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Policy issues plague Ukraine ag sector

Iurii Mykhailov 02/28/2014 @ 9:34am

Despite the existence of the Ministry of the Agricultural Policy and Food of Ukraine, there was not and still there is no the coherent agricultural policy that could describe goals, means and outcomes to be expected. Since the independence of Ukraine in 1991 the agricultural policy consisted and still consists in distributing the limited amount of budget funds among the selected group of thieves. Such policy inevitably had the number of negative impacts on the Ukrainian agriculture.

Though the agricultural land in Ukraine nominally was distributed among and privatized by 6.3 million peasants till now it is not allowed to sell/buy the agricultural land. When the collective farms had been disbanded their assets practically were looted by the top managers of that farms and local authorities. Peasants received land, but without the means to cultivate it the majority of them in order to survive had been forced to lease their plots (2-10 hectares depending of the regions) to newly founded enterprises.

At the beginning of the 2000-ties ostensibly in order to facilitate the accountancy for the small farmers there was introduced the so-called “fixed tax” for agricultural producers that combines 19 other taxes including the income tax. The fix tax rate is only 0.15 percent of the “nominal” price of land the average price of which is about 2,500-3000 USD per hectare. So regardless of what is produced on that land and what income is obtained the producer pays practically nothing in the form of taxes (excluding the tax on labor force).

Also agricultural enterprises were (and still are) taxed by the VAT (value-added tax) with the zero rate. This means that they actually do not pay the VAT and moreover they receive the VAT accrued on the previous stages of production. This is considered as the indirect subsidy to Ag producers. As the result the state budget does not get the VAT from the agricultural activity but has to refund the VAT to exporters.

Such governmental “care” towards small farmers caused the dashing emergence of the agricultural companies that rent hundreds of thousands of hectares of land.

In most cases such companies are registered in off-shores for the two reasons. First, to get some safety from the despotism of the Ukrainian power. And second, to secure their huge profits from the taxation abroad.

Also some companies registered in off-shores made IPO on the European financial markets (London, Frankfurt, Warsaw) and thus got access to foreign capital in the forms of direct investments or credits.

  1. The performance of the huge agricultural companies called “agroholdings” (since they incorporate a number of smaller agricultural enterprises) is far from perfect. Of the 15 companies that made IPO three had already busted and one is in the default situation. During the last year most of the Ukrainian agroholdings lost up to 40 percent of their market value.

  2. The bad performance of agroholdings has several reasons. There is no world experience of the management of such big agricultural enterprises land of which is scattered all over Ukraine. The gap between the salaries and bonuses of the owners and top managers are several orders higher than the wages of the hired workers who try to compensate their small wages with stealing of the resources (pesticides, fertilizers, fuel, spare parts etc.). To prevent this companies install the expensive sophisticated accounting systems, hire large security personnel, costly control and monitoring systems etc. The idea that skilled labor force must be adequately paid is on its very early stages of comprehending.

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Wow! Very Informatinve Article 03/01/2014 @ 12:27am Thank you, Iurii Mykhailov, for such an informative and professionally insightful article about production agriculture in Ukraine. If your country can find peace now and better government in the near future, Ukraine's agriculture would develop it's prime rightful place in the world. Prayers for your country and people. All of 'em.

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