Renewed Corruption in State-Owned Agrarian Fund Hurts Land Reform in Ukraine

On November 13, Ukraine’s parliament (the Verkhovna Rada), in its first reading, supported lifting the farmland sales moratorium (Rada.gov.ua, November 13). No one doubts that the bill will be signed into law by President Volodymyr Zelenskyy before the end of the year. If so, this means that starting on October 1, 2020, six million land owners will have the full right to dispose of their property, and all residents of Ukraine will have the right to buy land legally. This would fulfill a long-awaited economic reform step, which, according to various estimates, could accelerate Ukraine’s annual real GDP growth rate by 1.5–2 percent (Khpg.org, November 14, 2019; Worldbank.org, October 2, 2017).

For nearly two decades, Ukraine has banned the sale of land, which in turn has stymied the country’s economic growth and stunted its investment-friendly reputation. Not only does this moratorium empower agricultural conglomerates and agro-oligarchs at the expense of Ukraine’s smallholder farmers (who might otherwise use their land as collateral for accessing credit, for example), but it has also led to inefficiencies in the country’s agricultural system—leaving large tracts of land uncultivated or producing well below its potential, and creating corruption opportunities along the way (Interfax, December 2, 2016; Voxukraine.org, May 31, 2017). Additionally, the European Court of Human Rights ruled in 2018 that the Ukrainian government’s ban on the sale of agricultural land was illegal, as it violated the human rights of Ukrainians (Hudoc.echr.coe.int, August 22, 2018). Lifting the moratorium, on the other hand, could add some $15 billion to the economic output of Ukraine, further consolidating the country’s dominance of global food exports markets (Worldbank.org, October 2, 2017).

The Zelenskyy government is bent on changing the status quo. Both President Zelenskyy and Prime Minister Oleksiy Honcharuk have called for land reform to be completed in the next year (President.gov.ua, October 9). Two approaches to land reform are working their way through the Rada—one originating with the Cabinet of Ministers and the other in the parliament. Both bills would ensure land reform comes into force on October 1, 2020, and lift the moratorium on farmland sales. The government’s draft immediately gives foreigners the right to purchase land, while other legislation restricts the ability to purchase land before January 1, 2024, to domestic companies that have been registered in Ukraine for at least three years. A reconciled version of the bill is expected to pass the legislature (Pravda.com.ua, November 13).

At the same time, the agricultural sector and the domestic land market are in dire need of an operator who can provide financial resources to support small- and medium-sized farmers looking to purchase land. Ukraine’s regular banking system is still in recovery from a financial crisis and does not lend to the real estate sector (Bank.gov.ua, June 2019). The state budget, meanwhile, provides for only 4.4 billion hryvnia ($150 million) for these ends, enough to cover less than 10 percent of future demand (Censor.net.ua, November 13). It is especially important to consider that 30–40 percent of the financing that sowing farmers rely on to operate comes from borrowed funds. Of these loans, 8.8 billion hryvnia ($360 million) per year would traditionally come from the state-owned Agrarian Fund, which simultaneously generates about 1 billion hryvna ($41 million) in net budget revenues annually (Ua-outlook.com.ua, June 25).

However due to the chaotic policies of Timofiy Mylovanov, Ukraine’s new minister of economic development, trade and agriculture, the Agrarian Fund is today at risk of liquidation (see below). Cumulatively, this could result in 2 billion hryvnia ($82 million) in losses to the state and also hit grain harvests next year—the basis of Ukrainian exports, which would significantly shake exchange rate stability and force the Honcharuk government to seek unscheduled new loans.

A recent investigation by agricultural market analyst Ivan Kyrychevsky, citing open sources, including data from the National Agency for the Prevention of Corruption (NACP), found that the Agrarian Fund had until now been a highly profitable state-owned enterprise (SOE) in agriculture. However, the Fund had become a target of “gray cardinals” within the Ministry of the Economy’s Department of Rural Politics, Alex Lissitsa, along with Hennadiy Supykhanov, whose father was an agriculture advisor to former president Viktor Yanukovych. According to Kyrchevesky, Lissitsa and Supykhanov have actively engaged in a campaign to undermine Agrarian Fund Chairman Andriy Radchenko and seize control of the company for themselves. Conspicuously, on the exact same day that Supykhanov filed an e-declaration to compete for the position of Fund chair (Declarations.com.ua, October 23), Economy Minister Mylovanov announced on Facebook he would be sacking Radchenko. Compounding the bad optics, the Cabinet has, to date, not published an official decision on the dismissal of the Agrarian Fund’s head, thus fueling intrigue about “trusted cronies” and fears of a return to corrupt practices (The Page, October 29). This clumsy attempt to dismiss Radchenko on the pretext that a liquidation manager should be appointed in his stead increasingly looks like an attempt to incorporate Ukrainian state enterprises into “ministerial business.”

Under Radchenko’s leadership, the Agrarian Fund had prioritized corporate governance reform to boost the company’s transparency, accountability and, ultimately, its profitability (Diplomatic Courier, September 7). For example, the Fund had implemented competitive tender practices for its contracts and hiring decisions, improved employee incentives and salaries in order to boost retention and decrease corruption, implemented regular, independent financial audits of company operations (all made available to the public), as well as created a new position—an independent, anti-corruption “ombudsman” to both prevent and root out internal corruption. The results of Radchenko’s anti-corruption focus are compelling. No longer among the country’s least profitable publicly owned firms, the Agrarian Fund is now the 16^th-largest SOE contributor to the Ukrainian state budget (Me.gov.ua, July 19). Rather than leaching money from government coffers, the Agrarian Fund is now actively adding to it. Furthermore, the Agrarian Fund plays an important role in Ukraine’s agricultural economy in general as well as in ongoing attempts at reform of this sector more specifically. The current threat of its liquidation or seizure by Yanukovych-era “gray cardinals” (The Page, October 29) thus inflicts a serious blow to the reform plans put forward by the president and prime minister.