Eminent Domain, Moscow-Style

The city razed almost 100 buildings overnight, without compensating owners.

No recourse.

Photographer: Vasily Maximov/AFP/Getty Images

When it comes to eminent domain, officials in Moscow just made Donald Trump look like a piker. The city government simultaneously tore down 97 buildings containing hundreds of shops and restaurants, all with valid property documents and legal leases. And none of the small businesses stands to receive any compensation.

It was dubbed the "Night of the Long Diggers" on social-media networks, though I've been unable to track down the blogger who originally coined the clever phrase. Russian authorities are choosing to address an economic crisis largely of their own making by bulldozing small business rather than nurturing them. They also are showing the investors who are sticking out the slump that private property rights aren't guaranteed. Muscovites are swallowing all this without protest.

QuickTake Vladimir Putin

The razed buildings sprang up next to the Russian capital's subway stations in the 1990s and early 2000s, when the popular Mayor Yury Luzhkov was in power and his supremely corrupt city government was open to just about anything in exchange for kickbacks. The edifices were ugly, resembling small strip malls without parking lots. They cluttered up the spacious Soviet-designed plazas around the entrances to palatial subway stations, with their high arched ceilings, stucco and mosaics. Yet they allowed Muscovites to have a quick bite, buy a bottle of water or a mobile phone on the go.

People loved to hate the chaotic mini-malls: They looked decidedly un-European in a metropolis striving for sophistication. Yet almost everyone in Moscow had a favorite shop in these makeshift arcades, whether it sold pies, car parts, flowers or alpaca hats from Peru -- they were a well-kept secret or a guilty pleasure.

Then Sergei Sobyanin, a Siberian who was appointed mayor of Moscow in 2010 by then-President Dmitry Medvedev, set about reshaping Moscow to match his vision of capital-city glory. This entailed repaving pedestrian walkways with garden tiles (and changing these every year), a war on street kiosks, which were removed or torn down without much concern for their owners, and, after Sobyanin confirmed his status in a 2013 election, the introduction of paid parking throughout the city, with violators mercilessly towed (the system costs more to run than it brings in revenue).

Last year, his attention turned to the subway strip malls. The city government declared them illegal structures akin to squats, even though their owners were in possession of all the documents required by Moscow's bloated bureaucracy. In December, the city council passed a resolution requiring the owners of 104 buildings to remove them at their own expense -- or else the city would tear them down.

The owners couldn't believe the city would make good on its threat. Some secured court decisions to protect their property rights. Forums were convened to discuss the issue. Delovaya Rossiya, the officially sanctioned business lobby, took the side of the businesses threatened with extermination. It seemed disaster could be averted, especially because President Vladimir Putin had recently stressed the importance of small businesses for Russia's economy:

We always say this: small and medium-sized business is, should be the true foundation of our country's economic development.

On Monday, the deadline for  the owners had to remove the buildings arrived, and Sobyanin struck. Heavy construction machinery rolled up, accompanied by riot police. Heartbreaking scenes ensued. In some cases, shopkeepers weren't allowed to get their goods and equipment out of the stores before excavators started crushing them. Shopkeepers tried to barricade themselves in, and some posted pictures of Putin in shop windows in the hopes that they would ward off the demolition crews. Nothing helped. Eyewitnesses described devastation, plunder and despair. Shopkeepers called on passers-by to support them, but they found little sympathy.

"Moscow, 4 a.m. The authorities launch a small business support program," pro-business activist Alyona Popova commented sarcastically on Facebook. "Soccer fans or any other hooligans have never staged such a pogrom on Moscow streets as the mayor's office has staged," the blogger Arseny Bobrovsky wrote.

Sobyanin's take was understandably different. In a post on the social network Vkontakte, he wrote that the retail buildings built in the 1990s, "clearly with bureaucrats' aid," were "dangerous to Muscovites" and that the city would let their owners build shops elsewhere. He made no mention of compensating them for the lost property.

The Moscow city government's resolution from December allows the owners of razed shops to seek compensation directly from the city on condition that all ownership rights are waived. It's more likely, though, that the shopkeepers will seek redress in the courts: The resolution, which allows the city to strip people of their property without a court order, has few supporters among Moscow lawyers. Delovaya Rossiya estimates that Moscow could face claims of 22 billion rubles ($275 million). The city also stands to lose 2 billion rubles a year in taxes from the shops and cafes that operated in the destroyed buildings.

The Russian Orthodox Church would like to have chapels built where the shops stood, but that's probably not going to happen. Shopkeepers expect the Moscow city government to sanction the construction of new retail space there so that new officials, too, get their chance to make some spare cash. "Are there any guarantees that something new won't get built there?" asked the anti-corruption activist Alexei Navalny, who came in second in the 2013 mayoral election. "It'll be like the kiosks in underground crossings: First officials said they presented a terrorist threat and tore them down, but now other people are building ones exactly like those old ones."

That won't necessarily happen, either. The Moscow government can do without the taxes it gets from small business because most of Russia's large companies are based in the capital, and most of the country's  wealthiest people pay their personal taxes there. It can afford to sacrifice thousands of jobs and millions of dollars simply to show Muscovites who their boss is should economic hardship give them any funny ideas. A lot of what's going on in Russia today makes no economic sense and serves no economic purpose: It's just a show of force by Putin's "power vertical."

No business in Russia, big or small, is immune from expropriation: One day an owner may find that new bureaucrats are not responsible for the actions of their predecessors or that the political agenda has changed. The state remains the only true owner of assets, as it was in Soviet times. It may allow these assets to be milked for private profit, but it keeps a tight grip of them -- and by extension on the people who manage them. That's eminent domain in its purest form.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.