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Bar Journal - June 1, 2003

Property Law Reform in Russia

By:
 

THE LANDSCAPE

Arrival at the Vologda train station evokes contradictory impressions. The station’s elegant architecture stands in defiance of its neglected condition. The cold air is crisp but laden with palpable traces of the heavy industry producing ball bearings and other products that once fed a powerful war machine and are now cast into an international market. These mammoth factories also provide the heat and hot water on which the city depends, a reminder that the industry was built in Soviet times as part of a grand social plan. Streets are lined with beautiful wooden structures, now being repaired, yet almost everyone lives in one-bedroom flats in cookie-cutter apartment blocks with drab entrances and stairways. A few Western-style shops and restaurants stand opposite a statue of Lenin. The bundled-up citizens, who walk most places they go, pay little attention to either.

Russia continues to be an enigma. By comparison to other cultures, modern Russians are scientifically knowledgeable and well-educated. They quickly grasp the legal and economic concepts that guide Western political systems and economies, concepts few Americans take the time to consider and most take for granted. But adapting to the functional realities of an economic system based on self-reliance, risk, and contention is not an intellectual exercise—it requires a certain way of life, one that clashes with the authoritarian culture that has defined so many aspects of Russia’s legacy.

Modern Russians decided they needed to try a path that diverges from their legacy. In December 1991, President Gorbachev announced, to the world’s amazement, that Russia had abandoned the Soviet master plan. Since then, real property reform has been among the nation’s most difficult challenges. The emergent Russian Federation has declared constitutional rights to property, and has issued decrees and enacted legislation to facilitate private ownership of some types of real property. Still, more than a decade later, about 95 percent of the land remains under state control, and housing conditions have improved for only a privileged few. Nevertheless, structural changes have been made to chart a course toward a rule of law that facilitates individual ownership and private trade in real property.

This article briefly discusses the legal context for Russia’s real property reforms, and this author’s experience with the Russian-American Rule of Law Consortium collaborating with Russian judges and land officials in the Vologda region.

THE REFORM

For centuries, Russia’s land has belonged to a central authority. The tsar and the church were proprietors, and the vast majority of Russians lived as serfs. The Bolshevik revolution of 1917 replaced the tsarist autocracy with an even more authoritarian regime that strictly forbade private ownership. Under communist rule, everything belonged to the state, to be managed as part of a grand social plan. Everyone was a tenant at will. Russia’s leadership faces this entrenched legacy of authoritarian control as it tries to guide the country into the world market in the turbulent wake of the Soviet Union’s dissolution in 1991.

Soon after the dissolution of the Soviet Union, the embryonic Russian Federation adopted legislation authorizing some private ownership. Owners’ rights remained subject to overarching reservations, such as obligations to promote "efficient use" of the land. The mindset can be illustrated by the phrase used in Russia to refer to property matters—"land relations"—illustrating that property ownership continues to be considered in a social context. The newly defined relations allowed some land plots, apartments, factories, and commercial properties to be transferred into private ownership according to rules established by the local governments. Sometimes no payment was required. For example, private apartment units were allocated 300 square meters per garden plot.1 But even though some plots were put into private hands, Russia did not have the legislative framework or the implementation mechanisms to advance private ownership and investment in real property.

The property law reforms that have been undertaken in Russia are complex and manifold. In ten years, Russia has had no fewer than 31 laws, 44 presidential decrees, and 180 government resolutions regulating land relations.2 Government agencies responsible for implementing the reforms, and potential owners, must wend their way through this legal maze. Three of the enactments have begun to shape a framework for significant reform.

In 1993, Russia adopted a constitution that declared rights to possess, use, and dispose of land.3 In 1994, the country enacted a new Civil Code. The Civil Code has been called an "economic constitution" for the manner in which it introduced basic commercial law mechanisms, including those needed for private ownership and conveyance.4 Russia then took a big step, in 2001, with the adoption of a comprehensive Land Code.

