Andrey Rozhnov of Frishberg & Partners -
With food prices rising across the globe, adventurous foreign investors can find excellent business opportunities in Ukraine's agricultural sector despite (or perhaps due to?) the global economic crisis. Known as "the breadbasket of Europe," Ukraine still boasts enormous land reserves that can grow various grains, seeds, fruits and vegetables, as well as support livestock. And due to the crisis, at last everything and everyone is available for sale or rent at rock-bottom prices.
The main question for foreign investors is whether there is any profit in buying Ukrainian farmland to start a farm business. At first glance, land rights may appear to be a sore topic for investors since the current legislation temporarily prohibits the sale of agricultural land.
To circumvent this legislation, many investors have been successfully leasing farmland either on a short-term (2-5 years), medium-term, (5-25 years) or long-term (up to 49 years) basis. In the process, they have saved millions of dollars in cash, which would otherwise be necessary to purchase the land, making their business more profitable. This is an excellent reason why investors prefer leasing Ukrainian farmland instead of owning it outright.
Obtaining land rights to start agricultural production is relatively simple in Ukraine. The legal framework is quite straightforward and the numerous examples of successful foreign-owned operations exist, including Cargill and Chumak (formerly known as South Foods).
Importing foreign equipment is often a pre-requisite to starting agricultural operations due to the lack of quality machinery and/or outrageous prices in Ukraine. There are several ways in which foreign equipment can be imported, including: (a) by contributing such equipment to a 100% foreign-owned company's share capital; (b) via a leasing arrangement whereby the ownership of the equipment is retained by a non-resident, who receives regular payments for the use of the equipment; (c) by purchasing the equipment via a sale-purchase agreement.
The current land-related legislation prohibits using agricultural land as collateral, precluding the possibility of obtaining much-needed financing. However, rights to future harvests can serve as liquid collateral, giving rise to the possibility of financing according to the Civil Code of Ukraine and the Law on Pledges.
Of course, as in any other jurisdiction, the Ukrainian government has a statutory right to regulate the market of agricultural products. It does so in the form of price regulation (eg. setting minimum and/or maximum purchase price, when necessary), commodity and/or financial interventions, as well as the establishment of export and import quotas with respect to the agricultural products that are subject to regulation. The list of agricultural products, subject to regulation, is established by law and includes certain grains and animal products. Last, but not least, resident agricultural producers can enjoy a special VAT payment regime, provided they comply with the statutory requirements.
In conclusion, due to its enormous reserves of top-quality soil, Ukraine is undoubtedly one of the best places in the world for agricultural producers. And one day Ukraine will surely regain the long-standing status of being "the breadbasket of Europe." The brave investors who decide to set up production during these turbulent times will undoubtedly be rewarded in the future, as they corner the market before their competition even enters Ukraine.
Andrey Rozhnov is a senior associate with the Kiev-based law firm of Frishberg & Partners
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