ECONOMY
Property Rights No Longer Work in Russia
July 1, 2024
Tatiana Rybakova
Journalist and writer
Journalist Tatiana Rybakova explains how the institution of property in Russia is collapsing before it ever fully crystallized. It is this fact, in her view, that drives the instability of the Russian economy and the country’s development as a whole.
Over the last two years, headlines about claims from the Prosecutor General justifying why this or that property should seized by the state have become commonplace (see more Russia.Post coverage here).
Going after real estate
Recently, the Prosecutor General filed a claim in the court of the city of Odintsovo (Moscow Region) to seize land that had previously belonged to the Barvikha Sanatorium from its current owners.
The prosecutor told the court that the land was sold in 2001 at a price 236 times lower than the market value: back then, the land cost RUB 54.4 million, but “in reality, this land plot cost RUB 13 billion… which indicates the dishonesty of the contract concluded,” RBC quoted the prosecutor as saying.
It turns out that prosecutors determine the real cost of property, not the market. Nevertheless, this approach comes as a surprise: in claims brought in the last two years that ended in the nationalization of enterprises, prosecutors used the same exact argument about the discrepancy between the purchase price and the “real” value.
Courts judged such arguments sufficient: in total, more than 100 enterprises with assets of RUB 1.3 trillion have been nationalized since 2022. Prosecutor General Igor Krasnov himself cited these figures during the St Petersburg International Economic Forum, apparently considering this his contribution to the country’s attractiveness for investment.
Now, however, the regime has moved from nationalizing factories and warehouses to redistributing land.
In the Barvikha case, the buyers are accused of “hiding behind papers” – how the prosecution refers to a completely lawful investment contract. The same line was used by Moscow Mayor Sergei Sobyanin years ago when he reclaimed property from Moscow business owners.
Going after real estate
Recently, the Prosecutor General filed a claim in the court of the city of Odintsovo (Moscow Region) to seize land that had previously belonged to the Barvikha Sanatorium from its current owners.
The prosecutor told the court that the land was sold in 2001 at a price 236 times lower than the market value: back then, the land cost RUB 54.4 million, but “in reality, this land plot cost RUB 13 billion… which indicates the dishonesty of the contract concluded,” RBC quoted the prosecutor as saying.
It turns out that prosecutors determine the real cost of property, not the market. Nevertheless, this approach comes as a surprise: in claims brought in the last two years that ended in the nationalization of enterprises, prosecutors used the same exact argument about the discrepancy between the purchase price and the “real” value.
Courts judged such arguments sufficient: in total, more than 100 enterprises with assets of RUB 1.3 trillion have been nationalized since 2022. Prosecutor General Igor Krasnov himself cited these figures during the St Petersburg International Economic Forum, apparently considering this his contribution to the country’s attractiveness for investment.
Now, however, the regime has moved from nationalizing factories and warehouses to redistributing land.
In the Barvikha case, the buyers are accused of “hiding behind papers” – how the prosecution refers to a completely lawful investment contract. The same line was used by Moscow Mayor Sergei Sobyanin years ago when he reclaimed property from Moscow business owners.
Then-President Dmitry Medvedev hosting the Russian soccer team at Meyendorff Castle. July 2008. Source: Wiki Commons
The prosecutor argued that the buyer of the land, a company called Country-Pro, promised to renovate the Meyendorf estate, but instead divided up the land into lots and sold them for private houses to be built there. However, the estate was in fact renovated, and the castle there, in the style of a French chateau, became the state residence known as Barvikha – one of Vladimir Putin’s palaces.
Of course, it is the proximity to Putin’s residence, combined with the big names of the defendants, that has attracted the media’s attention. Among them are prominent members of the business elite and their family members. For example: Dmitry Mazepin, the former owner of Uralchem; Nadezhda Advokatova, the wife of restaurateur Arkady Novikov; Zoya Strunina, the mother of the cofounder of the luxury retail chain Mercury; Ekaterina Janashia, the wife of developer Mikhail Khubutia (owner of the Gostiny Dvor complex in Moscow).
Finally, Meyendorf is located within the village of Podushkino, which is built up with elite houses and features in the popular detective novels of Darya Dontsova, one of whose heroines actually lives there. Meanwhile, in the elite Meyendorff Gardens cottage development live entirely nonfictional characters of the current social and political drama.
Propaganda can spin the claim against members of the elite as a manifestation of social justice – everyone is equal before the law, they say. And conspiracy theorists can guess at whether the case is because Putin himself wants to move all his neighbors away from his palace or whether someone from his inner circle, with the help of prosecutors, decided to make sure the “wrong” people could not communicate with Putin.
