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In addition to this, exercising the right for privatization of land plot is to a great dependent on the correct definition of the government authority which is to decide on the matter. Currently there may be the following difficulties: according to the RF Law On Enactment of the Land Code of the Russian Federation, the decision about privatizing land may be made by the local administration, under the jurisdic tion of which the respective territories are. However, on the other hand, decisions about privatization of land plots carrying privatized business entities may be made only by the same government authorities, which had made the decisions on privati zation of the assets located on those plots (item 14 of Article 43 of the RF Law On State and Municipal Property Privati See: Izvestiya. April 24,2003; Vedomosti. April 25,2003; Gazeta. April 25, 2003.

Kommersant. January 29, 2002. P. 8.

Land Relations Reform and Land Privatization in the Cities: Review and Evaluation Analytical Re port by the Institute of Urban Economics, p.36. See: www.asdg.ru.

Drafting of recommendations on the development the real estate and land market with the aim of taking into account the interests of the small and medium size business (The role of Chamber of Commerce of RF and territorial Chambers of Commerce). Final report of the Chamber of Commerce of RF and of the information and consulting center Business Tezaurus), 2006, p.12.

RUSSIAN ECONOMY IN trends and outlooks zation). In some cases local administrations would review such applications through a general procedure, and in case privatization request is turned down, the respective business entity would institute a claim against local administration, and not against the government authority having executed privatization of the assets.

This often leads to escalation of litigation costs (e. g., Resolution of the RF Su preme Arbitration Court Presidium No.992/04 of September 28, 2004).

The issue about the borders of land plots also remains difficult. No common uniform approach to defining the size of the land plot qualified for privatization has yet been developed in the practice of arbitration courts. When defining the size of a land plot some courts are based on the concept of effectively used area of the land plot, understanding it as an area directly under the building; other courts are based on the total area of the land plot according to the map provided by the cus tomer and certified by the respective territorial branch of the State Land Cadastre.

The latter position seems correct and in compliance not just with the Law itself, but with the key principle underlying the concept of land privatization. Thus, the RF Su preme Arbitration Court in the Resolution on a specific case No.4345/04 of August 17, 2004, on calling void the decision of Klin raion administration of Moscow Re gion about turning down the application for buying out a land plot, stated that priva tization of the full size land plot was the thing to do in order to assure compliance.

The issue of collective buying out the land plot carrying buildings/facilities be longing to several business entities is very relevant for smaller businesses104. In the majority of cases a small business entity owns just a portion of premises inside a building, which it shares with other owners. Joint application to the respective au thority will be required in such case in order to execute the sales and purchase agreement for buying out the respective land plot. In reality this is impossible to im plement. As a rule, some of the smaller businesses occupying the premises are owners, and some are tenants. The owners are not interested in switching to the lease type relations, tenants do not always have the resources required for buying out the premises and the land plot. Besides, the procedure of collective buy out of a land plot is cumbersome and overcomplicated from the point of view of achieving the consensus on the terms of ownership and shares of the participants.

To summarize, the following needs to be emphasized: the idea itself of grant ing the rights for decisions on land privatization, on defining the value of land plots, on organizing cadastre registration of land and on some other related issues to the entities of the federation and local self government bodies seems pretty feasible.

However, real capabilities and inclinations of those who will be empowered with such a function need to be taken into account when implementing this idea.

The high level of corruption of Russian bureaucrats is widely known, as well as the fact that local self government in Russia is underdeveloped, and regional budg ets suffer from significant deficit. In such situation the impossibility to guarantee fair Drafting of recommendations on the development of real estate and land market with the aim of taking into account the interests of the small and medium size business (The role of Chamber of Commerce of RF and territorial Chambers of Commerce). Final report of the Chamber of Commerce of RF and of the information and consulting center Business Tezaurus), 2006, p. 4546.

Section Institutional Problems land privatization is obvious. The privatization mechanism itself as stipulated by the legislator (even disregarding the local normative acts) is designed in such a way, that a huge number of various officials from different organizations need to agree on pri vatization decision in order to make it happen. Such mechanism practically makes privatization of land impossible for business entities. The most major and meaningful businesses, either controlled by the state or loyal to the current government, may still count on positive decision being made on land privatization under acceptable terms and conditions (e. g., by enacting new laws reducing the buy out price for such enti ties or by adjusting the land value in case the RF Government uses a reduction fac tor). But for smaller and medium size businesses the situation may soon become a catastrophe. Implementation of the land privatization scheme currently stipulated by the law may result in future concentration of land property, as well as redistribution of land ownership rights among a very limited circle of stakeholders.

Implementation of the following measures may significantly improve the situa tion with land privatization:

1. minimize engagement of bureaucrats and the level of their arbitrary decision making in the process of defining the value of the land plots and their borders, i.

e., the maximum possible regulation of the matter at the federal level;

2. eliminate (or bring down significantly) the buy out price for operational smaller and medium size businesses;

3. exclude all norms stipulating violation of private property rights, as well as land ownership and disposition rights, from the RF Land Code, City Planning Code and from other legal acts of the Russian Federation and of the entities of the federation;

4. enact the law on land reserve excluding the possibility of reserving privately owned land and of violation of the rights of owners and other parties exercising lawful use and possession of land; stipulating for setting up a transparent proc ess of putting state and municipal lands into a reserve category (prohibited for buying out);

5. enact legal norms assuring the lists of land plots included into Master Plans of the cities development are mandatory for publication in the media;

6. introduceg a system of measures to provide the regions with the incentives to delineate land ownership rights and to increase the privatized lands share;

7. introduce legal banning with regards to changing the order of distribution of land privatization revenues between the federal budget and the budgets of the RF entities for a long enough period;

8. introduce legal banning for the RF entities to escalate the buy out price for land plots occupied by business entities;

9. develop credit mechanism for business entities to buy out the land plots carry ing their buildings/facilities to assure annual interest rate at no more than 35%;

10. introduce the long term installments mechanism to pay for privatization of land plots;

11.provide for regional branches of the State Accounting Chamber to check the justification of cadastre valuation of lands in the regions, abolish laws and regu lations of the RF entities approving cadastre evaluation above the market price.

