Fertile Ground
The Ukrainian agrarian sector was the most dynamically developing and promising one over the last few years. The favorable geographical advantages and strategic importance of the sector create a fertile ground for investments, expansion, innovations, and regulatory initiatives. The vertical integration in the sector and consolidation of land resources, funds attraction and regulatory field are among the hottest topics for agribusiness on the eve of the season. Our May panelist team examines the recent developments.
What is the future impact of the institute of agricultural receipts in Ukraine on the development of agriculture?
What changes to current legislation (On Agricultural Receipts Act of Ukraine) and other novelties are necessary?
Certainly, the introduction of an agricultural receipts agency is aimed at attracting financing to the Ukrainian agricultural sector. This is not to say that before the On Agricultural Receipts Act of Ukraine came into force there were no legal mechanisms to attract financing for future harvests in Ukraine. There used to be futures contracts, as well as the possibility of transferring to pledge a future harvest according to Article 576 of the Civil Code of Ukraine. Nevertheless, introduction of agricultural receipts is intended to enhance financing schemes reliability and to introduce additional guarantees on the protection of agricultural enterprise creditors.
It is early days to talk about the effectiveness of this law in its current edition. In order this law to be effective in full, the state authorities should draft subordinate acts that adopt the form of the receipts on goods and financial agricultural receipts, determine the procedure of Register on agricultural receipts maintenance as well as the procedure for obtaining information from this Register, the procedure of resolving disputes between the creditor and the debtor by the authorized bodies, the procedure of determining the quality of products, etc.
In general, introduction of the On Agricultural Receipts Act of Ukraine is a positive point. But at the time when this comment appears if the institute of agricultural receipts has not been realized in practice, its reliability and practicality and, thus demand, will remain in doubt.
Ukrainian agroholdings recently became large borrowers. From the legal point of view, what should be the emphasis for agricultural holdings when they attract financing?
For different tax and regulatory reasons, lenders usually distinguish between different companies making up the group while structuring agroholding financing transactions. As a matter of practice, fundraising achievements of the companies holding the majority of the group’s assets (so-called propcos) are modest.
At the same time, parent companies located in foreign jurisdictions, which have no production base, but exercise control over the other companies, are the group’s fund raising leaders. In this case the affiliated assets of propcos are used as collateral.
Notably, both propcos and their multiple affiliates are usually involved as sureties in long-term financing transactions (including Eurobonds). In this context, a creditor should mind that payments under suretyships granted under foreign parent companies’ obligations would require the receipt of an individual license of the National Bank of Ukraine, which is not necessary if secured loans are disbursed to Ukraine.
Despite having a high value, certain assets of Ukrainian companies cannot be pledged as a matter of law.
In particular, Ukrainian law prohibits the taking of security over agricultural land and lease rights to public or municipal land plots. The aforementioned restrictions would not reduce the security portfolio if shares or interest in the relevant affiliated company can be pledged. It should be taken into account that Ukrainian legislation treats pledges of participatory interests in limited liability companies or memberships in farming enterprises less favorably than pledges of shares in joint stock companies.
What are the chances that the Draft Act on the Land Market will be enacted by the end of this year? Could any of the provisions of this Draft be considered reform of land law?
The Draft Act On the Land Market No.9001 that was considered by the Ukrainian Parliament at the end of 2011 was returned to its authors, who were instructed to address the most important issues of operations with all categories of land. However, some reformatory provisions of this Draft regarding operations with agricultural land met with a strong reaction from the public and had to be returned for further improvements.
One of the most recent versions of this Draft, which was published by the Holos Ukrayiny (Voice of Ukraine) newspaper (issue No.14 (5264) of 25 January 2012), contained provisions that were previously unknown to Ukrainian land legislation. The said Draft provided that the ownership of agricultural land was restricted to Ukrainian citizens, state, local and territorial communities, and the state land bank; imposed limits on the size of land plots that could be leased; provided for antimonopoly restrictions on the acquisition of ownership or the right to use land plots intended for commercial farming.
