OVERVIEW

OF THE

SOVIET HOUSING SECTOR

December 1991
 OVERVIEW
OF THE
SOVIET HOUSING SECTOR

Prepared for

Office of Housing and Urban Programs

AID

Prapared by

Michael Alexeev
Lee Baker
and
Matthew Westfall
PADCO, INC

AID Contract No. DHR-1008-C-00-0108-00

RFS #98

December 1991
 OVERVIEW OF THE SOVIET HOUSING SECTOR

TABLE OF CONTENTS

1 INTRODUCTION AND EXECUTIVE SUMMARY ........................ 1

1.1 Introduction ................................................ 1
1.2 Executive Summary ........................................... 2
1.2.1 Existing Housing Stock .................................. 2
1.2.2 Institutional Framework for Housing Production and Management .. 3
1.2.3 Housing Finance and Financial System ....................... 7
1.2.4 The Construction and Building Materials Industry .............. 10
1.2.5 Private Sector Participation in Housing Production ............. 14
1.2.6 The Informal Sector .................................... 15
1.2.7 Framework for Housing Reform and Priority Areas for AID Technical
Assistance ........................................... 17

2 HISTORICAL BACKGROUND ..................................... 18

2.1 The Bolshevik Revolution ..................................... 18
2.2 The Five Year Economic Plans (FYPs) ........................... 20
2.3 The Khrushchev Years ....................................... 20
2.4 The Brezhnev Years ard Beyond ............................... 21

3 CURRENT CONDITIONS AND RECENT REFORMS .................... 23

3.1 Recent Reforms ............................................ 23
3.2 Property Rights and Privatization ............................... 24

4 THE EXISTING HOUSING STOCK ................................. 27

4.1 Distribution of Housing Space ................................. 28
4.2 Age Composition and Retirement Rates of Soviet Housing ............ 31
4.3 Access to Infrastructure ...................................... 33
4.4 Volumes and Types of Housing Construction ....................... 35
4.5 Mechanisms and Types of Tenure ............................... 40
4.5.1 State-Owned Housing ................................... 40
4.5.2 Cooperative Housing ................................... 42
4.5.3 Pri-'ately Owned Housing ................................ 43
4.5.4 Private Rental Housing ................................. 43
4.5.5 Countryside Houses (Dachas) ............................. 44
 Table of Contents, continued

5 INSTITUTIONAL FRAMEWORK FOR HOUSING PRODUCTION

AND MANAGEMENT ........................................... 45
5.1 The Overall Planning Process for State Housing Construction .......... 45
5.2 Regulatory Framework for the Planning of the Soviet Cities ........... 48
5.3 Design of Housing and Control of Standards ........................ 49
5.4 Land Use Practices ......................................... 49
5.5 Infrastructure and Supporting Facilities ........................... 51
5.6 Management of Housing ...................................... 51
5.7 The System of Housing Allocation .............................. 52
5.7.1 State-Owned Housing ................................... 52
5.7.2 Cooperative Housing ................................... 56
5.7.3 Privately-Owned Housing ................................ 57
5.7.4 System of Residence Permits (Propiska) ..................... 57

6 HOUSING FINANCE AND FINANCIAL SYSTEMS ...................... 59

6.1 Direct Investments from the State Budget ......................... 59
6.2 Enterprise Funds ........................................... 62
6.3 Housing Cooperatives ........................................ 63
6.4 Individual Private Construction ................................. 64
6.5 COsL Recovery Mechanisms for the Maintenance of State-Owned Housing . 65
6.6 Major Repairs of Housing ..................................... 67

7 THE CONSTRUCTION AND BUILDING MATERIALS INDUSTRY ......... 69

7.1 Structure of the State-Owned Construction Industry .................. 70
7.2 Current Practices of Constructien Contracting ...................... 73
7.3 The System of Rewards in the Construction Industry ................. 74
7.4 Quality of Workmanship ...................................... 75
7.5 Constructicn Costs .......................................... 75
7.6 The Building Materials Industry ................................ 76

8 PRIVATE SECTOR PARTICIPATION IN HOUSING PRODUCTION ........ 80

8.1 Construction Cooperatives .................................... 81
8.2 Leaseholds ................................................ 83
8.3 Commercial Banks .......................................... 84
8.4 Commodity Exchanges ....................................... .85
8.5 International Joint Ventures ................................... 86
8.5.1 Construction Projects ................................... 86
8.5.2 Production of Construction Materials ....................... 88
8.5.3 Other Joint Ventures ................................... 88

9 THE .NFORMAL SECTOR ........................................ 90

9.1 Housing Construction and Repairs .............................. 90
9.2 Housing Allocation .......................................... 91

-iv­
 Table of Contents, continued

10 FRAMEWORK FOR HOUSING REFORM AND TOPICS FOR

FURTHER INVESTIGATION ...................................... 94
10.1 Framework for Housing Reform ................................ 94
10.1.1 Property Rights and Privatization .......................... 94
10.1.2 Rents, Prices and Subsidies .............................. 95
10.1.3 Housing Finance ...................................... 95
10.1.4 Housing Production .................................... 96
10.2 Topics for Further Investigation ................................ 97

ANNEX A. List of Contacts

BIBLIOGRAPHY

List of Tables
Table 1. Residential Housing Stock ................................... 28
Table 2. Distribution of Households by the Size of Occupied Living Space ...... 29
Table 3. Per Capita Housing Stock by Republic - 1989 ..................... 31
Table 4. Distribution of Housing by Age and Outside Wall Material .......... 32
Table 5. Dilapidated and Condemned Housing Stock ...................... 34
Table 6. Availability of Utilities and Other Amenities ..................... 36
Table 7. Housing Construction by Republic (square meters of housing space) .... 37
Table 8. Housing Construction by Republic (thousand housing units) .......... 38
Table 9. Housing Construction per 10,000 Population by Republic ............. 39
Table 10. Distribution of State-Financed Housing by Wall Material ............ 39
Table 11. Forms of Ownership of Housing Stock, 1990 ...................... 40
Table 12. Distribution of Families by Type of Housing ...................... 42
Table 13. Changes in Housing Conditions and Waiting Lists in Urban Areas by Republics,
1989 ................................................... 54
Table 14. Relationship Between Housing Space and Income - 1989 ............ 55
Table 15. Capital Investment in Housing Construction .............. 59
Table 16. Housing Construction by Source of Financing ..................... 60
Table 17. State Investment in Housing by Selected Economic Sectors ........... 62
Table 18. Income and Expenditures of Housing Maintenance Organizations of Local
Councils ................................................ 67
Table 19. Income and Expenditures of Housing Maintenance Organizations of Financially
Autonomous (Kiozraschet)Enterprises .......................... 68
Table 29. Production of Constraction Materials ........................... 78
Table 21. Production of Cement by Republic ............................. 79
Table 22. Prices on "Alisa" Exchange in Early May 1991 ..................... 86
Table 23. Black Market Prices for Construction Materials, 1990 ................ 92

-V_
 4

OVERVIEW OF THE SOVIET HOUSING SECTOR

1 INTRODUCTION AND EXECUTIVE SUMMARY

1.1 Introduction

The Soviet Union finds itself at a historic juncture in its development. The aborted
August 1991 coup dramatically enhanced the possibility and acceptability of reforming its
centrally planned economies, and has invigorated the process of economic transformation.
For the housing sector, long a source of major social, economic and political problems, the
ramifications are great. The following "desk top" study, a description and analysis of the
Soviet housing sector, will facilitate AID's long-range objectives of providing assistance, in
concert with other bilateral and multilateral donors, in support of durable democratic insti­
tutions and the transformation to market-oriented systems.

The Soviet housing sector embodies many of the contradictions that have emerged due
to economic restructuring as entrenched ideology and tra litions clash with new ideas and
change. Turf battles are presently being waged in cir councils at the municipal level
throughout the country, as well as in the parliaments of the independence minded republics.
As each strives to achieve consensus over the direction, timing, and pace of new initiatives,
it is clear the inexorable process of democratization is well under way.

This study describes and evaluates the various components of the housing sector and
related infrastructure, analyzes recent reforms and enabling legislation, identifies the most
pressing obstacles to reform, and concludes with suggestions on priority areas for technical
assistance. At the request of the Office of Housing and Urban Programs, an outlinie of this
technical assistance program is provided under separate cover. Finally, an extensive biblio­
graphy and a list of individuals contacted is provided in the annexes.

It should be noted that events in the Soviet Union are unfolding rapidly, and in many
areas documentation is either obsolete or non-existent. In the USSR, numerous actors at the
republic and local levels are grappling with the challenges of transformation, while at the
same time debating opticns for independence and autonomy. In this changing environment,
it is difficult to be definitive. In the newly independent Baltic republics, for example, the
issues of privatization, ownership of land, and housing are currently under discussion in
parliament, while the Soviet republics, such as the Ukraine and Byelorussia, though still
attached to the crumbling Union, are focused quite seriously on upcoming referendums on
full independence. Indeed, it is presumptuous at this point in time to refer to the region as
 -2­

thc Union of Soviet Socialist Republics, or USSR, which we use here loosely for the sake
of convenience.

Finally, an important caveat is included with respect to rates of exchange between US

dollars and Soviet rubles. While an exchange rate of US $1 to 6 rubles, currently the
commercial rate, is used in this study, these numbers should be treated with caution.
Multiple exchange rates are in effect, each vastly different by orders of magnitude. Other
rates available include the tourist rate of US $1 to 47 rubles, up from a previous rate of US
$1 to 32 rubles, and the black market exchange rate, which currently stands at US $1 to 50­
60 rubles. Additionally, rapidly accelerating inflation has made monetary aggregates less
meaningful in the current circumstances. Recent estimates of inflation reach several hundred
percent per year.

1.2 Executive Summary

This Executive Summary highlights the principal findings and conclusion of a "desk top"
study of the Soviet housing sector. Prior to this discussion, however, the present section
updates the reader regarding tle most recent reforms that have occurred in the sector. Many
of these reforms, some as recent as the failed August 1991 coup attempt, have enormous
potential for supporting efforts to transform the Soviet housing sector into a market-oriented
system. Recent reforms include:
* Restrictions on private ownership of property have been greatly reduced or relaxed, while
the system of residence permits has been abolished;
" The investment process for housing finance has been increasingly decentralized, which
has eiiormous implications for municipalities involved in the delivery of housing, as well
as potential homeowners;
" The 1988 decree to accelerate the development of private housing construction offers
increased opportunities for both urban and rural households to build new housing or
improve their existing housing conditions;
* Privatization of state-owned housing I.as already begun-37,000, 211,000, and 127,000 units
werc sold in 1989, 1990, and the first six months of 1991, respectively.

1.2.1 Existing Housing Stock

The following points summarize the key indicators of the Soviet housing stock.
* Performance of the Soviet housing industry has historically been evaluated and rewarded
by government in terms of space provided and the number of units produced;
" Eighty-five percent of approximately 90 million Soviet households resided in "self­
contained" versus communal housing units (1990);
 -3­

* Ratio of households to housing units has increased since 1980, and currently stands at
1.17 households per housing unit;
• Almost 33% of Soviet households do not enjoy even the modest all-union "sanitary norm"
of 9 meters per person;
• While more than 70% of the Soviet housing stock has been erected since 1960, the rate
of housing retirement has been growing over the last five years due to the particularly
poor quality of housing built in the late 1950's and early 1960's;
" Almost 2% of the housing stock was considered dilapidated and in need of emergency
repair in 1989;
" More than 55% of the housing stock does not have access to a full range of public ser­
vices (i.e., sewerage, potable water, central heating and hot water); this figure is close to
90% in rural areas;
" Housing space pr.duced in 1989 was almost 23% greater than in 1980; however, 1990
production decreased to 1.8 million units, representing a decline of 340,000 units
compared to 1989 and the lowest level of output since 1986;
" Large panel construction (LPC) totaled 50-55% of all state-financed housing in urban
areas during the 1980's;
" Three major types of housing ownership in the USSR (1990) are state, cooperative and
individual (private); state ownership dominates in thie cities (72.3%), while private hous­
ing is prevalent in rural areas (69.8%); cooperative housing constitutes a relatively small
share of the total (5.7% urban versus 0.2% rural);
* Although mandated responsibility in 1957, municipalkies controlled less than half of
urban and just over 5% of rural state-owned housing in 1990 (ministries and enterprises
have maintained control of the rest);
* Approximately 8 million people, often including entire families, lived in enterprise- and
ministry-run worker hostels in 1989; and
* Until recently, construction of private housing was prohibited in cities of over 100,000.

1.2.2 Institutional Framework for Housing Production and Management

The allocation of functions and responsibilities within the Sovirt housing sector among
the union, republic ,and local levels of government is in a state of flux. The importance of
the union government, particularly the union ministries, has been rapidly declining since
early 1990. Even prior to the failed August 1991 coup attempt, the majority of policy and
planning decision-making had passed to the republic level of government.

Currently, most urban housing is still designed and built by state design bureaus and
construction enterprises, respectively. Until recently, the major part of financial resources
for construction has been appropriated by the central government, while thea -2tualcontract­
 -4­

ing and oversight of housing construction, as well as management of the existing housing,
has remained the responsibility of the local entities, including local government and state
entt rprises. The executive committees of the local councils are playing an ever increasingly
important role with respect to the provision of housing.

This chapter attempts to trace the evolution in the allocation of housing sector
responsibilities among the three levels of government in the areas of policy and plan
formulation, financing, regulatory framework, production, maintenance and cost recovery.

1.2.2.1 The Overall Planning Process for State Housing Const ruction

Until the demise of the union ministries, all state housing construction took place in
accordance with the plans of economic and social development of the USSR. State housing
construction was carried out directly through centralized allocations of investment resources,
and indirectly through the internal funds 3f the state enterprises. With respect to housing,
priority in centralized investment allocations was given to the construction of workers' hous­
ing for the new enterprises and in newly developing regions.

1.2.2.2 Regulatory Framework for the Planning of the Soviet Cities

Zoning of Soviet cities takes place within the framework of the so-called General Plan
of the City which is formulated by the municipal authorities. The General Plan outlines the
directions of a city's long-term development including the approximate volume of new con­
struction requirements.

Planning for the development of Soviet cities, and the private sector's potential role in
that development, is viewed problematically for the following reasons:
" no coherent guidelines for city development exist in the USSR;
* cities do not have adequate staff to elaborate nor rev'ew development plans and often
contract with special agencies in Moscow or St. Petersburg, which have almost no know­
ledge of local circumstances;
• adequate demographic and economic data are usually not available to city planners nor
construction enterprises;
* completed plans are often not implemented due to the municipalities' lack of investment
resources and political authority over the industrial enterprises and other agencies;
* enterprises and agencies contract for housing construction according to their own
priorities often disregarding the General Plan and the existing city infrastructure;
* acute shortage of housing and lack of resources for resettlement prevent the cities from
tearing down existing obsolete dwellings, thereby pushing new urban development onto
the periphery.
 -5­

1.2.2.3 Design of Housing and Control of Standards

The design of housing is usually performed by central design bureaus subordinate to the
State Committee on Architecture. In larger cities such as Moscow, the entire construction
complex (design and construction) may be subordinate to the city council. Often there is no
competition in design and little consideration given to alternative designs for projects.
Cooperative and private consumers of housing, like municipal authorities and state-owned
enterprises, usually use standardized housing designs. In the late 1980's, the government per­
mitted the formation of housing design cooperatives, but little information is currently
available on their activities.

1.2.2.4 Land Use Practices

Land use practices in Soviet cities have not been motivated by a desire to allocate land
to its best and most cost-effective use. Land has been treated as a free commodity with no
inherently different values for central versus peripheral locations. Thus one finds obsolete
factories with extensive storage yards near the center of most towns, occupying land that
would be better used for housing or service functions. Opportunities for more intensive and
rational land use are foregone. As a result, vast tracts of prime urban land are wastefully
tied up with inefficient and inappropriate land uses.

The above scenario underscores the lack of functioning land markets. At this point, Soviet
cities are beginning to address the absence of land markets. According to the existing law,
all land in the USSR is a national property. In other words, the law still does not permit full
private ownership of land. The law on land reform passed in late 1990 allowed private
farmers a limited ownership of land (farmers can "own" land but cannot resell it to another
individual). Further land legislation is being prepared in the Russian parliament, but at
present it is not clear what degree of private ownership will be permitted. While significant
resistance to allowing relatively free trade in land by individuals persists, the recognition of
the necessity of land markets is growing. Without such systems in place, land cannot be
allocated or developed efficiently.

Full private ownership of land is not necessarily the only solution. Some suggest that
municipalities make use of leaseholds and charge rents on a percentage of the current
market value. This has the advantage over sales by permitting the municipality to correct
initial errors in valuation that may frequently occur, given the lack of information on land
values. A forthcoming Russian Republic decree on housing construction apparently will not
address land ownership issues.
 -6­

1.2.2.5 Infrastructure and Supporting Facilities

The construction and maintenance of infrastructure (utilities, utility lines, access roads,
public transportation) is the responsibility of either local authorities or enterprises. Utilities
and other infrastructure for housing construction cooperative (HCC) projects are the respon­
sibility of the city councils. Both city councils and state enterprises, however, tend to neglect
the development of infrastructure for housing. Construction of actual housing space has his­
torically been considered more important than the adequate provision of supporting infra­
structure.

1.2.2.6 Management of Housing

Management of state-owned residential housing is performed by either the local executive

committee of the local council or by the enterprise which financed the construction. Coope­
ratives and private individuals manage their own housing. Utilities, however, are usually
under the control of the city council. Enterprises and organizations which own housing often
manage some of the utilities servicing the housing under their control.

1.2.2.7 The System of Housing Allocation

The following sections describe the allocation process for state-owned, cooperative and
privately-owned housing.

1.2.2.7.1 State-Owned Housing

State-owned housing is highly subsidized by the Soviet state. High subsidies combined
with the relatively insufficient size of the housing stock result in large and persistent excess
demand for state-owned housing. This necessitates the employment of formal, non-price ra­
tioning mechanisms such as waiting lists. The waiting lists are managed by the executive
committee of the city or district council, in the case of municipal housing, and by the enter­
prises in the case of departmental housing.

The officially proclaimed criteria for placement on a waiting list are based mainly on the
"genuine need" for improvement in a household's living conditions. Normally,
the "genuine
need" applies when a household has access to less than 7 square meters per person. The
limit is higher for the residents of communal apartments. The occupants of dilapidated hous­
ing are also eligible to join a waiting list. Some categories of citizens such as war veterans,
the handicapped, "heroes of socialist labor" and the like have privileges allowing them to by­
pass the regular waiting list (they form a list of their own). Criteria for being put on a wait­
ing Ust fo- housing differ among the individual cities and republics.
 -7­

1.2.2.7.2 Cooperative Housing

To a large extent cooperative housing is supposcd to be allocated on the basis of the

ability to pay. The prices of cooperative housing, however, are based on official wholesale
construction costs and do not represent true market clearing prices. In addition, the state
subsidizes the construction of cooperative housing through low interest rate loans. This
results in queuing for cooperative housing as well. As of January 1, 1988 the number of
people on cooperative waiting lists reached 1.5 million. Many of these people (36.5% in the
Russian republic alone) were also on waiting lists for state-owned housing. At the present
rate of cooperative housing construction, it may take up to ten years to provide cooperative
housing for every person waiting for it. Moreover, households must meet certain "need"
criteria to qualify for cooperative housing, which implies that v.hen such requirements are
lifted, as is proposed, more people are going to join the queue.

1.2.2.7.3 Privately-Owned Housing

The allocation of private housing normally takes place on a market or second economy
basis. The primary non-market element impacting the allocation of privately-owned housing
concerns the allotment of building plots. The priority for building plots is given to those on
waiting lists for housing improvement, especially employees with distinguished work records,
retirees, war veterans, and the physically handicapped. Preference is given to those house­
holds which transfer their state-owned accommodations to the local council in exchange for
a privately-owned house. Generally, though, the allocation ofprivate housing is based mostly
on the ability to pay. Obstacles to the private production of housing include the lack of
access to construction materials and skilled labor, and poor supporting infrastructure.

1.2.3 Housing Finance and Financial System

Most housing construction in the USSR is still financed by the state. In 1989 the direct
investment by both the state and state enterprises comprised 77% of the total investment
for housing. Public organizations such as trade unions, housing cooperatives, individuals, and
collective farms provided the balance.

Since the beginning of 1991 the Soviet government has tried to limit the role of central
budget financing to only those projects of special importance for the entire economy. To this
end, the government created the Fund for Economic Stabilization which was supposed to
be the only source of centralized investment financing.
 -8­

1.2.3.1 Direct Investments from the State Budget

Direct investments from the state (i.e., union) budget have been the primary source for
housing construction in the past. These investments, in turn, were managed by the city coun­
cils or state enterprises. The state disbursed financial resources to the councils which con­
tracted for construction with builders. Historically, central budget allocations have also gone
to enterprises and organizations which may or may not supplement these appropriations with
internally generated funds.

The breakup of the union ministries has had a dramatic impact on the Soviet housing
financing system. The recent virtual disintegration of the Soviet Union has all but eliminated
traditional central budget sources with the exception of monetary emission and some foreign
trade income. For this reason, centralized investments will no longer play a significant role
in housing construction. It must be mentioned that the role of the central budget in housing
financing has been rapidly declining since early 1990. Even prior to the August 1991 coup
attempt the bulk of state financing had been channelled through budgets of state-owned
enterprises. Nonetheless, some centralized investments in housing remained until very
recently. Presumably, at the present time the functions which used to be performed by the
central government budget have shifted to the republic budgets. Since the republic govern­
ments will no longer transfer resources (taxes and enterprise profits) to the union govern­
ment, they cannot expect to receive sizeable centralized budget allocations for housing from
the center anymore.

Local government has also received a greater authority to introduce local taxes and to
determine the patterns of spending of the resources available to them. The cities also have
acquired the power to influence the housing plans of the enterprises located on their terri­
tory. Finally, recent republic decrees authorize municipal authorities to receive a major
portion of the proceeds from privatization of state-owned housing. In most cities these pro­
ceeds are supposed to be spent primarily on construction of new state-owned housing.

1.2.3.2 Enterprise Funds

State-owned enterprises and organizations finance their housing construction from two
sources-directly from the state budget and from the funds accumulated out of their retained
revenues. As long as these enterprises are state-owned their internal funds should be consid­
ered as part of overall state financing. Nonetheless, with the increasing autonomy of Soviet
enterprises and organizations, and particularly the prospect of their privatization, the imme­
diate source of financing acquires special importance.

Recently, the most important dev.-lopment in the pattern of investment financing in the
co:ntry as a whole has been the decentralization of the investment process. With respect
to .cate financing of housing construction this implies a greater emphasis on enterprise funds
 -9­

at the expense of central investment allocations. While 52% of all housing space in 1988 was
financed directly from the state budget, only 31% was targeted to 12ceive centralized financ­
ing in 1990. Durirg this same period the share of housing financed from the funds of state
enterprises increased from 17% to 36%. The ramifications of this shift in financing indicate
a g'reater role for local constituents, such as enterprise workers and consumers in general,
in setting investment pricrities.

1.2.3.3 Housing Cooperatives

Historically, cooperatives have received little funding, given the higher priority placed on
other housing investment. Lately, a significant role in solving the housing shortage has been
assigned to the HCC's, though in 1989 cooperative construction still accounted for only 6.1%
of the total construction of hjusing in the USSR.

1.2.3.4 Individual Private Construction

Private housing construction takes place on a much smaller scale than the state-owned
housing construction, and accounted for only 18.4% of all housing construction in 1989.

The regulations on the financing of individual housing construction were significantly

changed by the Soviet government in a February 11, 1988 decree entitled "On the Measures
to Accelerate the Development of Individual Housing Construction." According to this
decree, urban residents can obtain up to 20,000 rubles for 25 years for a new house and up
to 3,000 rubies for 10 years for improvements and reconstruction. In both cases the
payments start in the third year. Urban residents can also obtain up to 20,000 rubles for 25
years for the purchase of an existing home. Here payments start in one year. The interest
rate is 2% annually for rural residents and 3% for urban dwellers. Physically handicapped
individuals, veterans of World War II, and survivors of military personnel killed in action
pay no interest on these loans. No independent confirmation was possible regarding the
extent to which loans to private individuals are being made in urban areas.

1.2.3.5 Cost Recovery Mechanisms for the Maintenance of State-Owned Housing

The Soviet system of rents in state-owned housing has remained essentially the same
since 1928. In those days rents were differentiated according to household income, but wage
inflation over time has eliminated most rent variations. The basic monthly rent is either 13.2
kopeks or 16.5 kopeks per sq. meter (10.76 sq. ft.), depending on the size of the city (100
kopeks equal one ruble). Rentals do not take into account locaticn inside the city or the
quality of housing. The only exception is the rent charged for occupancy in high-rises, which
is set at 30 kopeks per square meter (US $0.05). Rent is charged only for "living space,"
which excludes kitchens, bathrooms, and other auxiliary areas. Households which have more
than 12 square meters per person (plus 6 square meters per family) have to pay triple the
 -10­

usual rate for the excess space. The average monthly rent per square meter reached 1.59
rubles in 1988.

1.2.4 The Construction and Building Materials Industry

Since the first five-year plan in the late 1920's, the Soviet economy, by international stan­
dards, has been characterized by an unusually high rate of investment in tht housing sector.
Traditionally the share of -onstructionand installation expenditures in Soviet capital invest­
ments has exceeded 50%. Naturally, the Soviets have had to create a large construction in­
dustry in order io support this investment program.

