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The Russia Journal
December 7-13, 2001
No progress on housing reform

The Moscow city government recently discussed an issue that affects not only Muscovites, but people throughout Russia – shifting full housing and utilities costs to the population. The discussion ended with Moscow Mayor Yury Luzhkov proposing to postpone a decision, but the very fact that the issue was on the agenda is interesting in itself.

Housing and utilities reform is usually listed as just one of a series of reforms the government economic strategy proposes carrying out. But it is different from the other proposed reforms in that no other reform is probably so sorely needed and yet so difficult to implement.

In 1997, when the state budget carried the main burden of housing and utilities costs and the ruble-dollar exchange rate was high, budget subsidies to the housing and utilities sector were equivalent to $17 billion – more than all Russia’s foreign-debt payments. Even now, after the ruble’s fivefold devaluation and when the population’s share in housing and utilities costs has risen to 45 percent, the state still pays billions of dollars in subsidies.

One of the main objectives of housing and utilities reform is to free the state of this burden and shift it to the population. This is a justified objective, especially now when the petrodollars have stopped flowing in. The other main objective was to stop the dreadful wastage in the sector and improve the poor quality of the services the population has had to make do with so far.

Attempts were made to get these reforms under way, and a program actually came close to implementation several years ago when then President Boris Yeltsin gave conservative Prime Minister Viktor Chernomyrdin two "young reformer" deputies – Boris Nemtsov and Anatoly Chubais.

The 1998 financial crisis, which cut average monthly wages from $150 to $60, forced the government to postpone implementation of these painful reforms, but the economic growth of 2000-01, which saw the average wage rise back up to $120 a month, convinced the government it was time to tackle the thorny issue.

The reform plan was to gradually raise the population’s share in housing and utilities costs until it covers the full cost. Families for whom the full costs would be equivalent to more than 13 percent of their budget would be eligible for subsidies, while the most well-off families would be expected to pay the full costs.

The social and economic sense of the idea was that the subsidies would go directly to the population, rather than to the housing- and utilities-maintenance offices that currently receive state subsidies and spend them as they please. The objective of reform is to de-monopolize the sector and give residents the right to choose their own maintenance-service providers. The idea was that by introducing economic incentives and better technology, maintenance costs would drop by a third and the population’s overall share in costs wouldn’t increase proportionately to the state’s savings in the sector.

This general scheme proposed by Economy Minister German Gref’s reform program is almost the same as that proposed in 1997 by the "young reformers." But the political balance of force has changed radically since then.

Four years ago, the government’s greatest critic was Moscow Mayor Yury Luzhkov. Luzhkov not only criticized the "young reformers," he announced that Moscow would not follow the federal timetable for housing and utilities reform. Russia was to have completed these reforms by 2003, but Moscow planned to draw them out to 2008. The 1998 crisis pushed back the federal deadlines, too. It was all the more surprising, then, that the Moscow government discussed a plan to shift full costs to the population from the beginning of 2002.

In the end, the controversial decision wasn’t taken, but the attempt to discuss it showed to what extent even Russia’s capital isn’t ready, either technically or intellectually, for this difficult undertaking.

Moscow’s more than 9 million inhabitants still don’t have individual gas, heating and water meters in their apartments, only electricity meters. This means reform won’t create any economic incentives to save resources, instead, there will just be a mechanical shift of costs from the state to the population. This contradicts the whole principle of the reform and will inevitably increase social tension.

What’s more, Muscovites haven’t even heard of attempts to set up alternative housing- and utilities-maintenance services. The monopoly is still in place and the maintenance offices have no responsibility to anyone. Even more surprising was the Moscow government’s final decision. The city authorities admitted that more preparation had to be done before implementing reform but, in the meantime, invited Moscow’s wealthiest residents to voluntarily pay a greater share of costs.

The plan is for residents to receive two types of bill – one with the full cost, the other with the subsidized costs. In other words, two different prices for the same good. But this approach is a classic command-economy method, not a market method. Under this plan, the subsidies continue to go to bureaucratic organizations, when the original reform plan was for subsidies to go to the people, not the bureaucrats, who really need them.

Moscow’s spontaneous housing and utilities reform attempt has not only failed, it has shown that the city government has not yet understood the reform’s basic ideas and its social and economic sense. This makes it all the more likely there will be no successful housing and utilities reform in the near future.

But what was really surprising was what German Gref, who attended the Moscow government meeting, said on the subject. He said the Moscow authorities had proposed a fine program and that its basic ideas could be spread to the whole of Russia.

It’s either one or the other – either political peace with Luzhkov is more important for Gref than housing and utilities reform, or Gref, the "father of the reform program," has forgotten his own ideas.

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