Agrarian Uniqueness
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In all times, the Ukrainian agrarian sector has been considered an engine of the country’s economy. Even in extremely difficult economic stages, the agrarians managed to raise funds, adjust production for local consumption and enhance export capabilities. And expectedly the strategic importance of the sector is pivotal for economic recovery too. Thus, the upcoming reforms in legislation should be exceptionally well-thought-out process. As we found out from Oksana Kryzhanivska, partner at Alexandrov & Partners Law Firm, it entails numerous pitfalls and requires very serious considerations.
UJBL: How important is agribusiness for Ukraine at the present time and in the future?
Oksana Kryzhanivska:At present, every fifth citizen of Ukraine is involved in the agricultural sector and 70% of the country’s territory is used for agribusiness. Thanks to the efforts of our producers, Ukraine is already a global leader in terms of the production volume of sunflower (10.5 million tonnes) and export volume of sunflower oil (3.3 million tones), and we are the fourth largest country in the world in terms of the export volume of corn (16.7 million tones). Also, our country is the eighth largest exporter of wheat (7.8 million tones) in the world. Ukraine has significantly increased its volume of export of chicken meat.
Annexation of Crimea and military operations in the East affected the decline of activity in the metallurgical sector of economy and the export of agricultural products surpassed the export of metallurgical products.
These figures speak for themselves. Today, we are globally known as an agricultural country and we have all the potential for that. We have, so to say, an agrarian uniqueness — one tenth of the world’s black soil is concentrated in Ukraine (no surprise there!). It would be foolish not to take advantage of what the nature gave Ukraine as a gift and not to place a stake on the agrarian area.
UJBL: What do you think are the most promising areas in agribusiness?
O. K.: At the present time, when you analyze the news feed on the Internet you come across may titles with screaming indices: “Ukraine is Beating the Records Related to Export of Agricultural Products”, “Ukraine is Capable of Doubling the Export of Agricultural Products”, etc. But all of those are merely quantitative indices and they are related to export and production of raw materials, not finished goods.
Unfortunately, today Ukraine is a raw material country, but as we all know, it is much more profitable and promising to sell finished products. Higher added value of goods (the more the product is finished the higher the value) directly influences the investment attractiveness of the country of origin.
Also, I cannot but mention a highly important area of the agricultural sector — the cultivation and production of organic products. At present, more than 400,000 hectares of land is used for the production of organic products. The domestic market of consuming such products in 2014 reached EUR 14.5 million showing an increase by 29 times as compared to 2007. Also, Ukraine has the absolute potential for establishing itself as a leader of exporting organic products into EU market where the consumption of organic products exceeds EUR 21.5 billion. This ought to be considered very seriously.
UJBL: What are the other sectors in our country on which the focus should be?
O. K.: Certainly the country needs to diversify its risks and you cannot “boost” just one area.
We have a great IT potential. Our clients include quite a lot of foreign IT companies that hire Ukrainian specialists to outsource their work. Also, the number of programmers who leave Ukraine each year is quite sad — 5,000 people, taking into account the fact that up to 17,000 IT specialists graduate from higher education institutions annually. In other words, virtually 30% of the most successful programmers leave the country.
I also believe that the logistics sector is quite promising but this is for the future and provided that the economy stabilizes.
The construction area is popular amongst investors but at the moment we are observing certain decline in that area. There is an increased competition in the area of residential development and under the given circumstances the property is being sold with insignificant profit for the developer. The overall situation in the country has forced many businesses to slightly reduce the pace of development, so the office buildings are not as demanded as they used to be. But the construction of industrial and processing facilities takes on a new level. Also, I believe that the construction in the agricultural area is quite promising — I mean construction of plants for the processing of agricultural products and infrastructure facilities.
I would also like to see high quality and powerful garbage recycling activity in Ukraine. Recycling of garbage is not just a cleaning activity but also a method of obtaining additional energy (for example, production of biodiesel, etc). I consider this to be quite a perspective and above all an important area that is ready to develop. There is a gap in the garbage recycling area and the opportunities are huge.