Since 1990, however, the volume of investments in the USSR in the housing sector has
been declining and the performance of the constnction industry has deteriorated. This
decline is the end result of an industry that is characterized by large, monopolistic state­
owned enterprises, an inefficient reward system, obsolete equipment, shortages of skilled
labor and little technological innovation. Projects typically suffer long delays and are of poor
quality, with a large number left uInfinished due to the fragmentation of resources among
too many projects. Together with the entire Soviet economy, however, the construction in­
dustry is undergoing a process of structural reforms aimed at helping the industry overcome
these problems and improve performance.

The main trends in the Soviet construction industry are the increasing decentralization
of investment, the decline of the state-owned construction enterprises, and the growth of the
cooperative sector. In recent years, the construction industry has experienced a proliferation
of institutional and administrative changes and the adoption or numerous new laws and reg­
ulations designed to make the industry more market-oriented.

Housing, as a sub-sector of constr':ction, accounted for 16.5% of all capital investments

in 1989. The housing industry shares all the problems of the construction industry in general.
It should be emphasized, however, that the housing industry stands to be the primary benefi­
ciary of the construction industry's trend toward decentralization, the investment shift toward
the non-productive sector, and the introduction of market-oriented reforms.

1.2.4.1 Structure of the State-Owned Construction Industry

Traditionally, the administrative structure of construction in the USSR has been quite
complicated and has historically experienced less stability than most cther sectors of the
economy. Until recently, the Soviet Union's construction industry was v;erseen by a supra
construction ministry or committee (GOSSTROI). This ministry was divided into a number
of operating branches or contracting construction entities (podriadnye): (1) "trusts" or
"associations"; (2) "construction-installation administrations"; (3) "kombinats" (usually
for
 -11­

housing construction); and (4) "production and technological acquisition administrations"

(upravlenieproizvodstvenno-tekhnicheskoi komplektatsii).

Since the mid-1980's the Soviet government passed a number of decrees affecting the
administration of the industry. The main goals of these decrees included the tollo"ing: 1)
relieving the central authority of micro-ma..agement and increasing the autonomy of con­
struction enterprises; 2) strengthening the role of contract or negotiated prices (dogovomye
tseny); and, 3) increasing the mutual responsibility of all participants in the project for
achieving the final results.

Until 1986 the main federal administrative organ in construction was the State Committee
on Construction Affairs. In 1986 it was transformed into the Union-Republic State Con­
struction Committee (Gosstroi USSR), and given the status of a subdivision of the Council
of Ministers of the USSR. Its responsibilities incluc d administration of the activities of the
union and republic construction ministries, coordination of the Gosstrois of the republics
and the autonomous republics (established in 1962-1965), and implementation of unified
technological policy and improvements to the system of incentives in the construction sector.
The importance of Gosstroi USSR was underlined by the appointment of a Deputy Chair­
man of the Council of Ministers of the USSR as its director. However, due to the union
government's trend toward decentralization, in 1988 Gosstroi lost much of its importance
and was transformed into a committee on norms and technology without any responsibility
for directing the activities of the various ministries with responsibility for construction.

Until recently, the bulk of the state-owned construction industry has been managed by
various ministries organized according to either the type of construction they perform, or
by the region where they operate, or by the major project they work on. Almost all of these
ministries, especially at the union level, have been disbanded in the last 2-3 years. In
addition to the union ministries that previously engaged in construction, there are also con­
tracting construction organizations subordinated to the executive committees of the local
councils (municipal authorities), contracting organizations of various branch ministries and
administrations. The combined total of local and ministerial contracting (podriadnye) con­
struction organizations account for 90% of the construction volume in the USSR.

A significant number of construction organizations-mainly in the area of housing and

other consumer oriented construction-is subordinated to the executive committees of the
local councils (municipal authorities). The largest cities have "main construction administra­
tions"-umbrella organizations for the housing contracting construction organizations. Some
of the largest are Glavmosstroi and Glavmosinzhstroi (Moscow), Glavleningradstroi and
Gla-rleninzhstroi (Leningrad/St. Petersburg), Glavkievgorstroi (Kiev), Glavtashkentstroi
(Tashkent), and Glavmosoblstroi (Moscow Province).
 -12-

There are also approximately 550 technically obsolete and inefficient enterprises (housing
const,-tction kombinats) utilizing large panel construction technology in the production of
building materials. Often times, these kombinaty are involved in actual construction as w, 1l.
These enterprises have an annual production capacity of 689 million sq. ft., which accounts
for almost 60% of state housing construction (70% in the cities).

1.2.4.2 Current Practices of Construction Contracting

Recent changes in the Soviet consi daction industry have reduced the role of central plan­
ners, while strengthening the importance of the negotiated contract between construction
enterprises and clients. The construction contract agreement (dogovorpodriada)has becc me
the main legal document regulating the actions of involved parties, prescribing rights, 'ad
responsibilities, and (together with existing laws) the punitive measures for inadequate or
incomplete performance,

1.2.4.3 The System of Rewards in the Construction Industry

Due in part to n incentive structure which rewards gross volume output, the Soviet con­
struction industry is plagued by unfinished projects, high costs and a low rate of labor pro­
ductivity. The existing system of rewards creates strong incentives to produce homogeneous
products on a mass scale, and to resist innovations in design and technology. With this sys­
tem, construction enterprises are interested in taking on more expensive projects and have
little incentive to minimize costs. Frequently, it is advantageous to use costlier methods
because the rewards are correspondingly higher. In the past, cost overruns often did not
present a major problem for the coatractor, since the client, being a state entity, could
request additional resources from tht, state budget to cover project cost overruns.

1.2.4.4 Quality of Workmanship

The local monopoly position of the construction enterprises, combined with the acute
shortage of housing and the perennial fixation on "fulfilling the plan", contributes to the
notoriously poor quality of Soviet housing. Future tenants of state-owned housing have only
a limited input in the acceptance of the finished unit. Municipal authorities who serve as the
client are not particularly interested in the quality of workmanship. Not surprisingly, the
quality of units produced for enterprises or for housing cooperatives, whose members them­
selves are prospective residents, is significantly better than that of housing built for munici­
palities.
 -13­

1.2.4.5 Construction Costs

It is difficult, for a number of reasons, to evaluate real increases in Soviet housing con­
struction costs over the years. The reward structure of the constnction industry and the
accommodating behavior of state-affiliated clients are partially responsible for the rapid
increase of housing construction costs in the USSR. Despite steady growth over the years,
Soiet wholesale construction prices have remained significantly below market-clearing
levels. This situation has been somewhat alleviated by a dramatic wholesale price increase
in early 1991 when the cost of 1 square meter of housing went from 260-300 rubles to 900­
1000 rubles (in official prices). Despite this steep climb, official costs continue to be well
below the per square meter prices reflected in the bids at private housing auctions.

1.2.4.6 The Building Materials Industry

The Soviet building materials industry is a critical element in the housing construction
process and determines its production potential. At present, severe shortages exist in the
Soviet Union for virtually all types of basic construction materials such as cement, non­
metallic (nerudnye) wall materials, various prefabricated construction components (sbomye
konstrukisii), and bricks. The immediate reason for shortages is, of course, the imbalance
between state prices and the available financial resources of the construction enterprises.

There are, however, additional factors which exacerbate the situation. First, Soviet
workers and managers lack incentives to be careful and frugal during the transportation,
storage, and usage of the construction materials. Second, the existing system of rewards
provides strong incentives for both architects and builders to use the greatest amount of
construction materials in designing and executing projects. Third, the large volume of moth­
balled designs and shut-down construction projects in the USSR prevents the use of valuable
materials in other, possibly more important, projects. Fourth, there are strong incentives for
project management to hoard the most critical, shortage-prone construction r :ateials and
equipment for other purposes, such as barter transactions. Fifth, in addition to a low aggre­
gate price level, incorrect relative prices increase shortages of some construction materials
compared to others.

Besides the factors listed above, the shortages of construction materials are exacerbated
by the stagnation of the construction materials industry which has been growing at close to
a zero rate over the past ten years. The main reason for this slow growth is the small
volume of capital investments in the industry. This has resulted in excessive obsolescence
of fixed assets and a low technological level of production. Even those investment funds that
are earmarked for the expansion of the construction materials industry are constantly under­
utilized due to the lacX of the physical and administrative capacity of the responsible imple­
menting ministry.
 -14­

1.2.5 Private Sector Participation in Housing Production

Since the mid-1980's, Soviet leaders have recognized that the housing problem could not
be solved without an active participation of the private sector. The recent dissolution of the
central authority in the Soviet Union has led to a precipitous decline of the state sector in
the economy. Currently, the very economic survival of the former Soviet republics depends
to a large extent on the ability of the private sector to provide a viable alternative to the
disintegrating state sector.

While the growth of private enterprise in the USSR has been encouraging, the private
sector remains relatively small and continues to be plagued by serious problems which
undermine its potential. These problems include :
* the short-term orientation of entrepreneurs due to political instability in the country and
the unpredictability of the future legal environment and taxation rules;
• the large di . . retion of the local authorities in the implementation of the existing
legislation and licensing of private sector activities;
" the instability of the financial system, inconvertibility of the ruble, and an accelerating
inflation rate;
• the generally underdeveloped nature of capital and financi, markets;
* the lack of the essential business skills (e.g. accounting) and business culture in the
country;
• the poor state of the country's physical infrastructure.

These problems seriously impede the development of the private sector in housing
construction, already a relatively lengthy and capital intensive process. On the other hand,
the acute housing shortage in the country and the perception of housing as a hedge against
inflation create strong demand for private construction services.

1.2.5.1 Construction Cooperatives

While state-owned construction enterprises are reducing their output, construction

cooperatives have been growing in number and importance. At the end of 1990 there were
75,522 active construction cooperatives employing 2.5 million people including part-timers.
The construction cooperatives were the most common and the fastest growing type of coope­
ratives in the USSR in 1990. Their number in that year almost doubled (in 1988 there were
only 1,800 construction cooperatives). Construction cooperatives volume reached 25.96 bil­
lion rubles (US $4.33 billion), leaving all other types of cooperatives far behind. Construc­
tion cooperatives produce mainly for enterprises and public organizations. This tendency can
be explained by the fact that state-owned enterprises are able to help the cooperatives to
procure construction materials and transport.
 -15-

In 1989 in order to protect themselves from the arbitrariness of the authorities and to
improve coordination of their activities, construction cooperatives organized the Union of
Construction and Industrial Cooperatives of the USSR (UCIC USSR). The union is a legal
entity whose primary responsibilities include: (1) defense of the rights of its members; (2)
help in training the cooperative labor force; (3) exchange and dissemination of technological
information; (4) organization of cooperative foreign trade activities and joint ventures; and,
(5) development of its own construction materials industry to provide crucial inputs for its
members. As noted previously, this last task is particularly important due to the poor per­
formance of the Soviet construction materials industry.

1.2.5.2 Commodity Exchanges

Emerging commodity exchanges constitute a vital element of free market infrastructure

in the Soviet private sector. Their importance is enhanced by the breakdown in the state
supply system. While the importance of commodity exchanges grows rapidly, no systematic
information about them is currently available.

The distinctive feature of the Soviet exchanges is that buyers expect immediate delivery
of purchased goods. In this sense the exchanges operate more like an auction rather than
a western-type commodity exchange. The work of the exchanges, handicapped by the inade­
quate communications system, is not as efficient as it could be.

1.2.5.3 International Joint Ventures

Many joint ventures between foreign, and specifically US-based companies, and Soviet
counterparts are coming on line, but their role in local housing construction has been
limited. Of those housing projects currently underway, the majority are exclusive inter­
national housing developments catering to expatriates working with multinational corpora­
tions in the Soviet Union. Generally, leasing a unit in these projects requires payment in
convertible foreign currencies. The text highlights several foreign-Soviet joint-ventures
organized for the production of housing and building materials.

1.2.6 The Informal Sector

The informal sector plays a vital role in the overly regulated Soviet economy, where even
now the state attempts to control most prices and where until only recently most private
economic activities had been prohibited. Without a large informal sector the Soviet economy
would have collapsed many years ago. In the past, informal economic activities alleviated
mistakes of the central planners, coordinated a significant share of microeconomic activities,
and allowed individuals and organizations to circumvent the bureaucratic red tape. For the
foreseeable future, informal contributions to the Soviet economy in general, and to housing
 -16­

in particular, will remain crucial for understanding the workings of the system, and the prog­
ress and effects of reforms.

1.2.6.1 Housing Construction and Repairs

Like in many other countries, the Soviet construction sector has always attracted a
significant portion of informal economic activities. For years, thousands of private con­
tractors known as shabashniki have been building houses, roads, farm buildings, and other
structures. Shabashniki usually work in teams of 3-9 people, earning 3-4 times as much as
they do in their state sector jobs. Some also take payment in-kind. Most of the work sha­
bashnikiperform is under contract with collective and state farms, but sometimes they work
for individuals as well. Even though a legal contract may be present between the customer
and a representative of the shabashniki,the shabashniki team itself would not, as a rule, be
a legal entity.

One of the greatest difficulties experienced by shabashniki as well as by officially

registered construction cooperatives, is procuring construction materials. Often the only
channels for obtaining crucial inputs are through begging, bribing, or stealing. The legal
commodity exchanges are underdeveloped, and are not accessible to many construction out­
fits, particularly to shabashniki. Black markets in construction materials are widespread.
Prices in these markets vary across regions and normally exceed the official prices several
fold.

1.2.6.2 Housing Allocation

The second economy also plays an important role in allocation of housing, including
state-owned, in the USSR. Even prior to current reforms, Soviet households managed to
bypass the strict rules of housing allocation and obtain the amount of housing corresponding
at least to some extent to their monetary wealth. The informal mechanisms for achieving
this goal included side-payments during exchange of apartments, bribes to housing allocation
officials, and renting housing from private individuals when the amount of rent exceeded the
legal limit.

Another mechanism for improving one's housing situation through informal means is rent­
ing a dwelling from private individuals. Soviet law has always allowed renting one's housing
unit. Until recently, however, it had been prohibited to extract profit from such an arrange­
ment. Also, the system ofpropiska (residence permit) has imposed significant restrictions on
private rentals. While less than 1%of Soviet families were officially renting their housing
from private individuals, the true size of this phenomenon is surely much greater. In addi­
tion, even those who are officially registered as renters almost certainly have to pay large
premia over the officially listed rental charges.
 -17­

1.2.7 Framework for Housing Reform and Priority Areas for AID Technical Assistanco

This final chapter presents the outline of a broad framework for the mid- to long-term
reform of the Soviet housing sector.

A joint IMF-World Bank Study of the Soviet Economy proposes four principal areas for
reform of the Soviet housing sector: (1) property rights and privatization; (2) rents, sale
prices and subsidies; (3) housing finance; and, (4) housing production and delivery. The IMF
study notes that housing reform is an important component of overall macroeconomic sta­
bilization and structural change. It cannot proceed separately, but must be integrated with
reforms in other parts of the economy. The report goes on to state that reform of the hous­
ing sector must deal simultaneously with both the existing stock and new production. The
text briefly summarizes the principal elements of a framework for the reform of the Soviet
housing sector as set forth in the IMF document.
 -18­

2 HISTORICAL BACKGROUND

By the turn of the century, urban housing conditions under the Czar in pre-Revolutionary
Russia ranked among the worst of the modern world. A 1912 census of St. Petersburg and
Moscow found eight occupants per apartment, compared to 2.7 in Paris. In most cities, sew­
age systems were unknown, and water systems served less than 10% of the population. Cen­
tral heating was a luxury for the very few. The average living space per urban dweller at the
time has been estimated at seven square meters, two meters less than the currently recog­
nized Soviet sanitary standard of nine square meters. For workers, housing was often a bunk
in a shack-dormitory attached to a factory. These dank, dark hovels, lacking basic sanitation
facilities, provided a breeding ground for disease, despair and eventual revolution.1

2.1 The Bolshevik Revolution

Lenin called for "peace, bread and land" in 1917 and proposed that apartments of the rich
be requisitioned for worker housing. One of the first acts of the Second All-Russia Congress
of Soviets was to adopt the Decree on Land of November 9, 1917, the first step towards the
nationalization of all land and the "municipalization" of many urban dwellings. On August
20, 1918, the Decree on the Abolition of the Private Ownership of Urban Real Estate was
ratified, which allowed for the living quarters of "non-working" individuals, classified as
"bourgeois parasitic elements", to be confiscated. Those to be evicted often lost most of their
personal possessions as well. Approximately 1,000,000 persons in Moscow and Leningrad
improved their living conditions under this initial redistribution.

Under the 1918 act, all municipal land was placed under the control of local councils.
Cities with more than 10,000 inhabitants "municipalized" all dwellings whose value and size
exceeded a minimum defined by each local Soviet. The right to build in such municipalities
was declared the sole right of the local authorities. With this law, private ownership was
abolished and many privately-owned houses were nationalized, creating a state monopoly
over the construction of all new housing, control over all land and the management of its
housing stock.

Confusion resulted over the mass evictions and shifting residents. Vindictive "house
management committees" were placed in charge of assigning housing. Urban residents,
unsure of their housing rights, became indifferent to maintenance ii,.ds and over time,
capital housing repairs were ignored. The dwindling number of private homeowners who still
retained ownership to their dwellings became increasingly reluctant to maintain their

1 See Chapter 2 in Alfred DiMaio, Soviet Urban Housing: Problems and Policies, HUD, 1974, for a full
discussion of Soviet housing in historical perspective.
 -19­

property as well. Between 1917 and 1923, the private housing sector, comprising more than
three-fourths of the entire housing stock, remained unmanaged, leading to the rapid deter­
ioration of many residential buildings.

The housing stock suffered additional damage when workers, who were moved into large
homes that had been confiscated, tore up timber framing, wood flooring and trim for stove
fuel, and ruined the plumbing with which they were unfamiliar. The result was a dramatic
reduction in the amount of available housing. The total number of dwellings in Petrograd,
for instance, declined from 225,987 in 1910 to 192,146 in 1920, while Moscow lost one-fourth
of its housing stock in the first five years of the Revolution.

Despite this decline, the government strived to achieve an ultimate goal of providing free
housing for all. A July 1919 law froze rents, and provided subsidies for those who could not
afford their rents. Wages were partly paid in-kind in the form of living quarters by state
enterprises. On January 1, 1921, all rents were abolished, yet at the same time many cities
saw a sudden influx of newcomers seeking jobs in state factories and the return of urban
dwellers who had fled to the countryside during the Civil War and Intervention.

Seven months later another law was introduced to encourage repairs, stipulating that costs
of such repairs could be charged to the tenant. Unable to cope with growing demand, the
Soviet government turned to its citizens for help through the promulgation of a decree "On
Cooperative Housing" on August 19, 1924. This two-fold policy encouraged house building
and house management "on the principles of self-help of the toiling masses" through
voluntary cooperative societies. Two types of house construction cooperatives (ZhSKT) were
allowed, as well as a house leasing cooperative (ZhAKT). In addition to cash payments,
association members could pay for their shares with construction materials and labor.

By the early 1930's, however, cooperative housing fell into official disfavor, since it
seemingly promoted "individualist tendencies" of cooperative management boards over the
interests of the state. In 1937, the ZhAKT were abolished, and.all buildings with outstanding
government loans were transferred to either the administration of local councils or enter­
prises which initially funded these ventures.

The government slowly realized that rents would need to be reintroduced to cover the
costs of housing production and management. In 1926, an all-Union rent law was adopted,
yet rates were so low that heavy government subsidies were still required. Under the New
Economic Policy (NEP) of the time, policies of "denationalization" and "demunicipalization"
were carried out. Demunicipalization eased the chaotic housing situation by turning over
housing to their previous owners on "leasing-management" arrangements. Within a few years,
however, the government flip-flopped once again and unilaterally liquidated privately-held
leases.
 -20­

2.2 The Five Year Economic Plans (FYPs)

Several years later another effort was made to address the continuing housing shortage.
A major decree, "On Housing Policy" of January 4, 1928, provided inducements of "preferen­
tial treatment" to attract private investment in housing. The decree promised limited govern­
ment interference, the ability to set rents, and preferential tax treatment. These actions,
however, were soon superseded by a series of ambitious Five-Year Economic Plans. These
economic plans set the production levels and annual targets for housing, as well as other
sectors in the economy.

The first Five-Year Plan emphasized rapid development of heavy industry, and paid very
little attention to the country's housing needs. The ratio of expenditures for housing during
the first, second, and third Five-Year Plans was only one-half that of the period from 1923
to 1928. From 1923 to 1940, available urban living space per person diminished 40 percent,
from 6.45 square meters to 4.09 square meters, mostly due to in-migration from rural areas.

World War II took a terrible toll on the Soviet people and their cities, resulting in the
death of about 25 million persons. The massive destruction of the war left six million
buildings damaged, depriving an additional 25 million persons of shelter. Half the nation's
housing stock was destroyed. Over 70,000 villages and 1,710 cities were demolished or
burned. Following the war, some concessions were made to encourage private building, yet
new laws during the Stalin era restricted private buildings to two stories and five rooms
total. Between 1946 and 1956 some 300 million square meters of housing were produced,
more than 50% of all pre-Revolutionary housing, but the housing problem remained acute.

2.3 The Khrushchev Years

In June, 1957 the Party adopted an extensive housing program aimed at eliminating
shortages "within the next ten to twelve years". The 1957 "Decree on Developing Housing
Construction" called for a 100% increase in the volume of housing to be produced during
the 1956-1960 Five-Year Plan, and criticized the fragmented fashion in which housing was
being developed as well as the shortage of construction materials.

The 1957 Decree also encouraged the organization of individual builders into housing
cooperatives, which had been prohibited in 1937. The USSR Ministry of Finance was
allowed to grant loans to "citizens jointly erecting multiple-apartment houses on the same
terms that it grants to private builders," but stipulated that construction must be undertaken
by "skilled contractors," which meant state construction enterprises, thus effectively eliminat­
ing private initiative. In addition, all construction cooperatives were limited to only em­
ployees of specific industries and enterprises; thus, citizens from different labor organiza­
tions or industries were prohibited from jointly forming a housing construction cooperative.
Not surprisingly, housing cooperatives were slow to get off the ground.
 -21-

An ambitious Seven-Year Plan (1959-1965) put forth by Khrushchev combined plans to

invest 380 billion rubles in housing and communal construction in a massive effort to double
the amount of urban housing within seven years. Emphasis was placed on industrialized
construction and prefabrication to achieve the goals of the Seven-Year Plan, and indeed, a
record number of units were produced. Notwithstanding regular reports of under-fulfilled
housing plans and shoddy workmanship, the USSR ranked number one in the world in built
apartments per 1,000 population for this seven-year period (DiMaio 1974).

In a search for new socialist ways to solve the housing problem, Khrushchev and the Party
sought to root out a private property psychology by enacting a series of "anti-parasite laws".
During 1961 and 1962 a series of confiscations of privately built homes and measures which
restricted the availability of construction materials led to a sharp reduction in individual
construction. Individual construction fell from 27 million square meters in 1960 to 16 million
square meters in 1964. Despite its setbacks, the Seven-Year Plan represented a major effort
to address the country's housing problem. Approximately one-half of the country's
population, according to Soviet reports, moved into new apartments or improved its housing
during this period. Still, significant shortages plagued the Soviet housing sector.

2.4 The Brezhnev Years and Beyond

At the Twenty-Third Party Congress, a new housing initiative was launched by Brezhnev
to expand the volume of housing construction by 30% over the previous Five-Year Plan.
With capital investments in housing pegged at 45 billion rubles, up from 35 billion in the
previous FYP, 480 million square meters of housing were planned. Increased industrialized
construction and increased productivity were emphasized in Congress reports and post-
Congress articles, which focused heavily on the importance of off-site prefabrication of
structural elements. By 1969 the output of prefabricated parts accounted for 50% of the
total amount of structural elements used for large panel construction, increasing to 80% by
1970. Despite these efforts, first year production was off by 10 million square meters, and
for the first time official announcements failed to reveal the exact amount of urban housing
erected.

Housing cooperatives were promoted under the 1971-1975 Five-Year Plan, with appropria­
tions of 78.5 billion rubles for housing, up 21.6 percent from the previous five-year period.
Despite a plan to accelerate production, actual performance fell below yearly targets, due
in part to the rapid urbanization of the country. In an eleven-year period from 1959 to 1970,
the urban population increased by 36 million persons. Of these, 14.6 represented the natural
increase in population, 5 million the transfer of formerly rural communities to urban status,
and 16 million rural-urban migrants.

The grandiose promises of the Khrushchev administration that each family would be
provided with a rent-free, fully-equipped apartment by 1980, thus ending the country's severe
 -22­

housing shortage, were left unrealized. In 1981 Brezhnev noted the continuing prominence
of housing in the social program, and oversaw the ratification of the "Principles of Housing
Legislation" in the Supreme Soviet. Nevertheless, widespread shortages, exacerbated by a
stagnant national economy, led to a continuing crisis in the housing sector.

