 26750) – from Nordreihn-Westfalen. The total value of farming land sold in the country in 2007 exceeded the sum of EUR 1 billion.²¹ 

    To conclude, we would like to point at the following: prolongation as well as lifting of moratorium will have negative outcomes. The ability of the state to offer and implement a model of the market which would minimize risks is fairly dubious. Nevertheless, we are strongly supporting the lifting of moratorium – by such an act we would limit corruption and make the market more transparent. The market price of our land – a national treasure – will start shaping, and every day of market functioning will add to this price. No doubts that liberalization of the market will uncover and sharpen all Ukrainian vulnerabilities in the field of land relations. We will finally see the real scale of such problems as incomplete and ineffective state land cadastre, soil protection and preservation of soil fertility, establishment of rational land use.²² But land gaining price as an economic asset as well as formation of a class of landowners-investors are by themselves powerful means for tackling such problems. 
 

    Max Fedorchenko, Center for Land Reform Policy in Ukraine, 2009, for GEOprofile Magazine (2009, #2)