UJBL: How is the situation with investments in the agricultural sector? Are foreign companies still interested in this sector?
O. K.: Definitely. Judging from the experience of our company I can say that not a single foreign investor has left this business over the past few years (I mean amongst our clients). Moreover, a wise investor has a good feeling when to make an investment: investments should be made at the downturn of the market and sell at the growth of the market. Therefore, I would characterize the interest to opportunities in the agricultural sector of Ukraine as growing and active. Believe me foreign investors are purchasing agricultural companies quite actively at the present time.
Taking into account the drop in the hryvnia exchange rate and the situation in the country, the existing investors are somewhat restructuring their business in Ukraine. For example, they sell businesses where the growing of crops will become significantly expensive because of the need of constant irrigation and they are becoming more interested in agricultural companies based in Western Ukraine.
UJBL: The cancellation of special VAT treatment for agrarians is being discussed very actively at the present time. What do you think: should it be cancelled or not?
O. K.: The issue is really quite relevant. I think that the special treatment for agrarians should not be cancelled at the moment. I will explain why.
The cancellation of the special VAT treatment for agricultural producers is a requirement of IMF and it is motivated by the fact that different tax benefits for agrarians cost UAH 30 billion for the budget and half of the amount accounts for VAT. Jerome Vacher, IMF representative in Ukraine says that the agricultural sector, which comprises 10% of Ukrainian GDP, generates only 1% of tax revenues.
But let’s look at the situation from the other side. The agricultural sector is an obvious locomotive of the Ukrainian economy at the moment. Special VAT treatment had been introduced in 1999 when the level of development of Ukrainian agricultural sector was very low and the quantity indicators were equal to those in the 1950s, but by 2014 the agricultural sector accounted for 10% of GDP.
Agriculture is a huge segment that rests on three pillars: financial, land and intellectual. Everything is fine with the last two even though I would like to note that there is an urgent need for upgrading of all processes. The financial aspect is structured at the expense of profitability of the company (equity capital), loan funds and subsidies.
The situation with loan funds is difficult in our country and the profitability of agricultural companies somewhat deteriorated due to devaluation of the hryvnia. The cancellation of the special regime will lead to a situation when one of the pillars, on which the agricultural sector rests, will dent significantly.
And now I will demonstrate the consequences of cancellation of the special treatment using examples. Accumulated VAT provides additional in 7.5% return for agribusiness. There are areas that are marginally profitable (pig breeding — 6%, poultry production — 9%, oats — 0.1%, barley — 0.6%). Cancellation of the special treatment will result in the decrease of the marginally profitable areas. The fields will be seeded with more profitable crops (mostly crops intended for export). The producers are already saying that they will decrease to the minimum or will entirely refuse to breed cattle if they are transferred to the general taxation system. This will result in the loss of more than 36,000 jobs. As a result, this reform will lay an additional burden on the end user, the cost of some foods will increase in price even more, and this despite the fact that now the people spend more than 48% of their budget on food.
UAH 30 billion that have not been received by the budget due to the tax benefits for agrarians is a significant figure. But according to alternative calculations the equivalent of agricultural corruption comes to USD 2 billion. Another figure for comparison, the 2015 state budget allocated more than UAH 23.2 billion for the Office of the State Road Agency of Ukraine.
It’s a fact that in some countries the agricultural sector is not supported by the government, but it is supported in most of the countries.
Why break the chair on which you sit? Until the government has something to offer to agrarians the special treatment should be retained and, in the meantime, work should be done on finding alternative methods of supporting the agricultural producer. In general, such type of support as accumulation of VAT in our country is a much more reasonable mechanism than subsidies and this is because there is a high level of corruption. The less the participation of officials the better it is for business, at least in this context.
UJBL: How do you evaluate the prospects of agrarian receipts?
O. K.: The institute of agrarian receipts is quite new. The Agrarian Receipts Act became effective in March 2013, but despite that I consider this instrument to be a very effective way for raising funds in the agricultural sector.
