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. Last Updated: 07/27/2016

BRICK BY BRICK: Foreign Investors Await Property Law Reforms

Today, as business people around the world look on, Russia is gearing up for the March 26 presidential election, which has the potential to generate unprecedented progress toward political stability, strong economic programs and productive legal and financial reforms in Russia.

Let's hope. Since the declaration of reforms 15 years ago, Russia has passed through substantial changes in both economical and political spheres. One area that needs serious attention is the development of the Civil Code legislation (November 1994), which confirmed ownership of real property and protected foreign investors. However, due to the legislation's ambiguity, it has done little to attract the level of investment Russia needs.

Despite substantial steps forward in clarification of the law relating to real estate in Russia, the problem of land rights remains unanswered. The following rights for land have been established: the right of inheritable life possession; the right of permanent use; the leasehold right and the ownership right.

Although the purchase of land is legally possible, the absence of a new land code and the lack of clear legislation on land make the purchase of public land impossible in the majority of the territories of the Russian Federation. Local governments prefer to withhold ownership rights to municipal lands, with only rights of lease granted to private entities. The situation, however, differs from region to region.

In some areas, such as St. Petersburg, the sale of land to companies is a common practice, and this proactive region has attracted the bulk of foreign investment. Guaranteed land ownership rights made possible the following investment projects in St. Petersburg: Wrigley invested $70 million in a chewing gum factory; Philip Morris invested $330 million in a tobacco plant and the European Bank for Reconstruction and Development invested $40 million in Baltika breweries. In comparison, land in Moscow may only be leased for 49-year terms or the right to permanent use. As a result, we see no large-scale investments in the capital.

Moscow's most valuable asset is literally right underneath it. Today, City Hall understands that land rights are an important factor to investors, and to themselves as well.

Since 1999, a number of steps have been taken to stimulate the market, including the creation of a legal structure for selling land in the Moscow region that is being tested in a pilot program. Zelenograd, northwest of Moscow, has been chosen as a location to sell a number of land plots. Further steps include: creation of a sales method; definition of sales price and clear guarantees to future landowners.

The market value of the nation's land is $5 trillion, according to the State Land Committee. Should a property tax equal to 2 percent of the property market value be implemented, the budgets of all levels will be able to receive up to $100 million annually. This is almost five times more than the 1999 federal budget.

Foreign investment is slowed by the lack of clear legislation that guarantees the ownership rights for land. Fortunately, the land rights problem is listed among the most important to be solved by the new State Duma. This gives us hope that with a new land code we will begin to see the substantial increase in foreign investment the nation needs.

Chris King is director of business development at Colliers HIB.