True. Ukraine has succeeded in its quest to emerge as a significant international player. Its strategy seems efficient, statistics wise. But the strategy has inherent limitations… as the proverb goes dont put all your eggs in one basket. Chipping in, Nicolas Perrin, an advisor in Agrarian Affairs at the French Embassy in Kyiv, says, “Ukraine is doing its best to develop its exports in order to promote its products and contribute to the fight against hunger in the world. But exports are too often presented as a panacea: companies are becoming too dependent on these exports. It is possible to rebalance the situation by encouraging agri-food processing and this high-quality sector to meet domestic demand. The needs of the Ukrainian population are probably not sufficiently taken into account, which may lead to opportunities in the Ukrainian market.” Aka the Ukrainian paradox.
To bet on an exports-only economic model is probably not the best idea. Retail sales in the domestic market should also be developed.
Read here The 1st part of the Ukrainian report: A blooming giant.
On the flip side, this can be viewed as a weakness in the country’s economy. An export driven economy certainly has its benefits, but a balanced approach, which develops the domestic market along with international markets would be more intelligent.
Ukraine’s exports need to be more diversified.
Fact is, “We are working on a double strategy for Ukraine exports”, says Bohdan Shapoval, General Manager at the Ukrainian Food Export Board (UFEB).
There are two points to be noted here:
- “We want to diversify our export channels and find new markets. Before 2013, Russia was our main market. We exported more than 70% of our dairy products to Russia, more than 80% of pork, 98% of beef… Similarly, in the other direction, we have to find new suppliers. For example, we started working with Egypt, Azerbaijan, Kazakhstan, Uzbekistan…”
- “We want to develop ‘ready-to-eat’ products: the Ukrainian agricultural sector is not sufficiently focused on the processing industry. We are only starting and we have had very good results, for example for the transformation of sunflower seeds into oil. Ukraine therefore has great potential for this.”
Summing up the Ukrainian agriculture market at the export level would be reductive, since a lot of work still remains to be done in that area. For example, investments are still hampered by protectionist laws that we have inherited from the 1990s, which continue to remain in force.
Lifting of the moratorium on the sale of lands
The opening up of Ukraine’s agriculture to foreign investments could be the next major logical step in the government’s playbook. As a first step in this direction, it should lift the controversial moratorium on the sale of agricultural lands. And this old story should come to an end soon as President Zelenskiy recently announced, on July 10, that he would push for this reform in order to get IMF loans.
Everyone is in favor of it other than those from rural areas who have a vested interest in maintaining the status quo. Corruption is still filling some pockets in local governance and the government’s willingness to move closer to European standards is similar to a new threat against traditional systems of bribery, cash still changes hand for getting a certificate or a missing document.
“In the end, the debate about lifting the moratorium is only financial: who will get rich the most?” Money, money, money, says Olga Kozak from the Institute of Agrarian Economics in Kyiv.
What about the moratorium? The reality of the situation today in Ukraine is that, landowners cannot sell their lands. This prohibition is linked to the famous moratorium that prohibits the transfer of parcels of agricultural land. This measure, a remnant of the past, is now obsolete and does not serve any purpose and needs to go. Ukrainians know it, the days of the old Soviet methods are over.
“At the institute, we hope for the lifting of the moratorium, but I do not see it coming soon. It has been a topic of discussion for 29 years, it can continue. Politicians in Kyiv can imagine a policy, but the farmers on the ground do not want the law to be changed because they will not have the means to buy themselves the land they exploit, they do not have this kind of money. It is also a very political issue, critics accuse the supporters of lifting the moratorium to want to “sell the motherland” and their honor. This is a very virulent debate, while in the end, the debate is only financial: who will get rich the most?” Money, money, money, says Olga Kozak from the Institute of Agrarian Economics in Kyiv. Clearly she has no qualms of seeing the market a bit deregulated.
Ukraine’s many partners see things differently. While some, such as France, Europe’s champion who coined the term, “Liberté, Fraternité, Egalité” wants to see progress made on the issue, others, who may have a vested interest, may not be so generous in their views.