Five years later at the Twenty-Seventh Party Congress, Mr. Gorbachev, speaking on "the
social importance and acuteness of the housing problem", pushed for the adoption of
dramatic reform-oriented ideas packaged in the "new" Party Program. Departing from
previous ways of official thinking, the new measures called for the equitable distribution of
housing, fair rents, and an increased contribution by the tenant population for housing
improvements and repair. In April 1986 a new decree, "On the Principal Directions for
Accelerating the Solving of the Country's Housing Problen", addressed the issues of
unwarranted demolition, inequitable housing allocation, incorporation of the population's
own income in home improvement, and streamlining the process of housing exchanges
(Andrusz 1990).

For nearly seventy years, up through the continuing program of perestroika, the Soviet
government has laboriously strived to meet the dual objectives of a separate dwelling unit
for each Soviet family at a low rent. As Andrusz aptly points out, the first goal might be
achieved at the expense of the second following the implementation of market-oriented
reforms. In any event, it is clear, given the magnitude of the task, that introducing a market­
based housing system on the inefficient, mismanaged, and often corrupt Soviet housing
sector will be an enormous challenge.
 -23­

3 CURRENT CONDITIONS AND RECENT REFORMS

The following chapters of this overview report will refer time and again to the fact that
the institutional and legal apparatus for the provision of housing in what was the Soviet
Union is in a state of flux. Numerous reforms are underway that directly address the chief
p, oblems affecting the Soviet housing sector. As the various republics struggle to achieve
increased levels of authority-or indeed, actual independence as several upcoming republic­
level referendums seek to accomplish in both the Ukraine and Byelonissia-the implemen­
tation of reforms has been neither consistent nor even clear. Prior to discussing in detail the
various elements of the union-dominated Soviet housing sector that has been declining in
importance for the past five years, this chapter briefly summarizes in one place the most
recent reforms that have occurred in the sector (referencing the following sections to which
these reforms apply), many as recent as the failed August 1991 coup attempt.

3.1 Recent Reforms

As noted throughout the text, a number of reforms have enormous potential in supporting
efforts to instill a market-oriented system on the Soviet housing sector. Restrictions to
private ownership have been greatly reduced or relaxed (see section 3.5.3), while the system
of residence permits has been proclaimed unconstitutional (see section 4.7.4). In the area
of housing finance, the investment process has been increasingly decentralized (see chapter
5), which has enormous implications for municipalities involved in housing construction, as
well as potential homeowners themselves. The 1988 decree to accelerate the development
of private housing construction offers increased opportunities for both urban and rural
households to build new housing or improve their existing housing conditions (section 5.4).
Existing obstacles to increased private sector participation, key factors such as the
unpredictable legal environment, unstable financial system, and poor supporting infrastruc­
ture, are noted in chapter 7.

For the Soviet construction and building materials industry, recent changes have reduced
the role of central planners, while strengthening the importance of the negotiated contract
between builders and clients (see section 6.1). Additionally, the evolving official attitude
toward informal sector activities-including the full formalization of some, such as authorized
bidding and auctions-have served to empower the entrepreneurial spirit of Soviet citizens
to improve their housing situations for themselves. Finally, new official efforts to support
international joint ventures have the potential to effect a meaningful transfer of Western
technological knowledge, building and construction skills, and efficient management systems
(see section 7.6).
 -24­

3.2 Property Rights and Privatization

Virtually all Soviet and western economists studying Soviet reforms agree that most of
state-owned housing must be privatized. Privatization has already begun. The sale of state­
owned apartments to their residents started in 1989 when 37,.00 or 0.1% of all self­
contained state-owned units were sold for a total of 164 million rubles (US $27.3 million).
In 1990 211,000 apartments were sold for 1.3 billion rubles (US $217 million). During the
first six month of 1991, salks exceeded 127,000 units generating about 676 million rubles of
revenue (US $113 million). In the Russian republic. 26,684 apartments were sold during
January-April 1991 for a total of 144.5 million rubles (US $24 million). According to the
Russian republic privatization law, the proceeds from privatization are deposited into the
account of the entity which managed the privatized unit, i.e. either the city council, or an
enterprise, or another public organization. The funds in this account are supposed to be
used for future housing construction and major repairs of the local housing stock.

A privatization law was enacted in the Russian republic in July of 1991. According to this
law, an apartment which has a minimum of 18 square meters of housing space per person,
plus 9 square meters per household, is transferred to the household free of charge. (The
local councils of people's deputies have the right to increase these minimum living require­
ments.) Citizens h:ave to pay for the excess according to valuations made by special housing
commissions. These valuations are supposed to take into account quality and location of
housing.

Payments for privatized housing can be made over time by the homeowner. The councils
of people's deputies can provide payment relief for certain categories of renters, such as low
income families and pensioners. The households who have less than the minimum space may
be compensated during the transfer of the apartment.' The proceeds from privatization are
to be used for new construction and for major repairs of existing housing stock. The owners
of the privatized dwellings are supposed to pay for the utilities and repairs according to the
same fee schedules that are used for servicing state-owned housing.

The existing waiting lists have been preserved, and the old rules of eligibility for joining
a waiting list remain in force. After obtair.ing a new apartment the renter can decide
whether or not to privatize it. However, the same person can privatize an apartment only
once. The , les for joining the cooperatives remained unchanged as well.

The decision to preserve the old waiting lists was motivated by the consideration of
fairness to those households that have spent years waiting for their improved state-owned

'TheRussian F7epublic privatization law involves giving each household more than the average square meter
per person in the country (15 square meters) and hence may result in large cash payments from local govern.­
ments to tenants, depending on the details of implementation.
 -25­

housing allocation. At the same time it perpetuates the grossly inefficient system of housing
distribution (see section 4.7). New housing allocations to households on waiting lists,
however, will become more limited in the future. Some new housing built by the state is
being auctioned off to the highest bidders.

The free of charge transfer of state-owned housing to the tenants has been criticized by
several economists. Bessonova (1991) notes that while it is tne that state-owned housing has
been paid for by the population's taxes, such a transfer is inherently unfair. She notes, after
all, everybody paid the taxes but only those who live in state-owned housing receive the
benefits of free ownership. Bessonova asserts that this kind of privatization preserves the
existing housing inequality and would even exacerbate it in the future. Others argue that
free transfer does not help to reduce the state budget deficit.

The IMF (1991) contends that without rent increases there would be little incentive for
the tenants to buy state-owned housing (see also Boiko, 1991). Rents have not been
increased yet but most observers think that such an increase is inevitable. For this reason
and because state-owned housing sells for a fraction of what housing costs in housing
auctions, privatization is picking up speed, particularly in the Russia republic in sub cities
as Stavropol and Krasnodar, where the local authorities are trying to minimize the
bureaucratic red tape associated with the process. In Moscow, new rules for privatization
took effect in October 1991. On November 6, 1991, however, Mayor Popov of Moscow
announced that in order not to adversely affect the family budgets of Muscovites on the eve
of price liberalization, the privatization process will be modified. Privatization will be
replaced by a free-of-charge transfer of ownership to the current residents. In the future,
however, when the economy stabilizes, the housing owners will be assessed higher taxes for
the "excess" housing space they acquired. According to the latest information, the Moscow
City Council did not support the mayor's position and the privatization process was
suspended altogether until the mayor and the Council could reconcile their differences.

Other republics ai'e also aggressively pursuing the privatization of their public housing
stock. The Ukraine parliament passed a law at the end of October that gives all households,
including those on waiting lists, a housing voucher that can be used as (partial) payment for
purchasing a unit or for rental payments. The law envisions a provision similar to that in the
Russian Republic in which a minimum quantity of housing would be given away free of
charge (in essence a flat price discount).

The opening of Soviet housing to market forces has had an immediate and dramatic
effect on prices. The prices at the 1990 housing auctions in the USSR were usually in the
30-50 thousand rubles range (US $5000-$8333) for a standard two-room apartment. At the
first auction in Tallinn (Estonia) in February 1991 one-room apartments went for 50,000
rubles, two-rooms brought 82,000-110,000 rubles and three-room units attracted offers of
150,000 rubles each. The 1991 auctions in Moscow have resulted in astronomical bids by
 -26-

Soviet standards of up to 3 and 4 million rubles for a three-room apartment. 3 In a recent

sale, a suburban 75 square meter unit sold for 1.7 million rubles. At these prices, tIe
purchasers are usually enterprises and foreign companies.

'These figures published in Argumenty i fakty, no. 23, 1991 soumd unbelievable. More would have to be
learned about this auctior, before making any definitive conciusions about the Moscow housing market.
 -27­

4 THE EXISTING HOUSING STOCK

Soviet housing has historically been a highly heterogenous consumer good. Consumption
of housing cannot be summarized by a single indicator, as housing units differ according to
a number of characteristics including size, location, design, and availability of infrastructure.
Historically, however, the Soviet planners have tended to define housing in terms of space
quantified in "millions of square meters", the number of housing units produced, and the
number of rooms available to households. It is on these three indicators that the perfor­
mance of the housing industry has been evaluated and rewarded by the Soviet government.

In 1986 Gorbachev's government launched the "Housing 2000" program with the goal of
providing each Soviet household with a self-contained (separate) dwelling. In early 1990
slightly over 85% of approximately 90 million Soviet households (families and singles)
resided in self-contained housing units. Despite government efforts to increase the amount
of housing available, the ratio of households to housing units haF tctually increased since
1970, and currently star.as at 1.17 households per housing unit. The total housing stock ex­
ceeded 48.5 billion sq. it. in 1990, which translated into 170 sq. ft. per capita.

In order to fulfill the "Housing 2000" program, the Soviets planned to construct 21.5
billion sq. ft. of housing during the 1986-2000 period, later revised in a May 1990 Presi­
dential Decree to 28 billion sq. ft., or over 40 million new housing units. In July 1991,
however, the main Soviet statistical organization, GOSKOMSTAT, characterized the fulfill­
ment of this program as "unrealistic."

To their favor, the Soviets have made significant progress toward achieving their target
of a "socially necessary minimum" of housing space per person. The improvement of housing
conditions is evident in the changing standards for new apartment allocations. In the early
1960's a household moving into newly built housing would normally be awarded a flat with
n - 2 rooms, where n is the number of household members (i.e., a household consisting of
four people would move into a two-room apartment). By the late 1960's the formula was
modified to n - 1,and by the late 1970's the rule "one room, one person" was in effect for
over one-quarter of all newly built housing units.

The following sections of this chapter look beyond these highly aggregated data in order
to describe the current housing situation in the USSR more adequately in terms of produc­
tion, distribution, access to infrastructure, and types of tenure.
 -28­

4.1 Distribution of Housing Space

Most of the Soviet housing stock (64%) is located in urban areas. However, the per
capita distribution of housing space differs significantly between urban and rural areas where
the average allocation at the end of 1989 was, respectively, 164.7 and 180.8 square feet per
person (Table 1). These averages, however, gloss over wide variations in housing quantity
and quality among households. The regional distribution of housing and "living space" among
Soviet hoaseholds is presented in Table 2.4 It should be noted that almost 33% of Soviet
households do not enjoy even the modest all-Union "sanitary norm" of 9 square meters per
person.5

TABLE 1
RESIDENTIAL HOUSING STOCK
(million sq. meters of housing space)
1980 T 1985 _ 1986 1987 1988 1989
Total Stock 3573 4072 4191 4316 4431 4541
State-Owned 1866 2278 2508 2596 2524 2604
Cooperative. 103 136 143 154 161 175
Private 1604 1658 1683 1720 1748 1778
Per capita, sq.m. 13.4 14.6 14.9 15.2 15.5 15.8
Uiban Housing Stock 2203 2561 2641 2720 2801 2874
State-Owned 1553 1844 2051 2121 2037 2108
Cooperative 102 133 142 150 158 164
Private 548 584 590 599 608 618
Per capita, sq.m. 13.1 14.1 14.3 14.5 14.7 15.1
Rural Housing Stock 1370 1511 1550 1596 1630 1667

State-Owned 313 434 457 475 487 496

Cooperative 1 3 3 3 3 11
Private 1056 1074 1093 1121 1140 1160
Per capita, sq.m. 13.9 15.6 16.1 16.1 17.0 17.0
Source: Narkhoz 1989, p.165; Zhilishchnye (1990), pp.15-17. _2L_7

4Living
space differs from housing space (or "overall useful space" in Soviet parlance) in that it excludes
kitchens, bathrooms, and other auxiliary areas. Living space on average constitutes approximately 60% of all
housing space.
5While
9 square meters was the all-Union standard, it is incorporated into the codes of only Moldavia, Latvia,
Armenia, and Turkmenia. The standard, for example, in Uzbekistan was 10 square meters per person, in the Uk­
rainc-13.65 square meters, and in all other republics-12 square meters.
 -29-

TABLE 2
DISTRIBUTION OF HOUSEHOLDS BY THE SIZE OF
OCCUPIED LIVING SPACE - 1989
(Millions of Households)
Size of Living Space per Person, square meters
Total
House- 5 & less 5-6 7-8 9-12 13-14 15-19 2
greater

[__
holdsgrae

__ _ -TOTAL _

USSR 71.1 4.4 9.4 12.3 22.4 7.1 9.7 5.8

RSFSR 39.2 2.2 5.2 7.0 13.1 4.0 5.3 2.4
Ukraine 13.8 0.8 1.6 2.1 4.1 1.5 2.2 1.5
Byelorussia 2.7 0.1 0.3 0.4 0.9 0.3 0.4 0.3
Uzbekistan 3.3 0.3 0.6 0.6 0.9 0.3 0.3 0.3
Kazakhst in 3.7 0.3 0.6 0.7 1.2 0.3 0.4 0.2
Georgia 1.2 0.06 0.1 0.2 0.3 0.1 0.2 0.3
Azerbaijan 1.3 0.2 0.2 0.3 0.3 0.08 0.1 0.08
Lithuania 1.0 0.06 0.1 0.1 0.3 0.08 0.2 0.2
Moldavia 1.1 0.06 0.1 0.1 0.3 0.1 0.2 0.2
Latvia 0.7 0.03 0.08 0.1 0.2 0.07 0.1 0.07
Kirgizia 0.8 0.08 0.1 0.2 0.2 0.07 0.09 0.07
Tadjikistan 0.8 0.1 0.2 0.2 0.2 0.04 0.05 0.02
Armenia 0.5 0.04 0.08 0.1 0.1 0.04 0.06

r___
0.06
Turkmenia 0.6 0.05 0.1 0.1 0.2 0.05 0.06 0.04
Estonia 0.4 0.01 0.03 0.06 0.1 0.06 0.08 0.06
.. _._ _ _ _ _ _ _ _ _ __i

______ URBAN AREAS ___

USSR 48.2 3.1 6.7 8.6 16.2 4.9 6.2 2.5

RSFSR 28.9 1.7 4.0 5.3 10.1 3.0 3.6 1.2
Ukraine 9.2 0.6 1.2 1.5 2.9 1.0 1.3 0.7
Byelorussia 1.7 0.1 0.2 0.3 0.6 0.2 0.2 0.09
Uzbekistan 1.5 0.1 0.2 0.3 0.5 0.1 0.2 0.1
Kazakhstan 2.2 0.2 0.3 0.4 0.7 0.2 0.3 0.1
Georgia 0.7 0.05 0.08 0.1 0.2 0.05 0.1 0.08
Azerba,jan 0.7 0.1 0.13 0.1 0.2 0.04 0.07 0.04
Lithuania 0.7 0.05 0.1 0.1 0.2 0.05 0.1 0.05
Moldavia 0.5 0.05 0.08 0.09 0.2 0.05 0.05 0.03
Latvia 0.5 0.02 0.06 0.09 0.1 0.05 0.09 0.03
Kirgizia 0.3 0.03 0.06 0.07 0.1 0.03 0.04 0.02
Tadjikistan 0.3 0.C4 0.06 0.06 0.08 0.02 0.03 0.01
Armenia 0.4 0.03 0.06 0.09 0.1 0.02 0.03 0.02
Turkmenia 0.3 0.03 0.05 0.06 0.09 0.02 0.03 0.02
Estonia 0.3 0.01 0.03 0.05 0.1 0.05 0.05 0.03
 -30-

TABLE 2
DISTRIBUTION OF HOUSEHOLDS BY THE SIZE OF
OCCUPIED LIVING SPACE - 1989
(Millions of Households)
Size of Living Space per Person, square meters

Total 20 &
House- 5 & less 5-6 7-8 9-12 13-14 15-19 20a&
holds greater

[ __ _RURAL AREAS _ _____ _ ____J

USSR 22.9 1.3 2.7 3.7 6.2 2.2 3.5 3.3
RSFSR 10.3 0.5 1.2 1.7 3.0 1.0 1.7 1.2
Ukraine 4.6 0.2 0.4 0.6 1.2 0.5 0.9 0.8
Byelorussia 1.0 0.02 0.07 0.1 0.3 0.1 0.2 0.2
Uzbekistan 1.8 0.2 0.4 0.3 0.4 0.2 0.1 0.2
Kazakhstan 1.5 0.1 0.24 0.3 0.5 0.1 0.1 0.1
Georgia 0.5 0.01 0.02 0.05 0.1 0.05 0.1 0.2
Azerbaijan 0.6 0.07 0.1 0.2 0.1 0.04 0.09 0.04
Lithuania 0.3 0.01 0.02 0.03 0.1 0.03 0.05 0.1
Moldavia 0.6 0.01 0.05 0.06 0.1 0.07 0.1 0.2
Latvia 0.2 0.01 0.02 0.03 0.1 0.02 0.03 0.04
Kirgizia 0.5 0.05 0.07 0.08 0.1 0.04 0.05 0.05
Tadjikistan 0.5 0.1 0.1 0.1 0.1 0.02 0.02 0.01
Armenia 0.1 0.01 0.01 0.02 0.0 0.02 0.03 0.04
Turkmenia 0.3 0.02 0.04 0.05 0.1 0.03 0.03 0.02
Estonia 0.1 0.0 0.0 0.01 0.0 0.01 0.03 0.03
[Source: Zhilishchnye (1990), p.59.

The availability of housing space also differs among the Soviet and Baltic republics. The
three Baltic republics, with 18-19 square meters (193.7-204.5 square feet) per capita, have
considerably more housing space per person than the rest Gf the USSR. The Central Asian
republics occupy the bottom of the rankings, with only 10-14 square meters (10.8-150.7
square feet) per capita (see Table 3) To some extent this disparity is due to the variations
in the demographic composition of the republics. Larger families in all republics tend to
have lower per capita housing space, and the average size of households in Central Asia is
significantly higher than it is in the Baltics and in the Slavic republics (Russia, Ukraine, and
Byelorussia). Nevertheless, the data in Table 3 also reflect real differences in the allocation
of housing among the republics.
 -31-

TABLE 3
PER CAPITA HOUSING STOCK BY REPUBLIC . 1989
(Square Meters per Person) __

TOTAL POPULATION FAMILIES SINGLES

Housing Living Housing Living Housing Living
Space Space Space Space Space Space
USSR 15 10 14 10 30 19
RSFSR 15 10 14 9 28 18
Ukraine 17 11 16 10 36 22
Byelorussia 16 11 15 10 32 21
Uzbekistan 14 9 14 9 33 20
Kazakhstan 13 9 13 9 28 18
Georgia 20 14 19 13 47 32
Azerbaijan 12 8 12 8 31 19
Lithuania 18 11 17 11 32 20
Moldavia 18 12 17 11 35 23
Latvia 18 11 16 11 32 20
Kirgizia 13 9 13 9 31 20
Tadjikistan 10 7 10 7 28 18
Armenia 12 8 14 10 40 26
Turkmenia 13 9 13 9 33 21
Estonia 19 13 17 11 35 22

SOURCE: GOSKOMSTAT USSR, Press-vypusk No.177, May 4, 1990.

4.2 Age Composition and Retirement Rates of Soviet Housing

As noted in Table 4, Soviet housing stock is relatively young. More than 70% of it has
been erected since 1960. Despite the fact that less than 14% of the stock had been built
prior to 1951, the rates of housing retirement have been growing over the last five years.

During 1986-1989 about 1.7% of the existing housing stock or 823.5 million sq. ft, of
housing has been retired. Normally, 20-25% of this housing is retired due to old age and
disrepair, another 20-25% in order to free up space for new construction, and the remaining
50-60% is retired for other reasons such as conversion to non-residential uses.

The age composition of retired housing is unknown. Presumably most of it is old. How­
ever, given the particularly poor quality of housing built in the late 1950's and early 1960's,
it is likely that a significant amount of that relatively new housing has been retired as well.
According to a Soviet researcher (Gertsberg, 1990), most of the five-story walk-ups built dur­
ing 1956-1970 are not worth maintaining for more than 50 years.
 -32-

TABLE 4
DISTRIBUTION OF HOUSING BY AGE AND
OUTSIDE WALL MATERIAL (PERCENT)
All Houses Year of Construction
1951-60 1961-70 1971-80 1981-88
r TOTAL
Total 100 15.9 25.0 25.3 20.4
Brick 100 15.6 28.0 26.4 18.6
Concrete, Large Panels, Blocks 100 4.4 21.8 37.1 35.7
Wood 100 25.8 22.1 12.5 8.4
Mixed Material 100 25.1 26.4 18.2 12.5
Clay 100 23.4 27.5 17.5 12.2
Other Materials 100 24.7 28.3 21.0 16.8
All Houses 100 100 100 100 100
Brick 37.5 36.8 41.8 39.2 34.3
Concrete, Large Panels, Blocks 27.1 7.5 23.5 39.7 47.6
Wood 18.6 30.3 16.4 9.2 7.6
Mixed Material 4.4 7.0 4.7 3.2 2.7
Clay 10.5 15.5 11.5 7.2 6.3
Other Materials 1.9 2.9 2.1 1.5 1.5
URBAN AREAS
Total 100 15.0 24.1 27.3 21.8
Brick 100 17.5 28.0 25.2 16.6
Concrete, Large Panels, Blocks 100 4.3 22.4 37.6 34.6
Wood 100 29.9 16.5 9.9 7.3
Mixed Material 100 32.5 21.8 12.8 7.6
Clay 100 30.5 22.9 11.6 6.4
Other Materials 100 35.4 23.3 14.9 11.6
All Houses 100 100 100 100 100
Brick 42.1 49.2 48.9 38.9 32.0
Concrete, Large Paniels, Blocks 38.6 11.2 35.9 53.3 61.4
Wood 11.2 22.3 7.7 4.1 3.8
Mixed Material 3.1 6.8 2.8 1.5 1.1
Clay 3.8 7.8 3.6 1.6 1.1
Other Materials 1.2 2.7 1.1 0.6 0.6
 -33-

TABLE 4
DISTRIBUTION OF HOUSING BY AGE AND
OUTSIDE WALL MATERIAL (PERCENT)
All Houses Year of Construction
1951-60 1961-70 1971-80 1981-88
RURAL AREAS
Total 100 17.4 26.9 21.9 17.9
Brick 100 10.9 28.1 29.2 23.5
Concrete, Large Panels, Blocks 100 4.9 16.7 31.9 45.3
Wood 100 23.3 25.6 14.0 9.0
Mixed Material 100 19.1 30.3 22.6 16.4
Clay 100 21.3 28.9 19.2 13.9
Other Materials 100 17.7 35.1 25.0 20.2
All Houses 100 100 100 100 100
Brick 29.7 18.7 31.0 39.6 38.9
Concrete, Large Panels, Blocks 7.5 2.1 4.7 10.9 19.0
Wood 31.3 42.1 29.9 20.1 15.7
Mixed Material 6.6 7.3 7.4 6.8 6.0
Clay 21.8 26.7 23.4 19.1 17.0
Other Materials 3.1 3.1 3.6 3.5 3.4
[SOURCE: Zhilishchnye (1990).

In addition, some housing was lost due to natural disasters and accidents. For example,
the 1989 Armenian earthquake destroyed 42 million sq. ft. of housing space. At the end of
1989 approximately 639 million sq. ft. of space housing 4 million people was classified as
dilapidated and in need of emergency repair.

Among the republics, the Baltics had the highest rates of dilapidated state and public
housing stock (Table 5). This is due to the fact that the Baltic republics, spared the kind of
destruction to the housing stock which took place in Russia, Byelorussia and the Ukraine
during World War II, has a larger proportion of older housing, which tends to be more in
need of repair.

4.3 Access to Infrastructure

One of the major parameters of housing quality is access to infrastructure. More than
55% of the Soviet housing stock does not have a full range of amenities (sewer system,
running water, central heating, hot water). In rural areas this number is close to 90%. Only
20% of rural residents have access to running water. The inadequate power and capacity of
 -34­

the water plants result in frequent interruptions in water supply to the population. In almost
all republics the quality of drinking water fails to meet minimum government standards.

TABLE 5
DILAPIDATED AND CONDEMNED HOUSING STOCK
__________(square meters)

State and Public Housing Stock Privately Owned

Housing Stock in
Union/ Urban Areas
1987 1989 (end of 1989)
Republics
Total Percent Total Percent Total Percent
Space of Total Space of Total Space of
(000's) (000's) (000's) Total
USSR 59,131 2.8 49,733 1.8 9,622 0.5
RSFSR 35,171 2.2 29,758 1.7 5,137 0.8
Moscow 1,242 0.8 1,118 0.7 71 13.5
Leningrad 523 0.6 572 0.'7 31 2.6
Far East 3,662 4.1 2,901 3.0 396 2.7
Ukraine 4,219 1.1 4,421 1.0 390 0.1
Lithuania 1,822 4.6 1,517 3.5 1,202 4.3
Latvia 4,320 11.6 3,890 10.0 66 0.7
Estonia 1,179 5.1 1,078 4.5 14 0.1
Georgia 965 3.3 394 2.9 72 0.1
Azerbaijan 389 1.3 368 1.2 ....
Armenia 534 2.2 756 3.2 742 3.0
Uzbekistan 1,097 1.5 1,066 1.4 1,483 0.9
Kirgizia 340 2.1 285 1.7 4 0.01
Tadjikistan 316 1.9 255 1.4 83 2.7
Turkmenia 739 5.0 665 4.4 ....
Kazakhstan 6,892 4.7 4,098 2.6 250 0.3
Byelorussia 893 1.0 356 0.4 169 0.2
Moldavia 443 2.0 373 1.6 11 0.02
SOURCE: ZHILISHCHNOE (1990), p.2 6- 3 2 .

