Global Risk Insights

The myth of fingerprints: Russia and Kazakhstan’s legacy of ghost assets

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The collapse of the Soviet Union gave rise to a vast archipelago of unclaimed man-made objects and land in Russia and beyond. Thousands upon thousands of roads, bridges, water pipes, gas pipes, power grids, cemeteries, farmland, and more have passed from state hands to no one in the last 26 years. These assets aren’t just lying around. They’re being used.

Without proprietors, inefficiencies, corruption, and extensive shadow economies pop up around them. China’s Belt and Road Initiative – packaged in part as a driver of development for Russia and Central Asia – dodges the myriad issues facing municipalities in the region as a result of the absence of legal responsibility for infrastructure in use. Building new roads and rails to transit goods does little to help the legal chaos surrounding ownerless assets, reiterating the extent to which China’s avowed virtue of non-interference in the domestic affairs’ of others handicaps the utility of projects ostensibly meant to encourage development.

In Russia, all trouble leads (back) to roads

Russia, it is said, has two troubles: roads and fools. Unfortunately, when in power the latter make it exceedingly difficult to build the former. Russia ranks 99th globally according to the World Bank’s LPI (Logistics Performance Index) with some of the world’s worst roads and it’s estimated that Russia’s infrastructure investment needs approach $1 trillion, around 75% of Russia’s GDP. Ownerless roads are an excellent prism through which to observe Russia’s development problems and are emblematic of the issues presented by ownerless infrastructure more generally.

The energy-driven economic resurgence Russia experienced during Putin’s first two terms did not support a road construction boom. Official figures from the Federal Road Agency Rosavtodor show that roughly 6,500 kilometers (km) of new roads were built in 2000. That figure dropped to 2,000 km of new roads built annually by 2005 and has not broken 3,500 km since. The Federal agency Rosstat records that Russia’s road network expanded by 504,000 km between 2003 and 2015. Only 30,300 km were new construction. The rest were ownerless roads legally registered by regional or municipal governments in search of more federal funding, revenues, or control over local economic activity.

The growth of the road network through the registration of roads without a legal proprietor parallels a significant growth in the country’s fleet of light and heavy vehicles. According to Rosstat’s 2016 statistical review, light vehicle ownership has increased almost 2.2 times over figures from 2000. Truck fleets grew around 41%. Greater car ownership means more wear on roads, roads often maintained by strained regional and municipal budgets, informal agreements, or else rural and suburban residents paying out of pocket themselves.

The costs of ‘ownerlessness’

For private property owners, a law was signed in 2014 to calculate property taxes off of cadastral values – the value of the land in the State’s property register. As a result, Russian courts have seen a swell in the number of cases disputing the value of land because inaccurate data regarding land value is grounds for a claim.

Regulations change every few years, hundreds of thousands of assets vanished off of balance sheets during Russia’s market transition, petty corruption can affect claims, and the excess of assets built in the Soviet period seriously complicate determining prices. Municipalities struggle to determine how much to collect, reducing revenues or allowing for arbitrary demands for more payment in taxes. This affects decisions about acquiring ownerless assets like roads.

One can imagine how local, regional, and national elites can exploit that in a market where there often is not enough data to conclusively set a market price, especially since the shadow economy makes up as much as 39.3% of Russia’s GDP. Russian regulations attempt to align valuations of state-registered real estate with market prices, but increasing the state’s role in establishing benchmarks can achieve contradictory ends. There may be an improvement in the transparency of pricing on paper, but it makes bribery or keeping objects off of state registers more attractive depending on the interests of a buyer or seller.

It also potentially hinders the megaprojects Russia hopes for in negotiations with China since cost calculations have to account for land acquisition in remote, sparsely settled areas with considerable quantities of ownerless assets. These issues pertain to road, rail, and pipeline projects, forming part of the chain of corruption that Russian firms like Gazprom and Stroygazmontazh use to inflate the value of tenders they wish to deal to themselves.

Large projects in Russia are generally a means of distributing state wealth to oligarchs whose firms make money on costs, not the profitability of what’s being built. Once built, however, markets can be captured or affected through regulations adopted in Moscow in an ad hoc fashion, often in the guise of creating federal revenues to prop up budgets. The Platon toll system on Federal roads is a prime example.

As a result, prices can be lowballed with the right connections or else exaggerated to justify larger loans for state firms depending on whether the state is providing compensation or a private entity is selling the asset. Both construction of new roads and the incorporation of existing roads into legal registries with all the municipal, regional, and federal implications for budgets and responsibility that entails take a hit.

Incorporating ownerless roads into governmental or private proprietorship can affect functioning shadow economies without necessarily meeting needs, entrenching the interest of those using them to fight proprietorship and local authorities stuck weighing costs and benefits. These issues pertain to everything imaginable, from gas distribution pipelines to power grids, water pipes to cemeteries, and more.

Not that all that glitters is Silk Road

Though the statistics are less forthcoming, these issues pertain to Kazakhstan as well. Take roads as an exemplary case. State figures estimate that Kazakhstan currently has 128,000 kilometers of roads, of which 85,600 kilometers are public use and 42,400 kilometers are private roads for industrial enterprises, farms, mines, and forests. Kazakhstan scores higher than Russia on the LPI – 77th – but has received considerable help from multilateral institutions like the World Bank, Asian Development Bank, and the European Bank for Reconstruction and Development in conjunction with connectivity initiatives predating the appearance of China’s Belt and Road Initiative.

