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Too strict property purchase procedures for foreigners may scare off investors

November 20, 2013, 19:30 UTC+3 Zamyatina Tamara
© ITAR-TASS/Sergei Bobylev

MOSCOW, November 20. /ITAR-TASS/. - The Russian government is considering a regulatory approval system for foreigners acquiring residential and industrial property and land in the country. A draft law limiting real estate transactions for foreigners was put out by the Ministry of Economic Development for public discussion. This measure may concern not only individuals but also companies owning a controlling stake in foreign property. Experts fear that the proposed bill may deteriorate the investment climate in Russia, while at the same time it may help prevent the emergence of so-called ethnic enclaves.

“We will not tolerate the creation of closed ethnic enclaves inside Russia with their informal jurisdictions, which might live beyond the common political and cultural space of the country and defiantly ignore the generally accepted rules, norms and regulations,” Vladimir Putin said in a presidential message to the Russian Federation Council in December 2012.

This risk is real. In Moscow and other big cities of Russia migrants from former Soviet republics try to live densely, buying flats in same districts. Whole economic sectors, such as retail trade and vegetable stores, acquire a distinct ethnic flavor, thus creating tensions in society. In October, the murder of a young man by a citizen of Azerbaijan in Moscow's Biryulyovo district sparked a wave of protests against illegal migrants in the capital.

“The integration of migrants into Russian society is impossible, if they settle altogether in whole blocks and prefer to stew in their own juice,” Emil Pain, a senior lecturer at the Moscow Higher School of Economics, general director of the Centre for Ethno-Political Studies told Itar-Tass.

However, in contrast to many other countries of the world, the possession of property does not automatically give a person the right to receive Russian citizenship.

In order to acquire real estate in Russia, a foreign person or entity will have to get official written permission for a three-year term, during which the person or entity in question is entitled to affect the deal.

“Proposed measures to limit foreigners’ rights to purchase real estate in Russia will have a negative impact on the investment climate of the country, at least. Besides, this may harm big Russian companies participating in the process,” the deputy director of the Institute of Strategic Studies and Analysis, Aleksei Denisov, told Itar-Tass.

As far as ethnic enclaves are concerned, the expert believes there are other methods to deal with them: “Russian officials should have prevented the concentration of migrants from Soviet republics in certain districts. They seem, however, to do it on purpose, therefore provoking events, like protests in Biryulyovo, in several cities of the country.”

Sergey Dubinin, the chairman of the VTB bank's Supervisory Council, said in an interview to Itar-Tass he was bewildered by the public presentation of the bill: “The Economic Development Ministry’s task is to attract foreign investors and not to scare them away. It is essential to raise Russia’s rating in terms of investment attractiveness, as it has always been declared by the government. Besides, a number of investors are Russian companies in Cyprus, the Netherlands and the British Virgin Islands, which are offshore territories. It is clear that Russian money was taken abroad. But what’s the use of hindering its return to Russia?”

“Imposing restrictions on real property purchases by foreigners will in no way solve the problem of national enclaves, given that citizens of Chechnya and Dagestan are residents of Russia and certainly not foreigners. That is why I find the bill absolutely useless. I can hardly understand why such a professional economist as Minister of Economic Development Aleksei Ulyukaev did not object to the document,” Dubinin said.

The expert believes the law will give rise to new corruption schemes, if adopted: “Russia’s federal property management agency will have to create a new administrative machinery responsible for issuing permissions for foreigners to purchase real estate. It would be a potential bonanza for bribe-takers and a barrier to investors. The proposed law is unlikely to solve any problems. On the contrary it would just breed many others.