Agricultural reform in Ukraine — Agrarian Notes

The Law introduces the “agrarian notes”, which will have the status of securities and will be issued in electronic form under the control of the National Securities and Stock Market Commission.

It should be noted that prior to the adoption of the Law on Agrarian Notes, traditional agricultural receipts were the main instrument used in Ukraine to secure loans in the agricultural sector  (the Law on Agricultural Receipts).

 

Agricultural receipts served as a promise by a farmer to repay a loan or deliver a certain amount of agricultural products. This instrument was first introduced in Ukraine to increase the farmers’ access to credit resources, meet their working capital and investment needs. Agricultural receipts allowed farmers to use future harvests as collateral for loans, which helped to increase the availability of financing. However, this instrument had certain limitations and difficulties in use, in particular, because of the need for physical presence to sign documents, the need for notarization and other bureaucratic procedures.

The Law of Ukraine “On Agrarian Notes” will operate in parallel with the existing legislation on agricultural receipts (the Law “On Agricultural Receipts”) without excluding the use of the latter, thereby providing market participants with an opportunity to choose between the two instruments depending on their needs.

The Law of Ukraine “On Agrarian Notes” introduces a new financial instrument into Ukrainian agricultural practice that provides farmers with additional opportunities to attract investment and credit. 

Main opportunities and consequences of the adoption of this Law are:

• Simplifying access to finance: The Law facilitates the attraction of financial resources to agricultural production, in particular, by simplifying the process of issuing and circulating agrarian notes as a financial instrument. Thus, the agrarian notes can be used by farmers to raise funds from creditors, providing more opportunities for the development and modernization of production. 
• Electronic form to simplify issuance and use: Agrarian notes that exist in the electronic form provide greater transparency and efficiency in the management of these financial instruments. The electronic form simplifies their issuance, circulation and use. This provides greater convenience and efficiency compared to paper documents. At the same time, the existence of two parallel instruments — the traditional documentary agricultural receipts and the electronic agrarian notes — gives farmers the opportunity to choose the most appropriate instrument depending on their needs and working conditions.
• Strengthening the legal framework: The introduction of agrarian notes into the legal framework allows farmers to operate more flexibly and efficiently, promoting growth and innovation in the industry, namely:

• Supporting the development of livestock: The ability to use livestock and animal products as collateral can help to attract investment in livestock, which is particularly important in regions where such industry is of key importance. For example, with the possibility of using livestock and animal products as collateral, the agrarian notes can be a significant incentive for the development of livestock production, providing farmers with access to the necessary resources to expand and modernize their farms.
• Increasing the turnover of agricultural products: More efficient financing and crediting can help to expand production and increase the turnover of agricultural products on domestic and foreign markets.
• Strengthening creditor confidence: The creation of an electronic register of agrarian notes, as well as an electronic cabinet for transactions with them, increases transparency and strengthens creditor confidence in the agricultural lending mechanism, which can reduce the cost of credit for farmers. The Law also ensures the reliability of the agrarian notes: if the debtor fails to fulfill its obligations under the agrarian note, the creditor can obtain a writ of execution for the relevant recovery by applying to the Agrarian Note Register.
   

In turn, it should be noted that although the Law on Agrarian Notes provides significant opportunities for farmers and the financial sector, there are certain aspects that require careful consideration.

Here are some potential “pitfalls” and aspects that may be subject to ambiguous interpretation:

1. Regulatory uncertainty: A careful reading of the Law may reveal uncertainties in the regulatory requirements, especially with regard to maintenance of the register of agrarian notes and the mechanisms for their use. This raises the following questions:  These issues may require further clarification and explanation in the course of implementing the Law. It is important that market participants, agrarians and financial institutions carefully read the Law and interact with the competent authorities to resolve any uncertainties.

2. Pledge of livestock: The possibility of using livestock as collateral raises the issue of its valuation, maintenance and sale in the event of a default under the agrarian note. This requires clear procedures and may create additional costs and complex legal challenges.

3. Ensuring the rights of creditors: Although the agrarian notes are supposed to reimburse creditors for their expenses in the event of a debtor’s default, the details of how the creditors’ rights are protected, especially in situations of competitive claims or debtor bankruptcy, may need additional clarification.

4. Impact on small farms: The need for access to electronic systems and digital signatures may be a barrier for small farms that do not have sufficient technical equipment or knowledge to effectively use the new tools.

5. Double financing: There is a risk of double financing when the same property is used as collateral for different financial obligations without proper disclosure to all interested parties. This requires clear rules and control over the registration of collateral.

6. Arbitration courts: The possibility of resolving disputes under the agrarian notes in arbitration courts or international arbitrations may create additional financial burdens for farmers, especially for small and medium-sized producers, who may not have the resources to represent their interests in such courts.

7. Transparency and compliance: The need to ensure transparency in the circulation of agrarian notes and compliance with the regulations may require additional efforts by the regulators and market participants to establish effective monitoring and reporting mechanisms.

Each of these aspects requires a detailed consideration and potential adaptation of regulations or practices on the use of the agrarian notes to ensure their effective and fair application. It is important that all stakeholders, including farmers, lenders and regulators are involved in the process of developing and refining the mechanisms for implementing this law, as well as addressing potential problems that may arise in the course of its application.

Considering all of the above, we can conclude that the Law on Agrarian Notes is undoubtedly an important step forward in the development of Ukrainian agricultural sector, offering a new instrument for lending and investment. However, the success of this innovative instrument will depend on clear regulation, access to technology for all farmers and the ability of the market to adapt to new conditions. 
In the near future, there will be new opportunities for growth and development for farmers by attracting investment through the agrarian notes. This instrument can become a key element in the strategy of financing agricultural activities, promoting innovation and stability in the agricultural sector of Ukraine.

Contact our experts at BDO in Ukraine for professional advice that will help your agricultural enterprise achieve success. With years of experience working with leaders in the agricultural sector, we will provide you with not only knowledge but also support in implementing strategic initiatives. Do not miss the opportunity to utilize our expertise to improve your business.

The material was prepared by the specialists of the Agricultural Sector industrial group at BDO in Ukraine.

*Disclaimer:
This information is general information and does not constitute professional advice or service. Before making any decision or taking any action that may affect your finances or operations, you should consult with a qualified professional advisor. Please contact BDO in Ukraine for advice.