Main Limiter for Crediting Ukrainian Ag Sector. Part 2

02.02.2017

Interview with Mr. Gary Reusche

Mr. Gary Reusche, Agricultural Finance and Insurance Expert, advisor to the Management Board of Bank Credit-Dnepr in Agricultural Lending, Professor, worked as IFC (World Bank) Senior Operations Officer in Ukraine (eight years)

UkrAgroConsult: in the Law of Ukraine on the State Budget 2017 the main principle to distribute the state subsidies for farmers is proportionally to the amount of the agrarian production sold by agrarian producer. Do you think that such approach stimulates , first of all, big agro companies? Could such principle reflect the state policy to reform agrarian relations (land sale) which indirectly support enlargement of agrarian enterprises into agroholdings?  

Gary Reusche: I cannot directly answer this question as I am not sufficiently familiar with the 2017 budget. 

In my contribution to the World Bank discussion, I have suggested that (1) there is not a level playing field between holdings and independent AgriSMEs and (2) the holdings have benefitted from the method of privatization of the ex-collective farms to lease large tracts of land for their production. Due to their access to investment funds, many of the holdings have invested in new production equipment, logistics, transport, and storage. They have hired highly trained and qualified managers and used the best production practices. These are good things. If I understand correctly, the budget suggests that a high percentage of the subsidies will be paid to the Holdings.

I cannot separate the discussion of Holdings from the issue of land plots. If subsidies are paid mainly to the Holdings, how is this related to the owners of the land plots? Are leases being paid fairly and openly on the land used for this production? Will the owners of the land plots receive their fair share of the income derived from this production, including the subsidies?

Leasing is a normal activity and it will certainly continue. However, from everything I have read, the lease system in Ukraine is still not functioning effectively, open to public scrutiny, and perhaps this subsidy is contributing to an unequal playing field. It may be that the subsidy helps the Holdings, and is unfair to plot owners that don’t receive a fair payment for the leases.

I have two more questions. One concerns the use of taxpayer resources and the second concerns WTO compliance. Regarding the first question, how does the payment of this subsidy contribute to the development of Ukrainian agriculture and the Ukrainian economy? What is the government trying to achieve by this subsidy? What is the policy that this subsidy is supporting? For me the question is:  “Does this subsidy contribute to an equitable balance between the Holdings and the independent small and medium sector?”

The second question concerns WTO. How is this subsidy categorized according to WTO agreements? WTO has developed policies concerning subsidies. The Agriculture Agreement distinguishes between support programmes that stimulate production directly, and those that are considered to have no direct effect. It seems to me that the Ukrainian subsidy will have a direct effect on production. Is it “amber box”?  Again what is the government policy. I feel strongly that green box subsidies are the subsidies needed today in Ukraine. They include government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes.

UkrAgroConsult: It is known that IMF renders Ukraine the financial support at very complicated period of reforms and democratic change and put forward some requirements on transition of existing economic system. In this regards, could international partners of Ukraine – IMF, WB, EU or USA –put, as one of conditions of the next financial support (tranche or loan), an adoption and implementation by our government of the program on the opening free land market with clear focus on family farms and strict limitation of the possibility / exclusion of land market monopolization?

Gary Reusche: The World Bank for many years has connected its support to agriculture in Ukraine to the land market. In other words, no support was given because of the land market. I have heard this stated for years. IFC has been the main instrument of the World Bank group in Ukraine. USAID also had a large project to develop a land market, including legal support centers throughout the country that provided services to the lease holders.

Donors have worked and provided significant resources, amounting to millions of USD, to develop the land market. Now we see that the IMF is making the land market a condition for disbursements. How much more pressure can the international partners exert to help open the land market?

International partners can only support and help to open the land market. A lot has been done already. Personally I feel this matter should be taken out of the hands of unqualified politicians and lawyers. A broad and agreed coalition including all stakeholders, consisting only of recognized experts, should develop the plan to remove the moratorium in the minimum time possible. This plan should be confirmed by a binding and firm commitment made with the involvement of all the principle stakeholders. This would be a time-bound plan approved by law. No delays in its implementation tolerated.

This could be one in less than a month if there was political support at the highest level.

UkrAgroConsult: By your opinion, what is more restrict the opportunities to establish financing cooperatives or cooperative banks of agrarian producers in Ukraine – lack of the state support, low financial capacity of farmers or their mistrust in and indisposition for such step?

Gary Reusche: Since the early 1990s the international community along with many Ukrainian stakeholders have tried to develop credit unions in Ukraine. Legislation based on the WOCCU model. By 2003, when I managed an EU project for the development of credit cooperation for rural areas, the deficiencies in legislation were clear. First we developed a “white paper” that was approved by the Cabinet of Ministers. Then, together with the Canadians and Germans, the government, and representatives of credit unions, we worked for many months to develop legislation that would resolve the many issues that prevented the development of credit cooperation in Ukraine.

It is my understanding that there are both legal and regulatory issues that have not been settled for more than 10-15 years. I would rather not list all the issues as I have not been active in this sector for years. There is a new project with USAID assistance where WOCCU is again working with local stakeholders to resolve some of the legal/regulatory issues that hold back development. This project would be the best source of information.

My feelings about credit cooperation is that the services required by the rural sector in Ukraine require a regulated bank, and not separate legislation for credit unions. In Western Europe, cooperative credit is successfully provided by cooperative banks and these banks serve agriculture and SMEs. The legislation for banks is the foundation for the credit cooperation, and credit cooperatives compete in the marketplace like any other bank. 

However the WOCCU model with credit unions, under development for more than 20 years in Ukraine, is also a variant if the legal/regulatory environment constraints can be overcome. There are positive examples in Europe, such as in the Netherlands, Poland, and Ireland. They are contemporary models based on WOCCU Model law, though contextualized. The work well in these alongside cooperative banks and commercial banks.

So it may be that a diversified financial market  of commercial banks, cooperative banks and credit unions provides for healthy competition and choice for the customer – never a bad thing. Under EU directives “credit institutions” are defined and include all deposit taking credit institutions and treat them indifferently.

The initial efforts to develop credit cooperation in Ukraine resembled the soviet system of cooperation. In other words, not-democratic and top-down. As I recall, there were serious omissions in the legislation that prevented the development of a true cooperative system. Some of these issues have been overcome, but overall the development after nearly 25 years of continuous donor support is still insufficient.

As a final input, I think I should mention the US farm credit system. It is not a true cooperative, but it is a good model for development. I was responsible a couple of years ago for a group of Ukrainian policy makers to visit the US and study the US system. The major funding for the US system is coming from capital markets. I think it is unrealistic to assume that the Ukrainian government will fund credit cooperation of any kind.  The US government’s role is to enable the system and assure that it operates with financial safety and soundness, like any private sector financial institution. More information for this system can be provided if interested.

Note: the views of the interviewer and the interviewees may differ

Readers choice: TOP-5 articles of the month by UkrAgroConsult