A large part of the utility pipeline network is in need of emergency repair. According to
GOSKOMSTAT, the long-term neglect of existing utilities by local authorities and enter­
prises, both of whom have responsibilities for the provision of infrastructure, has brought
 -35­

the utility services system "to the brink of collapse. ''6 More data on the availability of
amenities in Soviet housing is presented in Table 6.

4.4 Volumes and Types of Housing Construction

The rates of growth of Soviet housing production in terms of housing space and the
number of units peaked during the 1956-1960 five-year plan (FYP) when the average annual
production reached 1,020 million sq. ft. Housing construction remained stable until 1980
when growth picked up. The increase in housing production was part of the Soviet gov­
ernment's effort to improve the plight of consumers. The output of housing during the last
FYP showed almost a 17% increase over the previous period.

The amount of housing space produced in 1989 was almost 23% greater than that in 1980
(housing construction broken down by republics is presented in Tables 7-9). The industry's
performance in 1990, however, has been disappointing to Soviet planners. Only 1.8 million
housing units were built totalling 1,238 million sq. ft. of space which represents a decline of
150 million sq. ft. or 340,000 units compared to 1989. In fact, the 1990 output measured in
terms of housing space was the lowest since 1986.

Until recently, most of the activities of the Soviet housing construction industry have been
planned in a highly centralized manner. The performance of the industry has been evaluated
based on the fulfillment of a system of government plans, including quarterly, six-month,
annual, and five-year plans. The most important of these plans was the annual plan. As
previously mentioned, the planners measured the sector's performance mainly by the meters
of housing space built and by the number of housing units produced.

The concentration on the narrow range of physical output indicators led to a high degree
of standardization of Soviet construction techniques at the expense of variety and innovation.
Large panel construction (LPC) constitutes by far the predominant type of new urban
housing, accounting for 53% of state financed housing output in terms of space (see Table
10). This type of construction has been favored by Soviet planners since the mid-1950's,
when the housing construction industry was industrialized to address the severe housing
shortage left in the wake of World War II.

6GOSKOMSTAT,
Press-vypusk 214, July 24, 1991.
 -36-

TABLE6...
AVAILABILITY OF UTILITIES AND OTHER AMENITIES
:(end of year, percent)
E1980 1985 1989
Urban living space, equipped with
running water 70.4 74.8 77.3
sewage 67.0 71.0 74.1
central heating 68.2 73.1 75.8
hot water 42.0 54.9 59.9
bathroom or shower 60.0 64.7 68.t
gas stove (gas lines or bottle) 71.0 73.6 74.6
electric stoves 3.0 9.4 12.1
State, public organizations, cooperative-owned ur­
ban living space equipped with
running water 89.8 91.8 93.2
sewage 97.8 89.7 91.4
central heating 86.5 88.9 90.3
hot water 57.1 71.2 76.3
bathroom or shower 79.9 83.2 86.0
gas stove (gas lines or bottle) 79.4 78.3 77.3
electric stoves 4.1 12.5 15.8
Privately-owned urban living space equipped with
running water 17.1 22.7 25.1
sewage 10.0 14.0 17.1
central heating 17.9 24.8 28.3
hot water 0.5 5.2 6.4
bathroom or shower 5.4 8.4 10.5
gas stove (gas lines or bottle) 48.2 59.5 65.9
electric stoves 0.0 0.0 0.1
State, public organizations, cooperative-owned rural
living space equipped with
running water 30.3 38.4 45.0
sewage 23.0 28.5 34.2
central heating 26.9 30.8 34.9
hot water 9.1 13.6 16.8
bathroom or shower 19.4 23.9 29.4
gas stove (gas lines or bottle) 60.8 73.7 77.6
electric stoves 0.2 1.8 2.7
SOURCE: Zhilishchnye (1990), p. 39 .
NOTE: Of the privately-owned rural housing, 76% is equipped with gas, 8-16% is equipped with central
heating and running water, and less than 4% is equipped with sewage lines.
 -37-

TABLE 7
HOUSING CONSTRUCTION BY REPUBLIC

1980 1985 1986 1987 1988 1989

Million square meters of housing space
USSR L 105 113 1 119.8 - 131.5 132.3 128.9
Thousand square meters of housing space
RSFSR 59,351 62,551 66,174 72,845 72,330 70,983
Ukraine 17,326 19,193 20,441 21,257 20,978 19,510
Byelorussia 4,291 5,106 5,396 5,878 5,594 5,650
Uzbekistan 5,742 6,004 6,345 7,051 8,251 8,629
Kazakhstan 5,793 6,627 6,791 8,323 8,784 8,608
Georgia 1,698 1,727 1,696 1,778 1,687 1,497
Azerbaijan 1,348 1,746 2,104 2,849 2,815 2,650
Lithuania 1,686 1,841 1,990 2,098 2,003 1,843
Moldavia 1,526 1,699 1,803 2,111 1,974 1,757
Latvia 1,099 1,170 1,266 1,354 1,130 1,085
Kirgizia 1,059 1,096 1,198 1,216 1,354 1,462
Tadjikistan 1,049 1,096 1,203 1,423 1,618 1,684
Armenia 999 1,113 1,290 1,142 1,125 1,328
Turkmenia 1,028 1,129 1,180 1,308 1,544 1,621
Estonia 812 785 815 812 677 589

SOURCE: Narkhoz 1989, p. 156; Kapital'noe (1989), p. 136.

Dating from the mid-1950's, the government decreed the development of a network of
LPC plants and design bureaus mainly in the largest cities. The LPC technology fit the pat­
tern of Soviet planners reliance on large scale standardized solutions involving assembly-type
heavy industrial techniques. The LPC process seemed to allow for the realization of large
economies of scale in housing production, and offered the prospect of rapid improvement
of Soviet housing conditions. All other housing construction technologies were considered
"without a future" and were starved of resources, leading over time to the deterioration
of
their physical assets and their associated pools of human capital. Despite three decades of
emphasis on LPC technology, efforts to meet the country's demand for housing have largely
failed.
 -38-

TABLE 8
HOUSING CON3TRUCTION BY REPUBLIC
(thousand housir.g units) ___•_____

1980 1985 1986 1987 1988 1989

USSR 2,004 1,991 2,100 2,265 2,231 2,119
RSFSR 1,190.5 1,151.4 1,217.1 1,312.9 1,282.6 1,231.3
Ukraine 329.0 341.0 361.1 371,0 361.2 328.7
Byelorussia 80.4 88.5 92.1 99.7 92.5 94.4
Uzbekistan 91.7 85.0 90.3 100.8 111.7 114.0
Kazakhstan 103.5 110.3 110.9 134.0 134.6 127.9
Georgia 25.1 26.2 24.2 24.5 22.7 18.2
Azerbaijan 23.3 27.7 32.4 39.0 37.0 34.8
Lithuania 28.3 28.8 30.8 33.8 31.6 28.8
Moldavia 27.5 28.1 29.0 34.2 30.6 25.7
Latvia 19.9 19.9 21.1 23.0 18.3 17.4
Kirgizia 18.1 16.6 18.9 18.9 20.3 21.7
Tadjikistan 18.7 19.4 20.8 24.6 27.1 28.8
Armenia 15.4 16.6 18.2 15.8 14.5 17.7
Turkmenia 14.5 15.7 16.9 17.4 19.3 20.1
Estonia 14.4 13.5 13.5 14.0 11.4 9.5
SOURCE: Narkhoz 1989, p. 159; Kapital'noe (1989), p. 147.

The rigid large panel construction process has left an indelible mark on the Soviet urban
landscape. In order to make the LPC process cost efficient, the panel producing enterprises
undertake large production runs, requiring a high degree of standardization. As a result,
five-story and later nine-story large panel buildings have come to dominate housing con­
struction in all Soviet cities, accounting for 76% of all housing produced by LPC technology.
These buildings have only 5 different apartment plans which must accommodate 20-25 dif­
ferent types of families as distinguished by the Soviet sociologists (Ronkin, 1989, p. 16). The
rigidity of standardized panel construction has resulted in a monotonous and expressionless
look to the majority of new urban developments; and an inconsistency between the available
housing and the social and demographic composition, cultural traditions, and preferences
of the population. In addition, the standardization has ignored the varying climactic
conditions of different geographic regions of the USSR.
 -39-

TABLE 9
HOUSING CONSTRUCTION PER 10,000 POPULATION
BY REPUBLIC
(average annual production, housing units)
-7976-80 J 1981-85 1986-89
USSR 78 74 77
RSFSR 88 83 87
Ukraine 69 67 69
Byelorussia 82 86 94
Uzbekistan 60 51 54
Kazakhstan 75 69 78
Georgia 50 51 42
Azerbaijan 42 41 52
Lithuania 95 84 85
Moldavia 68 65 69
Latvia 79 75 76
Kirgizia 51 44 48
Tadjikistan 54 45 51
Armenia 58 53 50
Turkmenia 54 46 54
Estonia 92 91 78
SOURCE: Zhilishchnye (1990), p. 9 5 .

TABLE 10
DISTRIBUTION: OF STATE-FINANCED HOUSING
BY: WALL MATERIAL
____________________ (percen to f all fin ishedco n structio n) _

1980 t 1984 1989

Brick and stone 35 34 33
Large panels 51 52 53
Large blocks 5 5 4
Wood 5 5 5
SOURCE: Zhilishchnye (1990), p. 9 9 .
 -40-

To a large extent this situation is due to the prevailing reward structure in the Soviet
housing construction industry. Since industry performance has been based solely on the
number of square meters of housing built, the easiest way to fulfill plan targets has been to
build essentially the same housing everywhere (see chapter 7).

4.5 Mechanisms and Types of Tenure

There are three major types of housing ownership in the USSR: state, cooperative, and
individual (i.e., private). State ownership dominates in the cities, while individual housing
is prevalent in rural areas. The cooperative housing sector constitutes a relatively small
share of the total (see Table 11). A minor share of housing belongs to public organizations
such as trade unions.

TABLE 11
FORMS OF OWNERSHIP OF HOUSING STOCK, 1990
(percent)
Urban J Rural
State Housing 72.3 24.0
* Regional/Local Councils 35.5 1.3
* Ministries/enterprises 36.8 22.7
Public organizations 0.3 0.3
Collective farms 0.3 5.8
Housing Cooperatives 5.7 0.2
Private 21.4 69.8
SOURCE: IMF (1990), p. 339 .

4.5.1 State-Owned Housing

State-owned housing is divided into municipal stock and "departmental" (vedomstvennyi)

stock managed by the industrial enterprises and ministries. In 1957 the Soviet government
transferred responsibility for all state-owned urban housing to the jirisdiction of the
municipal authorities (city councils). The rationale for this decision was the hope for
improved coordination of housing construction and allocation under a "single-developer"
system (see Trehub 1985 for a more detailed description).
 -41-

So far, however, the ministries and enterprises have been largely successful in resisting
this transfer. Control over housing is important for enterprises because the departmental
housing stock plays an important role in their ability to attract and retain valuable em­
ployees. 7 In addition, the municipal authorities are normally ill-equipped to take on the
burden of building and operating more housing. Despite the central authorities' repeated
calls for the transfer of housing to the city councils, the municipalities controlled less than
half of urban and just over 5% of rural state-owned housing stock in 1990 (see Table 11).8
During the 1986-1989 period only 850 million sq. ft. of housing (8% of the (epartmental
stock) were transferred to the city councils.

Soviet citizens rent housing from the state for indefinite terms. The renters consider their
apartments as almost their personal property which can, after some effort, be transferred
to their children or even "sold" to others. 9 Even individuals who rent their housing in
buildings managed by enterprises cannot be easily evicted after the termination of their
employment.10
The Soviet enterprises and ministries also operate a large number of worker hostels,
which by the end of 1989 housed approximately 8 million people. As a rule, several workers
share a room in these hostels. Common facilities (kitchens, bathrooms, etc.) are very limited
in availability and are shared by a large number of people. Regulations prohibiting families
from living in the hostels for singles are not always enforced. Sometimes factories build
temporary dormitories for families, but many families end up living in these quarters for
many years. According to one Soviet newspaper account, at one enterprise three quarters
of the residents had been living in such a "temporary" hostel for almost twenty years (Trud,
December 8, 1984). Hostels are located primarily in the new industrial cities, as well as in
the cities with highly restrictive residency policies such as Moscow.

According to official data, almost 15% of Soviet households continue to reside in

'"communal" apartments where several families share a kitchen, a bathroom, and other

7Note,
however, that housing does not serve as an efficient incentive for better work. It takes a long time to
obtain a unit even for a good worker and, more importantly, after it has been awarded housing loses its incentive
role.
8Itmust
be mentioned that Moscow and other large cities have a better track record of bringing state-owned
housing under the control of the municipal authorities.
9While exchanges of apartments are legal with the new occupants registering with the respective management
organization, "selling" of state-owned housing by the tenants is, of course, illegal. Nevertheless, transactions
similar to selling and purchasing, including side-payments during apartment exchanges and bribes to officials re­
sponsible for housing allocation, are commonplace.
"Housing controlled by state-owned farms and some other types of enterprises provides an exception to this
rule.
 -42­

auxiliary facilities. These data, however, may be seriously flawed as they do not take into
account the members of extended families who are forced to share an apartment because
they cannot obtain separate housing. Official data on distribution of families by type of
housing are given in Table 12.

TABLE 12
DISTRIBUTION OF FAMILIES BY TYPE OF HOUSING
Number of sand
Families, Thou- Percent
Pretoof Total
oa

Total Urban Rural Total Urban Rural

Apartments 38,642 33,077 5,565 52.9 66.6 23.8
Houses 24,283 8,276 16,077 33.2 16.7 68.3
Communal
Apartments 3,488 3,158 330 4.8 6.3 1.4
Parts of houses 2,414 1,525 889 3.3 3.1 3.8
Hostels 2,285 2,138 147 3.1 4.3 0.6
Other 223 158 65 0.3 0.3 0.3
Total Families 73,078 49,644 23,434 100 100 100
NOTE: Figures do not include households consisting of singles nor those renting
privately.
SOURCE: GOSKOMSTAT USSR, Press-vypusk No.177, May 4,1990.

4.5.2 Cooperative Housing

A housing construction cooperative (HCC) is a voluntary organization of citizens who

wish to improve their housing conditions by constructing an apartment building using their
pooled resources and government credit. It is important to unders tand that HCC members
do not physically build housing by themselves but hire construction contractors (usually
government enterprises) to do the job. Housing cooperatives are independent legal entities.

Strictly speaking, the cooperative members do not own their apartments. Instead they own
shares in the building. Decisions regarding the sale, exchange or bequest of their dwellings
must be approved by the executive committee of the cooperative. All such transactions are
contingent on the approval of the cooperative's membership. Given their participatory
nature, housing cooperatives constitute relatively democratic organizations of citizens.
 -43-

At present, cooperative housing constitutes approximately 5.7% ofall urban housing stock
and 0.2% of rural housing (Table 11). The share of cooperatives in housing construction has
grown, from 5.2% in the late 1970's to over 6% in the second half of the 1980's, but remains
small relative to overall output. Historically, little funding has been available to cooperatives
because of the higher priority accorded to other housing investments. The role of the HCC's
is likely to increase in the near future as reforms shift the burden of housing financing from
the state to individuals (see sections 5.3 and 8.1 for more information).

4.5.3 Privately Owned Housing

Private ownership of housing is widespread in rural areas, where it constitutes 69.8% of

all housing stock, and in small cities. Until recently, individual housing construction had
been discouraged by the government, and indeed, construction of private housing was pro­
hibited in cities with a population of over 100,000. Serious limitations on the size of
privately-owned residences were in effect as well. In addition, the exchange of private houses
for state-owned apartments was not permitted.

By now, most restrictions on private ownership of a dwelling unit have been lifted or
greatly relaxed, and individual housing construction is seen as a primary means of resolving
the country's housing problem. It is still prohibited, however, for Soviet citizens to own more
than one residence, and spouses living together can only own one house." Importantly, the
law continues to prohibit private ownership of land on which housing is situated. The sale
and bequest of privately-owned houses, though, can be accomplished relatively freely.

4.5.4 Private Rental Housing

Soviet law has allowed households and singles to rent all types of housing from private
individuals. State-owned and cooperative apartments, however, cannot be systematically
rented out for profit under the law. 12 Officially, a landlord can charge rent only up to the
amount of his own expenditures on the dwelling. This restriction has been routinely violated.
According to some estimates, the per square foot rent charged in the late 1970's in private
subletting typically exceeded the rent on state-owned housing by a factor of 10 and more
(Alexeev 1991). According to Soviet newspaper reports, the rent for a one-room apartment
in a Moscow cooperative in the mid-1980's varied from 50 to 100 rubles a month depending
on location. Based on official data, an average Soviet household at the time was spending
less than 15 rubles a month on housing rent and utilities. (For more information on private
rentals see section 8.2.)

"Suburban residences not equipped for year-round occupancy are excluded from this rule.

T'he word "systematically" provides a loophole making it difficult to convict anybody for violating this law.
 -44­

4.5.5 Countryside Houses (Dachas)

The law prohibits a Soviet household to own or rent more than one permanent residence.
Households are allowed, however, to have a country house, or dacha. The concept of a
dacha is rather broad and vague. The following is a description provided by Smith (1976):

Dacha is one of those magical elastic words in Russian that conceals more than it reveals. ... For a dacha
can mean anything from a little, oversized toolshed or a one-room cabin on a tiny plot of ground, sur­
rounded by a development of identical little cabins with no privacy, to a modest but pleasant four-room
country cottage without plumbing in a plain Russian village, to a grand mansion taken over from the old
aristocracy or a more up-to-date, rambling country villa built in the forties by German prisoners-of-war.
(p. 47).

Some dachas are owned by the state or an organization and can be used free-of-charge
or for a token payment by certain officials. Others are privately-or cooperatively-owned,
and can be bought or sold in a rather free market environment. The owners often spend
weekends, vacations, and even some weekdays at their dachas. Many urban households rent
dachas during the summer. According to "Sotsial'noe ..." (1989), there exist 6.3 million sub­
urban dwellings for "temporary living," Out of this number, almost 6.2 million are houses
located on garden plots, with the remaining 103,000 referred to as dachas. Estimates
(Kosareva et ai, 1990) indicate that only about 20% of construction materials for garden
houses are obtained legally. As a rule country houses have virtually no amenities.

The demand for dachas and garden houses appears to be rising rapidly, and their
construction is accelerating. It must be noted that the newly built dachas are considerably
better supplied with amenities than the existing stock. Soviet economists expect that the
urban population's investments in country houses will more than double its investments in
individual permanent residences.13

3As a means of providing a quick, significant, privately-financed increment to the housing stock, it has been
suggested that garden houses could be converted into year-round units. Of course, this proposal would have to
be evaluated against the costs of providing basic infrastructure and probably improved transportation services.
 -45­

5 INSTITUTIONAL FRAMEWORK FOR HOUSING PRODUCTION

AND MANAGEMENT

As one hears on all fronts, the allocation of functions and responsibilities within the
Soviet housing sector among the union, republic and local levels of government is in a state
of flux. The importance of the union government, particularly the union ministries, has been
rapidly declining since early 1990. Even prior to the failed August 1991 coup attempt, the
majority of policy and planning decision-making had passed to the republic level of
government.

Currently, most urban housing is still designed and built by state design bureaus and
construction enterprises, respectively. Until recently, the major part of financial resources
for construction has been appropriated by the central government, while the actual
contracting and oversight of housing construction, as well as management of the existing
housing, has remained the responsibility of the local entities, including local government and
state enterprises. The executive committees of the local councils are playing an ever
increasingly important role with respect to the provision of housing.

This chapter attempts to trace the evolution in the allocation of housing sector
responsibilities among the three levels of government in the areas of policy and plan
formulation, financing, regulatory framework, production, maintenance and cost recovery.

5.1 The Overall Planning Process for State Housing Construction

Until the demise of the union ministries, all state housing construction took place in
accordance with the plans of economic and social development of the USSR. State housing
construction was carried out directly through centralized allocations of investment resources,
and indirectly through the internal funds of the state enterprises. With respect to housing,
priority in centralized investment allocations was given to the construction of workers' hous­
ing for the new enterprises and in newly developing regions.

The center allocated investment resources either by industry or region. There existed a
long list of the union and union-republic ministries and agencies which received planned
centralized allocations of resources for housing construction. 14 In addition, the Councils of

"4The union ministries are subordinated to the Council of Ministers of the USSR. The union-republic
ministries ,ist both at the union and at the republic level. In this case the republic ministry is subordinated to
both the corresponding union ministry and to the republic Council of Ministers.
 -46-

Ministers of the union and of the autonomous republics,15 and the executive councils of
people's deputies in the provinces and in the cities were supposed to work out the five-year
and annual plans for residential construction and its corresponding infrastructure. The
annual plans formulated by the regional authorities included the planned housing targets of
the enterprises subordinated to the all-union authorities.

After receiving information on housing requirements, the union ministries used to allo­
cate the disaggregated investment targets to their respective subordinated enterprises. Plan
targets included the total cost of construction work, the overall housing space, and the
number of apartments to be built. In a similar manner the Councils of Ministers of the
republics disaggregated the plan targets for their constituent autonomous republics and the
executive councils of the provinces and cities, as well as for their subordinated republic-level
enterprises. The final lower level plans (those at the autonomous republic, province and city
levels, and at the enterprises) were based on the total construction volumes approved from
above. However, the lower level authorities provided the higher authorities with information
on housing requirements and investment allocations. These requests were presumably taken
into account when the higher level planners disaggregated the housing targets for the lower
level planners.

The centralized planning targets for housing construction were formulated in physical
units such as housing space and the number of apartments constructed. The volume of finan­
cial investment was then determined based on an average estimated cost of housing for each
republic or union ministry.

The role of the central and republican planners essentially ended after the final versions
of the local disaggregated plans were distributed. From that point on the local authorities
(either municipal or enterprise) contracted for housing construction with the builders and
oversaw the construction process. 16

Housing construction in large cities was and still is conducted mostly through a single
(unified) client organization set up under the municipal executive committee. Depending on
the volume of construction, these organizations are called "sectors," "administrations," or

tThe union was composed of 15 republics. The republics are divided into provinces (oblast', plural oblasti).
Certain national areas within some of the union republics are named the Autonomous Soviet Socialist Republic.
Their top officials have titles of ministers. For most practical purposes, however, the status of the autonomous
republics is similar to that of a province.

"6It must be pointed out, however, that earmarking investment resources for a particular project in the plan
does not necessarily imply that these resources would actually be available to the project. Further intervention
of the authorities at the republican or ministerial level may be required to assure obligation of the needed inputs.
Often the construction organization or the client may find it necessary to intercede with higher level authorities
in order to ensure the flow of financing through project completion.
 -47­

"main administrations of construction" (see section 7 for a detailed explanation of the Soviet
construction sector). As a rule the city contracts with a state-owned construction enterprise.
The largest cities have their own construction companies. Recent changes have involved the
affiliation of construction cooperatives with municipal authorities, which have appeared in
cities such as Omsk. These brigades build residential housing under contract with the city
council or other clients.

In the past, the union ministries that received centralized investment allocations and
wanted to build housing for their enterprises in a particular city, transferred the investment
resources to the Council of Ministers of the corresponding republic. The republican authori­
ty then made these resources available to the city council. After the construction phase was
completed, the city council's executive committee allocated the requisite amount of housing
space to the appropriate enterprise. 7

In some large cities, and in many medium to small size cities and towns, a majority of
housing was, and most likely continues to be, contracted directly by the industrial ministries
and departments, which circumvents the municipal executive committee process. Various
cooperative and public entities also organize for the purpose of housing construction.18
These organizations obtain land for construction from the municipal government, contract
for design work, obtain necessary bank credits, and negotiate a contract with a construction
organization. Sometimes these latter organizations, which wish to construct housing on a
one-time basis, use a construction company temporarily set up for a specific project.

An important function of the local authorities has always consisted in monitoring the
quality of construction. The responsibility for the final approval of the completed project
belongs to the special "state acceptance commission." Prior to presenting the project to the
commission, however, the client and the builder check the quality of work to verify agree­
ment between the performed work and the original project design, cost estimates, and other
parameters. At the final stage of the process, the project is inspected by the executive
committee of the local council of people's deputies. Only atfter the executive committee
approves the report of the state acceptance commission can the housing project be included
in the plan fulfillment report.

7The city normally withholds certain amounts of housing for the workers of the construction enterprise that
constructed the housing (10% of housing space), for the housing management personnel (2% of housing space),
and for resettlement of the displaced residents from the site of the new housing (up to 6% of housing space).