The agrarian receipt is a document of title to commodity that fixes an unconditional undertaking of an obligor, secured by a pledge, to deliver agricultural goods or to pay monetary funds under the terms and conditions provided for therein.
This method is beneficial for the agricultural producer because it provides the producer with funds before the harvest and at the same time without involving bank financing. At the same time, the agrarian receipt quite effectively protects the interests of the takeout lender (pledge of the future crop, additional pledge, notarization of the receipt, enforceability of the debt outside of court via notary writ, the creditor is able to monitor the crop, etc.).
Of course, the Agrarian Receipts Act in certain parts requires deletion of ambiguous wording (for example, the law uses such a concept as “marketing year” which is not defined in Ukrainian laws, etc.). At the present time, the agrarian receipts are used within the pilot project implemented only in Poltava Region, but I believe that this instrument will get accustomed and will be used actively.
UJBL: At the cost of what funds are agricultural producers being financed most effectively?
O. K.: Equity capital of agricultural producers. That is why it is very important not to deprive them of government support. The situation with bank lending cannot be characterized as active at the moment. Certainly, the banks offer loans but in amounts that are not interesting for major agribusiness. We are talking about several million hryvnias. It is quite difficult for medium and small agribusiness to pay high interest rates ranging from 22% to 30%. In general, the unstable situation with Ukrainian currency does not facilitate the decrease of interest on loans that are higher than in Europe by several times.
UJBL: Since the interest of foreign investors to Ukrainian land is quite high, what do you think, how will foreign investors behave after the cancellation of the moratorium on the sale of agricultural land?
O. K.: Studies show that neither small nor medium nor large agribusiness favor opening the land market today. Thus, according to the research conducted by Agri Survey, 48% of agrarians with land bank of about 1,000 hectares, 64% of agrarians with a land bank ranging from 1,000 to 5,000 hectares, 42% of agrarians with a land bank of more than 5,000 hectares are against the opening of the land market, and 60% of all surveyed agrarians are not ready to buy the land. The majority of our clients also say that they are not ready to buy land if the market is opened.
I believe that the land market have to be opened, but not now. This has to be a well-thought-out and stage-by-stage process. To make it clearer, I must say that it is necessary to amend more than 100 regulatory acts in order to open the land market. Our company has been engaged in the drafting of regulatory acts for many years. Believe me that it is impossible to revise properly and with due quality such quantity of regulatory acts by the beginning of 2016.
The land market should be opened in stages: state owned and municipally owned land should be offered for sale first and then land owned by individuals. The minimum price for the land should be fixed by the government and in general a lot of mechanisms need to be thoroughly worked out in order to reduce the likelihood of speculation and cheating of peasants.
UJBL: Today there is an active discussion of a Unified and Integrated Strategy for Development of Agricultural Sector and Rural Territories During the 2015-2020 Period. What do you think are the most important points in that document?
O. K.: I think that the Ministry of Agrarian Policy is one of the most active ministries today. Yes, the Unified and Integrated Strategy for Development of Agricultural Sector and Rural Territories During the 2015-2020 Period is a rather comprehensive document.
But frankly speaking, the agrarian sector needs one document that will contain clear objectives which we plan to accomplish. It should be a short document and the rest should consist of detailed documentation for its implementation.
We are involved in a large number of public discussions and hearings related to land and agricultural matters, interact with governmental agencies, local self-government bodies and business, analyze and provide recommendations regarding draft regulatory acts. Certainly, in the process of reforming the agricultural sector there should be a more in-depth dialogue between the authorities and representatives of all categories of agribusiness — from the owner of the land to agricultural holdings.
In any case, the agrarian policy of the government should be aimed at supporting villages rather than reducing them, as well as at the development of farming and medium-sized businesses.
Alexandrov & Partners
Key facts:
Year of establishment 2002
Number of lawyers/partners 17/3
Core practice areas
- Agribusiness;
- Construction &
Real Estate;
- Land;
- M&A ;
- Investments
The photo session was taken at the Praha restaurant.