This Draft failed to receive sufficient support from the general public and Members of Parliament. Hence, legislators decided to look for alternative solutions. Some aspects of operations with non-agricultural land were addressed by the On Making Amendments to the Land Code of Ukraine regarding the Procedure for Selling Land by Auction Act of 5 July 2012 and some other statutes. In order to create a comprehensive legal framework for the regulation of operations with agricultural land, a number of statutes and regulations have to be developed, including the On Operations with the Agricultural Law Act of Ukraine, which is the most important piece of legislation in this area. According to the Transitional Provisions of the Land Code of Ukraine, the sale of agricultural land in Ukraine will be prohibited until the On Operations with the Agricultural Land Act of Ukraine has come into effect, but in any case it will not be allowed until 1 January 2016.
It is worth mentioning that the Draft Act On the Land Market is not on the agenda of the second session of the Ukrainian Verkhovna Rada of the seventh convocation.
What are the features of the legal regulation of organic production in Ukraine? Is there any specific legislation on certification of organic agricultural products?
Ukraine has been drafting its organic legislation more than 12 years, but these efforts did not meet with success. Therefore, the Ukrainian organic industry’s development without legal basis is very slow today. For instance, in 2012 the share of internal organic production in total agricultural production accounted for 0.5% in the light of 10%, scheduled for 2015 by the State Program of Ukrainian Agriculture Development until 2015.
To date Ukraine has not developed its own national regulation and institutional system for organic products certification, and has not implemented EU standards, that’s why the overwhelming majority of domestic organic farms are certified by foreign certification bodies principally in accordance with EU Regulations, since the Ukrainian organic products are exported mainly to the EU, exports to which should be certified by company accredited in the EU. At the same time, Organic Standard Ltd., founded in 2007 as a result of the Swiss-Ukrainian Cooperation Project, is the unique domestic certification body in Ukraine, accredited pursuant to ISO/IEC Guide 65 and officially recognised in the EU and in Switzerland.
But the key question remains open: should Ukrainian organic regulations be adopted as a law or approved as state standards — easier for application and international harmonization, following deregulation policy and growing tendency in the world?
What are the features of the regulation of insurance for agricultural producers in Ukraine?
The agricultural sector involves a great deal of business risks. Therefore, Ukrainian agricultural companies require reliable and efficient insurance mechanisms. Even though the Ukrainian government has not endorsed legislative procedures for certain types of compulsory insurance (e.g., liability insurance for producers, using or storing pesticides and agrochemicals), recent trends in agricultural insurance brought a range of perspectives for agricultural producers.
Under the On Peculiarities of State-Subsidized Insurance of
Agricultural Products Act of Ukraine of 9 February 2012, No.4391-VI (the Act) Ukrainian agricultural producers may obtain compensation of up to 50% of their insurance fees. The Act provides for certain restrictions in terms of objects of agricultural insurance, insurance risks and insurance tariffs.
To be eligible for the state subsidies an agricultural producer must meet legislative requirements and comply with the respective procedure. Upon execution of an insurance agreement (in accordance with the respective insurance standard) and payment of an insurance fee the agricultural producer must submit an application and the supporting documents to the competent state bodies evidencing compliance with legislative requirements and restrictions. Agricultural insurance may be provided by licensed insurers, which are the members of the Agricultural Insurance Pool. Currently, there are nine insurance companies, which have obtained the respective license, and only four of them are members of the Agricultural Insurance Pool (e.g., Ukrainian Agricultural Insurance Company and Dominanta).
In 2012 state-subsidized agricultural insurance was rather limited in terms of objects of insurance (winter wheat) and overall coverage (0.7% of the territories where winter wheat is cultivated). Despite the legislation, whose implementation is expected in 2013, experts are rather pessimistic about agricultural insurance in Ukraine due to unclear procedures for allotment of state subsidies as well as low benefits and problems with receipt of a license, which insurance companies face.