"8Alternatively, a housing cooperative can delegate the role of the consumer to an appropriate department
of the executive committee of the local council.
 -48­

5.2 Regulatory Framework for the Planning of the Soviet Cities

Zoning of Soviet cities takes place within the framework of the so-called General Plan
of the City which is formulated by the municipal authorities. The General Plan outlines the
directions of a city's long-term development including the approximate volume of new con­
struction requirements. Due to their aggregate nature and low degree of precision, the con­
struction volumes in the General Plan rarely have a significant effect on the specific policies
of residential construction.

Planning for the development of Soviet cities, and the private sector's potential role in
that development, is viewed problematically for the following reasons (see Poulsen, 1980):
• no coherent guidelines for city development exist in the USSR;
" cities do not have adequate staff to elaborate nor review development plans and often
contract with special agencies in Moscow or St. Petersburg, which have almost no know­
ledge of local circumstances;
• adequate demographic and economic data are usually not available to city planners nor
construction enterprises;
" completed plans are often not implemented due to the municipalities' lack of investment
resources and political authority over the industrial enterprises and other agencies;
" enterprises and agencies contract for housing construction according to their own
priorities often disregarding the General Plan and the existing city infrastructure;
" acute shortage of housing and lack of resources for resettlement prevents the cities from
tearing down existing obsolete dwellings, thereby pushing new urban development onto
the periphery.

Typically, residential housing takes up only 20-25% of a city's territory. Approximately

40% of the developed territory is occupied by industrial enterprises and warehouses. Accord­
ing to Ronkin (1989), in most cities 70-75% of new construction will have to take place on
undeveloped land located at or near the periphery.

It should be noted that the General Plans for most cities had been developed prior to the
introduction of the ambitious "Housing 2000" program. For that reason, existing city plans
have inadequate provisions for the building plot and land requirements to meet the "Hous­
ing 2000" program goals. Many large cities already lack available land for residential con­
struction.
 -49­

5.3 Design of Housing and Control of Standards

The design of housing is usually performed by central design bureaus subordinate to the
State Committee on Architecture. 19 In larger cities such as Moscow, the entire construction
complex (design and construction) may be subordinate to the city council. Even at that level,
however, an incentive structure that rewards gross volume output and other plan targets im­
pedes innovation and variety of design (see section 6.3).2" Often there is no competition
in design and little consideration given to alternative designs for projects. Cooperative and
private consumers of housing, like municipal authorities and state-owned enterprises, usually
use standardized housing designs. In the late 1980's, the government permitted the formation
of housing design cooperatives, but little information is currently available on their activities.

The responsibility for providing expert advice to construction organizations, controlling

quality of output, developing Pew technologies and standards, lies with the State Committee
on Construction and Investments (formerly GOSSTROI), an agency which until 1988
coordinated the activities of a major portion of the Soviet construction industry.

5.4 Land Use Practices

Land use practices in Soviet cities are notably different from those in the West. Western
cities have developed through a multitude of individual-public and private sector-decisions
based on maximizing the utility of their investments. These decisions take into account dif­
fering costs of land based upon competitive bidding, economies of scale, and the benefits
of agglomeration with similar or complementary enterprises. In this market-based environ­
ment, differential land rents can be visualized as a three-dimensional surface with its pin­
nacle in the central business district and lesser nodes at important transportation intersec­
tions.2

19According
to Ronkin (1989), in the entire Soviet Union there is only one central and 5 regional design insti­
tutes which develop a limited number of basically similar standard designs. There is a significant additional pool
of skilled architects and engineers who work in the Soviet construction industry but who can presumably switch
into residential housing design. As recently as early 1991, researcl. work in construcdion organization and tech­
nology was performed by 50 research institutes and 84 research divisions in the design institutes attached to
Gosstroi USSR, construction ministries, committees, trusts, and associations. In addition, A/E design work is
performed by scientists from 30 construction and architectural ttcaching institutes and 90 construction depart­
ments of the polytechnic teaching institutes (roughly equivalent to US engineering schools).
2 The construction industry as a whole is evaluated by the state apparatus according to the estimated
(smetnaia) total cost of its projects (the greater the cost, the greater the reward) and the amount of housing
space built, regardless of its acceptability to the future occupants.
21See Thomas Poulson, "Urban Forms and Infrastructure in the Soviet Union" in S. Grant, Editor, Soviet
Housing and Urban Design, HUD, 1980, pp. 18-20.
 -50-

In Soviet cities, however, public decisions have not been motivated by a desire to allocate
land to its best and most cost-effective use. Land has been treated as a free commodity with
no inherently different values for central versus peripheral locations. Thus one finds obsolete
factories with extensive storage yards near the centers of most towns, occupying land that
would be far more useful for housing or service functions. Between 30 and 40 percent of
inner areas of cities are, in fact, given to industrial land uses-a very high proportion in
comparison with the 8 to 11 percent characteristic of American cities.22

Since the ministries responsible for industrial land use pay no taxes based on the utility
of land, nor would it receive anything for relinquishing its central location, there is no
incentive to relocate. Thus, opportunities for more intensive and rational land use are fore­
gone. This contributes to a fossilization of city land use patterns-once a structure and a
function is established, it perpetuates itself until a specific administrative decision forces
change. As a result, vast tracts of prime urban land are wastefully tied up with inefficient
and inappropriate land uses.

At present, Soviet cities are beginning to address the absence of land markets. According
to the existing law, all land in the USSR is national property. In other words, the law still
does not permit full private ownersilip of land. The law on land reform passed at the end
of 1990 allowed private farmers a limited ownership of land (farmers can "own" land but
cannot resell it to another individual). Further land legislation is being prepared in the
Russian parliament, but at present it is not clear what degree of private ownership will be
permitted. While significant resistance persists with respect to allowing relatively free trade
in land by individuals, the recognition of the necessity of land markets is growing. Without
such systems in place, land cannot be allocated or developed efficiently.

The land situation is further compounded by considerable confusion over what

government entity or enterprise owns which state assets, and the unclear division of
responsibilities for the development and maintenance of public spaces and urban utilities.
Full private ownership of land is not necessarily the only solution. Experts have noted the
important experiments taking place in China that involve long-term leasehold contracts
"rmparable to those in effect in Hong Kong. 23 Under such a system, the state maintains
permanent ownership of urban land, but land-use rights can be traded and inherited
according to the terms of the lease.

2 Ibid, p. 19.
3See Chapter 9: Housing in "A Study of the Soviet Economy", IMF, World Bank, OECD, and EBRD,
February 1991.
 -51­

5.5 Infrastructure and Supporting Facilities

The construction and maintenance of infrastructure (utilities, utility lines, access roads,
public transportation) is the responsibility of either local authorities or enterprises. Utilities
and other infrastructure for housing construction cooperative (FiCC) projects are the
responsibility of the city councils. 24 Both city councils and state entcrprises, however, tend
to neglect the development of infrastructure for housing. Construction of actual housing
space is considered more important than the adequate provision of supporting infrastructure.
This is due to the fact that the reward structure under which performance is evaluated is
based on the housing space built and the number of households resettled in new housing.
Additionally, housing construction often takes place on the outskirts of the city, making pro­
vision of adequate infrastructure extremely expensive. Enterprises, acting as free riders on
existing municipal services, often disregard the effect of new housing production on the city
resources.

The same factors inhibit the development of commercial and community facilities such
as shops, stores, schools, recreational areas in newly built housing projects. In the larger
cities of the Russian republic, expenditures on commercial and community facilities
constitute 25% to 33% of total investment in housing construction. Soviet researchers,
however, have calculated that the ideal figure should exceed 50%. Given the emphasis on
housing production, resources allocated for community and commercial facilities are often
under-utilized. In 1987, for example, 98% of the resources allocated to housing were
expended, while only 86% of the resources earmarked for the construction of supporting
facilities were utilized.

The implications of the decentralization tiend in housing finance cil the development of
infrastructure and supporting facilities are not clear. On the one hand, traditionally,
investments for infrastructure used to come mainly from the central budget. The reduction
of the role of central budget may, therefore, lead to a reduction in expenditures on infra­
structure. At the same time, an increase in housing construction activities by enterprises,
cooperatives, and individuals may further burden the existing infrastructure and services. On
the other hand, local sources of financing are presumably more responsive to the wishes of
the new housing tenants who may demand more locally-based investments in supporting
facilities and infrastructure.

5.6 Management of Housing

Management of state-owned residential housing is performed by either the local executive

committee of the local council or by the enterprise which financed the construction.
Cooperatives and private individuals manage thepr own housing. Utilities, however, are

"Incidentally, this is one of the reasons why the local authorities do not particularly favor HCC's.
 -52­

tsually under the control of the city council. Enterprises and organizations which own
housing often manage some of the utilities servicing the housing under their control.

Management of state-owned housing is guided by economic and financial plans that are
prepared for every housing management organization. These plans are developed by the
housing manager and the accountant and have to be approved by the municipal authorities
or by the enterprisc which owns the building. An economic-financial plan is based on the
condition of the housing unit and takes into account the comments of the tenants. I he plan
is considered by the so-called housing committee (domovoi kormitet) which can make non­
binding suggestions. The housing committee is a public organization of the tenants residing
in a housing unit serviced by a particular housing management organization. The housing
committees are subordinated to the executive committee of the local people's council or to
the trade union administration of the enterprise which owns the building.

It is our understanding that there are a large number of state-owned management

organizations. At least in some districts of Moscow and St. Petersburg, there are 3 or 4
present. To date they have not competed with each other. Importantly, however, they could
be transformed into competitors in the future.

5.7 The System of Housing Allocation

Residential housing is one of the most strictly rationed goods in the Soviet Union. The
Soviet Constitution proclaims Soviet citizens' right to housing and guarantees this right by
"fair allocation under public control." This allocation is not supposed to be based on one's
abijiv to pay but on a series of other indicators such as number of people in the family,
state of their health, or participation in the Great Patriotic War. While the Soviet desire to
provide decent housing to every citizen is commendable, the existing rationing system lends
itself to improprieties, corruption, and preferential treatment of certain consumers, creating
gross inefficiencies and inequalities, and impeding improvement in Soviet housing conditions
in the process.
The following sections describe the allocation process for state-owned, cooperative and
privately-owned housing.

5.7.1 State-Owned Housing

State-owned housing is highly subsidized by the Soviet state. High subsidies combined
with the relatively insufficient size of the housing stock result in large and persistent excess
demand for state-owned housing. This necessitates the employment of formal, non-price ra­
tioning mechanisms such as waiting lists. The waiting lists are managed by the executive
committee of the city or district council, in the case of municipal housing, and by the enter­
prises in the case of departmental housing.
 -53-

The officially proclaimed criteria for placement on a waiting list are based mainly on the
"genuine need" for improvement in a household's living conditions. Normally, the
"genuine
need" applies when a household has access to less than 7 square meters per person. The
limit is higher for the residents of communal apartments. The occupants of dilapidated hous­
ing are also eligible to join a waiting list. Some categories of citizens such as war veterans,
the handicapped, "heroes of socialist labor" and the like have privileges allowing them to by­
pass the regular waiting list (they form a list of their own). Criteria for being put on a wait­
ing list for housing differ among the individual cities and republics.

The interminc ble and ever-lengthening waiting lists illustrate the growing crisis of the
housing allocation system. In early 1991, the number of urban families and singles on these
lists nationwide reached over 14 million people (23% of all households). Almost three
quarters of these people resided in "self-contained" (versus communal) apartments with iess
than 7 square meters of housing space per person. Two million singles on these lists were
living in hostels. About two million families (120%- of all households on waiting lists) have
been waiting for improvement in their housing condition for over 10 years.

The data on the length of waiting lists and their movement as of early 1990 are shown
in Table 13. During the first six months of 1991, only 600,000 urban households, representing
4.4% of all families and singles on waiting lists, improved their living conditions and were
removed from waiting lists. Note that only the residents who have lived in a city for over
five years are eligible for a "permanent residence permit" (postoiannaiapropiska),thus enab­
ling them to join a waiting list. This implies that many recent arrivals in Soviet cities are not
reflected in the above numbers, regardless of whether they have a "genuine need" for hous­
ing improvement.'

Waiting lists by themselves, however, are not a very good indicator of housing demand.
Joining a list is essentially a cost-free endeavor, and as state-owncd housing rents are much
lower than the cost ot alternative types of housing, there is a strong incentive to do so.
Therefore, virtually all households who somehow satisfy the criteria join the queue. Some
households misrepresent their living conditions (i.e., by feigning overcrowding by registering
relatives who do not actually live in the dwelling).

Waiting lists are not the only way to obtain improved state-owned housing. Apparently
occupational status and connections play an important role in the allocation of state-owned
housing. Moreover, even though the "ability to pay" is supposedly not a factor for selection,
there is strong statistical evidence that household income and other "financial incentives"
operating through the second economy, are prime determinants in the allocation of state­
owned housing (see Alexeev, 1988 and Table 14).

'Most of the data in this paragraph are from GOSKOMSTAT, Press-vypusk 214, July 24, 1991.
 -54-

TABLE 13
CHANGES IN HOUSING CONDITIONS AND WAITING LISTS
IN URBAN AREAS BY REPUBLICS, 1989
Households on Number of Households on
Number of Waiting List with Waiting List as of
Households Improved Housing January 1, 1990
whose Hous- Percent of
ing was Im- Total
proved Households Percent of
(000's) on Waiting
Union/Republic J (000's) Tol
List (000's) Households
USSR 1,884 1,740 12.5 14,256 23.4
RSFSR 1,264 1,171 13.0 9,156 24.7
Ukraine 245 219 9.1 2,504 22.1
Byelorussia 80 76 12.5 619 28.1
Uzbekistan 45 44 17.8 218 12.3
Kazakhstan 109 98 18.1 547 19.7
Georgia 12 11 8.4 129 16.3
Azerbaijan 18 18 12.7 136 15.4
Lithuania 22 20 14.1 142 16.7
Moldavia 18 15 7.8 216 32.9
Latvia 16 13 9.0 149 21.6
Kirgizia 10 10 11.6 88 19.2
Tadjikistan 12 12 14.6 85 23.2
Armenia 10 10 13.3 113 27.5
Turkmenia 10 10 9.4 113 32.3
Estonia 13 13 28.9 41 9.8

SOURCE: SSSR v tsifrakh v 1989 godu, p.122.

The housing conditions of young families are the worst of all major demographic groups
in the Soviet population. Tue proliferation of the so-called Youth Residential Complexes
(YRC) has been billed as one solution to alleviating the problem. The YRC's are built
mostly by their future residents-young people, mostly families, between the ages of 18 and
30-in their free time utilizing the materials and equipment provided by their erpioyers
(state enterprises). The employers provide at least part of the financial resources necessary
to reimburse the professional building contractors. It is not clear if the state also participates
in financing the YRC's directly. Often several enterprises pool their resources in a YRC
project.
 -55-

TABLE 14
RELATIONSHIP BETWEEN HOUSING SPACE AND INCOME- 1989.
Average Monthly Income per Person for Urban Households
(Rubles)
Housing Space per 75 and 75-100 100-150 150-200 200-250
Person (m2) less 7- J 0 J 2 5 more
5.0 and less 22.3 17.0 11.9 7.3 5.5 5.8
5.1 - 7.0 24.2 22.8 19.8 14.8 11.3 9.9
7.1 - 9.0 21.8 23.1 22.3 18.7 15.5 13.2
9.1 - 11.0 15.7 18.8 22.3 23.1 19.8 15.7
11.1 - 13.0 6.7 7.6 8.7 10.3 10.6 9.6
13.1- 15.0 4.5 5.0 6.7 10.9 14.1 14.1
15.1- 17.0 2.2 2.2 3.1 5.3 7.4 8.8
17.1 - 20.0 1.4 1.9 2.6 4.7 7.5 10.3
20.1 - 25.0 0.7 0.8 1.4 2.5 4.0 5.5
25.1 - 30.0 0.3 0.5 0.7 1.4 2.4 3.9
30.0 and more 0.2 0.3 0.5 1.0 1.9 3.2
Average useful 10.6 11.4 12.6 14.5 16.6 18.6
space per person
Average living 7.7 8.2 8.9 102 11.6 12.9
space per person

SOURCE: GOSKOMSTAT

The YRC's are supposed to reduce construction costs and to improve housing conditions
of young families. However, th--free or very cheap labor of the youth participating in the
construction is often used by the builders to increase the earnings of the professional
construction workers. The YRC brigades are usually assigned to the least "profitable" tasks
in the project. From an economic standpoint, if one takes into account the lack of
construction skills and the sometimes significant opportunity cost of the future YRC
residents, actual cost reductions are questionable.
 -56-

In any case, the YRC's do not provide a long-term solution to the Soviet housing prob­
lem. The accommodations in the YRC's are relatively poor often with only one communal
kitchen per floor and no cooking facilities inside the flats. Also, it is not clear what will
happen to families as they grow older and larger. There are no guarantees that they would
be able to move to more suitable accommodations.

5.7.2 Cooperative Housing

To a large extent cooperative housing is supposed to be allocated on the basis of the

ability to pay. The prices of cooperative housing, however, are based on official wholesale
construction costs and do not represent true market clearing prices.26 In addition, the state
subsidizes the construction of cooperative housing through low interest rate loans (see
section 5.3). This results in queuing for cooperative housing as well. As of January 1, 1988
the number of people on cooperative waiting lists reached 1.5 million. Many of these people
(36.5% in the Russian republic alone) were also on waiting lists for state-owned housing.
At the present rate of cooperative housing construction, it may take up to ten years to pro­
vide cooperative housing for every person waiting for it. Moreover, households must meet
certain "need" criteria to qualify f2r cooperative housing, which implies that when such
requirements are lifted, as is proposed, more people are going to join the queue. 7

A housing cooperative can be affiliated with local councils, enterprises, collective farms,
or other public organizations. In order to organize a housing cooperative a group of inter­
ested citizens has to petition the housing department of the local municipal authGrity. They
may also organize through their place of employment, coursing their petition through the
management and the trade-union committee of the enterprise. A meeting is then convened
by the housing department (or the enterprise management together with the trade-union
committee) with everyone wishing to join the cooperative. The decision of this general meet­
ing, together with the list of the proposed members and their family members, is forwarded
to the executive committee of the local council. The council then either accepts or rejects
the general meeting's decision.

'Market clearing prices are prices which result in a balance between the supply of a commodity or service
and its demand. The official prices of housing and construction materials in the Soviet Union are too low in the
sense that demand at these prices far exceeds the available supply. This results in a shortage. Note that a
shortage in economic terms is simply a result of artificially low prices. Therefore, a sure way of eliminating a
shortage is to raise prices high enough to bring demand dovm to the level of supply. This may not always be,
however, a politically acceptable action.
'Household need in terms of living space per capita is determined by the republic or municipal authorities.
In most places it varies between 5 and 9 square meters per person. The local authorities are allowed to impose
additional requirements for cooperative housing eligibility.
 -57-

The number of cooperative members can vary significantly from one republic to another,
as each republic has its own "Guidelines for Cooperative Charters." In the Russian republic,
for example, the minimum number of members of a cooperative is set at 60 for Moscow and
St. Petersburg, at 48 for the capitals of the autonomous republics and provincial centers, at
24 for all other cities, and at 12 for rural areas. In other areas the minimum number of
members necessary to found a cooperative varies from 8 in Ashkhabad, to 10 in Alma-Ata,
to 24 in Tbilisi, to 40 in Kiev.

5.7.3 Privately-Owned Housing

The allocation of private housing normally takes place on a market or second economy
basis. The primary non-market element impacting the allocation of privately-owned housing
concerns the allotment of building plots. The priority for building plots is given to those on
waiting lists for housing improvement, especially employees with distinguished work records,
retirees, war veterans, and the physically handicapped. Preference is given to those house­
holds which transfer their state-owned accommodations to the local council in exchange for
a privately-owned house. Generally, though, the allocation of private housing is based mostly
on the ability to pay. Obstacles to the private production of housing include the lack of
access to construction materials and skilled labor, and poor supporting infrastructure.

5.7.4 System of Residence Permits (Propiska)

The Soviet Union uses a system of internal passports as a means to control the movement
and distribution of the population. A person is required to have a residence permit in order
to obtain a job. In some areas and for some people such permits are relatively easy to
obtain, but in many cities it is an extremely difficult process. Thepropiskasystem is a source
of severe inefficiencies and inequities. One of its primary effects has been to keep Soviet
peasants in a state of virtual serfdom by preventing their migration to the cities.

Temporary permits are issued for certain industrial sectors and cities which, for whatever
reason, experience a particularly severe labor shortage. Typically, it takes at least five years
to turn a temporary permit into a permanent one. While a temporary permit is sufficient for
employment, it does not qualify a person for permanent housing allocation or purchase. The
system of residence permits forces people to live in hostels or rent rooms from private
individuals for years. In 1989 worker hostels provided shelter for almost 8 million laborers
and, quite frequently, their families. 28

Enterprises located in the cities trying to control their population growth are required to
pay the city a fee for each additional person they hire. This fee presumably represents the

'Strictly speaking, Soviet regulations do not permit the housing of families in hostels, but these regulations
are often ignored by local authorities and hostel management.
 -58­

cost to the city of housing and other services for the additional employees. Reportedly, this
charge in the case of Moscow in 1990 was 30,000 rubles (US$5,000) (IMF, 1991).

According to the Soviet newspaper Izvestiia (October 14, 1991), the Soviet Committee of
Compliance with the Constitution (Komitetkonstitutsionnogonadzora)proclaimed the institu­
tion of propiska unconstitutional. While registration of residence may still be required, the
citizens do not have to obtain permission to reside anywhere outside of military bases and
border settlements. However, the Committee's decision relates only to prior Union legisla­
tion. In order to obtain real force this decision will need to be confirmed by the legislatures
of the various republics.
 -59­

6 HOUSING FINANCE AND FINANCIAL SYSTEMS

Most housing construction in the USSR is still financed by the state. In 1989 the direct
investment by both the state and state enterprises comprised 77% of the total investment
for housing. Public organizations such as trade unions, housing cooperatives, individuals, and
collective farms provided the balance. The breakdown of housing investments and construc­
tion by the source of financing since 1986 is presented in Tables 15 and 16.

TABLE 15
CAPITAL INVESTMENT IN HOUSING CONSTRUCTION
(comparable prices, billion rubles) __ _

Other Public Collective

State Organizations Cooperative Private Farms Investment
In- % of In- % of In- % of In- % of In- % of In- % of
vest- Total vest- Total vest- Tocal vest- Total vest- Total vest- Total
Year ment ment ment ment ment ment
1986 23.6 76.4 0.3 0.9 1.5 4.9 2.8 9.0 2.7 8.7 30.9 100
1987 25.9 77.3 0.2 0.6 1.6 4.8 3.3 9.8 2.5 7.5 33.5 100
1988 27.2 76.4 0.3 0.8 1.6 4.5 4.1 11.5 2.4 6.7 35.6 100
1989 28.3 77.3 0.3 0.8 1.5 4.1 4.3 11.7 2.2 6.036.6 100

SOURCE: SSSR v tsifrakh v 1989 godu, p.113.

Since the beginning of 1991 the Soviet government has tried to limit therole of central
budget financing to only those projects of special importance for the entire economy. To this
end, the government created the Fund for Economic Stabilization which was supposed to
be the only source of centralized investment financing.

6.1 Direct Investments from the State Budget

Direct investments from the state (i.e., Union) budget have been the primary source for
housing construction in the past. These investments, in turn, were managed by the city
councils or state enterprises. The state disbursed financial resources to the councils which
contracted for construction with builders. Historically, central budget allocations have also
gone to enterprises and organizations which may or may not supplement these appropria­
tions with internally generated funds.
 -60-

TABLE 16
HOUSING CONSTRUCTION BY SOURCE OF FINANCING
(million square meters of useful space)
Other Public Collective
State Organizations Cooperative Private Farms Investment
In- % of In- % of In- %of In- %of In- %of In- %of
vest- Total vest- Total vest- Total vest- Total vest- Total vest- Total
Year ment ment ment ment ment ment
1986 85.3 71.2 0.9 0.8 8.2 6.8 17.4 14.5 8.0 6.7 119.8 100
1987 94.3 71.8 1.0 0.8 8.9 6.8 19.3 14.7 7.9 6.0 131.4 100
1988 92.6 70.0 1.0 0.8 8.7 6.6 22.7 17.2 7.3 5.5 132.3 100
1989 89.6 69.5 0.9 0.7 7.8 6.1 23.7 18.4 6.4 5.0 128.9 100
Urban Areas
1986 66.5 81.1 0.6 0.7 7.9 9.6 6.8 83 0.2 0.2 82.0 100
1987 73.8 81.9 0.6 0.7 8.6 9.5 6.9 7.6 0.4 0.4 90.3 100
1988 73.9 80.6 0.7 0.8 8.5 9.3 8.1 8.8 0.5 0.5 91.7 100
1989 71.5 80.7 0.6 0.7 7.6 8.6 8.5 9.6 0.4 0.5 88.6 100
Rural Areas
1986 18.8 49.7 0.3 0.8 0.3 0.8 10.6 28.0 7.8 20.6 37.8 100
1987 20.5 49.9 0.4 1.0 0.3 0.7 12.4 30.2 7.5 18.2 41.1 100
1988 18.7 46.1 0.3 0.7 0.2 0.5 14.6 36.0 6.8 16.8 40.6 100
1989 18.1 45.0 0.3 0.7 0.2 0.5 15.7 39.0 6.0 14.9 40.3 100
SOURCE: SSSR v tsifrakh v 1989 godu, p.114.