“Every year, lifting of the moratorium on the prohibition of the sale is postponed by one year. This situation is problematic because a farmer who does not own land will not tend to invest in expensive irrigation systems or other. This prohibition creates instability because current investments are not guaranteed,” says Perrin from the French embassy.
“This moratorium should be lifted soon to create a transparent market for farmland,” says Perrin. “The newly elected president – Volodymyr Zelenskiy – voted in favour of lifting this moratorium. A draft law has already been prepared but its content has remained confidential. Many hypotheses are probably to be defined, as for example regarding the limits that will be established in the access to the property for the particuliers (200 hectares) And the companies (1500 hectares).”
He went on to add,“It is seldom mentioned of reflections as for the solutions that could be put in place to regulate transactions and thus seek to encourage small and medium-sized farms or young farmers. Following the parliamentary elections, the deputies will probably have to position themselves fairly quickly on this law whose adoption could take place in 2020. This subject is particularly sensitive and important for Ukraine, which hopes to attract many investments thanks to the opening of the market.”
The keyword here is ‘investments’, and Ukraine still looks like a blank sheet for investors and international financial institutions. Even the International Monetary Fund (IMF) sees the issue as a priority. The Ukrainian parliament however keeps postponing the issue every year.
The IMF has made it clear that if the measure is adopted it would add 1.5 points of growth each year to the country’s economy. A possible reasons for repeatedly deferring the issue every year is that members of parliaments will have too much to lose. Il looks like IMF’s pressure worked, the new President said he would involve the very credibility of his team in this affair. The situation should however be easier for conducting reforms once the new parliament is convened.
Parliamentary elections were scheduled on July 21 instead of next October. President Volodymyr Zelenskiy’s candidates won it all yesterday in Ukraine. House of representatives should vote the lifting in the coming months.
Future investments and corruption
The question of lifting the moratorium on land sale is closely linked to issues of corruption, which is a significant scourges plaguing the Ukrainian economy. It’s the last main string attached to the ancient world. Under pro-Russian Viktor Ianoukovytch’s rule, corruption was in fact the State’s religion.
In 2015, British daily The Guardian crowned Ukraine as “the most corrupt nation in Europe”.
In 2012, accounting and audit firm Ernst & Young, ranked Ukraine among the three most corrupt countries in the world. In 2015, British daily The Guardian crowned Ukraine as “the most corrupt nation in Europe”. In 2017, Transparency International’s corruption perception index placed Ukraine in the 130th position in a list of 180 member countries.
Corruption played a significant role in 2018’s presidential election with former President Petro Poroshenko losing the race over the issue. Much has been done to combat corruption during the term of the previous president. It is to be seen what Volodymyr Zelenskiy, the new President, who’s election campaign centered on fighting corruption, does to fight this menace. Although he promised to fight it it didn’t provide any details on how he would do so.
At the local level though, many intermediaries still survive through bribes. This is the kind of atavistic behaviors that Ukraine will have to eradicate in anticipation of the opening of its agricultural market once reforms are embraced and land owners allowed to sell their lands.
“There is still a lot of corruption in Ukraine, it’s no secret. We are seeing some improvement, but the problem is far from settled. Personally, I will not advise foreign farmers to come and invest in Ukraine, for now. To find land for rent for long-term leases, investors will have to pay a lot of middlemen”, says Kozak, from the state Institute of Agrarian Economics. Although it sounds harsh, this is the ground reality.
Much remains to be done said Perrin, while adding, “The Ukrainian authorities have fought a lot against corruption since Maidan in 2013-2014; it must be acknowledged. There is still a lot to do. In 2015, the liberalization of agriculture made it possible to eliminate controls and administrative procedures that were sources of corruption. To obtain any document or certificate, a company had to pay the official concerned. This situation was explained, for example, by the low level of income of public servants who logically set up systems to improve their resources. In Ukraine, the gray economy is everywhere. There is still a lot of black market in the country. About 30% of GDP would come from unofficial activities.” Thirty percent!
The ball is now in the new ruling team’s court in Kyiv. President Zelenskiy will have to explain what he intends to do concretely against corruption. Let’s wait and see.
All that needs to be improved
It would be misleading if we are to restrict ourselves only to Kyiv. The Ukrainian capital is a bubble in a deeply traditional and rural country, with 31% of the population living in rural areas with very rudimentary levels of comfort, according to statistics from the World Bank.