The Land Code passed only after bitter debate and to the surprise of many. Communists and other powerful political groups decried what they viewed as a proposed auction of Russian soil. Their opposition was not just nostalgia for a bankrupt economic worldview; fears of oligarchic control have some basis in recent experiences involving the privatization of state enterprises. Nonetheless, President Putin assembled sufficient votes to enact the legislation necessary for Russia to begin to move toward a system more in line with prosperous market economies.

The Land Code allows private ownership and conveyance of commercial and urban land, and about 40 million dacha plots. This is only about 2 percent of Russian land, but it includes the most highly prized investment properties. Although the point of the Land Code is to enable some types of real property to be transferred into private ownership, the nature of that ownership still is riddled with qualifications. Consider, for example, the declaration that "[s]tate-owned or municipality-owned plots of land may be transferred to citizens and legal entities to become their property, except for the plots of land which cannot be a private property in compliance with the present Code federal laws."5 This leaves potential purchasers, and government agencies, to consider other federal laws to determine whether property can be privately owned. Consider also the qualification that "[l]imitations on rights to land shall be established by acts of executive governmental bodies, acts of local government bodies or court decisions."6 Even accounting for what may be lost in translation, a qualification that "rights" can be limited by "acts of executive governmental bodies" and others reveals a shaky foundation.

The Land Code is the most ambitious property reform so far, but it only begins to define core legal concepts and mechanisms. It outlines an approach for allocating responsibility for transfer of state-owned property into private hands. To tackle the question of which government authority controls particular plots, the Land Code recognizes certain precedents and instructs that federal laws shall govern the process.7 But there is much sorting out to do before transfers can occur; the Land Code merely lays a framework for the sorting process.

The realities are such that the reformers can only attack so many major issues at a time in dealing with real property. The agenda was shortened by summarily dealing with some difficult issues. For instance, to address the question of restitution for those whose property was confiscated by the prior regime, the code declares that "[t]he plots of land nationalized prior to January 1, 1991 under the legislation effective as of the time of land plot nationalization shall not be subject to return and the value thereof shall not be subject to reimbursement or compensation."8 The code permits foreign citizens and legal entities to purchase land made available for privatization,9 but there are restrictions in other legislation to restrict foreign ownership, and passionate resistance to foreign control of Russian soil remains. In these and other respects, the Land Code’s simplicity belies an underlying complexity.

IMPLEMENTATION

Russia’s reforms have created part of the legal and administrative apparatus necessary for private real estate ownership. A legal environment conducive to private development of real property cannot emerge until property rights are credible. Property rights will not be credible until they can be trusted. This means that owners’ rights must be well- defined and protected by law. Also, reliable information about ownership interests must be available to potential purchasers and others involved in real property transactions, such as mortgage lenders looking to the property as security for loans that make ownership possible. Without protected rights and publicly available information, the potential value that property represents as collateral will not be accessible, and ownership investment will be stunted.10 Russia has just begun to build the foundation that can achieve these goals. This foundation has several core elements, including a public registration system that reflects property interests; value information based on the market rather than government fiat; and transfer of ownership to those invested in upkeep and improvement. A brief description of each follows.

Public Registration System

In 1999, Russia established an Institute of Justice for Registering Titles (known by the Russian acronym "GUYU") within the Russian Federation Ministry of Justice. The GUYU has regional offices and is charged with implementing the enormous task of registering titles for a regime that only recently recognized a right to ownership and conveyance. To register a title in Russia, the proposed owner must first undergo a municipal review process, and then submit the appropriate documents to the registry for approval. The registry has an expert investigate the application and, if everything is in order, the applicant gets what amounts to a title certificate within a few months.

Although part of the GUYU’s function is to record real estate ownership, the information it keeps is not open to the public generally. It assures registrants that the records will only be disclosed to those with a recognized need to know. This confidentiality reflects several concerns. Those who can afford to own valuable property do not want the information to be made available to those who may seek it to mark targets for crimes. Also, Russia’s political culture does not include a public right to know. Lack of public access to information inhibits the development of a real property market. Potential purchasers and lenders cannot be certain about the status of interests in property they are looking to acquire or on which they are relying for collateral.

