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. Last Updated: 07/27/2016

Land Reform: The Race Is On

The new Land Code is just a small part of an unprecedented series of reforms being undertaken to eventually introduce a Western-style land market in Russia. The issues range from valuating land parcels for tax purposes to protecting the quality of farm soil. But first the government has to decide the ownership of some 90 percent of the nation's land -- and solve an intergovernmental feud for control of the entire reform effort. Yevgenia Borisova reports in the second of a two-part series. Click here to read first article.

The government has its hands full. It is trying to create a land market in a country that has never truly had one. It is also trying to estimate the value of every plot of land in a nation that spans 11 time zones. And to complicate matters, the ownership of 1.56 billion hectares, an area roughly 63 times the size of Great Britain, is unclear. Considering that it took the government two years just to figure out how many banks it owns stakes in, creating a true free market for land could take a generation or more -- but its pressing forward aggressively.

From the government's perspective, the whole point of land reform is to stimulate the economy, generate revenue and improve the standard of living for the population. But to buy and sell land -- and tax it -- it first needs to decide who owns it.

When the Bolsheviks seized power in 1917, they declared that all land should belong to the people. In the Yeltsin era the title to the nation's land was changed from the Bolshevik "all peoples' ownership" to "property of the state." But in order to proceed with privatization and create a large class of private landowners, the government needs to decide which of the 1.56 billion hectares are federal and which are sub-federal.

Tax and property officials in various administrations are hoping that the new law, "On the Division of Lands into Federal, Regional and Municipal," which took effect Jan. 17, will put an end to the chaos. According to the law, a "specially authorized federal body dealing with property in accordance with other bodies of executive power ... will prepare lists of land parcels owned by the Russian Federation, regions and municipalities."

To the surprise of some, however, this powerful body apparently will not be Roszemkadastr -- the federal land service currently compiling the first national land cadastre (a public survey of the value, extent and ownership of land as a basis for taxation) -- but the Property Ministry. According to ministry spokeswoman Anna Martynova, the Property Ministry now has the authority to determine the ownership of all disputed land.

The ministry said that the federal government will retain 69 percent, or 1.1858 billion hectares, 90 percent of which is "forests, water reservoirs and reserves" that cannot be bought or sold. Few expect a turf war to erupt over controlling forests or rivers, but bureaucrats at all levels are already maneuvering to influence who will get the proceeds from leasing or selling the rest. The battle is expected to be most intense in Moscow, where the federal government has thousands of properties and institutions and annual revenues from land leases and taxes is more than $100 million.

According to the 2002 federal budget, cities are entitled to 50 percent of all revenues from land taxes and lease payments, while regions are entitled to 35 percent and the federal government 15 percent. But the budget doesn't specify whether this means all land owned by local administrations, or simply all land within their boundaries.

Moscow could suffer more than other regions from the law, "On the Division of Lands," for several reasons. The city earned 3 billion rubles ($98 million) last year from land leases versus 327 million rubles from land taxes. Yury Lebedev, a lawyer with the firm Linklaters & Alliance, said every percent of Moscow land taken by the federation would result in losses to the city, on average, of several million dollars.

Another problem for City Hall is that under the new law, land under the thousands of federal enterprises and organizations in Moscow will most likely become federal property, according to an official from City Hall's land committee, Moskomzem, who asked not to be named. "If under current law, say, one-hundredth of Moscow's land belongs to the Russian Federation, then under the new law it could become, say, one-third," the official said. Currently less than 20 federal entities officially occupy land identified as federal, including the Kremlin, Supreme Court, Constitutional Court and Federation Council.

Additionally, it is clear that land in Moscow will at some stage be sold, and if parts of downtown, the nation's priciest district, are identified as federal, losses to the city's budget will be huge. "Proceeds from the sale of land, as envisaged by the Land Code, will go to the budget of the owner of the respective land," Lebedev said.