Corruption tends to sticky, much like an old gum. Ukraine’s rural regions have their work cut out and they will have to work on their reputation. Truth be told, Ukrainian regions are doing everything they can to bring about development and allow brands to use the image of a terroir. There is a demand for this. But we still need easy access to these regions. Which is easier said than done.
The to-do list of changes required to develop Ukraine’s rural regions hangs on the desks of all foreign embassies who are likely to finance these infrastructure projects.
“Ukraine is suffering from networks of another age”, says Nicolas Perrin, who knows the country, including its capital and rural regions very well. He has spent 5 years here, and has seen a lot of progress.
Here is Perrin’s To-do list:
- Railway: Ukraine’s rail network, managed by state-owned company Ukrzaliznytsia, is obsolete and needs a major overhaul. The network is obsolete and lacks locomotives and grain wagons; this has a cascading effect on the entire economy. The obsolete network creates delays and its malfunctions have a systemic effect on the country.
- Road and highways: in 2013, The Daily Mail asked if Ukraine had the worst road system in Europe. Although the sector has seen lots of improvements since then, a lot more remains to be done.
- Irrigation systems: Ukraine’s irrigation structures ancient with most of them tracing back their history to the Soviet times. It would be necessary to update pumping units, pipes… Further, nearly 1.5 million hectares with agronomic potential require irrigation; these lands would contribute to the potential of the southern regions of the country. Around $2 to$3 billion would be needed to complete the modernisation of this project. Essentially, development in this sector is stalled because of the moratorium prohibiting sale and purchase of farmland. From an investor’s perspective, their unwillingness to invest in the sector is understandable since by law they are prohibited to own the land.
- Ports: ports allow commodities to be exported by sea and Ukrainians have an interest in developing this sector. Already the country’s river transport, especially on the Dnieper River, is under development, and the Nibulon group is sinking in big money to develop the sector.
In the past five years, much has been done to boost Ukraine’s exports, said Gautier Maupu, an analyst for the French consulting firm Agritel.
“If the port infrastructure is very modern – Odessa for example has nothing to envy to French ports –, logistics in the country for transport (truck or train) is catastrophic. Roads are even worse in Ukraine than in Russia, railway infrastructure has not changed since the 1970s. We have a real problem here.” According to Perrin, to complete these major projects, would require large investments in the range of $2 to $3 billion, which could be procured from international institutions, including the World Bank.
Mirroring this view Bohdan Shapoval commented, “Ukrainian countryside is poor and under-equipped, agricultural workforce (17% of the active population) is very cheap (monthly salary: 200 euros) but well trained. Ukraine is also starting to develop new technologies to increase crop yields. But it is far behind (only 10% of farms use new production techniques/technologies). In 2018, Ukraine invested only $4 million in 70 start-ups that develop new applications for agriculture (drones, sensors …).” Yes, Ukraine is into Agriculture 4.0 too.
Ideas for a brighter future
One of the current developments in agriculture is towards the recognition of local products, preferably organic, which rely on a well-defined identity.
“Ukrainians are very fond of local productions and quality labels”, says Nicolas Perrin. “These local products are also a sector with high potential for the country, for domestic consumption. Recently, I went on a mission to the wine-producing sector of the border region of Transcarpathia (local name of this region: Zakarpattia) with Hungary, Romania and Slovakia, which is a region renowned for its wine business. Independent winemakers follow a regional strategy, as they are proud to highlight their typically traditional production by valuing its origin and quality. Their potential for economic development is obvious, but they need the means to succeed in producing, structuring their communication and marketing their production. For example, they need to invest in machinery for grape harvesting and processing, but these are often out of reach for small production units.”
These structures however require investments and the backing of sustainable funding. Local interest rates are prohibitively high and thus a clear deterrent.
“Talking of investments through is a non-starter since local banks lend with interest rates of 25%, which does not justify ever using them. In the countryside, it is therefore self-financing and woolen stockings that finance the activity. On the other side of the spectrum, agro-holdings use loans with rates set by international financiers, at very low rates, which are therefore favorable for making the necessary investments in storage and logistics infrastructures,” explained the French official.
