International -- International Finance: REAL ESTATE
WHOSE LAND IS IT, ANYWAY? (int'l edition)
All through the blue-green pine forests surrounding Moscow, red brick mansions are going up. Prices start at $300,000, and a grand dacha can cost $1 million or more. The lush properties are designed for superrich urbanites, who under Russia's two-year-old Constitution can now own their homes.
But thanks to the communist-era land code, which makes it hard for companies to own land outright, developers have to finance projects individually--and in cash. Without clear-cut ownership to provide collateral, banks are skittish about writing mortgages. So to get financing, developers must devise elaborate ruses such as having a "gardeners' cooperative" hold title until a house can be completed and sold. Says Vladimir Orlov, head of the Russian Mortgage Assn.: "The law makes us use some very uncomfortable arrangements."
STRONG TABOO. Russians have a historically deep attachment to the soil. And as capitalism takes root, they're starting to realize the financial potential of the ground under their feet. But land ownership still remains extremely controversial in Russia. With little history of private land ownership, and a strong taboo left over from communism, the country is making only slow progress in implementing this fundamental principle of market economics. The obstacles are also impeding development of a mortgage market that would give a huge financial boost to startups in private farming, housing, and industry.
The land issue is being hotly debated in campaigns leading up to the parliamentary elections scheduled for Dec. 17. Communist conservatives, who are expected to do well in the races, want to outlaw all foreign landholding and make it tougher for Russians to buy and sell land. For example, they would forbid the resale of farmland. Meanwhile, reformers and centrists, such as members of Prime Minister Viktor S. Chernomyrdin's party, have pledged to make it easier for Russians to exercise their newfound right.
But without a strong political commitment to open up the system, state agencies have been trying to maintain their grip on most land. City governments effectively own all property within city limits, while farmland is nearly the exclusive domain of collective and state farm managers. That inhibits development and scares away investors.
Bureaucratic restrictions don't help, either. No reliable register exists of liens on property, so would-be buyers or lessors often find their land pledged to someone else. Local authorities can veto what kind of businesses may be operated on property they lease. Even privatized Russian companies face problems. Although factories and other buildings can be privately owned, the land underneath is considered state property.
BANNED. Some reform-minded localities are finding ways around this restriction. Nizhniy Novgorod and the region around Moscow are selling off land as well as buildings. In some cases, such auctions create a loophole for foreign investors, who are technically banned from other forms of land ownership.
That's how Dutch conglomerate Unilever PLC this year got title to land under a cosmetics factory in St. Petersburg. Unilever bought 90% of a Russian company and had that entity secure the land. Lawyers say U.S. companies have done similar deals with local governments. But because the issue is so politically charged, few want it known.
The farm sector has been moving equally slowly toward privatization. Even though farmers desperately need capital, banks are reluctant to make loans securitized by land that has little commercial value. The only tracts certain to be profitable are farms near big cities that can be converted into estates for Russia's nouveaux riches. And private farming hasn't taken off. So far, some 280,000 farmers out of 10 million own their land. After two years of reforms, only about 90 of 23,000 collective farms have had land privatized.
But some have made a success of private farming. One is Vladimir Golovtayuk, who bought his land in 1987 in an early program under perestroika. Today, he raises horses for racing and hunting in Podolsk, about 50 km southwest of Moscow. Another is Yuri Babansky, who suffered vandalism and legal threats before he turned his 400-hectare cattle farm in Kaluga, 250 km south of Moscow, into a profitable, private operation. Says Babansky: "I wouldn't want to go back to how it was before." Unfortunately, many powerful elements in Russia don't want to go forward, either.By Geoff Winestock in Moscow