Eventually, the owner of every plot of land in Russia will be identified and documents will be issued to every land user. But in Moscow alone, this process could take years. "I am not sure it will happen shortly," said Faina Khusainova, who runs a department of the Moscow tax inspectorate.

'Printing Money'

One of the problems complicating the process is the lack of a single authority to deal with land. Experts say too many government agencies are finding land a very lucrative target for applying their expertise -- and justifying their existence. In addition to the various infighting among various bodies in thousands of local and regional administrations, at the federal level, the Tax Ministry, Justice Ministry, Property Ministry, State Construction Committee, Roszemkadastr and other administrative bodies are all trying to influence the process to their own advantage.

The biggest loser so far seems to be Roszemkadastr, which was created in 1991 to be a single federal land authority. But its influence and budget have slowly been reduced over the past decade. What was once a policy-making ministry with thousands of employees is now just another cash-strapped, understaffed and overburdened agency.

The Justice Ministry has already usurped a lucrative function of Roszemkadastr -- registering land deals. Since 1998 the ministry has established 1,700 offices and hired 18,000 employees throughout the country to register such transactions, according to Deputy Justice Minister Alexander Karlin.

Karlin said that the ministry has approved more than 5 million land transactions for an average fee of 5,000 rubles. That equates to more than $800 million, and Karlin said "not even 1 percent" of the demand for registration has been met.

"The Justice Ministry has essentially been given a license to print money," said Frederik Zetterquist, area manager of Swedesurvey, the Swedish National Land Survey's overseas agency that has been helping Russian authorities conduct a pilot land cadastre project since 1995. "Roszemkadastr lost a major source of income at the expense of the Justice Ministry," he said.

So far has Roszemkadastr's star fallen that in many regions its land inspectors, who earn just 1,500 rubles a month, are responsible for up to 200,000 hectares, roughly the size of Slovenia.

Feoktista Rogozhina, head of the Kletsky district land committee in the Volgograd region, said that her budget had been reduced to the point that she cannot afford stationary, let alone basic office repairs. Even the name of the body is ridiculous, she said. "In the past Roszemkadastr was a department of the Land Committee. ... It is now called Roszemkadastr for some reason. It's like renaming the Agriculture Ministry the Vegetable Ministry and pretending vegetables are the only thing in agriculture to worry about."

Too Many Cooks

Zetterquist was critical of the government's decision to divide Roszemkadastr's functions among different agencies and ministries, a decentralization process that is just the opposite of what Sweden is doing.

"In Sweden we are integrating information because everybody knows it is advantageous for society. But it is not the case here," he said.

Indeed, Russia is apparently unique in this regard, said Olga Nesterova, head of the department in charge of land valuation at Roszemkadastr. She said her service conducted a survey among the 29 member countries of the United Nations working group on land surveying and land resource management and found that half have a special land service that controls all issues related to land management.

"The other half said that the responsibilities are shared with either financial authorities, tax authorities or local administrations," she said. "None said they share functions with property bodies -- which are normally created for a transition period only."

While the Justice Ministry now registers land deals, the powerful Property Ministry has been put in charge of land distribution on all levels. It has also been tasked with preparing a new state register where land and buildings, as well as any improvements made to them, will be listed as a single piece of real estate -- a land and real estate cadastre. The State Construction Committee, or Gosstroi, however, also wants to participate in preparing the cadastre.

According to the deputy head of Roszemkadastr, Viktor Kislov, his organization has had a long history of conflict with Gosstroi, which is fighting to retain its network of real estate inventory bureaus, or BTIs, where all buildings and apartments are registered.

Linklaters' Kuzin said, "Look, we have a register for deals in the Justice Ministry, a register for real estate with BTI, a land cadastre, and now you talk about a land and real estate cadastre. I have even heard about a special register for state property. This is nonsense. How will all these registers relate to each other? How many resources will be lost? It will definitely not benefit the development of business in Russia."

