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Top Trends and Expectations for 2021
It is widely acknowledged that the agricultural sector has always been a major driving force of the Ukrainian economy. Even though agribusiness now accounts for 10% of the country’s GDP, various opportunities for growth and development of the sector are still to be put into operation. Recent estimates by the Ukrainian Institute for the Future and Latifundist Media suggest that by 2030 the importance of the agro-industry will continue to increase dramatically. Ukraine will strongly maintain its position as an international leader in supplying crops and oilseeds and become a ‘world store’ of ecologically clean and fresh produce. The most important current trends and expectations in the Ukrainian agrobusiness sector along this way are the European Green Deal (EGD), agricultural insurance, agrarian bonds, and land reform.
Pro-European Course of Reforming Agricultural Legislation
The European Green Deal consists of a number of policy initiatives transforming the EU into the first climate-neutral continent by 2050. The deal is set to implement broad objectives. Its core spheres include biodiversity, sustainable agricultural policy (the From Farm to Fork system), sustainable industry, clean energy, and climate action.
There are ongoing discussions within the Ukrainian business community regarding the EGD as its implementation is likely to create big challenges for Ukrainian and EU businesses and to have a major impact on economic, social and political cooperation between Ukraine and EU.
For example, EU policies in the agricultural sphere and the transition towards a sustainable food production system are likely to tighten requirements for agriculture and food produce, which would subsequently result in additional trade barriers and harm Ukrainian exports. This issue highlights the necessity to align the Ukrainian agro-industry with EU requirements and to overhaul the current system in line with eco-friendly food production and expansion of smart farming. It is also important to note the prospective Carbon Border Adjustment Mechanism (CBAM) that should come into effect in 2023. The Ukrainian government has proposed to consider Ukraine alongside the EU in the administration of CBAM due to Ukraine’s undertakings to implement the corresponding laws. Furthermore, Ukraine plans to introduce a respective emission trading scheme.
Currently, there are several directions of applying Ukraine’s efforts to join the EGD.
Firstly, at the strategic stage, the Green Deal roadmap will be developed for Ukraine. Similar, for example, to the Green Agenda for the Western Balkans, it will contain flagship initiatives, which both Ukraine and the EU are interested in. In practice, this may include cooperation in the hydrogen fuel sphere, single emission trading scheme, development of the cluster of Nature 2000 conservation area, integration of Ukrainian producers in EU supply chains, and inclusion in the EU Renovation Wave Strategy.
Secondly, in the harmonization process, Ukraine will fulfill its undertakings under the Ukraine-EU Association Agreement and international agreements within the EGD. It is important to remember that the EGD is a dynamic process, so Ukraine will monitor it constantly and modify its efforts to keep up with EU requirements.
Thirdly, local initiatives are very important too. Cities hold a special place in implementing the Green Deal and may enforce smaller local initiatives ahead of the national political and economic process.
Ideally, all three directions shall will be pursued by the country simultaneously, supporting and amplifying each other.
Relaunch of Agricultural Insurance
On 17 February 2021, the Cabinet of Ministers of Ukraine adopted a draft law setting out a new insurance scheme for agricultural products. This draft of amendments to Law of Ukraine No. 4391-VI On the Specifics of State-Supported Insurance of Agricultural Products repeals the previous agricultural insurance pool scheme, criticized by numerous experts in the field due to the lack of transparency in the selection of insurers. The new draft law establishes clear mechanisms to access government aid and defines market participants, insurance objects, products, risks, claims and contract requirements. It ensures transparency and sets out requirements for eligible insurance companies and their control.
These changes are positively welcomed by both agro and insurance market professionals as the previous system proved itself to be unsatisfactory and failed to provide effective risk management mechanisms. Besides, Ukraine has one of the lowest levels of agricultural insurance penetration in the market, partly because the old scheme was costly and had a limited selection of counterparties and a complicated insurance structure. Effective government support of agricultural insurance can become a powerful relief instrument for the Ukrainian agro industry amidst the coronavirus crisis and drought.
The market niche for Ukrainian agricultural insurance is nearly vacant and provides significant expansion opportunities. Thus, government support to remove obstacles is essential to boost the economic performance of agrobusiness. This drive is supported by agro entrepreneurs who claim that the inability of the state to cover losses caused by extreme weather conditions has left many agricultural producers alone on the brink of insolvency. This is the major reason why it is so important to reboot agricultural insurance in the immediate future.
As of April 2021, the Tax Committee of the Verkhovna Rada approved Law No. 5104, which introduces efficient state support of the agricultural insurance market.
Agrarian Bonds Redesigned
Agrarian bonds were introduced in 2012 as an instrument for financing agricultural producers in accordance with Law of Ukraine No. 5479-VI On Agrarian Bonds. However, in practice, such bonds began to properly function only in 2015, following amendments to relevant laws and regulations, which purported to clearly define the status of agrarian bonds.
Agrarian bonds have a strong potential to positively influence development of agro production, but only if the respective legal norms are effectively enforced. In particular, it is crucial to clearly define a taxation regime of transactions with these bonds. This will make these instruments more attractive to agro enterprises, banks, non-bank credit institutions, and private investors, including non-residents.
On 3 February 2021, the Ministry of Economic Development, Trade and Agriculture of Ukraine announced Draft Law No. 2805-д On Amendments to the Law of Ukraine On Agrarian Bonds and Certain Other Legislative Acts of Ukraine Regarding the Functioning and Circulation of Agrarian Bonds, which will redesign the nature of agrarian bonds from document of titles to securities. Other major novelties will include expansion of the range of issuers of agrarian bonds, simplification of the process of issuing, circulation, and termination of agrarian bonds, providing for the issue of long-term bonds, and strengthening guarantees for creditors’ rights in case of their enforcement on the bonds. The Ministry expects the draft to become law in 2021.
Land Reform Unfolds
Land reform mainly stipulates the possibility for Ukrainian citizens, legal entities owned by Ukrainian citizens, state, or territorial communities, banks, state, or territorial communities to acquire arable land into ownership. Liberalization of the land market will take place in several stages.
During the first stage, which started on 1 July 2021, only individuals (Ukrainian citizens) are able to freely purchase agricultural land. The maximum amount of land that can be so acquired is 100 hectares per individual.
During the second stage, which commences on 1 January 2024, legal entities will be able to purchase arable land. The ownership ceiling is set at 10,000 hectares per legal entity.
Land reform is a fundamental process of change in the agricultural sector of Ukraine, which is still far from taking its final legal form. As of April 2021, the status of this massive work is in the table below.
As projected, to complete land reform in its main aspects, it is necessary to develop and adopt at least 3 major laws and 39 Decrees of the Cabinet of Ministers of Ukraine in this sphere.