Of course, it is the proximity to Putin’s residence, combined with the big names of the defendants, that has attracted the media’s attention. Among them are prominent members of the business elite and their family members. For example: Dmitry Mazepin, the former owner of Uralchem; Nadezhda Advokatova, the wife of restaurateur Arkady Novikov; Zoya Strunina, the mother of the cofounder of the luxury retail chain Mercury; Ekaterina Janashia, the wife of developer Mikhail Khubutia (owner of the Gostiny Dvor complex in Moscow).
Finally, Meyendorf is located within the village of Podushkino, which is built up with elite houses and features in the popular detective novels of Darya Dontsova, one of whose heroines actually lives there. Meanwhile, in the elite Meyendorff Gardens cottage development live entirely nonfictional characters of the current social and political drama.
Propaganda can spin the claim against members of the elite as a manifestation of social justice – everyone is equal before the law, they say. And conspiracy theorists can guess at whether the case is because Putin himself wants to move all his neighbors away from his palace or whether someone from his inner circle, with the help of prosecutors, decided to make sure the “wrong” people could not communicate with Putin.
“The important thing is that now the state can take away not only businesses but also real estate, justifying that by simply saying it was sold too cheaply.”
Are private houses no longer safe from the state?
Recall that at the time of the collapse of the USSR there was no private ownership of land in Russia: all land was owned by the state, collective farms, factories, etc. Today, all modern private houses sit on land that was privatized in the last 30-odd years.
So, if all this property now depends on the will of prosecutors, millions of landowners are vulnerable.
The Barvikha claim is one of many recent examples that suggest that the institution of property in Russia, already flimsy, is being destroyed.
In fact, businesses, as mentioned above, are already being taken away full steam ahead. Financial assets? Look at what happened to shareholders of the Solikamsk Magnesium Plant: a court ruled that when they bought their shares on a stock exchange, the transaction was done in bad faith, since the privatization of the plant had previously been deemed illegal by a claim of the Prosecutor General. Private houses? The story with Barvikha shows that they are fair game too.
What about apartments? Currently, Russians are furiously scooping up apartments in new buildings before the preferential mortgage program ends. Unfortunately, the reality is that legally the owner of an apartment only owns a certain amount of air within its walls: all public spaces belong either to the municipality or the developer.
And apartments, like all other property, can legally be taken away from anyone who the authorities do not like – just accuse the owner of slandering the army (i.e., opposing the war) or collaborating with an “undesirable organization.”
Some Russians have made their own conclusions: sales of gold bars and investment diamonds have increased exponentially in Russia since 2022. Diamonds are small, and you can swallow them before crossing the border or when investigators come to carry out a search. As for gold – you can bury it, though better to do that not on your own lot (for now), but in the nearest forest.
A serious philatelist I know said that there is now an unprecedented rush to buy very rare stamps. For a connoisseur a stamp is an easily concealable asset. Meanwhile, those without the money for diamonds or rare stamps are buying cash dollars and cryptocurrency or, at worst, an apartment with a preferential mortgage.
Recall that at the time of the collapse of the USSR there was no private ownership of land in Russia: all land was owned by the state, collective farms, factories, etc. Today, all modern private houses sit on land that was privatized in the last 30-odd years.
So, if all this property now depends on the will of prosecutors, millions of landowners are vulnerable.
The Barvikha claim is one of many recent examples that suggest that the institution of property in Russia, already flimsy, is being destroyed.
In fact, businesses, as mentioned above, are already being taken away full steam ahead. Financial assets? Look at what happened to shareholders of the Solikamsk Magnesium Plant: a court ruled that when they bought their shares on a stock exchange, the transaction was done in bad faith, since the privatization of the plant had previously been deemed illegal by a claim of the Prosecutor General. Private houses? The story with Barvikha shows that they are fair game too.
What about apartments? Currently, Russians are furiously scooping up apartments in new buildings before the preferential mortgage program ends. Unfortunately, the reality is that legally the owner of an apartment only owns a certain amount of air within its walls: all public spaces belong either to the municipality or the developer.
And apartments, like all other property, can legally be taken away from anyone who the authorities do not like – just accuse the owner of slandering the army (i.e., opposing the war) or collaborating with an “undesirable organization.”