"It's always better if you can have one body dealing with the land," Zetterquist said. "It will be more effective, more efficient to have information gathered by one body. Now they have to exchange information between these organizations. This is something extra you have to do and this is a disadvantage, of course. Say Gosstroi is afraid to spread their information because they think it is valuable for them..."

Despite losing a major source of revenue and much of its authority, Roszemkadastr is still in operation. In fact it is moving forward with an ambitious six-year, 33 billion ruble federal program to create a computerized database of all plots of land and buildings and structures that exist on them.

"In the next six years, we will put everything that exists in Russia into one register," Kislov said.

This project has caused some concern in the Property Ministry, which is anxious to control the key elements of land reform. A statement from the ministry said that the fact that too many government agencies are working with land is a "real problem." It also said that one of the aims of the government's policy on using real estate effectively is to "exclude different agencies from the functions of managing land and passing it on to only one [body]."

The ministry did not elaborate but, presumably, it was referring to itself. The ministry may believe that now is an opportune time to step in and take control, since Roszemkadastr has nearly finished its most vital task -- putting a cadastre value on all rural and urban land that can be used to calculate taxes.

Valuing the Land

Roszemkadastr has nearly completed its cadastre for agricultural land and expects to finish its registry of urban land by the end of the year. This process, however, will not determine the market price for every plot of land. "Cadastre valuation" is simply a euphemism for the "mass valuation of land."

None of Russia's regions have prepared a Western-style land register that would list all, or even most, of the land plots that are owned or managed by separate individuals or corporations, said Roszemkadastr's Nesterova. "For taxation reasons, there is no difference if agriculture land within an area occupied by a former collective farm is of different quality, as long as we have an average cadastre value of land for the whole parcel [from which taxes are paid]," she said.

Like most other issues related to land reform in Russia, however, the way it is being done has caused considerable controversy.

The biggest problem with the method used to assess agricultural land is that it relies on soil quality data compiled between 1969 and 1989. Soil quality, according to experts, comprises about 80 percent of the cadastre value of land.

Quality characteristics include thickness and richness of soil, inclusion of sands, clay or stones, humidity and erosion. Other qualities such as location are also considered. The assessment is lower if a parcel is located on a slope, in a ravine, or far from transport infrastructure. The assessment also includes economic indices such as costs of production in the area.

However, according to many agriculture experts, in many cases the quality of the land has changed dramatically since 1969-89. In addition to erosion and depletion of nutrients, some 80 billion tons of waste -- 1 billion tons of it toxic or radioactive -- is spread on agricultural lands throughout the country, according to Deputy Natural Resources Minister Ivan Glumov.

One expert who is working on the rural land cadastre provided, on condition of anonymity, one example of how flawed the valuation process is. Speaking of a region where land was assessed at about 5,000 rubles per hectare, the expert said, "We conducted our research within the limits of collective farms that no longer exist. We didn't take any samples of the earth – we based everything on data that has been added to our files since 1972.

The source said this method skewed the results and valued land in remote areas accessible only by plane and in good weather at about 9,000 rubles -- more than four times the cadastre value of some areas close to the regional capital that have been well taken care of despite having inferior soil quality.

"How could we offer these assessments to our governor for his approval?" the expert said. "We went to Moscow and convinced those who deal with our stuff to consider improvements made to the land, such as fertilizing and irrigating. The problem is that our instructions say that only natural productivity must be considered. I think people who prepared such instructions have a very vague idea of what land is about. So now, we corrected the assessment and the cost of land near [the city ] is about 9,000 rubles while land in remote districts has been lowered."

Cadastre values of farmland in different regions are listed in the "National Report on Land" issued by Roszemkadastr in December.

Regional values vary from 400 rubles per hectare in the oil-soaked autonomous district of Khanty-Mansiisk to 43,600 rubles in Krasnodar territory. In the Moscow and Leningrad regions, that average value is 22,030 rubles, and 23,000 rubles respectively. There are no values for Chechnya, Chukotka or Taimyr.

