Staff Paper No. 394 - Abstract
Land Reform, Taxes, Privatization, Land Markets and the Feasibility of Mortgage-Backed Credit for Agriculture in Russia
Staff Paper No. 394, April 1996, 27p.
Land reform in Russia has begun, but progress is slow. Only 6.3% of the land was claimed by about 300,000 families, and their private farms are only 9.1% of all farms, as of 1994. The rest of 44 million families involved in Russian Agriculture still work state farms or in collectives, now called corporations or cooperatives. The managers still expect the state to subsidize them to cover losses. State banks are being privatized; knowing that the collectives default whenver things don't go well, the banks have little interest in financing farming.
The small private farms, averaging 43 hectares, have little access to credit. Farm supplies are hard to find, and many of the farms are unprofitable. The new farmers that have actually received legal titles know that a bill nearing approval in the Duma would limit their ability to sell, rent or mortgage their land, though President Yeltsin juist issued a decree that may give them that ability. Private farmers and collective managers often say they would be willing to mortgage land for long term credit, but doubt that the law would allow this; foreclosure seems inconceivable. The land market is far from transparent, and managers with idle land seem uninterested in selling some of it in order to buy inputs and farm with their own working capital.
The market for rural land in Russia is active but far from transparent. Land tax assessments and other official prices are far below real market values. Lenders thus have little help in estimating the price they would receive if they were to auction foreclosed land.
This paper suggests exploration of two cariants on mortgage finance. In one, the borrower would get an individual co-signer, who would provide liquid collateral by depositing negotiable securities or buying a certificate of deposit in the lending bank. The borrower would pay a fee to the co-signer, who would thus assume the credit risk.
The second variant mortgages the use of land, but not its ownership. Upon default, the borrower would be evicted but only for a period agreed when the loan was made. The land would be rented out for that time; the rent would cover the overdue loan payment. At the end of the lease, the owner would return to his land. since no one loses land forever, it would be politically wasier to implement; this model works in the Dominican Republic.
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