Shortly after the collapse of the USSR, the CIA rated Ukraine as the most likely to succeed and prosper in the post-Soviet era. Indeed, all the objective indicators were there: a highly educated population, unrivaled agricultural potential, a wide and diverse array of industry, an abundance of natural resources, temperate climate, and a strategically favorable location between the Occidental and Oriental worlds
But, in the short term, Ukrainians would have to survive a very difficult transition while the economy ground to a halt. All assets in Ukraine, other than small private homes and tiny plots of adjacent land, had been owned by “the people” (i.e., the government), and Soviet authorities never envisioned or provided for any other possibility. So the first order of business was to print up and distribute to “the workers” shares of ownership in the plants where they had been working, and to the farmers, portions of the land which they had worked “collectively.”
But this failed to produce a revival of the economy because starting up industrial plants and farming small private plots of land required capital to pay for utilities, fuel, current and back wages, equipment, supplies, etc. Neither workers, nor farmers, nor their managers, nor banks, nor the government had the capital, and the little they had was in a currency that was quickly losing value domestically and almost worthless abroad. And the “shares” of ownership as well as land lots became meaningless because there was no money to restart them or even to buy seeds. The “owners” quickly traded them away for a sack of rice or a bottle of vodka.
So, President Leonid Kuchma had a seemingly bright idea. His administration would cobble together “financial-industrial” groups (later known as “clans”) consisting of anyone who had hard currency and offered to invest in the operation of specific, largely dormant, industrial sectors and/or facilities. Ownership of these facilities would be transferred from the state to private individuals or groups responsible for kick-starting the nation’s industrial economy. Huge, highly sophisticated plants and complexes worth hundreds of millions of dollars and which may have taken years to construct were thus “privatized” for little more than pennies on the dollar.
Naturally, all the “plum” assets which were sure money-makers and required very little capital were the first to be “privatized”; only those assets that were deemed to be of strategic importance or were “losers” (such as the coal mines) remained with the state. The “clans” then used these assets to further bootstrap themselves – with the aid of bribery, intimidation, extortion, “raids” and occasional “contracts” on partners and competitors – into their current roles as “captains of industry” and, collectively, as the owners of an estimated 80 percent of the nation’s industrial economy. By 2008, the wealth of the 50 top oligarchs was equal to 85 percent of Ukraine’s GDP, and with it came their stranglehold on Ukraine’s economy, politics, foreign relations, media, culture, civic activism, judiciary, law enforcement, etc.
It must be remembered that these “captains of industry” were, generally, not very nice people. They were the ones who (legally or illegally) had access to hard currency or assets – either KGB, Soviet-era satraps, thugs or (as in the case of billionaire oligarch Victor Pinchuk) related to powerful politicians. Therefore, it should come as no surprise that – unlike American “robber barons” who left the country more prosperous and powerful – these “shanovnyky” who had “privatized” Ukraine’s vast industrial wealth but contributed very little, are responsible for Ukraine’s ranking as Europe’s poorest country.
Why this “walk down memory lane” when the issue before us is the lifting of the moratorium on land sales? Remember the adage “fool me once, shame on you; fool me twice, shame on me”? That is why we must be reminded that the same people who bear direct responsibility for the endemic corruption, exploitation and looting of the nation’s industrial assets are still in control of much of Ukraine’s government and media, are aware of Ukraine’s agricultural potential, and may be positioning to “privatize” large swaths of Ukraine’s “black gold” with which its very culture and national identity has been linked through centuries – its “chornozem.”
At present, 75 percent of Ukrainian land belongs to the approximately 7 million citizens who had each received five to six acres as their share of the dissolution of collective farms. The remaining 25 percent remains in the hands of the state. However, the moratorium on sale of land, dating back to 2001, makes it impossible to establish land values, and, therefore cannot serve as collateral for loans from banks for additional purchase or investment in land. Most of the owners who are not actively engaged in farming lease out their lots to others for periods of eight to 10 years at annual rentals ranging from $100 to $400.