Four state-owned banks have traditionally provided the financing for housing construc­
tion: the Industrial Development and Construction Bank (Promstroibank)which controls
32% of all state financing of housing, the Housing and Municipal Service and Social Devel­
opment Bank (Zhilsotsbank) which controls 29% of the total, the Agro-Industrial Bank
(Agroprombank) - 23% of the total, and the Savings Bank (Sberbank) - the remaining
16%.29 These banks normally do not serve as financial intermediaries making loans directly
to households. In fact, they often do not make any loans at all. Entities receiving state
financing for housing construction are allowed to open an account in a state bank. Payments
from this account then go to the contracting organization (builder). The main purpose of
the bank is simply to provide financial control over the construction process. State banks,
however, are allowed to make loans to contracting organizations that have been selected to
build housing for either a state enterprise or a private individual. Currently, with the

'The information in this paragraph comes mainly from A Study of the Soviet Economy, v. 3, IMF, World
Bank, OECD, and EBRD, 1991.
 -61­

breakup of the central ministries, most of the banks are in the process of conversion into
stock companies whose shareholders include other state banks or enterprises.

Recent studies report that the volume of direct state expenditures on housing construc­
tion, maintenance, and operation has approximately equaled the combined volume of rents
and income taxes (currently 13 percent of cash wages) collected by the state over the period
1922-1985. Though never publicly stated as an explicit policy decision of the Soviet gov­
ernment, Bessonova (1988), whose argument is summarized in English by Andrusz (1990),
maintained that the goal of the income tax system has been to centralize resources for
development of the housing sector. This argument has been generally accepted by specialists
in Soviet housing.

The breakup of the union ministries had a dramatic impact on the Soviet housing financ­
ing system. The recent virtual disintegration of the Soviet Union has all but eliminated
traditional central budget sources with the exception of monetary emission and some foreign
trade income. 30 For this reason, centralized investments will no longer play a significant
role in housing construction. It must be mentioned that the role of the central budget in
housing financing has been rapidly declining since early 1990. Even prior to the August 1991
coup attempt the bulk of state financing had been channelled through budgets of state­
owned enterprises. Nonetheless, some centralized investments in housing remained until very
recently. Presumably, at the present time the functions which used to be performed by the
central government budget have shifted to the republic budgets. Since the republic govern­
ments will no longer transfer resources (taxes and enterprise profits) to the union
government, they cannot expect to receive sizeable centralized budget allocations for
housing from the center anymore. Moreover, the republic governments are no longer obliged
to incorporate the housing construction plans of enterprises belonging to the union min­
istries into their own plans.

Local government has also received a greater authority to introduce local taxes and to
determine the patterns of spending of the resources available to them. 31 The cities also
have acquired the power to influence the housing plans of the enterprises located on their
territory. Finally, recent republic decrees authorize municipal authorities to receive a major
portion of the proceeds from privatization of state-owned housing. In most cities these
proceeds are supposed to be spent primarily on construction of new state-owned housing.

'Even these income sources appear to have been eliminated by the Russian republic government in mid-
November 1991.
3 Until
recently the USSR had only three types of local taxes-a tax on buildings, land, and motor vehicles.
However, the proceeds from these taxes were taken by the union government. The recent law "On General
Principles of Local Self-Management and Local Economies in the USSR" permits the local councils of people's
deputies to impose additional local taxes, fees, and tariffs, which they can use at their own discretion. This right
is confirmed by the Russian republic law on local budgets.
 -62-

In sum, the role of the union government in the housing area has been eliminated. The
republic governments have preserved a measure of authority in housing construction, while
the role of municipal governments has been enhanced. At the same time, of course, the
general tendency to marketization of the Soviet economy will be reflected in the increasing
importance of individual and cooperative financing of housing construction.

6.2 Enterprise Funds

State-owned enterprises and organizations finance their housing construction from two
sources-directly from the state budget and from the funds accumulated out of their retained
revenues. Of course, as long as these enterprises are state-owned their internal funds should
be considered as part of )werall state financing. Nonetheless, with the increasing autonomy
of Soviet enterprises and organizations, and particularly the prospect of their privatization,
the immediate source of financing acquires special importance.

One of the problems with enterprise financing of housing is the significant variation, given
the Soviet system of artificially set prices, in the varying profitability of different enterprises.
More importantly, state enterprises differ with respect to the amount of resources
(investments and subsidies) they receive from the state. For example, light manufacturing
and food processing until recently have received relatively few resources from the state and,
therefore, have built far less housing for their workers than enterprises in other industries
(see Table 17).

TABLE 17
STATE INVESTMENT IN HOUSING
BY SELECTED ECONOMIC SECTORS.
Square meters built per employee
Sector 1965 [ 1982

Energy and electrification 1.95 2.49

Chemical and petro-chemical 0.90 1.36
Ferrous metallurgy 0.50 0.81
Building materials industry 0.15 0.54
Light industry 0.09 0.22
Food processing 0.09 0.19
Agriculture 0.01 0.17
[SOURCE: Alekseev (1987), cited in Andrusz (1990), p. 2 6 5 .
 -63-

Recently, the most important development in the pattern of investment financing in the
country as a whole has been the decentralization of the investment process (see section 7).
With respect to state financing of housing construction this implies a greater emphasis on
enterprise funds at the expense of central investment allocations. While 52% of all housing
space in 1988 was financed directly from the state budget, only 31% was targeted to receive
centralized financing in 1990. During this same period the share of housing financed from
the funds of state enterprises increased from 17% to 36%. The ramifications of this shift in
financing indicate a greater role for local constituents, such as enterprise workers and
consumers in general, in setting investment priorities.

As noted previously, the continued importance of enterprise funds is, of course, in contra­
diction with the goal of transferring all state-owned housing to the municipal authorities.
Enterprises have been delegated a greater role in building an increased share of urban hous­
ing, but have not been given the responsibility to provide supporting infrastructure. This will
need to be resolved, perhaps by requiring enterprises to devote a certain share of their
resources to the provision of supporting facilities and infrastructure when undertaking a
housing constructirn project.

In addition to using existing internally-generated funds, an enterprise can indirectly obtain

financing from a state bank.32 The bank normally lends to tl ; construction organization,
not to the enterprise. The enterprise, however, is required to make a downpayment. The
downpayment is normally equal to 30% of total project cost, but is reduced (usually to 20%)
for some categories of enterprises such as those which produce consumer goods, and for
housing construction in the Far North, Far East. Kazakhstan, Siberia, and mining towns. 33

6.3 Housing Cooperatives

Historically, housing cooperatives have received little funding, given the higher priority
placed on other housing investment. Lately, a significant role in .,olving the housing shortage
has been assigned to the HCC's, though in 1989 ,ooperative construction still accounted for
only 6.1% of the total construction of housing in the USSR. Among the republics, the share
of cooperative housing construction reached 15.9% of the total in Lithuania, 13.6% in
Byelorussia, and 11.9% in Georgia and Estonia. In comparison, cooperative construction

32A
point worth considering is that by shifting much of the responsibility for housing construction to the
enterprises the state is in effect moving housing investment off budget. To the extent that enterprise: are
fimancing this construction through additional loans (because they are subject only to soft budget constraints),
then the banking system is financing the construction-leading to further macroeconomic problems.

'The recent attention devoted to mining towns is due in part to an increasing awareness of the very poor
hcusing conditions prevailing in such areas. This was dramatically brought to the attention of the central
authorities by the massive strikes in 1989 and again in 1990, organized by the miners' trade unions that wield
considerable political strength.
 -64­

plays an insignificant role in Kazakhstan, Tadjikistan, Turkmenia, and in some regions of

Russia (Amur, Kirov, Irkutsk, Samara, Smolensk, Ulianovsk provinces), where the
population is poorer than the Soviet average. 4

HCC's usually contract for housing construction with state construction enterprises, which
charge HCC's the same wholesale prices that they charge state organizations. As previously
noted, these prices are set below market clearing levels.

The members of HCC's are subsidized through state-sponsored low interest rate (0.5%
per year versus current estimates of inflation of at least 100%) long-term loans which
finance 70% of the cost for 25 years (80% in Kazakhstan, Siberia, Far East, Far North and
in the mining towns). In addition, the expenditures for preparing a site for construction and
for extending utility services to the site are borne by the local executive committee.

The loans to the HCC's are advanced by specialized banks such as Zhilsotsbank and
Sberbank (see section 5.1). To pay off the loans the HCC members make monthly payments
to the HCC. The HCC in turn makes quarterly payments to the bank. A 3% interest rate
is charged on overdue payments.

6.4 Individual Private Construction

Private housing construction takes place on a much smaller scale than the state-owned
housing construction, and accounted for only 18.4% of all housing construction in 1989
(Table 16). In rural areas, private houses can bc built by state inter-farm contracting
organizations 3- or by individuals. An individual may enter directly into a contract with a
builder. In cities, however, the individual's place of work (enterprise) or the local council's
executive committee enter into this contract on behalf of the individual.

The regulations on the financing of individual housing construction were significantly

changed by the Soviet government in a February 11, 1988 decree entitled "On the Measures
to Accelerate the Development of Individual Housing Construction." According to this
decree, rural residents wishing to build a new house can obtain loans of up to 20,000 rubles
(US $3333) for 50 years with payments starting in the third year. It is also possible to obtain
up to 4,000 rubles (US $666) for housing improvements. The payments here also start in the
third year and stretch over 10 years.

'While higher levels of cooperative construction activity normally correspond to higher income levels in cer­
tain republics, this alone does not explain the differences of HCC activity among the republics. The attitudes of
the local authorities toward housing cooperatives also play a significant role.

3Construction enterprises set up by the state to service the needs of groups of collective farms.
 -65-

Urban residents can obtain up to 20,000 rubles for 25 years for a new house and up to
3,000 rubles for 10 years for improvements and reconstruction. In both cases the payments
start in the third year. Urban residents can also obtain up to 20,000 rubles for 25 years for
the purchase of an existing home. Here payments start in year one. The interest rate is 2%
annually for rural residents and 3% for urban dwellers. Physically handicapped individuals,
veterans of World War II, and survivo:1 of military personnel killed in action pay no interest
on these loans. No independent confirmation was possible regarding the extent to which
loans to private individuals are being made in urban and rural areas.

If a loan is used for a purpose other than housing construction, repair, or purchase, the
state bank (Sberbank is the state bank most involved in lending to individuals) can call in
the !oan and charge 12% interest on the outstanding balance. Enterprises can also help with
payments on loans taken by employees for home building or home improvement. These
funds come from the enterprise's fund for social development. The size of the enterprise's
contribution is determined on the basis of the employee's seniority at the enterprise.

Recently, the government has permitted the sale cf unoccupied houses in rural areas to
urban dwellers for seasonal or temporary use as long as they contract with a state farm or
enterprise for delivery of agricultur. produce. In addition, all "unjustified" restrictions
specific to private housing construction (such as the prohibitioa to build individual housing
in the cities with population over 100,000) have been lifted. Urban dwellers have been
allowed to acquire niov.. for houses in suburban areas. Efforts are underway to revise the
General Plans for City Development in order to provide supporting infrastructure for newly
zoned areas for individual housing construction.

6.5 Cost Recovery Mechanisms for the Maintenance of State-Owned Housing

'The Soviet system of rents in state-owned housing has remained essentially the same
since 1928. In those days rents were differentiated according to household income, but wage
inflation over time has eliminated most rent variations. The basic monthly rent is either 13.2
kopeks or 16.5 kopeks per sq. meter (10.76 sq. ft.), depending on the size of the city. 6
Rentals do not take into account location inside the city or the quality of housing. The only
exception is the rent charged for occupancy in high-rises, which is set at 30 kopeks per
square meter (US $0.05).

Rent is charged only for "living space," which excludes kitchens, bathrooms, and other
auxiliary areas. Households which have more than 12 square meters per pers, n (plus 6
square meters per family) have to pay triple the usual rate for the excess space. The average
monthly rent per square meter reached 1.59 rubles in 1988.

TM
' here are 100 kopeks in a ruble.
 -66-

A common claim of the Soviet statistical agency is that the population's payments for
housing cover less than one quarter of state expenditures on maintenance. According to
Zhilishchnye (1990), state subsidies for operation and maintenance amounted to 11 billion
rubles in 1989 (a small drop from 11.4 billion rubles in 1988). Kolotilkin (1990), a Soviet
specialist on housing finance, has however disputed these claims, arguing that if one includes
rent for non-residential areas (stores, storage) in otherwise residential buildings, amortiza­
tion payments by the housing administrations of enterprises, ministries, and city councils, as
well as other payments, the subsidies would almost disappear. More than half of additional
payments cited by Kolotilkin, however, come from state-owned enterprises and, therefore,
represent a form of state subsidy to the individual renters.37

Rental payments constituted less than 3% of average household income in 1990. Taking
into account utility payments and payments for routine repairs, this percentage would ap­
proximately triple. 8 In any case, the cost of state-owned housing remains much lower than
the cost of cooperative or individual housing of comparable size and quality.

Incomes and expenditures of state-run housing maintenance (municipal and enterprise)

organizations are shown in Tables 18 and 19. These figures illustrate that the state enter­
prises tend to subsidize operation and maintenance to a greater extent than from the muni­
cipal maintenance organizations. The rationale is that enterprises, which have greater
resources, can better afford the subsidy. Specialized municipal organizations, however, may
be somewhat more efficient at maintaining housing stock.

Housing subsidies accrue to the households according to the amount of housing they
possess. Some researchers claim that housing inequality exacerbates income inequality while
others argue that this is not necessarily true. 39 The waiting lists described in section 4.7.1,
however, clearly demonstrate that the price of state-owned housing is far below market
clearing levels.

Despite the low rent, many tenants fall behnd in their payments. In 1989 overdue rents
amonnted to 307.9 million rubles or 13.7% of total projected annual rental payments (Boiko,
1991). This statistic testifies to the extreme poverty of a significant percentage of state­
owned housing tenants. This shortfall in payments is exacerbated by the virtual impossibility
of evicting a family from state-owned housing.

'The housing management organizations reimburse the state for part of the costs of reconstruction and
major repairs. They also cover part of their deficits from rental payments for non-residential housing users.

' Routine repair is the responsibility of the tenants.

'See Rutgaizer and Sheviakov (1987) for the first point of view, and Alexeev (1988, 1990) for the zecoud.
 -67-

TABLE 18
INCOME AND EXPENDITURES OF HOUSING MAINTENANCE
ORGANIZATIONS OF LOCAL COUNCILS
(per square meter of living space)
1985 Income 1989 Income
Total Rental Expendi- Total Rental Expendi­
I Payments tures Payments tures

USSR 3.18 1.59 3.39 3.30 1.60 3.67

RSFSR 3.29 1.65 3.69 3.46 1.67 3.97
Ukraine 3.30 1.51 3.05 3.07 1.51 3.52
Byelorussia 2.70 1.51 2.85 3.23 1.51 2.46
Uzbekistan 2.50 1.65 2.49 2.66 1.69 2.80
Kazakhstan 2.70 1.59 2.86 2.99 1.61 3.38
Georgia 3.07 1.53 3.28 3.64 1.56 3.64
Azerbaijan 2.78 1.53 3.12 3.13 1.59 3.51
Lithuania 2.99 1.61 3.57 3.20 1.63 3.73
Moldavia 2.76 1.64 2.81 2.86 1.71 3.03
Latvia 3.90 1.03 3.65 3.85 1.01 3.46
Kirgizia 2.20 1.55 2.49 2.32 1.54 3.49
Tadiikiscan 2.36 1.59 2.33 3.01 1.60 2.99
Armenia 2.31 1.21 2.88 2.26 1.11 3.40
Turkmenia 2.16 1.55 2.46 2.28 1.56 2.54
Estonia 4.31 1.62 3.91 5.31 1.63 2.61
SOURCE: ZHILISHCHNYE (1990), p.105.
NOTE: Total includes utility payments and payment for routine repairs.

6.6 Major Repairs of Housing

Financing of major housing repairs is provided by the institutional owners. For example,
enterprises repair the housing they own whiie cooperatives finance the repairs out of mem­
bers' dues. Expenditures on major repairs came to 4.3 billion rubles (US $717 million) in
1989, representing an almost two-fold increase since 1980. Approximately one million hous­
ing units (about 576 million sq. ft. of housing space) underwent major repairs.

According to GOSKOMSTAT, the average cost ef major repairs rose from 23 rubles per
square meter in 1980 to 80 rubles in 1989. The corresponding 1989 figures for the Baltic
republics were in the 120-145 rubles range due to a higher proportion of older housing, in
need of repair, in these republics.
 -68-

TABLE 19
INCOME AND EXPENDITURES OF
HOUSING MAINTENANCE ORGANIZATIONS OF
FINANCIALLY AUTONOMOUS (KHOZRASCHE7) ENTERPRISES
(per square meter of living space)
1985 Income 1989 Income

Total Rental Expendi- Total Rental Expendi­

Payments tures Payments tures
USSR 2.48 1.61 7.83 2.98 1.54 9.52
RSFSR 2.56 1.64 8.20 3.10 1.56 10.17
Ukraine 2.47 1.54 6.65 2.87 1.50 7.68
Byelorussia 2.08 1.50 6.29 2.93 1.47 9.25
Uzbekistan 2.30 1.75 7.14 2.53 1.63 7.15
Kazukhstan 2.16 1.49 7.75 2.53 1.48 8.30
Georgia 3.35 1.56 8.35 3.93 1.47 8.62
Azerbaijan 2.06 1.43 5.53 2.31 1.07 5.70
Lithuania 1.90 1.56 5.96 2.73 1.49 7.80
Moldavia 2.29 1.78 7.93 3.01 1.62 11.06
Latvia 1.90 1.11 6.58 2.44 1.01 8.92
Kirgizia 2.04 1.52 6.22 2.41 1.36 6.24
Tadjikistan 2.17 1.75 7.06 2.44 1.78 6.68
Armenia 1.53 1.12 5.89 1.57 0.87 5.66
Turkmeria 2.23 1.59 7.55 2.93 1.67 7.88
Estonia 2.31 1.70 7.58 2.68 1.76 8.74

SOURCE: Zhilishchnye (1990), p.106.

NOTE: Total includes utility payments and payment for routine repairs.

Major repairs can be either "complete" or "partial."During complete repairs, a significant

part of the entire building and mechanical plant are restored. This type of repair may
include the remodeling of communal apartments into self-contained units. Partial major
repairs only address a few particular elements of the building and/or equipment. The need
for two different kinds of major repairs has to do with the unequal longevity of the
building's components. Complete repairs are supposed to be performed every 18 to 30 years
depending on the type of the building. Partial major repairs are scheduled every 6 years.
 -69­

7 THE CONSTRUCTION AND BUILDING MATERIALS INDUSTRY

Since the first five-year plan in the late 1920's, the Soviet economy, by international stan­
dards, has been characterized by an unusually high rate of investment in the housing sector.
Traditionally the share of construction and installation expenditures in Soviet capital invest­
ments has exceeded 50%. Naturally, the Soviets have had to create a large construction ill­
dustry in order to support this investment program.

Since 1990, however, the volume of investments in the USSR in the housing sector has
been declining and the performance of the construction industry has deteriorated. This
decline is the end result of an industry that is characterized by large, monopolistic state­
owned enterprises, an inefficient reward system, obsolete equipment, shortages of skilled
labor and little technological innovation. Projects typically suffer long delays and are of poor
quality, with a large number left unfinished due to the fragmentation of resources among
too many projects. Together with the entire Soviet economy, however, the construction in­
dustry is undergoing a process of structural reforms aimed at helping the industry overcome
these problems and improve performance.

The main trends in the Soviet construction industry are the increasing decentralization
of investment, the shift of investments away from the "productive" sector to the "non­
productive" sector,40 the decline of the state-owned construction enterprises, and the growth
of the cooperative sector. In recent years, the construction industry has experienced a pro­
liferation of institutional and administrative changes and the adoption of numerous new laws
and regulations designed to make the industry more market-oriented.

Housing, as a sub-sector of construction, accounted for 16.5% of all capital investments

in 1989. The housing industry shares all the problems of the construction industry in general.
It should be emphasized, however, that the housing industry stands to be the primary benefi­
ciary of the construction industry's trend toward decentralization, the investment shift toward
the non-productive sector, and the introduction of market-oriented reforms.

'According to the Soviet classification system, investments are divided into either the productive or non­
productive sector of the economy. This classification is sometimes difficult to follow, but roughly speaking, the
productive sector includes the production of all goods and related services. The non-productive sector consists
of consumer services, as well as other subsectors such as housing, education, medical services, and public trans­
portation.
 -70­

7.1 Structure of the State-Owned Construction Industry

Traditionally, the administrative structure of construction in the USSR has been quite
complicated and ha, historically experienced less stability than most other sectors of the
economy. Until recent!y, the Soviet Union's construction industry was overseen by a supra
construction ministry or committee (GOSSTROI). This ministry was divided into a number
of operating branches or contracting construction entities (podriadnye): (1) "trusts" or
"associations"; (2) "construction-installation administrations"; (3) "kombinats" (usually
for
housing construction); and (4) "production and technological acquisition administrations"
(upravlenieproizvodstvenno-teklnicheskoi komplektatsii).

Since the mid-1980's the Soviet government passed a number of decrees affecting the
administration of the industry. The main goals of these decrees included the following: 1)
relieving the central authority of micro-management and increasing the autonomy of
construction enterprises; 2) strengthening the role of contract or negotiated prices
(dogovomye tseny);41 and, 3) increasing the mutual responsibility of all participants in the
project for achieving the final results.

Until 1986 the main federal administrative organ in construction was the State Committee
on Construction Affairs. In 1986 it was transformed into the Union-Republic State Con­
struction Committee (Gosstroi USSR), and given the status of a subdivision of the Council
of Ministers of the USSR. Its responsibilities included administration of the activities of the
union and republic construction ministries, coordination of the Gosstrois of the republics
and the autonomous republics (establishezd in 1962-1965), and implementation of unified
technological policy and improvements to the system of incentives in the construction sector.
The importance of Gosstroi USSR was underlined by the appointment of a Deputy Chair­
man of the Council of Ministers of the USSR as its director. However, due to the decentrali­
zation trend in the Soviet government, in 1988 Gosstroi lost much of its importance and was
transformed into a committee on norms and technology without any responsibility for direct­
ing the activities of the various ministries with responsibility for construction.42

41
Contract or negotiated prices are prices which the contractor negotiates with the client on a specific project
as opposed to the fixed prices set by the state pricing committee. The contract prices, however, have been subject
to various regulations and restrictions and until recently had not been allowed to be set outside of a range estab­
lished by the central authorities for various projects.
4 The planning of the activities of Soviet construction, as well as other industrial sectors, is conducted
according to a plethora of norms specifying, for example, wages paid per unit of output, levels of particular inputs
and so on. Needless to say, certain norms are more important than others in evaluating the performance of the
enterprise. Usually, the enterprises would strive to achieve only the most important norms at the expense of
others. The main indicators of enterprise performance, however, are fulfillment of planned targets for profitability
and the physical volume of output. It should be noted that profitability is strongly affected by the rather arbitrary
structure of state-controllea prices and by the degree of availability of crucial inputs. In other words, the rates
of profit for state-owned enterprises are not particularly relevant regarding the real contribution of the enterprise
 -71-

Until recently, the bulk of the state-owned construction industry has been managed by
various ministries organized according to the type of construction they perform, the region
where they operate, or the major project they work on. Almost all of these ministries,
especially at the union level, have been disbanded in the last 2-3 years. In addition to the
union ministries that previously engaged in construction, there are also contracting
construction organizations subordinated to the executive committees of the local councils
(municipal authorities), contracting organizations of various branch ministries and
administrations.

The combined total of local and ministerial contracting (podriadnye) construction organi­
zations account for 90% of the construction volume in the USSR. These are more or less
permanent operations. The other type, the khoziaistvennye (literally "economic") construction
organizations are set up for a specific task or project. The main financially autonomous 43
contracting units in Soviet construction are "construction-installation trusts" and "construc­
tion-installation associations" (the Russian acronym SMO). The trust is composed of "con­
struction-installation administrations", the "administration of production and technological
acquisitions", and some other divisions depending on the specifics of the trust's work.

Typically, a trust is the main contractor on a particular construction project. The trust
either owns equipment and transport through its subdivisions, or leases it from specialized
subdivisions of other construction administrations. It is the role of a trust to coordinate the
activities of all project participants. The decisions of the trust management with respect to
construction activities and the specific timetable for construction completion (within the
existing general plan) take precedence over all participants irrespective of their normal sub­
ordination to a particular ministry.

Construction-installation trusts, associations, and other organizations of the same level

(such as housing construction groups, factory construction groups, and construction­
installation trains) have the legal status of a state production enterprise and operate on the
principle of complete self-accounting (khozraschet). They have their own budget, bank
account, and charter fund (ustavnyifond),

The main subdivisions of the trust are the "construction-installation administration" (the
Russian acronym SMO) and the "mobil mechanized column" (PMK). These subdivisions do
not have the legal rights of a state enterprise and work strictly as subdivisions of a trust.

to the economy at large.

'Thedegree of financial autonomy of these enterprises is quite limited. The term "financial autonomy" here
is used to denote a khozraschet unit. Khozraschet implies a certain degree of financial independence, which
differs among enterprises.
 -72-

They do, however, have separate budgets and separate bank ccounts and can enter into
contractual agreements with individual consumers, suppliers, and other organizations.