The availability of public information about property rights is interrelated with the certainty that those interests are protected against others' claims. In the United States, no government approval is required for conveyances, but the many millions who buy, mortgage, and sell real estate interests rely on public registries to determine the enforceability of their interests. Public registries record instruments sequentially and provide an index for public search. These records become an essential means to identify and define property interests. The law gives priority to those who first record their instruments, and enables potential purchasers and lenders to determine the existence of prior rights by search of the records. The rules are embodied in state recording statutes, which are supplemented by many decades of legal precedent for resolving competing claims in tough cases.

The rules for conveyances in Russia are only beginning to take shape. Although registration creates a presumption of ownership,11 the priorities of competing claims are not well-defined. The essential component of a priority system in Russia, as elsewhere, depends on the extent to which a bona fide purchaser in good faith is protected against claims made by others. The Russian Civil Code creates a presumption of reasonableness and good faith.12 But Russian law also protects the ownership claims of certain classes of citizens even against later bona fide purchasers in good faith. For example, under the Civil Code, someone who was incompetent to make a transfer because of a legal disability can reclaim ownership rights if the transfer was against that person’s will.13 Potential purchasers and lenders do not have access to information about whether a prior owner falls within a category of owner whose interests cannot be transferred.14 While protection of ownership interests has social merit, such an approach leaves titles subject to dormant claims and diminishes their value.

Russia’s approach to title registration is more comparable to the Torrens system found in some legal regimes, including on a limited scale in a few of the United States. In such a system, the government assumes a protective role in registered land conveyances. A proposed purchase is submitted for approval to a government registrar, and when the transfer is registered, the registrant is given government tal assurance against competing claims. Such a licensing system is time-consuming and its workability depends on bureaucratic efficiency. Moreover, its reliability depends on the availability of remedies if the government makes a mistake in the registration process, such as wrongfully granting rights. Some of the jurisdictions in the United States that experimented with a Torrens system abandoned it because of the lack of resources for a guaranty fund. Russia’s public treasuries have neither the resources nor the reliability to give comfort against loss in real estate transactions, especially in any transaction involving property with substantial values, such as commercial or industrial development.

Property Values

A functioning private market for real property also depends on the availability of market value information, which is necessary to enable purchasers and lenders to make rational investment decisions. Market values cannot be determined without understanding how the market works. But Russia does not have this experience. At this date, several different "values" are used for various purposes. For example, a "cadastral value" is set for taxation, according to norms established by the federal laws. The municipal government, which is charged with taking market factors into account in establishing the cadastral appraisal of land for tax purposes, creates a schedule using economic zones and property types.15 Other values are used for other purposes. A different "land value," used for privatization, is based on tax rates, area, and building use. A "normative land value" is used when cadastral values have not been established. A "market value" is used when the government takes private property, for transactions between landowners, and other purposes.16 These variations cause confusion and complexity for the government and prospective owners.

The valuation issue is at the heart of disagreement about the extent that the market should be allowed to control the disposition of land. Traditionalists argue that the government should set values to achieve social goals. Those arguing for a market system correctly point out that government-set values distort the market and inhibit dynamics that privatization is intended to unleash. Even government officials who adhere to the social goals of a planned economy can see immediate benefits from tying values to the market, as a way to increase the government’s rental income and tax receipts. The system now being implemented is an attempted hybrid, in which governments sometimes set values based on government-determined factors, with varying degrees of proximity to realism, while private transactions are allowed to occur without price control. The approach taken in the Land Code is not due to any failure by the drafters to understand market principles; administratively imposed price ceilings were based on the realistic premise that a market of informed and willing buyers and sellers did not yet exist in Russia.17

Transfer of Ownership and Management

An indispensable reform now underway is the sorting of conflicting and competing authority over real property. In Soviet times, all real property belonged to the "state," but it is not always clear which part of the state owned particular property—the municipalities, the region, or the federal government—or which of various departments within these levels of government was responsible. This question is not only important in determining which government has the power to privatize, but also which has the responsibility for maintenance. The authorities are working through federal laws and decrees that attempt to untangle the situation.

