The government is finally offering businesses the opportunity to buy the land underneath their production facilities at a reasonable price.

Ekaterina Shokhina

Last Wednesday, the Ministry of Economic Development introduced several amendments to Russia’s land legislation for the government to examine. The changes involve lowering prices and extending the deadline for companies wanting to buy the land they use. The authors of the amendments hope to unite enterprises privatized in 2001 and the still state-owned land they occupy. This will give businesses full real estate rights and turn land into capital.

An unnatural gulf

A strange paradox has emerged in Russia. When state officials permitted companies to privatize, they retained control over the lots underneath company buildings and factories. Before the 2001 Land Code came into effect, when legal entities purchased a company, they automatically gained the permanent right to use the land. The legal status of land made it impossible for officials to take land away from entrepreneurs, but entrepreneurs also couldn’t sell the land, either. In return for this gift, the state simply collected the usual property taxes until very recently.
“For the majority of company and building owners, the inefficiency and unreliability of the `divided’ real estate system is obvious,” argues Andrei Lazerevsky, an advisor to General Director of United Machine Builders. Land, instead of being bought, sold, and invested in, remains “dead” to this day.
“It’s bad for citizens’ rights in general. The whole world is laughing at us. All the countries that moved from planned to market economies made real estate a single unit, meaning that enterprises were handed over to new owner along with the land they occupied. But not in Russia,” agrees Leonid Bandorin, a lawyer and consultant at the Institute of Urban Economics.

Too much of a good thing

The new Land Code finally unites production facilities and the land beneath them into a single legal unit. However, legislators face a serious challenge: calculating the value of land without a market. Businesses want their land for free, while officials want to sell it for as much as they can.
As a result, those putting together the new Land Code, supported by officials in Russia’s provinces and local governments, jacked up the price for buying land to exorbitant levels and gave companies a deadline of January 1, 2004 to either buy the land under their facilities or start renting it.
Representatives from the Russian Union of Manufacturers and Entrepreneurs (Rus. RSPP) protested that it was impossible to meet the conditions of the Code. According to their estimates, the overall cost of the land buyout, using current calculation methods, would total $106 billion, or more than a quarter of the Russian GDP.
The rent situation is also disheartening. “Renting state and municipal lots occupied by private companies is a great way to increase corruption,” says Andrei Ivakin, Deputy Director of the Corporate Management and the New Economy Department at the Ministry of Economic Development. “That is all it will lead to. State ownership of land is a powerful administrative resource.”
When it comes renting the land under company buildings, business’ hands are tied. You can’t move a building. Moreover, state administrators and private individuals never negotiate on equal terms. But business was not the only losing side. The state, according to the Russian Constitution, cannot force companies to buy land by threatening to kick them off their lots after the stated deadline. The unlimited use of land does not allow this. Thus, officials were forced to seek a compromise.

The compromise

“The Ministry of Economic Development, the ministry responsible for the land reform process, initiated a constructive dialogue between representatives of big and medium-sized companies, independent expert organizations, and other ministries and agencies. As a result, they found the golden mean between business and state interests. The total cost of land buyout was reduced to six billion dollars,” Bandorin related. “We attempted to find a compromise. On one hand, it was absolutely necessary to establish an institution and create the conditions for uniting the rights to property and to land. On the other hand, we had to make sure some funds would come to the state from land privatization. This last aim, in our opinion, is second priority, but it would not be wise to disregard it completely. Naturally, there is the concern that a certain category of land users will be able to engage in speculation, but if prices don’t go down, privatization could drag on for several decades. We had to pick the lesser of two evils,” said Ivakin, explaining the Ministry’s position. Independent experts agree.
The Ministry not only managed to create better conditions for the land buyout, but also agreed to extend the deadline by five years.
The government’s intention to prevent rental abuse is also worthy of support. Land rental contracts can extend for a minimum of ten years and a maximum of forty nine. Rental charges cannot exceed property taxes and remain in effect for the entire duration of the contract. The contract cannot contain any stipulations that will increase rent and cannot be annulled by only one party.
Experts are merely making some minor corrections to the new legislation. For example, Ivakin is convinced that in order to prevent corruption, money from privatization should go to local governments’ budgets. Otherwise local officials might be tempted to lower land prices for a fee from grateful buyers.
Leonid Bandorin believes that officials also need to level the playing field for those who have privatized recently and those who privatized long ago. Entrepreneurs going private today, according to the law, can purchase land at three times the cost of property taxes without any differentiation. This is less than those who privatized in 2001 have to pay. This difference in the rules for “old” and “new” owners is unacceptable and must be changed.

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