A significant number of construction organizations-mainly in the area of housing and

other consumer oriented construction-is subordinated to the executive committees of the
local councils (municipal authorities). The largest cities have "main construction administra­
tions"-umbrella organizations for the housing contracting construction organizations. Some
of the largest are Glavmosstroi and Glavmosinzhstroi (Moscow), Glavleningradstroi and
Glavleninzhstroi (Leningrad/St. Petersburg), Glavkievgorstroi (Kiev), Glavtashkentstroi
(Tashkent), and Giavmosoblstroi (Moscow Province).

In addition, there are approximately 550 technically obsolete and inefficient enterprises
specializing in housing construction (kombinats)utilizing large panel construction technology
in the production of building materials. Often times, these kombinats are involved in actual
construction as well. These enterprises have an annual production capacity of 689 million
sq. ft., which accounts for almost 60% of state housing construction (70% in the cities).
There are three basic types of kombinats in the USSR. One type produces 1-5 story walk­
ups, the second produces 5-9 story buildings, and the third specializes in 10-22 story units.
Approximately three quarters of housing produced by these enterprises consists of five- to
nine-story buildings. Five-story walk-ups account for more than a quarter, while buildings
with six or more floors constitute almost half of all state-owned housing production.'

A protracted period of negl~ect of alternatives to large panel construction has led to a

stagnation in the non-LPC building materials industry and to the deterioration of alternative
building skills. This situation, however, is apparently beginning to change. There is heavy
pressure being placed on the kombinats at the Russian Republic level to change their
designs radically. For example, Glavmosstroi, the large Moscow construction enterprise, is
going to begin the construction of single family units.

'There are, however, several variations on this organizational scheme for the Soviet construction sector. First,
associations may include trusts in their structure. Often trusts are not subordinate to a construction ministry but
to a non-construction ministry or to a large city (e.g., Moscow, Leningrad) government. Some non-construction
organizations or municipal administrations may include a construction-installation administration or a kombinat.
Also, some organizations may be directly subordinate to a republic council of ministers. Lately, all of the con­
struction ministries have been abolishrd and the trusts and organizations are supposed to be largely autonomous
or subordinate to the republic authorities. There are also private construction organizations which do not belong
to any government administrative structure. These are mainly construction cooperatives which ol.rate on the
basis of contracting with whomever is willing to pay.
 -73­

7.2 Current Practices of Construction Contracting

Recent changes in the Soviet construction industry have reduced the role of central plan­
ners, while strengthening the importance of the negotiated contract between construction
enterprises and clients. The construction contract agreement (dogovorpodriada)has become
the main legal document regvlating the actions of involved parties, prescribing rights and
responsibilities, and (together with existing laws) the punitive measures for inadequate or
incomplete performance.

The new weight given the construction contract calls for new approaches in contract nego­
tiation, particularly in light of the decreased importance of centralized investments and
planning. In the past, most pre-contract negotiations took place at the level of Gosplan
USSR, ministries and their departments. Decisions at this level determined the main para­
meters of a given project, including the level of effort, total amount of investment, selection
of contractors, project phasing, and the provision of technical documentation and supplies.
Following recent changes, building contractors (primarily trusts but other entities on occa­
sion) now have the responsibility to decide their own construction programs, find suppliers
of construction materials, and secure- financing for subcontractors. Additionally, they now
have the responsibility of evaluating the performance of their subcontractors.

The building contract covers the startup of operations and the entire period of construc­
tion. Payment(s) are made :, after the project is finished within the time period specified
in the contract, or at pre-specified stages or phases of construction.

Changes have occurred in thAe financing of investment projects as well. Previously, the
state would strictly regulate the actions of local councils, enterprises or other entities. State
banks specializing in construction would not provide financing unless all the numerous, and
rather onerous, regulations of Gosplan USSR, ministries or republic Councils of Ministers
were observed. Currently the union government controls only the investments made out of
the Fund for Economic Stabilization.

Financing of construction projects undertaken by an enterprise on its own can also be

accomplished through a loan from a commercial bank (see section 7.3). Enterprises can
directly open an account in a commercial bank. Payments to the various contractors and
subcontractors are made through this ordinary account. Recently, commercial banks consid­
erably simplified the paperwork involved with these accounts and expanded their range of
client services.

The new rules allow many different entities to participate in either productive or non­
productive sector construction projects. Client groups can include enterprises owned by the
state, individual citizens (both Soviet and foreign), social and religious organizations, part­
nerships, joint ventures, etc. In addition, public authorities at the federal, republic, or
 -74­

municipal level can act as clients on projects designed to fulfill state needs. These public
authorities are allowed to delegate the status of "project client" to an existing or newly­
created project-specific legal entity.

Project clients make project construction decisions, fulfill contractual obligations, accept
(or do not accept) the finished project or its stages in accordance with the terms of the con­
tract, and settle accounts with the contractor. The client is allowed to delegate the rights for
managing a contract to another legal entity, who will act on the client's behalf. The final re­
sponsibility for fulfilling the terms of the contract, however, rests with the client.

The role of the contractor can be played by construction-installation enterprises and other
enterprises and organizations that have been awarded the right to undertake project con­
struction, and by intermediaries who take on a coordinating function. This latter type of
entrepreneurial activity is now allowed, to varying degrees, under new federal and republic
laws.

As the construction industry undergoes transformation to a market-oriented system, atten­

tion has been given to the introduction of bidding for contracts. Gosstroi USSR developed
a Temporary Regulation on the procedures for organizing and conducting contract bidding
(tendera) for construction projects. This Regulation defines the procedures for preparing,
announcing, and conducting bidding for construction contracts, including procedures for the
utilization of foreign currency accounts. It is unclear if this Regulation has yet been imple­
mented.

7.3 The System of Rewards in the Construction Industry

Due in part to an incentive structure which rewards gross volume output, the Soviet con­
struction industry is plagued by unfinished projects, high costs and a low rate of labor pro­
ductivity. The existing system of rewards creates strong incentives to produce homogeneous
products on a mass scale, and to resist innovations in design and technology. With this sys­
tem, construction enterprises are interested in taking on more expensive projects and have
little incentive to minimize costs. Frequently, it is advantageous to use costlier methods
because the rewards are correspondingly higher (Morton, 1980). In the past, cost overruns
often did not present a major problem for the contractor, since the client, being a state en­
tity, could request additional resources from the state budget to cover project cost overruns.

As an additional bonus, housing construction enterprises receive 10% of all housing units
that are produced under contract with state-owned enterprises or municipal authorities for
their employees. This benefit does not exist in contracts with housing cooperatives, a fact
that contributes to construction enterprises' reluctance to build cooperative housing.
 -75­

7.4 Quality of Workmanship

The local monopoly position of the construction enterprises, combined with the acute
shortage of housing and the perennial fixation on "fulfilling the plan", contributes to the
notoriously poor quality of Soviet housing. Future tenants of state-owned housing have only
a limited input in the acceptance of the finished unit. Municipal authorities who serve as the
client are not particularly interested in the quality of workmanship. Not surprisingly, the
quality of units produced for enterprises or for housing cooperatives, whose members them­
selves are prospective residents, is significantly better than that of housing built for munici­
palities.

Reportedly, households moving into new state-owned housing have to spend an average
of 10% of production costs to fix construction and finishing defects in the unit. It is not
unusual for a new apartment to lack such "details" as a bathtub or doorknobs. Some
apartment buildings remain empty for months after the housing commission has accepted
the project as completed in order to allow the builders and the tenants to repair the most
important defects and/or complete the units.

The situation seems to be particularly bad in the countryside. The chairman of one dis­
trict council in a rural area of the Kirov province complained that (quoted from Andrusz,
1990, p. 273)

...in the best cases, the builders put up the wa!ls and add the roof. Decoration, pipe-laying and
underground systems are left unfinished with the tenants themselves digging trenches and laying pipes
without proper heed to sanitary requirements. As a consequence water leaks, under-heated homes, cuts
in the water flow and so on are common occurrences.

7.5 Construction Costs

The reward structure of the construction industry and the accommodating behavior of
state-affiliated clients are partially responsible for the rapid increase of housing construction
costs in the USSR (see section 6.3). In general, however, it is difficult, for a number of
reasons, to evaluate real increases in Soviet housing construction costs over the years. First,
Soviet prices are rather arbitrary and do not reflect relative scarcities in the economy.
Second, the real cost of housing varies significantly among the regions of the country and
even within the same city. Therefore, the geographical composition of new housing would
affect average housing costs. Thi-d, housing cost increases are due in part to the increased
provision of amenities in recently built housing and the rising average height of buildings.

One peculiarity of So'iet construction costs has to do with the dominant position of large
panel construction technology. This technology requires a housing construction organization
to build 3,000-4,000 housing units per year in order to break even. While large production
r:ins make this housing approximately 20% cheaper overall than brick technology, the use
 -76­

of large panel technology in small cities and in rural areas makes housing there about 25%
more expensive to produce than in larger cities.

Despite steady growth over the years, Soviet wholesale construction prices have remained
significantly below market-clearing levels. This situation has been somewhat alleviated by
a dramatic wholesale price increase in early 1991 when the cost of 1 square meter of hous­
ing went from 260-300 rubles to 900-1000 rubles (in official prices). Despite this steep climb,
official costs continue to be well below the per square meter prices reflected in the bids at
private housing auctions.

7.6 The Building Materials Industry

The Soviet building materials industry is a critical element in the housing construction
process and determines its production potential. At present, severe shortages exist in the
Soviet Union for virtually all types of basic construction materials such as cement, non­
metallic (nerudye)wall materials, various prefabricated construction components (sbomye
konstruktsii), and bricks. The immediate reason for shortages is, of course, the imbalance
betwee-: state prices and the available financial resources of the construction enterprises.

There are, however, additional factors which exacerbate the situation. First, Soviet
workers and managers lack incentives to be careful and frugal during the transportation,
storage, and usage of the construction materials. According to some estimates, losses in
transportation, storage, and through wastage account for 25-30% of all cement, 15-20% of
all glass, and 10% of all bricks consumed in the USSR. Other materials are wasted at simi­
lar rates.45

Second, the existing system of rewards provides strong incentives for both architects and
builders to use the greatest amount of construction materials in designing and executing
projects. Design firms, as well as builders, are rewarded according to the degree of plan ful­
fillment. Plan targets are commonly formulated in terms of ruble costs of the project. In
other words, the more expensive the design of an individual project, the greater the share
it would represent of the design firm's annual target. The builders' incentives are similar to
those of the designers.

Third, the large volume of mothballed designs and shut-down construction projects in the
USSR prevents the use of valuable materials in other, possibly more important, projects.

Fourth, there are strong incentives for project management to hoard the most critical,
shortage-prone construction materials and equipment for other purposes, such as barter

4Sneiderov (1991). Losses due to these factors may be overestimated since enterprises may be tempted to
report high losses to cover up internal theft of materials.
 -77­

transactions. Thus, even if the project has enough cement for its own use, it would try to
obtain more from state suppliers in order to exchange it for other building materials in short
supply. Meanwhile, inadequate storage facilities at many sites cause a significant amount of
building materials to be destroyed through exposure to the elements. Hoarding is often
undertaken by a project as protection against future shortages. If management expects a
shortage of bricks in the future, it will try to accumulate large inventories of bricks even if
the current needs of the project are met. When thousands of managers act in this manner
at construction sites across the country, shortages become a self-fulfilling prophecy while
storage costs increase tremendously.

Fifth, in addition to a low aggregate price level, incorrect relative prices increase
shortages of some construction materials compared to others. For example, the state price
of a ton of cement in 1990 was the same as the price of a ton of asphalt or a ton of sand.
Naturally, this will have a greater impact on aggravating the shortage of cement in
comparison to the shortage of sand.

Besides the factors listed above, the shortages of construction materials are exacerbated
by the stagnation of the construction materials industry which has been growing at close to
a zero rate over the past ten years (see Tables 20 and 21). The main reason for this slow
growth is the small volume of capital investments in the industry. This has resulted in
excessive obsole,;cence of fixed assets and a low technological level of production. Even
those investment funds that are earmarked for the expansion of the construction materials
industry are constantly under..utilized due to the lack of the physical and administrative
capacity of the responsible implementing ministry.

The importation of most building materials does not significantly affect their supply
situation. While as of 1989 the Soviet Union was a net importer of building materials in
value terms (the net imports amounted to about 630 million rubles), more than half of the
imports consisted of insulation materials. The country was a net exporter of such important
commodities as cement and window glass. The Soviet foreign trade publication for 1989
(Vneshne-ekonomicheskie sviazi SSSR v 1989godu) provided no data on the balance of trade
in other key materials, such as bricks. The recent hard currency problem has certainly
reduced the role of the building materials imports even further.

A relatively new problem results from the fact that a significant share of the production
of equipment for the construction materials industry in the USSR had been allocated to the
East Europeans (the former Soviet partners in the Council for Mutual Economic Assistance,
CMEA). Since early 1989, the trade links between the former CMEA partners and, espe­
cially, between the USSR and the East European countries, have been either weakened or
broken completely. The dramatic reductions of Soviet imports from Eastern Europe may
seriously damage some parts of the Soviet construction materials industry.
 -78-

TABLE 20
PRODUCTION OF CONSTRUCTION MATERIALS
1980 1985 [ 1986 1 1987 1988J[1989
Roofing Slate, million tiles 7,308 8,270 8,577 3,777 8,895 9,003
Construction Brick, billion units 41.8 41.2 42.6 43.4 45.0 46.0
Reinforced concrete components, min m3 122 136 142 149 153 151
Of which Stress Reinforced 27.2 29.6 31.2 32.1 33.3 32.3
Wall Materials, bin units of brick equiv. 58.0 59.1 61.6 62.8 65.8 68.1
Of which Construction Brick 41.8 41.2 42.6 43.4 45.1 46.1
Of which Fireburned Brck 27.5 26.6 27.5 27.8 29.0 30.0
Soft Roofing M,..erials, min sq.m. 1,723 1,928 2,002 1,983 2,010 1,962
Construction steel components, mln tons 4.6 4.6 4.6 4.6 4.6 4.4
Tile, mln sq.m. 0.6 0.6 0.7 0.9 0.7 0.6
Construction Glass, mln sq.m. 265 268 284 278 277 269
Linoleum, mln sq.m. 90.4 112 115 122 137 141
Ceramic Tile for Floors, mln :q.m. Ceramic 23.2 30.9 30.9 31.2 31.8 30.9
Facing Tile for Walls, mln sq.m. 32.6 41.8 42.8 46.1 48.7 51.6
Acid-proof Ceramics, thousand tons 609 606 607 595 585 569
Ceramic Sanitary Articles, million units 9.6 1J.0 10.3 10.8 11.1 11.2
SOURCES: Narkhoz 1989, p.400; SSSR vtsifrakh v 1989 goda, p.221.

Some analysts hold hopes for improvement in the situation through the conversion of
inilitary enterprises and the reduction in demands for military construction. The reasoning
is that the high technological potential of military enterprises may allow them to produce
more sophisticated equipment and entire t-chnological lines for the construction materials
industry. This argument suggests that significant resources could also be freed up by freezing
construction on militar, projects. The process of conversion, however, has been extremely
slow and adaptation of military enterprises to civilian production, when attem,-%!d, has been
mostly unsuccessful. Previous attempts to increase civilian production in military industries
has largely involved simply adding new facilities to the existing military enterprises, rather
than genuine conversion of military lines to civilian output. The experiences so far prov-de
little hope that conversion will make a difference in the construction materials industry over
the next 5 years or so.

The current emphasis on private housing construction makes production of bricks and
cinder blocks (iacheistyi beton or penobeton) particularly important. Cinder blocks are not
yet produced in the USSR on a significant scale due to the lack of the necessary equipment.
This situation is not likely to change in the near future. Surprisingly, the production of bricks
has been growing only by about 1%per year during 1980-89 despite the increase in demand
from private projects (see Table 20). In addition, the production of other materials used in
 -79­

construction such as glass, gypsum, and wooden boards has either stagnated or dropped in
the second half of the 1980's.

TABLE 21 .1
PRODUCTION OF CEMENT BY REPUBLIC
(thousand tons)
1980 1985 1986 1987 1988 1989
USSR 125,049 130,772 135,119 137,404 139,499 140,436
RSFSR 75,792 79,089 81,133 82,538 84,030 84,518
Ukraine 21,612 22,444 23,069 23,193 23,533 23,416
Byelorussia 2,035 2,119 2,141 2,204 2,266 2,283
Uzbekistan 4,179 5,287 5,425 5,512 5,583 6,194
Kazakhstaa '7,099 7,549 8,066 8,349 8,446 8,650
Georgia 1,673 1,576 1,544 1,481 1,351 1,530
Azerbaijan 1,196 1,253 1,279 1,290 1,220 1,59
Lithuania 3,373 3,383 3,388 3,394 3,405 3,410
Moldavia 1,221 1,232 1,955 2,209 2,361 2,258
Latvia 838 787 868 843 825 776
Kirgizia 1,272 1,209 1,272 1,311 1,380 1,408
Tadjikistan 1,052 1,080 1,102 1,094 1,109 1,110
Armenia 1,733 1,665 1,735 1,759 1,680 1,639
Turkmenia 761 1,005 1,024 1,066 1,110 1,057
Estonia 1,213 1,094 1,118 1,161 1,200 1,129
SOURCE: Narkhoz 1989, p. 3 9 9 .

The prospects for increased brick production are bleak. Out of 8,000 brickyards in the
USSR, the majority has been in operation for over 20 years and two thirds are in need of
major repairs and reconstruction (Minibaeva 1991). Newly commissioned plants for brick
production are experiencing difficulties due to lack of spare parts.

Lately, the increase in production of bricks has been slowed by the emerging ecological
movement which has prevented the development of some local deposits of raw materials,
such as sand, clay, asphalt, and gravel.
 -80­

8 PRIVATE SECTOR PARTICIPATION IN HOUSING PRODUCTION

Since the mid-1980's, Soviet leaders have recognized that the housing problem could not
be solved without an active participation of the private sector. The recent dissolution of the
central authority in the Soviet Union has led to a precipitous decline of the state sector in
the economy. Currently, the very economic survival of the former Soviet republics depends
to a large extent on the ability of the private sector to provide a viable alternative to the
disintegrating state sector.

While tne growth of private enterprise in the USSR has been encouraging, the private
sector remains relatively small and continues to be plagued by serious problems which
undermine its potential. These problems include:
* the short-term orientation of entrepreneurs due to political instability in the country and
the unpredictability of the future legal environment and taxation rules;
" the large discretion of the local authorities in the implementation of the existing
legislation and licensing of private sector activities;
C the instability of the financial system, inconverdbility of the ruble, and an accelerating
inflation rate;
* the generally underdeveloped nature of capital and financial markets;
* the lack of the essential business skills (e.g. accounting) and business culture in the
country;
* the poor state of the country's physical infrastructure.

These problems seriously impede the development of the private sector in housing
constraction, already a relatively lengthy and capital intensive process. On the other hand,
tihe acute housing shortage in the country and the perception of housing as a hedge against
inflation create strong demand for private construction services.

Most of the indigenous private enterprise in the USSR takes the form of cooperatives­
private partnerships which initially served as a compromise between the "socialist" and the
"capitalist" mode of ownership. By now the superficial distinctions
between a cooperative
and a purely private enterprise have all but disappeared.
 -81­

8.1 Construction Cooperatives

While state-owned construction enterprises are reducing their output, construction

cooperatives have been growing in number and importance.46 At the end of 1990 there
were 75,522 active construction cooperatives employing 2.5 million people including part­
timers.47 The construction cooperatives were the most common and the fastest growing
type of cooperatives in the USSR in 1990. Their number in that yar almost doubled (in
1988 there were only 1,800 construction cooperatives). Construction cooperatives volume
reached 25.96 billion rubles (US $4.33 billion), leaving all other types of cooperatives far
behind. Construction cooperatives sell their output mainly to enterprises and public
organizations. This tendency can be explained by the fact that state-owned enterprises are
able to help the cooperatives to procure construction materials and transport.

Cooperatives, in general, usually pay much higher salaries than do state-owned enter­
prises (417 rubles/month vs. 270 rubles/month in 1990). 48 Construction cooperatives pay
their employees at a somewhat higher than average rate of 463 rubles/month (the state
construction employees receive only 339 rubles/month). Moreover, these numbers seriously
underestimate the differences in wages since many of the cooperative employees are part­
timers and their monthly salaries reduce the average significantly.

According to Val'dman and Neshchadin (1990), the average 1989 full-time salary in
construction cooperatives was 852 rubles/month and by the end of the third quarter it
exceeded 1000 rubles/month. Shchekin a.;d Guliaeva (1990) estimate that full-time wages
in cooperatives in 1989 were 4.5 times higher than they were in state contracting organiza­
tions. Such differentiation in salaries is due to the cooperatives' ability to charge free market
prices and to determine the share of wages to total revenues without government regula­
tions. In construction cooperatives, 85% of all proceeds, net of the costs of other inputs or
about 53% of gross revenues, go toward the salaries of members and employees. By com­
parison, in state construction organizations the share of wages to gross revenues from
construction and installation work was less than 40%.

Construction cooperatives, especially those involved in the production of construction

materials, often start up operations by taking over poorly performing state-owned enter­
prises. Cooperatives commonly lease such enterprises with an option to purchase in the

4 The construction cooperatives should not be confused with the housing cooperatives discussed previously
(see section 4.5.2). The former actually do construction work of various kinds themselves, while the latter
traditionally contract out most of the work to state construction enterprises.
47Most
of the information in this paragraph is from Barbashov and Chebatkov (1991).
4 At
the commercial exchange rate of US $1 to 6 rubles, these numbers would translate to US $70 and US
$45, respectively.
 -82­

future. For example, Nev'ianski construction materials plant used to incur annual losses of
400,000 rubles. After cooperative "Stroitel" (Builder) rented it, the plant became profitable,
doubling its output of bricks and tiles, and increasing overall quality. In Moscow province,
another cooperative "Berezka" (Birch Tree) turned a money-losing state-owned fiber cement
plate factory into a highi), profitable venture in the first year of cooperative operation.
Output was increased by 35 Y and labor productivity by 60%.

The successes of construction cooperatives are due to the freedom they enjoy in their
entre reneurial activities. Their future depends on preservation of that freedom and on
remo\ ag several disadvantages they ha'. e relative to state-owned enterprises. While coope­
ratives are able to charge relatively high prices for their output, they often have to purchase
their inputs at retail rather than wholksale pric.es, due to an inadequacy of wholesale trade
in the USSR. Construction cooperatives purchase in excess of 20% of their materials on the
retail market.

As mentioned above, the cooperatives usually lease poorly managed and unprofitable
enterprises from the state. After a cooperative improves operations and operations, however,
the lessor, often with the backing of local authorities, sometimes tries to revoke the purchase
option in order to regain control of he revitalized enterprise.

Gradually, due to the existence of the cooperative alternative to state enterprises, compe­
tition for construction contracts has been emerging in the USSR, especially in rural areas.
The attitude of the local councils toward the construction cooperatives, however, has re­
mained ambivalent. On the one hand, better reliability and performance of the cooperatives
makes them useful to the local authorities. On the other hand. the incomes of their mem­
bers generate envy in the population. Authorities are also worried about the drain of skilled
labor from state-owned construction enterprises to the cooperatives. In any event, state­
owned enterprises still possess the bulk of the construction equipment and have access to
the state supply system. Some local authoritics tend to harass the cooperatives by holding
hearings on their activities and by instituting frequent inspections of their compliance with
the cooperative charter. On balance, however, the attitude of the local authorities toward
the cooperatives appears to be improving.

In 1989 in order to protect themselves from the arbitrariness of the authorities and to
improve coordination of their activities, construction cooperatives organized the Union of
Construction and Industrial Cooperatives of the USSR (UCIC USSR). The union is a legal
entity whose primary responsibilities include: (1) defense of the rights of its members; (2)
help in training the cooperative labor force; (3) exchange and disseminat.ion of technological
information; (4) organization of cooperative foreign trade activities and joint ventures; and,
(5) development of its own construction materials industry to provide crucial inputs for its
members. As noted previously, this last task is particularly important due to the poor per­
formance of the Soviet construction materials industry.
 -83-

Within the next 2 years the UCIC USSR is planning to build or rebuild about 70 brick
making plants with a capacity of 15 to 20 million bricks per year, 20 wood processing fac­
tories, and 3 plants for the production of sinks, bathtubs, and other fixtures. The union plans
to accomplish this by purchasing complete sets of equipment for these plants in the USSR
and abroad. A Belgium firm has proposed to deliver equipment for many of the brick mak­
ing plants. The UCIC also tries to find lessees or purchasers for unprofitable enterprises in
the construction materia!s industry, of which there are many in the USSR.

The UCIC has created several subsidiaries to implement its primary responsibilities.
These subsidiaries include a shareholding corporation "Svoi dom" (Own Hobie) for facilitat­
ing and organizing pivate housing construction in the USSR. This corporation will establish
enterprises to produce supplies and components for private housing construction. They hope
to help build 300,000-400,000 houses by 1995. Another subsidiary is a firm "Iniurbiuro" which
helps to disseminate technological and general information, organize workshops and semi­
nars, and instruct union members in legal and arbitrage cases. The union also organized a
foreign trade association "Stroiimpex" for import-export operations and to help its members
to conduct negotiations with foreign businesses.

