Enterprise Housing Divestiture in the Russian Federation

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Raymond Struyk, Ph.D., is a senior fellow at the Urban Institute and has been in residence in Moscow for over four years as director of the Institute's USAID-funded Housing Sector Reform Program (HSRP). Sheila O'Leary, J.D., is a policy analyst in the International Activities Center of the Urban Institute. Ilona Dmitrieva, Ph.D., is a municipal finance expert working on the HSRP infrastructure finance project in Moscow.

A lengthier version of this report is available in O'Leary et al. (1995) (see references). This version is available on the Center for International Private Enterprise website, (www.cipe.org). Reprinted with permission from CIPE.

During the Soviet era enterprises provided a range of social services to enterprise employees, including housing, kindergartens, recreational facilities, and health care clinics. In the middle part of this century the push to industrialize and modernize Russia led to the creation of enterprises in otherwise underdeveloped parts of the country. Because the capacity of local government (where it existed) in these areas was often insufficient to provide social services for the increasing labor force, and in order to attract employees, these areas developed into "company towns" with the enterprise providing nearly all social infrastructure. Even as these underdeveloped regions developed into urban areas, enterprises, indirectly supported by government subsidies, continued to provide these services to attract and keep employees.

The attitude of the federal government and enterprises to the provision of social services to employees has changed dramatically in the past few years with the government's efforts to reorient the Russian economy along market principles. The major program of reform affecting enterprises has been privatization of production facilities and related assets and divestiture of the enterprise's social assets. Given the amount of enterprises' resources devoted to provision of social services and maintenance of social assets, the privatization program assumes that after divestiture, substantial resources will be rechannelled into the enterprise's production and management activities, increasing the overall efficiency and profitability of the enterprise.

This article deals with housing and related infrastructure facilities, the largest social asset possessed by enterprises. Beginning in the early 1990s the federal government has mandated that privatizing enterprises divest their housing stock to local authorities. To assist local governments in absorbing the financial burden of divestiture additional tax revenue and federal budget subsidies are to be made available to local governments. Considering the potential impact on the financial position of the enterprise and the assumed resultant benefits to macroeconomic conditions as the byproduct of more productive and efficient enterprises, the federal government, enterprises and the international donor community have been eager to implement the divestiture program. On the other hand, local governments, fearing the financial burden of divestiture on their already inadequate resources to maintain the current municipal housing stock, have been hesitant to accept the stock despite the financial assistance offered by the federal government.

For reasons explored in this article the pace and process of divestiture have not been as rapid or smooth as envisioned in federal law. Much of the information presented in this article is the result of research conducted with enterprise directors and local government officials in three Russian cities (Petrozavodsk, Ryazan, and Vladimir) during the fall of 1995. In all, 35 enterprises were interview—10 in Petrozavodsk, 12 in Ryazan and 13 in Vladimir. City officials from the Finance Committee and Committee on Housing and Communal Services were interviewed in all three cities. The objective of the research was to consider the financial and legal implications of divestiture from the perspective of the municipality and enterprises and to understand why the pace of divestiture has not been as rapid as many enterprise directors and policy makers would like.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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