Sorting out government hegemonies does not begin to move the property into private hands. The deplorable condition of Russia’s real estate poses an enormous impediment to widespread private ownership. Consider, for example, the complex problem of transferring apartment ownership into private hands. Currently, the vast majority of Russians live in apartment blocks owned and managed by local government property committees. Most buildings are not well constructed and many are dilapidated. Rents are extremely cheap—only a few dollars, another product of the Soviet regime in which housing was to be provided by the state. The rents and other charges paid by occupants are a small contribution to costs.18 Although a tenant can acquire greater rights to the apartment by buying it, the new owner must continue to rely on the government to maintain the structure. Apartment owners who form a cooperative to acquire the building will be assuming maintenance and repair responsibilities that they are extremely unlikely to be able to meet. In a country where the per capita monthly income is only about $100, few have the financial means to begin to pay rents high enough to cover maintenance costs, much less make improvements or finance new construction.

Uncertainty about property rights and lack of reliable information about those rights and their values make secured financing for purchases unattainable. In Russia, "mortgages" are in reality personal loans based on income. Loans for property purchases are difficult to obtain; terms are at most only a few years, and rates high—usually more than 20 percent—because they are based on the borrower’s credit worthiness with little regard for any collateral value in the property. Even if ownership rights were more certain and identifiable, mortgages would remain of limited value because Russian law is unlikely to be receptive to lenders seeking to foreclose the mortgage and evict the defaulting homeowners. Yet without such a right to apply the security to the debt, a lender will not have recourse to ensure repayment, and a private mortgage lending market will not develop.

As daunting as these reform efforts are, perhaps the greatest challenge is yet to be undertaken—the reform of Russia’s agriculture. Russia’s farming capacity is a comparative advantage in the world economy. The vast country has much fertile soil, regions with long growing seasons, and an available agricultural work force.19 About 90 percent of farms are unprofitable, and 70 percent of agricultural enterprises, most of which have been privatized, are in arrears.20 Only around 10 percent of agricultural land is privately farmed, mostly in household plots, but this small part of the land accounts for 60 percent of agricultural production.21 The political and economic climate must change before the potential of private agriculture can be unleashed.

The Program

The New Hampshire-Vologda Rule of Law program mostly has addressed issues of immediate concern to judges and court administrators, such as jury trial procedure and sentencing. The author’s work on real property topics began with a 1999 meeting with the head of the Vologda region title registry. Structured real property programs began the next year, with a presentation on mortgages to judges at a regional judicial conference and at city hall to land administrators and city officials and employees. The participants expressed great interest in learning about home ownership and finance.

The author’s primary relationship has been with the Municipal Committee for Managing Municipal Real Property, which is responsible for municipal residential and commercial property. It manages the property, establishes rents, assesses taxes, handles privatization, and represents the interests of the government in joint ventures involving real property. The committee works with the Municipal Bureau of Technical Inventory, which maintains information about municipal property. The author has also collaborated with various other administrative agencies, commercial and civil courts, experts, and academics. Programs have addressed aspects of title recording, mortgage lending, assessment methodologies, the law of conveyances and competing claims, dispute resolution, eminent domain, and land use and environmental regulation. These are but the most pressing issues that the Russians have identified for us to address in the program.

THE HOPE

There is no model for the scale of change on which Russia has embarked. The product of seven decades of social experimentation, rooted in a notion that private property must be eradicated for society to progress, is not easily banished. Available models of existing market economies are not idyllic, and give pause to those entering a world in which competitive success is more highly prized than collective security.

Property law reform is at the very heart of Russia’s ability to transform itself from an authoritarian regime with strict control over its people and resources to a nation of citizens free to unleash their vast potential. The Russian property regime retains its core authoritarian nature notwithstanding the passage of national land reform legislation and the limited privatization of large industries and other property. The mechanisms for ownership and alienation remain ill-defined and not clearly protected by established legal precedent or custom. Citizens’ rights to own and convey remain suspect, and real estate cannot effectively be used as collateral for acquisition and construction. So far, only the elite have access to the financial means of substantial private ownership. The lack of a legitimate formal legal system with well-defined and protected property rights allows corruption and organized crime to flourish, causing widespread skepticism about the wisdom of economic and political liberalization.