Complicating the task, Nesterova said, is the absence of clear borders for parcels of land.

Urban Jungle

The valuation of urban land is much more complicated, and the difficulty is compounded by the sheer size of the country and a lack of both time and qualified personnel, Nesterova said.

"In developed countries, where a system of valuation has existed for centuries, each plot of land is assessed separately. But in [Russia], where such a system is only now being created, the assessment is based on so-called "mass valuation technology," she said. "But it is a step forward anyway."

To value urban land, Roszemkadastr has divided municipal areas into so-called cadastre blocks, plots in each of which have 14 different categories of value, depending on how the land is used or intended to be used. Cafes and restaurants are in one category, industrial enterprises are in another, for example. Each town or city is supposed to prepare 14 "patchwork quilts" that can metaphorically overlay a map of a cadastre block to determine the cadastre value of each square meter in a given area.

These "quilts" will also be used to determine how much land tax is owed. For example, to calculate the tax owed by a gas station, tax officials need only check the quilt that includes gas stations and multiply the cadastre value for that particular area by the number of square meters and then by the tax rate set by local administrations, which can vary by particular area or particular user. The draft of the second part of the Tax Code, expected to be passed by summer, stipulates that such rates must be between 0.1 percent and 2 percent of the cadastre land value.

Oleg Skufinsky, head of Roszemkadastr's department of technology for cadastre land valuation, said dozens of different criteria that affect land value were studied from transactions, interviews with land valuers and real estate dealers, newspapers, magazines and professional publications.

For properties near the Kremlin, cadastre values could be as high as 31,351 rubles per square meter, while industrial and communications enterprises could be valued as low as 3,776 rubles per square meter.

"But a cadastre value is not a market price," Skufinsky said. "The closer we will come to a developed market for land, the more transactions we will have and the closer the cadastre land values will resemble market prices."

This method is only "a simulation of the land market" because "a real market cannot exist in a country where a few regions freely sell land while in at least 14 regions no single transaction of land has ever happened," Skufinsky said.

As the market develops, cadastre values will move "closer and closer to market prices," he said.

Skufinsky sees cadastre valuation as more than just a step forward. He believes it will also improve land management. "There are other ways to use the cadastre land values than just for taxation. It could easily be used to evaluate the best use of land in a particular area," he said.

Padding the Budget

The cadastre valuation of the whole country is expected to be completed by the end of the year and put into use for taxing and leasing purposes in 2003. But so far, only Yaroslavl has officially approved its land register and submitted it to Roszemkadastr. Moscow will be next, according to Roszemkadastr, but official approval is not expected for several months.

Urban land valuation is also finished in Tatarstan, Bashkortostan, Tver and Kostroma -- areas that do not rely on federal funding and that paid for the assessments themselves.

Proper taxation of the land under commercial enterprises is the most important part of the system because up to 85 percent of all land taxes paid to the federal budget is supplied by cities and about 80 percent of land tax within urban areas is collected from industrial enterprises, Nesterova said.

Nesterova said that while it is difficult to forecast how much the new system will boost tax revenues throughout the country, it has been remarkably successful in Yaroslavl. "Believe it or not, in the first nine months of last year, tax collection from land in Yaroslavl doubled. It is phenomenal, because effectively nothing has happened except that the valuation of land, which did not affect the level of tax, was simply created and published," she said.

Nesterova believes it is a purely psychological effect. She said that after taxpayers saw that valuation of land had been done, they understood that they had to pay.

"The region's land committee even agreed with the local union of entrepreneurs on higher rates and now expects a boost of at least 40 percent in land tax revenues this year," Nesterova said.

It is not clear how much the new system will benefit Moscow because its cadastre has not yet been approved and no precise figures on current taxpayers are available.

But rough estimations by The Moscow Times suggest that land tax collections in the capital could jump 30-fold to some $300 million a year.