RUSSIAN ECONOMY IN trends and outlooks 5.4. Institutional Problems of Russian Capital Market 5.4.1. Russian Capital Market Dilemma In his famous novel The Notre Dame Cathedral Victor Hugo described the excruciation of Clod Frollo the priest balancing between the professional ethics principles and his lust towards Esmeralda the Gypsy. The Dilemma of Father Clod this is how one can figuratively describe the current attitude of global inves tors towards Russian capital market. It has been quite explicitly worded in one or the Wall Street Journal articles. According to western business community, internal opposition was aggressively suppressed Russia during the recent few years, the rights of foreign investors were rudely violated, and energy based blackmail was applied to some neighboring states. However, many of these western investors be lieve President Putin to be a hero merely because of one main thing: during 7 years of his presidency Russian capital market rallied impressively. Capitalization of Rus sian companies has grown from $74m in January 2000 to almost $1 trillion as of January 2007; RTS (Russian Trading Systems) index was demonstrating an aver age growth rate of 50% per annum105.

In general, the temptation of high profitability turns out to be stronger than concerns about economic liberties, investors rights and governments interfer ence with business. The story of Long Term Capital Management (LTCM) failure in 1998 is an evidence of how difficult it is to withstand the temptation of high profit ability of the emerging markets even for sophisticated institutional investors.LTCM one of the major hedging funds was established in 1994 by John Meri wether, former trading star in Salomon Brothers. Two very reputable people were among its directors Robert Merton and Myron Scholes, the Nobel Prize winners in economics of 1997. They are justly recognized as scholars whose conclusions and estimates allowed for creating a formalized market for derivates at the USA ex changes. LTCM was specializing at very risky commercial strategies for the emerg ing countries bonds markets. Thanks to this very positive publicity of its leadership and high profitability level (in 1997 LTCMs annual profitability constituted 40%), its assets value has reached $7.3 bln by 1997. However, the irony of fate was such that even such champion managers did not provide for maintaining the due pres ence of mind when performing risk evaluation for investment into Russian econ omy. The crisis of August 1998 turned out to be completely unexpected for them;

LTCM incurred the loss in the amount of half of its assets value, thus putting the USA at the edge of systemic financial crisis. The catastrophe was avoided only thanks to the immediate reaction of the US Federal Reserve System and of some major American financial institutions.

Chazan G. Investor Credit Putin As They Pile Up Profits. Hot Stock Makes Russian Leader a Hero With Money Managers. Wall Street Journal. January 22, 2007.

Dowd K. Too Big to Fail Long Term Capital Management and the Federal Reserve. CATO Insti tute briefing papers. September 23, 1999, 52.

Section Institutional Problems 5.4.2. Evaluation of Russian Capital Market Using CalPERS Pension Fund Methodology In order to fully understand the outcomes of Russian capital market 2006 per formance and the difficult choice for many foreign investors, lets try to evaluate it using some traditional methods of institutional foreign investors. For example, we can use the public materials of one of the major pension funds of the US Califor nia Public Employees Retirement System (CalPERS). CalPERS's methods for ana lyzing the feasibility of investment into emerging economies may be considered relevant due to several reasons. CalPERS is one of the most major and most con servative global investors, and its current assets value is over $225 bln. Its interest towards that or another emerging market automatically means some sort of a quality certification for that market proving it to be safe for other foreign inves tors. CalPERS methodology is public and is based on some competent research of emerging economies, ratings of civil liberties and freedom of press by Freedom House, global competitiveness index by World Economic Forum, shareholders and creditors rights guarantees assessment by Oxford Analytica, economic liberty in dex by The Heritage Foundation and Wall Street Journal, analytical materials by Wil shire Compass, stock exchanges and other sources of information. This methodol ogy has been in use for a number of years, it may as well be used as an indicator of global investors attitude towards that or another emerging market.

CalPERS methodology means assessing the possibility to invest into a spe cific emerging market based on two key factors country risks and risks inherent to a specific financial market. The maximum possible score is 3. In case a county achieves the score of 2.0 and more, it is automatically included into the list of coun tries permitted for investing CalPERS assets. In any other case the countrys finan cial market would be banned for investment for this pension fund.

Country risks are evaluated by CalPERS based on the following criteria:

Political stability the status of civil liberties, level of judicial system autonomy and political risk level;

Openness of information (availability and accessibility of data) including free dom of press rating, level of disclosure of monetary policy and budget data, quality of stock exchange listing and International Financial Reporting Stan dards (IFRS) application efficiency;

Labor Laws compliance with international standards of labor relations regulation ratification of ILO Convention, labor law compliance with ILO standards, effi ciency of law enforcement.

In other words, country risks stipulate evaluation of investment climate and in stitutions the foundation of financial markets.

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