Russia’s political mindset does not yet embrace private property as a fundamental natural right. It tolerates limited privatization as a pragmatic solution to collectivism’s economic failures. Change in this view cannot be expected to occur quickly. Private property is antithetical to the authoritarianism that has defined Russia both under the rule of the tsars and the communists. A private property regime is built on a system of voluntary transfers within an environment of open access to information, with rules of ownership and conveyance that are understood and enforced by custom and law. Without this framework, ownership remains only temporary possession.

Russia has made some progress toward democracy, but its culture of authoritarian rule has left a wide gap to bridge. But as the great Russian poet Alexander Pushkin said, "Custom is lord of all mankind." A custom of legitimacy in private transactions, enforceable by a rule of law, must evolve to unleash Russia’s enormous potential to improve conditions for its people. Lack of substantial economic improvement will undercut rule of law rhetoric in the short term, and in the long term, Russian citizens may continue to prefer the security of an authoritarian regime. Until the populace and the officials embrace the idea and institution of private property, the ultimate direction of reform remains uncertain. The course of real property reform will be a defining element in Russia’s transition to the rule of law.

Programs such as those conducted by the Russian American Rule of Law Consortium can help build a network of experts who understand the fundamentals of private property law and real estate markets. American participants can heed the advice of Thomas Jefferson, "that while we are securing the rights of ourselves and our posterity, we are pointing out the way to struggling nations, who wish like us to emerge from their tyrannies also." Our experiences can help others recognize the failings as well as the successes of a more developed market economy. The American model can boast of some very important successes—such as home ownership by a substantial majority of the population, and robust mortgage lending programs, all based on public access to information and a rule of law. Perhaps the Russian experience can illuminate some improvements, such as solutions to the affordability problem. We can all work together toward a goal of making life better for others.

ENDNOTES

1. Mikhail Zhuravlev, Land Relations and Appraisal of Real Property: Experience of, and Problems in Medium-Sized and Major Cities of Russia (2002) (presented to author).
2. Andrei Medushevsky, Power and Property in Russia: The Adoption of the Land Code, East European Constitutional Review 105, 112 (Summer 2002).
3. Konst. RF (1993), art. 36.
4. GK RF; see Dana Tumenova, Comment, Evolution of Land Reform in Russia: The 2001 Land Code and Its Impact on the Commercial Real Estate Market and Direct Foreign Investment, 11 Pac. Rim L. & Pol'y J. 769, 775 (2002).
5. Land Code RF, art. 15(2).
6. See id. art. 56(3).
7. See id. ch. III.
8. See id. art. 25(3).
9. See id. art. 28(5).
10. For a thoughtful discussion of how a rule of law is imperative for economic development, see generally Hernando de Soto, The Mystery of Capital (2000).
11. Institute for Urban Economics, Guarantees of Property Rights in the Russian Federation: Current Status and Proposed Improvements 22 (2001) (prepared for the Ministry of Economic Development and Trade of the Russian Federation).
12. GK RF, art. 10(3).
13. See id. art. 302(18).
14. Federal laws, departmental orders, and instructions require confidentiality. See Institute for Urban Economics, supra note 11.
15. Mikhail Zhuravlev, supra note 1.
16. Ludmila Ivanova, Vologda Oblast Real Estate Department, Taxation of Real Property (2002) (presented to author).
17. Medushevsky, supra note 2, at 111.
18. Raymond J. Struyk, Alexander S. Puzanov, and Anastasia Kolodeznikova, Administrative Practices in Russia’s Housing Allowance Programme, 38 Urban Studies 1045, 1047 (2001).
19. International Monetary Fund, Russian Federation: Selected Issues and Statistical Appendix, at 106 (2002).
20. Id.
21. Id.

Author

Attorney Charles A. Szypszak is a director and shareholderwith the firm of Orr & Reno, P.A., Concord, NH.

 

 

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