All the same, Kazakhstan ranked 117th for road quality at the World Economic Forum in 2014, dropping from the 98th place it took in 2006. As of 2014, the Ministry of Transport and Communications found that 33% of all roads were in unsatisfactory condition. While multilateral projects for road construction have benefited local communities and brought in civil society actors into the picture, they are unable to address issues plaguing the transport sector in Kazakhstan, some of which pertain to ownerlessness.

Figures from the Ministry of Transport and Communications state that Kazakhstan has 23,044 km of Federal roads, of which 12,301 km were international routes. The other 62,636 km of public use roads are local. Notably, the most recent development program unveiled in response to the collapse in oil prices – Nurly Zhol – only calls for repairs on 7,000 km of road and several landmark projects included in the initiative are functionally grandfathered in from projects initiated by the World Bank or Asian Development Bank. Though Kazakhstan’s budgetary situation has stabilized, part of Astana’s deficit reduction plans call for pulling back on stimulus spending from Nurly Zhol along with tax reform. But tax reform cannot happen without land reform, a continual thorn in the side of property rights and other bases for the development of infrastructure.

How much land does a ‘Stan need?

Land reform is intimately connected to the general legal concept of ownership or proprietorship in Kazakhstan. It’s a pressing issue, one that has inspired protests and fears of foreign ownership. Kazakhstan’s Land Code of 2003 legalized private property for the first time, hence the need for further amendments that have thus far has not led to consensus. About 36% of Kazakhstan’s territory – 98.6 million hectares – is arable land, yet only 1.2 million hectares as of 2015 had clear legal owners. In place of ownership, land is leased.

Last July, Kazakhstan began holding auctions for farmers to buy lands they were currently leasing at as much as a 50% discount. But the sale of land was to be accompanied by an increase in taxes that would bankrupt farmers with low profit margins. The end result is an ad hoc approach that seems to be protecting long-term leases while allowing for auctions on a much smaller scale.

In the past, the methodology to determine land values for sales, leases, or contracts, and taxes included a legal procedure through the courts and allowed for an independent valuation. The independent valuation was crucial, given how difficult it is to assess market prices with hundreds of thousands of hectares going unused or sliding back into state hands after going unclaimed for several decades. The independent valuation was an opening to bribe officials to overrate land values to receive greater compensation from the state since the vast majority of land deals involve transfers of land under lease from the state. Similarly to Russia, statutes were adopted stipulating that these valuations should not be higher than the market price. Instead of providing real reform, those involved in land deals receive much less in compensation, though citizens are able to achieve some redress through legal mechanisms.

These types of legal problems spillover into compensation for ‘urban renewal’ or development in towns and cities as well as legacies of dams, irrigation systems, power grids, and more built in the Soviet period. For example, farmers leasing land from the state are fined or lose land if its productivity declines from when they first leased it. Often enough, the Soviet-era irrigation systems, dams, or water supplies have dried up without the state’s recognition, punishing farmers for something no fault of their own.

More broadly, municipalities and regional governments struggle to fund public projects without effective means to value land, placing more stress on residents paying out of pocket, coming up with solutions informally, or else relying more on financial support from the Federal government at a time when the budget is strained.

The bigger picture

The power gap between federal centers and subnational governments in many of these countries is intimately connected to these problems as well. For example, the number of ‘donor regions’ Russia – regions that can finance services without requiring federal subsidies – dropped from 25 in 2006 to 14 as of 2015. Down from its 80% high, these 14 regions now provide about 60% of all regional tax revenues, a result of conscious efforts to centralize Mineral Extraction Tax (MAT) revenue and other rents in Moscow’s hands. Of these 14, four account for a majority of the money, including Moscow itself. In exchange, Moscow uses its greater budgetary control to dispense favors and buy loyalty. If a region want to incorporate, build, or repair roads, they increasingly need federal money to do so.

As of 2013 in Kazakhstan, only three regions of the country’s 16 received less than half of their budgets through money transferred from Astana. This structure parallels Russia. Oil and gas revenues for the state grew from $2.5 billion in 2005 to nearly $30 billion by 2014 alongside an increasing array of subsidies or support from the capitol. The collapse in oil prices forced Astana to spend the state’s oil fund – Russia did the same – to prop up budgets while cuts and reforms were made. Kazinform has reported that it costs 300 million tenge (around $910,000) to build one kilometer of road in Kazakhstan. Given the size of the country and population, this poses a disproportionate burden on less populated, rural authorities and communities that rely on money from Astana to provide services.

China benefits greatly from the centralization of budgetary power in these countries’ capitals for its purposes. China can negotiate desired infrastructure deals with national elites who largely control state financing and can override competing interests for things like the price of land, local concerns over the costs imposed, or legal responsibility for assets. National projects will provide benefits. A national highway or toll road will have some positive effects. But as long as the profits are directed towards nationally owned companies and any relevant tolls or taxes are collected nationally, it won’t resolve the problem localities face in meeting their own infrastructure needs.

This requires legal reforms and capacity-building for civil society and civic institutions, not exactly of much interest to Beijing. Growth in the short-term may give way to more unrest when the benefits are not distributed fairly and regions lag behind cities. But that’s probably all the same to China, no matter the proud rhetoric of non-interference in domestic affairs it cloaks its interests in. A community of common destiny does not look so pretty at the ground level across much of Russia and Central Asia.