Some Russians have made their own conclusions: sales of gold bars and investment diamonds have increased exponentially in Russia since 2022. Diamonds are small, and you can swallow them before crossing the border or when investigators come to carry out a search. As for gold – you can bury it, though better to do that not on your own lot (for now), but in the nearest forest.
A serious philatelist I know said that there is now an unprecedented rush to buy very rare stamps. For a connoisseur a stamp is an easily concealable asset. Meanwhile, those without the money for diamonds or rare stamps are buying cash dollars and cryptocurrency or, at worst, an apartment with a preferential mortgage.
“In addition, the vulnerability of property rights encourages get-rich-quick schemes.”
The Ministry of Industry and Trade suspended the issuance of subsidies to radio electronics manufacturers and began checking where previously allocated funds went. Given that this area is critical for Putin’s war in Ukraine, one can imagine the scale of the fraud for the ministry to take such a step.
Yet you can also understand the motives of the subsidy recipients. They are well aware of their vulnerability. No matter what, their businesses will either be taken away or destroyed, or they will be imprisoned themselves – either by influential competitors or after the current regime ends, when they will be labeled as accomplices.
The incentives for Russian business
Thus, the natural choice for business owners is to try to fill their pockets as quickly and fully as possible and get off this Titanic. But only from the outside does the IT sector look like a “quick” business: any serious IT company has 10-30 years or more of continuous development behind it. Whether the modern Russian IT industry has that many years left is a rhetorical question today.
Yet you can also understand the motives of the subsidy recipients. They are well aware of their vulnerability. No matter what, their businesses will either be taken away or destroyed, or they will be imprisoned themselves – either by influential competitors or after the current regime ends, when they will be labeled as accomplices.
The incentives for Russian business
Thus, the natural choice for business owners is to try to fill their pockets as quickly and fully as possible and get off this Titanic. But only from the outside does the IT sector look like a “quick” business: any serious IT company has 10-30 years or more of continuous development behind it. Whether the modern Russian IT industry has that many years left is a rhetorical question today.
The Samotlor Oil Field. Source: Wiki Commons
Neglecting strategic development for the sake of short-term gain was characteristic both of the USSR, which did not know private property, and the pioneers of Russian business – primarily commodities companies. An important oil industry figure told me how the Samotlor Field was destroyed in Soviet times – because you had to report here and now that you were exceeding the plan – and about how newly-minted private oil companies predatorily developed the fields they had inherited in the first years of post-Soviet economic reforms.
Still, over the next two decades, business gradually came to believe that private property was here to stay. The oil industry invited Western oil service companies with modern technology, which meant more could be extracted from oil fields while harming them less.
Metallurgists began installing modern filters to reduce air pollution. New businesses that owed nothing to privatization – having emerged organically, in response to consumer demand – decided that they were in no danger: retailers and IT companies built strategies to conquer if not the global market, then at least that of Russia and its neighbors. But now everything is in tatters: claims from prosecutors will get some and Western sanctions others, while Investigative Committee investigators, firmly convinced that they can throw anyone in prison, are awaiting all of them.
Still, over the next two decades, business gradually came to believe that private property was here to stay. The oil industry invited Western oil service companies with modern technology, which meant more could be extracted from oil fields while harming them less.
Metallurgists began installing modern filters to reduce air pollution. New businesses that owed nothing to privatization – having emerged organically, in response to consumer demand – decided that they were in no danger: retailers and IT companies built strategies to conquer if not the global market, then at least that of Russia and its neighbors. But now everything is in tatters: claims from prosecutors will get some and Western sanctions others, while Investigative Committee investigators, firmly convinced that they can throw anyone in prison, are awaiting all of them.
“It took some three decades for the wheel to turn 360 degrees and the economy to find itself in a ‘Soviet’ environment where property rights do not work.”
How long will it take for such an attitude to result in an inglorious end like the collapse of the USSR? Among all the theories that explain the cyclical nature of Russian politics and the “roller coaster” of the Russian economy, I consider the most important those that put the attitude toward property rights at the forefront.
When the economy turns again, with time there should emerge businessmen who believe that their property will not be taken away, along with new families who are confident that a house on their land is forever. But that will not happen until governments in Russia can be changed, the courts are independent, freedom of speech is guaranteed and similar things that will serve to establish, first and foremost, the inviolability of property rights.
When the economy turns again, with time there should emerge businessmen who believe that their property will not be taken away, along with new families who are confident that a house on their land is forever. But that will not happen until governments in Russia can be changed, the courts are independent, freedom of speech is guaranteed and similar things that will serve to establish, first and foremost, the inviolability of property rights.
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