He went on to add,“We are starting to see a strong craze to create sectors under geographical indications, thanks to a technical assistance program set up by the European Union. It is essential to stimulate small local sectors, and the best value of products through signs of quality and origin can improve the income of small producers.”
This presents an opportunity to fight the rot in the system – against those with vested interests who keep postponing reforms in rural agricultural land holdings.
Incidentally, public and private players, as observers of agricultural sectors, agree on one point – Ukraine’s To-Do list. If this new giant of agriculture relies heavily on exports, the country is also dependent for certain products:
- Fertilizers (nitrogen and phosphates)
- Agricultural machinery
- Field expertise
Two specific points seem very important: training and gas.
On the training front Ukraine needs access to a knowledge-base on current industry standards and practices. Young Ukrainians need practical training.
While institutes of agronomy are strong on theory, they fall short on providing practical hands-on experience. There is a lot to do in this area. In an interesting paradox, although the whole country has modernized in the last five years, it has not changed much in the last 30 years.
It is imperative to take agronomy out of this academic vision. The 23 agricultural universities in the country, need to create TPs (practical courses), create labs, teach proper English, forge partnerships with companies… Foreign universities should be encouraged to cooperate with their Ukrainian counterparts. In addition, it is imperative to develop linguistic cooperation (French, English, German). All this is obviously a matter of means.
Faced with a decline in Ukraine’s demography, there are fewer and fewer young people; that is why is it imperative to undertake training in agronomy and bring about reforms to meet the specific needs of companies in the sector.
With regard to natural gas, Ukraine is in a unique situation. It is the only European country which has to cough out large sums for its gas requirements. This is a financial drag on not only its agricultural sector but also its economy.
Gas enters into the composition of nitrogen fertilizers, the manufacture of which is the preserve of the Ostchem group.
“In 2017, the Antimonopoly Committee of Ukraine, issued statements saying they had detected the usage of gas in the chemical nitrogen fertilizers market, which is a pointer to unfair competition by the Ostchem Group; it also found nitrogen based fertilizers to be high over priced,” says Olga Khodakivska, deputy director of the Institute of Agrarian Economics.
“However, as of April 2019, the decision to prosecute the Ostchem Group for consideration by the Antimonopoly Committee of Ukraine was not taken. According to the results of the investigation carried out by the Committee, unfair competition qualified as a violation of the legislation on the protection of economic competition in the form of abuse of a monopoly the dominant situation on the market of the main types of nitrogen fertilizers by establishing excessive prices for the sale of goods that could not be established in the conditions of competition in the market,” she adds.
In the past, Russia provided Ukraine its gas requirements. According to the Institute of Agrarian Economics, Ukraine now has to buy Russian gas, which passes through European countries such as Switzerland (35.5%) and Germany (34.2%).
As a result of intermediaries, Ukrainian farmers have to shell out a higher price for gas for their fertilizer usage. But since Ukraine has plentiful Chernozem, its import of fertilizer, from Poland (38.6%), Tunisia (25.3%) and Turkey (21.8%) is very much limited.
“Seven regions of Ukraine have an average phosphorus content in the soil,” says Khodakivska. “The remaining regions are characterized by high content of phosphorus in soils. Seven regions of Ukraine have an average phosphorus content in the soil. The remaining regions are characterized by high content of phosphorus in soils.”
This is a real wealth for Ukraine.
As discussed in our earlier report, within 5 years, a very short span of time, Ukraine has managed to build an agricultural empire and has developed an agricultural export economy. This has triggered many questions vis-a-vis the sustainability and the need to diversify and make robust its economic model.
Although the former Soviet state, is surging ahead to with developing its economy and is eager to shed being a vassal of the Russian state, Russia’s illegal annexation of Crimea – where the vineyards were well known in Ukraine – is indicative of the geopolitical risks facing the country.
Ukraine will have to find the necessary resolve to pursue much need reforms, including in its land holdings; even in the approaching dark clouds, Ukrainians will cling on to the ray of hope, for every cloud has a silver lining.
To be continued.
Read here the 1st part of the Ukrainian report: A blooming giant.
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