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'Oligarchs' Want Land under Enterprises Given Free
Rossiyskaya Gazeta
1 April 2003
Article by Yevgeniy Arsyukkhin:
"The Oligarchs Are Demanding Privatization--a Second, Free One"

The oligarchs are demanding privatization--a second, free one. It could cost the treasury $100 billion.

They "cooked up" a new land resolution in the State Duma yesterday. The lower house's committee on property, supported by the RSPP [Russian Union of Industrialists and Entrepreneurs], demanded that key points of the Land Code that went into effect 18 months ago be revised.

The essential idea is that the land on which enterprises stand should be transferred to the plant owners without charge (the entrepreneurs only agree to pay the state for preparation of the documents). The "oligarchs" say that they already paid for the land when they privatized the enterprises in the early 1990s. The amount in question is $100 billion (that is how much the land under privately-owned plants in Russia is worth, by the most modest calculations). In May the committee is supposed to formulate specific amendments to the Land Code. The moment was very carefully chosen: by 1 January 2004 the plant owners must decide: either they redeem the land on which their enterprises stand, or they take it on lease. There is still time before 1 January.

So the idea is simple: they want the state to give them the land free! Viktor Pleskachevskiy, chairman of the State Duma committee on property who, we will recall, pushed the Land Code through a resistant parliament in the hot summer of 2001 and claimed that the Land Code was a "carefully thought-out document," now readily admits that they were "in a hurry to fill the legal vacuum" at that time. In short, they went too fast. The RSPP is even more categorical. RSPP vice president Oleg Kiselev says: "The Land Code cannot be followed.

"If all its innovations were realized, it would bring industry in this country to a halt."

But what arguments do the industrialists have? In the early 1990s when the first wave of privatization was underway, the industrialists were supposedly given to understand that together with the shop buildings and equipment, they were also buying the land. But inasmuch as the political situation in the country was complex, a compromise was proposed--permanent, unlimited use of this land. It was understood, they say, that in time the land would pass quietly and peacefully, by itself, to the owners of the buildings. It did not happen. Now they have to lease the land or redeem it.

Let us recall that the redemption price of the land for the owner of structures built on it is tied to the land tax rate. This rate is multiplied by a number of coefficients that are expected to take account of the "attractiveness" of the land, and the result is the price. But inasmuch as the state, while lowering turnover taxes, dreams of receiving its primary income from property taxes, the base land tax is constantly growing (3.6 times in just the last two years). On the other hand, the local authorities, who are the ones that set the coefficients, have pushed them as far as they can (the budgets are full of holes, but you only sell the land once). And so it turned out to be a little expensive (see table below).

Now the new owners of the factories and plants are claiming that the system is incorrect at its base, that growth in the land tax exceeds growth in inflation, and that the price of industrial land is higher than land for apartments.

The oligarchs need the land. There is a word--"capitalization," which means the appraisal of a business by independent auditing experts. If an enterprise's capitalization is high investors invest in it willingly. If the capitalization is "inflated," what happens is what happened to a number of leading American companies recently; when they were exposed, they fell apart and almost brought down the whole American economy. And then, a large machine building processing enterprise that does not own the land under its own shops but only leases it will not be able to earn points and will not attain an impressive capitalization.

So redeem it and get the capitalization! This is probably hard on the purely psychological level. Let us recall once again that at one time the plants and the steamships went to their owners at, to put it mildly, very low prices. The state decided to get back its losses through the land. The businessmen disliked this so much that they have now reached the point of saying that land is "a nonmarket element," and that it is "not an ordinary commodity." In short, it is almost like selling Mother Russia, which cannot be done. Similar words could be heard from the Communists in the summer of 2001, when they realized that with the adoption of the code they were losing their last administrative level for influencing the situation. Their opponents the "liberals," by contrast, interpreted land as "just another commodity." The liberals lasted exactly 18 months.

The idea of "land for free" seems to be gaining some reputable supporters. The Ministry of Industry, Science, and Technologies prepared a report for Duma hearings: we cannot let the enterprises spend all their working capital on land. What about wages, and development? On Friday the statement made by Andrey Fedorov, the chief of the MNS [RF Ministry of Taxes and Levies] resource payment administration, a statement that was thrown out casually and noticed by few, rang out at the MNS: the RF government is "reviewing the possibility" of putting the land chapter of the Tax Code into effect a year later than before, on 1 January 2005. Thus, the MNS is proposing to extend by one year the date before which enterprises can decide whether to redeem or lease.

It is coming down to direct pressure. There is no other way to assess the action of one prominent oligarch, who threatened, for example, to move his enterprise (not a small one, at one time it was built "by the whole country") out of the city whose authorities wanted to "skin" the oligarch. Clearly this is physically impossible, but what an impact! In principle this is no different from tractors and combines, which the Communists brought into the streets two years ago in protest against the Land Code. Even the MNS was subjected to indirect pressure. Last year, for the first time in 10 years, the land tax was not collected in the planned amount--the enterprises do not want to formally register their property under current conditions.

So the position of business is fairly unified and understandable. On the other hand, the government is hardly likely to undertake a second privatization "free," by the same token losing $100 billion just like that. Therefore, the parties must find a compromise before 12 May, when the Duma committee on property intends to formalize its amendments.

The Amount in Question

How much will certain Russian "oligarchs" have to pay to redeem their plants?

Enterprise and price of land, millions of dollars

GAZ [Gorkiy Automotive Plant]--104.2;

Izhorskiye Zavody [Izhora Plants]--80.2;

Kirovskiy Zavod [Kirov Plant] (St. Petersburg)--65.7;

Uralmash [Ural Heavy Machine Building Plant]--61.7;

Novolipetsk Metallurgical Combine--58.8;

Baltiyskiy Zavod [Baltic Plant] (St. Petersburg)--27.8;

SverdlovEnergo [Sverdlovsk Energy System]--80.1.

Source: RSPP

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