The land sale issue has been a controversial one for 19 years and has attracted very unlikely coalitions. On the one hand, patriotic and nationalistic Ukrainians, mindful of all the sacrifices Ukrainians had suffered in defense of their land, are fearful of dispossession of the land from small farmers into the hands of oligarchs and foreigners. Communists, who were instrumental in imposing the moratorium, are ideologically committed against private land holding. The pro-Russian parties are against any accommodation to requirements of the International Monetary Fund and to economic growth that would further push Ukraine out of Russia’s orbit. And populist politicians like Yulia Tymoshenko’s Batkivshchyna party are simply responding to the 60-70 percent of the nation that also – intuitively – resists land sales.
The moratorium has been lifted on the eve of April Fool’s Day. In itself, this is welcome news because the land, if privately owned and managed and the allowed to be freely sold, is a guarantor of prosperity for Ukraine and food for an increasingly hungry world. According to some estimates, Ukraine’s GDP would increase at an annual 19 percent rate and the value of its agricultural land would more than triple. Based on the economics alone, those who are opposed to lifting the moratorium have lost that argument long ago.
But the issue is not the benefit of land sales – but rather how and when the lifting of the moratorium is implemented and to whom it is sold. These appear to be the major concerns and the common rallying cry of the opposition. In fact, this point is so important that Col. Gen. Ihor Smeshko, one of Ukraine’s most outspoken defenders of private ownership and the free market, predicts a “social explosion” if the land sale law is handled without adequate protections for the small and medium farmer and restrictions on foreign ownership. By some estimates, foreign corporations already control (though they do not own) up to 10 percent (2.2 million hectares) of Ukrainian agricultural land.
Mr. Smeshko believes that the law should not be implemented during a period of deep global recession and possible depression, as this would border on criminality. He is very much concerned that “speculators” would buy up hundreds of thousands of greatly undervalued parcels from desperate owners “for nothing and cause a colossal fall in the value of national assets and impoverishment of the population.”
Second, the government is unprepared to monitor and control the process, even though this has been raised as a source of concern multiple times. The inventory of agricultural land is incomplete, and no procedures are in place for registration of land plots, including the filing of surveys, identification of owners, availability and current uses. There is no assessment of soil condition, type, composition and quality of the land. The government’s database is incomplete and full of errors.
In short, the law’s failure to ensure accuracy and transparency risks a second “Wild West” in which corruption would flourish.
Third, the law fails to protect and support small and mid-sized farmers who have been the backbone of Ukraine’s agriculture and the carriers of its culture. Ukraine’s law enforcement and judiciary systems, corrupt and ineffective as they are, will not be able to cope with the large-scale land speculation that this law will generate. Farmers, family farms, and voluntary co-ops should be given ownership incentives and provided with low-interest credit for expansion of land ownership or for seasonal loans based on newly created land values resulting from land sales or future harvests. Otherwise, they may end up in debt, dispossessed and working merely as hired hands on lands they once owned,
Fourth, President Volodymyr Zelenskyy had signaled his intention to call for a national referendum on the right to sell land to foreigners. The current law allows such sales. He would be wise to follow through with his suggestion.
In short, while the government’s intent may be commendable, the timing for implementation (October 1) could not be worse, and its failure to include measures to protect and support Ukraine’s small farmers and suppress corruption and abuse may snatch a bust out of (what should be) the jaws of a boom.
Ukraine’s first major sale of its industrial assets turned out to be a bust. Its land sales law would usher in the sale of its remaining, agricultural, assets. The stakes are very large, and Ukraine should not rush into a law for which the timing is so bad and for which it is unprepared. Perhaps Ukrainian authorities could agree with the IMF to pass a law allowing for a longer implementation period – not sooner than the return of a robust domestic and global economy.
George Woloshyn, MBA, JD, was a senior executive under three U.S. presidents: Ronald Reagan, George Bush and Bill Clinton. He served as the Office of Personnel Management’s Director of the Office of Federal Investigations, the Federal Emergency Management Agency’s Director of National Preparedness, and as Inspector General of a bank regulatory agency.