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Troubles in commercial immovable property privatization by small and medium sized companies in Russia

Since 90-s supporting small and medium sized companies (SMEs) is the one of the main topics of every Russian Government policy. So many talking about, however SMEs used to have only promises and real barriers instead of real supporting. Even the Act “About features of the state and municipal immovable property privatization by the small and medium businesses that have been leasing this immovable property, and amending some Acts of Russian Federation”, enacted on 22 July 2008 under No 159-FZ (the Act), the one has got rather ambiguities and because of that, it seems conspicuous by its sense absence.

According to the Act, SMEs who has been leasing the state or municipal immovable property for three and more years, have the preferential right to purchase of this property in course of it privatization, of course this rule is directed to supporting SMEs. After the Act came into force on 04 August 2008 some SMEs started applying to the municipals for acquisition of the right of ownership for leasing property. However the article 3 rules: SMEs have the preferential right to purchase of this property if the ones appropriate to the limit square that is defined by the local laws. The first operative part of the article 9 rules: if the limit square of the leasing immovable property is not defined by the local authorities till 01 January 2009, the Government sets its. Actually, the limit square of leasing immovable property, were set by the Government and regional authorities since 01 January 2009. Thus, SMEs couldn’t take leasing immovable property on the base of the Act after the one came into force in 2008. Therefore, in case the leasing immovable property term was expired till 01 January 2009, the SMEs didn’t get the preferential right to purchase of the leasing property.

But not just the first operative part of the article 9, the following operative parts of this article is much more ambiguous. First of all, the operative parts 2, 3 and 4 of the article 9 came into force since 01 January 2009. The operative part 3 of the article 9 (points 1, 2 and 3) rules the order in which the authorities must deal with the SME’s who applies for purchase of the property on basis of the preferential right. Particularly, the authorities must contract with regard to the market assessment making of the leasing immovable property. This contract must be made for two months since the SME’s application was received. But nothing is said about the term in which the assessment report must be made and received. In fact, according to the Act, authorities must only make the market assessment contract but must not secure the assessment making for certain term. Thus the issue about getting the assessment itself could have held in abeyance.

I mention as an example, a couple of facts from my practice. The family small sized company located in Kimry (Tver Oblast) applied to Kimry Municipal Committee of Property Management for purchase of leasing immovable property on 30 November 2009, the municipal authorities made the contract of the market assessment of the leasing immovable property on 29 December 2009. The term of the contract had been expired on 25 February 2010 but the assessment of the leasing immovable was not done because of the municipal authorities red-taping that is a blamed inaction in fact.
Moreover, the municipal authorities administered by the Mayor of Kimry municipality Mr. Litvinov do knowingly act for increasing the value of immovable property in relation the SME’s that have the preferential right to purchase the one. As a sequence, a couple of the SMEs have to bring lawsuits to the arbitration court and waste money and time in order to prove the property real value and misusing of the municipal authorities.

To sum up, the full applicability of the Act for purpose of real supporting of SMEs, the article 9 of the Act will have to be amended. And the rules in relation to SMEs’ preferential right to purchase the leasing immovable property must be administered on a fair, transparent and efficient basis, not by providing legal loopholes to the municipal authorities and actually by a clampdown on corruption. So being the representative of the small sized companies, I had applied to the President of Russian Federation for bringing the amendments in the Act for purpose of real supporting of SMEs’ and to curb municipal authorities’ misusing with the Act implementation. My appeal had been sent by the President Administration to the Administration of Tver oblast, according to the best Russian bureaucratic traditions. And I was responded that everything is OK.

Be that as it may, to support SMEs the authorities need less talking and more doing, be consistent and to encourage people who conscious about the problems created by arbitrariness and uncertainty. That’s what’s lacking. What’s more, in essence the abuse of power and improbity in the decision-making process on enforcement of the Act is corruptive form of behaviour which is indulged in by the local officials. So such forms of public officials’ behaviour remain sufficiently widespread to be regarded as a norm. In the same time, sound legal and ethical standards should be reflected in state and local administration in all its aspects.


Evgeny A. Nagornyy
April 2010

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Real Estate. Troubles in commercial immovable property privatization by small and medium sized companies in Russia