Together with the Institute of World Economy and Foreign Relations and other organiza­
tions, the UCIC founded an association of investors and builders called "AMESS" whose
purpose is the development of construction projects and programs to be undertaken with
foreign participation.

J.2 Leaseholds

Leasing of state enterprises by their work force is considered to be an intermediate form

of enterprise re-organization. It combines the features of both state enterprises and coopera­
tives. The workers are considered to be state employees and all assets continue to belong
to the state. At the same time, the leased enterprises do not have to adopt the state wage
rates and they possess a significant degree of independence from the state management
structure.

The results of leasing, however, are not very impressive. By the end of 1989 only 12% of
all state construction enterprises which had the possibility to switch to leasing arrangements
actually did so. In addition, leasing programs sometimes have similar features to the "cam­
paigns" of previous regimes when the workers fell under considerable pressure to lease their
enterprises. The improvements in performance of the leased enterprises so far have been
marginal. The problems of leasing are exacerbated by the lack of clarity in the leasing regu­
lations.
 -84­

8.3 Commercial Banks

Both Soviet and Russian republic law begrudgingly recognize the commercial banks' right
to exist, yet fail to provide a favorable legal environment supportive of the banks' activities.
State-owned banks have strong advantages vis-a-vis the commercial banks in this respect.
Both the Soviet and the Rus.ian republic Central Banks discriminate against commercial
banks, erecting numerous obstacles to their activities. For examp!e, state-owned banks are
allowed to loan 25 rubles against one ruble in reserve, while commercial banks are limited
to a 15:1 ratio for similar lending.

The central banks have devised comp!. 'ated and expensive registration procedures which
further impede the efficiency of emergent commercial banks. The process of registration for
a commercial bank, in principle a straightforward process, normally takes many months and
can encounter numerous delays. The Central Bank of the Russian republic appears to be
more bureaucratic than the Soviet Central Bank in this respect. In the summer of 1991 the
Chairman of the Russian Central Bank we::it as far as to impose a ceiling of 25% per year
on the interest rates that commercial ban l's are allowed to charge their customers. This is
in an environment where, according to many estimates, the inflation rate exceeds 100% per
year (some estimates go as high as 600%).5

The 25% per year interest ceiling, however, may not necessarily place the commercial
banks at a disadvantage since according to the most recent information the state baniks axe
paying 10-11% interest on time deposits. Note, however, that the deposits in the state banks
are fully guaranteed by the government while the commercial bank deposits are not
protected. In -ddition, the state banks have a local monopoly position in som- regions due
to insufficient development of the commercial banking system. A large proportion of
household time deposits in the state Savings Bank (Sberbank), however, were mit put there
voluntarily by the population. Instead, these deposits resulted from compensaticn paid to
current savers at the time of the price increases of April 2, 1991.50

Until recently, commercial banks could be searched withoul a warrant, or even closed by
the police or other security forces. The President of the Association of Russian Banks S.
Egorov referred to the current situation in the ban-king industry as the "war ef the banks"
(Rossiiskaiagazeta. October 2, 1991, p. 2).

The peculiar institutional structure of the Soviet economy makes estimating inflation extremely difficult. The
Soviet system has a number of markets for identical goods. There are state-run markets, "commercial" outlets,
black markets, commodity exchanges, and auctions. The pries in these markets, as well as their dynamics, often
differ significantly from each other. In addition, prices of many goods vary widely across regions All this makes
the determination of a single inflation rate problematic.

"The funds, which were designed to compensate savers for the decreased value oL tneir accounts, were de­
posited in thn Savings Bank and cannot be withdrawn for several years.
 -85-

Due in part to this hostile environmeit, the commercial banking sector in the USSR has
not yet sufficiently developed to adequately se;.ve the needs of the investment community.
The number of banks established in response to the promulgation of the Law on
Cooperatives in 1988 has grown from 77 commercial banks at the end of 1988 with assets
of 2 billion rubles, to over 400 by September 1990 with total assets of 32 billion rubles. 51
Today, approximately 1,500 commercial banks are now operating in the country with
probable assets in the 80-100 billion ruble range.

According to Egorov, howe\ r, the country's commercial banking capacity is "an order
of magnitude" less than necessary for servicing private enterprises. In many cities,
commercial bank branches simply do not exist, and where they do, the lack of modem
communications systems and equipment exacerbates existing inefficiencies.

8.4 Commodity Exchanges

Emerging commodity exchanges constitute a vital element of free market infrastructure

in the Soviet private sector. Their importance is enhanced by the breakdown in the state
supply sy.;t.m. While the importance of commodity exchanges grows rapidly, no systematic
information about them is currently available. The following is a description of the workings
of one of the better known institutions, a Moscow commodity exchange "Alisa" which
specializes in construction materials.

On any given "exchange day" all participants of the exchange have to pay an entry fee of
1,000 rubles (US $167). Every participant has to have either a stamp (promise to pay) of the
organization he represents or a check book for immediate payment for the negotiated trans­
action. All potential sellers who wish to take part in an auction have to deposit with the
broker 3% of the total value of the sale calculated using the maximum price asked by the
seller. This deposit serves as a confirmation of the actual existence of the goods. After the
transaction has been completed the seller receives a refund of the deposit within 5days. The
exchange obtains its commission from the buyer. If the coti-act of sale has been signed but
the sale falls through and it was the seller's fault, then the broker pays the buyer 1%of the
transaction value. (Presumably the exchange Keeps the selle ' deposit.)
The main feature of the exchange is that the buyers expect actual delivery of the goods.
In this sense "Alisa" operates more like an auction rather than a western-type commodity
exchange. The work of "Alisa", handicapped by the inadequate communications system, is
not as efficient as it could be. Table 22 provides some prices at which transatdons took
place in "Alisa" in May 1991.

5tSee
Chapter IV.5 on Financial Sector Reform in A Study of the Soviet Economy, IMF. 1990, foi further
description of the emerging commercial banking system.
 -86-

TABLE 22
PRICES ON "ALISA"EXCHANGE IN EARLY MAY 1991 (rubles)

Garden Houses 7,500 per unit

Suspended Ceilings 110 per square meter
Asphalt 300 per ton
Machine for Production of Wall Stones 50,000 per unit
Truck "Kamaz" 170,000 per unit
Steel Net 5 per square meter
Construction Nails 3 per kilo
Framing Steel 2,500 per ton
Sheet Steel 3,000 per ton
Wire Copper 27,600 per ton
Window Lintei 400 per unit
Facing Panels 150 per square meter
Red Brick 520 per one thousand
Facing Tile 40 per square meter
Wall Unit 315-360 per unit
Concrete Panels 740-1,100 per unit
Artificial Marble 190 per square meter
Plastic Cellophane Film 5 per linear meter
SOURCE: Izvestiia, 5-14-1991.

8.5 International Joint Ventures

Many joint ventures between foreign, and specifically US-based companies, and Soviet
counterparts are coming on line, but their role in local housing construction has been
limited. Of those housing projects currently underway, the majority are exclusive inter­
national housing developments catering to expatriates working with multinational corpora­
tions in the Soviet Union. Generally, leasing a unit in these projects requires payment in
convertible foreign currencies. The following sections highlight several foreign-Soviet joi,.i­
ventures organized for the production of housing and building materials.

8.5.1 Construction Pk'ojects

Senie Kerschner International Housing Limited has perhaps the largest and most well­
known project called Rosinka, located in the exclusive Krasr,,ogorsk ("Beautiful Hills") region
of Moscow. The Soviet partner is Zavet Ilyicha, a farming collective with 5000 acres of land
which stretch over a 10 village area. The plan calls for 478 two-story town house units in a
planned community with numerous amenities.
 -87-

The J. A. Jones Construction Company has organized a Moscow joint-venture called

Mosjonstroy. The Jones organization, with over $2.5 billion in annual revenues, has linked
up with the Soviet Union's largest engineering and construction agency, Glavmosstroi, a
conglomerate of 38 construction and housing divisions, 14 materials and components fac­
tories and numerous design er+"ies. Planned projects include mixed-rise large paneled
housing units for the City of Moscow, though nothing has been initiated to date.

The Perestroika JV is currently focused on the construction of two residential apartment

complexes in central Moscow. The project involves two other US companies, the World
Housing Corporation of Atlanta, a construction/development management company, and
the Savannah-based architects and engineers, Hussy, Gay, Bell and DeYoung. PJV's highest­
priority conplex is a low-rise development of several townhouse-style apartment buildings.
Lease prices are estimated between US$595 and US$650 per square meter. The second
Perestroika JV residential project is the renovation of a seven-story building. The building
will comprise 78 units, with amenities incluoing child care facilities, exercise facilities and
a lap pool, and social/conference rooms.

Polar-BEK, a Finnish-US group, is the only company with US representation to pre­

qualify for the 7.8 billion D-mark housing program for the Soviet troops returning from the
former East Germany.

The Soviet-American-Danish JV named Most (Bridge) has announced plans to build 120­
340 square meter cottages on the outskirts of Moscow. The coitages will be sold in rubles
to weaithy or credit worthy Muscovites. Prices range from 200,000 to 400,000 rubles (US
$33,333 to US $66,666). The JV expects to be allocated 20-25 hectares for the co-ruction
of about 100 cottages in the near future. According to the Soviet press, Most -1 inve. 300
million rubles in the project within the next five years. Most is a joint venture of Nevatim
(US), Group Jespersen (Denmark), and Infex (USSR).

Pacific Modem Homes Inc. of Elk Grove, California is completing a three-phase agree­
ment with Minskremstroi Production Association, headquartered in Minsk, to provide
equipment, training, and technology to produce industrialized housing in the Soviet Union.
The new 20,000 square foot factory, located in the village of Rakov, will be used primarily
to build housing for the victims of radiation fallout from the Chernobyl nuclear accident.
The accident orcurred al, -at 200 miles south of Minsk, the capital of the Soviet republic
Byelorussia. Five years later, 100,000 peoplc frokn these areas remain homeless. In the third
phase of the agreement, Soviet technicians will be trained at PMHI's Elk Grove facility to
produce custom housing components using PMHI's proprietary software and procedures.

K. Hovnanian Enterprises Inm,, a New Jersey-based residential developer, in a charitable

effort to aid citizens of Stepana~an, Soviet Armenia-the city devastated by an earthquake
in 1988-will build a 40-acre American Armenian village, financed by the American Armeni­
 -88­

an church. The $30 million project will comprise retail shops, a clinic, schools, a theater, and
325 two- and three-bedroom stacked flats. Of the first six 16-unit buildings, two are com­
pleted and a third is underway. Although the units are designed for three to four people,
they will likely be occupied by extended families owing to the scarcity of housing. The cost
of the residential section alone may reach US$6-7 million. The local Armenian government
has retained ownership of the land during the construction phase; upon completion, the
national government regains control as landlord. Lo,7: labor is provided by the Soviet con­
struction organization Gosstroi. After a year of on-the-job training, the local construction
crews will finish the job.

The Boston architectural firm SBA/Steffian Bradley Associates has created the Amstr,
joint venture with Millpond International and MGPO, the Moscow City Council's Depart­
ment for Housing and Office Buildings. Their first project, Borodinskaya Center is a free­
standing facility in downtown Moscow that will be developed into a five-story, 5,000-square
meter, Class A office building. The $12 million project is expected to be ready for occupancy
by the end of 1992. Other Amstroi projects under consideration in Moscow include addi­
tienal office buildings, urban and suburban residential communities, multi-use properties,
and a movie theater/nightclub complex.

8.5.2 Production of Construction Materials

Pioneer Windows of New York, a manufacturer of aluminum window frames, has begun
production in the USSR and plans to sell most of its products in rubles. A Finnish-Soviet
concern Nev-Al, owned by SV-Import KY (Finland) and the Construction Committee of the
City of St. Petersburg, is ;iso manufacturing aluminum window frames in the USSR.

A Spanish company Tribotechnica is building a brickworks factory in Sevastopol, the

Ukraine, and plans to expand into cement, windows, doors, wooden floors, and parquet
products.

8.5.3 Other Joint Ventures

Numerous other joint ventures have been created for a variety of manufacturing,
construction and marketing operations. A sampling of recent joint ventures, as noted in East
European Construction, includes the following:
" Americam International, originally linked with Intourist, will be opening the Radisson
Slavyanskaya hotel.
" An Irish-Finnish-Soviet joint venture between the Irish subsidiary of Sow,,nan Rakennus­
vienti Oy and the Mining Authority of Vyborg, has begun construction of a 200-300 bed
hotel in the center of Vyborg, a city near the Finnish border.
 -89­

" The German Lufthansa-owned hotel chain Kempinski is opening the Baltschug hotel in
Moscow.
" A Swedish-US-USSR joint venture between Sven Tumba, American International Golf
Resorts and UPDK of the USSR Ministry of Foreign Affairs is building the first official
18-hole course in the USSR.
" The Japanese have started construction of a colored steel manufacturing plant south of
Moscow for the production of construction, materials, appliances and automobiles.
" The Italian group Technipetrol is building a cotton mill and polyethylene plant in
Turkmenistan.
* United Cinema (US) has plans to build six multi-plex theater complexes in the USSR
containing 18 auditoriums.
• A Soviet-German joint venture is constructing a meat processing plant in Lugansi"
 -90­

9 THE INFORMAL SECTOR

Informal economic activities are important in any economy, and particularly in less
developed economies. In the overly regulated Soviet economy, where even now the state
attempts to control most prices and where until only recently most private economic
activities had been prohibited, the informal sector plays a vital role. Without a large
informal sector the Soviet economy would have collapsed many years ago. In the past,
informal economic activities alleviated mistakes of the central planners, coordinated a
significant share of microeconomic activities, and allowed individuals and organizations to
circumvent the bureaucratic red tape.

The informal sector, however, often exhibits serious inefficiencies compared to a devel­
oped rr trket economy with well-established market institutions. For this reason, the role of
the informal sector in the Soviet Union is expected to decline in the long term. In the fore­
seeable future, though, the contribution of the informal sector to the Soviet economy in
general, and to housing in particular, will remain crucial for understanding the workings of
the system, and the progress and effects of reforms.

For obvious reasons it is difficult to provide reliable quantitative estimates of current

operations of the informal sector. The descriptions in this section will be largely limited to
the qualitative institutional aspects and anecdotal evidence of informal sector activities.

9.1 Housing Construction and Repairs

Like in many other countries, the Soviet construction sector has always attracted a
significant portion of informal economic activities. For years, thousands of private
contractors known as shabashniki have been building houses, roads, farm buildings, and
other structures. A typical shabashnik is a male, 25-40 years old, who takes time off from
his state sector job to make extra money. Shabashniki usually work in teams of 3-9 people,
earning 3-4 times as much as they do in their official jobs. Some also take payment in-kind.
Most of the work shabashniiperform is under contract with collective and state farms, but
sometimes they work for individuals as well. Even though a legal contract may be present
between the customer and a representative of the shabashniki, the shabashnikd team itself
would not, as a rule, be a legal entity.

Some shabashniki have valuable construction skills and work for a period of 6 to 8
months before returning to their state job, while others are students or post-graduates who
work during vacations. Housing repairs in large cities are often performed by shabashniki
who moonlight after hours to supplement their low salaries in state jobs. In fact, income
 -91­

from such moonlighting is as a rule greater than the official salary. Until recently, however,
an official job has been required from all able-bodied adults not classified as dependents.

Presumably the proliferation of construction and repair service cooperatives (see section
7.1) has reduced the relative importance of the shabashniki.In fact, one could conjecture
that many of these cooperatives were organized by the former shabashnikiwho took advan­
tage of the possibility to engage in their trade with a greater measure of legal protection and
on a full-time basis. Nevertheless, shabashniki are still in demand for building private
country ',-ouses (dachas)and rectifying poor workmanship in state-built housing. Traditional­
ly, and te-ecially currently, mozt of the work by shabashnikitakes place in the countryside.

Interestingly, during the 1980's the media portrayal of a shabashnik changed from a
greedy parasite and a crook receiving money for shoddy workmanship to a positive response
to the inefficiencies and shortages created by central planning mistakes and bureaucracy.
During the same period the Soviet government attempted to codify the relationship between
shabashniki and clients, in part to control the phenomenon and in part to reduce the
vulnerability of the legally unprotected shabashniki to exploitation and fraud by their
employers.

One of the greatest difficulties experienced by shabashniki as well as by officially

registered construction cooperatives, is procuring construction materials. Often the oniy
channels for obtaining crucial inputs are through begging, bribing, or stealing. The legal
commodity exchanges (see section 7.4) are underdeveloped, and are not accessible to many
construction outfits, particularly to shabashniki.Black markets in construction materials are
widespread. Prices in these markets vary across regions and normally exceed the official
prices several fold (see Table 23). The data also reveal a rather high rate of inflation in the
black market for construction materials, with brick prices rising the fastest. It is difficult to
ascertain, however, whether or not black market inflation in construction materials prices
exceeds the economy-wide rate.

9.2 Housing Allocation

As previously mentioned in section 4.7.1, the second economy plays an important role in
allocation of housing, including state-owned, in the USSR. Even prior to current reforms,
Soviet households managed to bypass the striet rules of housing allocation and obtain the
amount of housing corresponding at least to :ome extent to the;," monetary wealth. The
informal mechanisms for achieving this goal included side-payments during exchange of
apartments, bribes to housing allocation officials, and renting housing from private
individuals where the amount of rent exceeded tie legal limit.
 -92-

TABLE 23
BLACK MARKET PRICES FOR CONSTRUCTION MATERIALS, 1990
(rubles)
Lum- Facing Win- Ply- Ce- Lino- Wall­
ber Block dow wood ment leum Brickr
(m) (m') (unit) (sq.m.) (50 kg) (sq.m.) (1,000) (roll)
Average 191 287 131 8.6 10.5 16.6 318 25.3
Ratio to state 2.4 8.9 2.7 3.2 2.3 2.9 4.1 3.0
price

December 1990
price as percent 116.6 268.0 118.7 124.9 124.9 128.3 160.4 117.4
of August 1990
price

In Cities:
Moscow 213 303 -- 8.7 19.5 13.5 228 18
Ashkhabad .............. 15
Baku 300 400 .. .. 9.0 -- 300 33
Vilnus 350 800 350 10.0 10.0 25.0 700 --
Yerevan .. .. .. 6.0 6.0 10.0 -- 50
Dushanbe .............. 23
Kiev .. .. 200 -- 30.0 -- 125 -.
Kishinev ................
Lvov ........ 15.0 ......
Minsk ................
Odessa 155 225 155 4.5 11.0 35.0 300 --
Riga 250 500 40 8.0 20.0 30.0 1,500 --
Tbilisi ........ 8.0 .... 40
Frunze ................
Kharkov ............ 2,500 --
SOURCE: Ekonomika i zhizn', no. n/a, 1990.

Numerous examples of illegal and semi-legal transactions in the Soviet housing market
provided in Morton (1980) and in the So,. .nedia confirm the existence of well-developed
second economy markets. Thus, Ekonomicheskaiagazeta (no. 36, 1986, p. 18) reported that
"citizens who have extra housing can easily exchange their flats for larger ones. Experience
shows that often a genuine buying and selling of housing is hidden behind such unequal ex­
changes." Side-payments go from the household leaving the smaller (worse) apartment to
the household moving into it.
 -93-

In many markets the per square meter rates for these side-payments are well-established.
According to reports in Soviet newspapers in the mid-1980's (cited in Alexeev, 1988), these
rates ranged between 100 and 250 rubles (US $17-42) in various cities outside of Moscow.
Perevedentsev (1990) reports a significantly higher range of 300 - 500 and more rubles
testifying to a significant degree of inflation in these markets. Outright bribes to the officials
responsible for housing allocation are not uncommon either.5 2

An important implication of these phenomena is that the actual beneficiaries of housing

subsidies may not always be the current residents of a state-owned apartment. When the
dv-elling is obtained through bribing an official or through a side-payment during the
exchange, either part or the entire subsidy is capitalized in the side-payment or bribe. The
household making the payment in effect "purchases" the subsidy, while the recipient of the
payment is the actual beneficiary of the subsidy. This argument has a bearing on the issues
of fairness in the process of privatization of housing, particularly for households who have
more than the average amounts of state-owned housing. Indeed, they may have paid for
their housing already. From this point of view, the fairness of forcing these households to
buy their excess housing from the state during privatization is questionable.

Another mechanism for improving one's housing situation through informal means is
renting a dwelling from private individuals. As was indicated in section 3.5.4, Soviet law
always allowed renting one's housing unit. Until recently, however, it had been prohibited
to extract profit from such an arrangement. Also, the system of propiska (see section 3.7.4)
has imposed significant restrictions on private rentals. While less than 1% of Soviet families
were officially renting their housing from private individuals, the true size of this
phenomenon is surely much greater. In addition, even those who are officially registered as
renters almost certainly have to pay large premia ever the officially listed rental charges.

The pending elimination of the propiska system in the republics, privatization of state­
owned housing, and the general relaxation of rules for private rentals will have an ambi­
guous effect on rental rates in real terms. On the one hand, the demand for private rentals
will experience a rapid increase which will, in turn, push up rental rates. On the other hand,
the supply will rise significantly, while the risk premium charged in illegal transactions for
private rental arrangements should disappear. On balance, barring imposition of high taxes
on housing rentals, complete legalization of private rental market would probably act toward
reducing the rental rates in real terms.

2For
references see Alexeev (1988).
 -94­

10 FRAMEWORK FOR HOUSING REFORM AND TOPICS FOR

FURTHER INVESTIGATION

This final chapter contains two principal sections. The first section establishes a broad
framework for the mid- to long-term reform of the Soviet housing sector. A final section
briefly discusses topics for further investigation.

10.1 Framework for Housing Reform

The joint IMF-World Bank Study of the Soviet Economy proposes four principal areas for
reform of the Soviet housing sector: (1) property rights and privatization; (2) rents, sale
prices and subsidies; (3) housing finance; and, (4) housing production and delivery. The IMF
study notes that housing reform is an important component of overall macroeconomic sta­
bilization and str.ctural change. It cannot proceed separately, but must be integrated with
reforms in other parts of the economy. The report goes on to state that reform of the
housing sector must deal simultaneously with both the existing stock and new production.
The following sections briefly summarize the principal elements of a framework for the
reform of the Soviet housing sector as set forth in the IMF document.5 3

10.1.1 Property Rights and Privatization

The goal of privatization should support the rational and efficient use of th- existing
housing stock. This implies the development of a well-functioning rental market, rather than
the hasty transfer of the existing stock to individuals at greatly undervalued prices in order
to simply free public authorities from the heavily subsidized costs associated with operation
and maintenance.

The IMF report notes that the privatization of the Soviet housing stock will have to
consider the following factors:
" major rent increases will have to precede changes in property rights in order to create
incentives to buy;
" valuation of existing units and the determination of selling prices will involve difficult
technical issues given the uncertainty with respect to housing prices following rent
increases;

The following section draws heavily on Volume 3, Chapter V.9 (Housing), pp. 330-335 of the Study of the
Soviet Economy, IMF et al., February 1991.
 -95­

• eligibility of prospective buyers, particularly whether individuals other than the current
occupants can purchase units;
* financing the purchase, given the existing high price-income ratio facing current tenants.

The clarification of property rights will take time. As mentioned above, the issue of rent
increases will have to be addressed before major changes in property rights can ad- ance very
far. Over time, the housing sector must clarify three types of property rights: (1) land use
rights; (2) ownership of buildings and individual housing units; and, (3) ownership of
infrastructure and other public assets by local governments and state enterprises. A
necessary first step is to remove the myriad laws and regulations that are systematically
biased against the free and effective use of private housing property.

10.1.2 Rents, Prices and Subsidies

Rent reforms and utility pricing reforms are necessary for the successful reorganization
of the housing sector. The two central principals of rent reform should be to ensure that
rent will not only cover operation and maintenance of a unit, but the full economic cost of
housing, as well as provide social subsidies directly to families and individuals in need,
rather than through the allocation of a specific subsidized unit. In addition, utility prices
should be shifted to full-cost pricing, while individual metering should be the norm and peak
load pricing introduced. Current subsidies and allowances for new production should be re­
channeled away from the state construction industry and, in stead, targeted directly to needy
households and other social groups.

'0.1.3 Housing Finance

As noted in previous sections, the USSR, even before the breakup of the union
government, did not have a developed housing finance system. Given the decline in
importance of the union government, it is now probable that housing finance systems will
have to be developed at the republic level as part of overall financial sector reform. The
IMF study proposes the following elements of such systems: (1) financially viable long-term
loan instruments; (2)separation of subsidy elements from financial credit, with a transparent
funding of subsidies; (3) introduction of effective forms of loan guarantees and foreclosure
laws; (4) creation of new lending institutions; and, (5) consideration given to local market
conditions when selecting the financial service to be provided and the specific housing
activities to be financed (i.e., financing package to include middle-income, as well as low­
income, housing, home improvement loans, and loans for the privatization of existing units.
 -96­

10.1.4 Housing Production

Competition among housing producers should be encouraged in conjunction with the

elimination of preferential treatment for large state construction enterprises. Reform of the
urban planning system and improved local government management will be critical
ingredients to improved housing production.

10.1.4.1 Diversification of the Housing Industry

The IMF study lists the main factors needed to stimulate the development of a diversified
and competitive building industry as follows: (1) enforcement of open competition among
housing developers and the emergence of private developers; (2) the dismartling of the
monopoly supply of building and construction materials; (3) phasing out of preferential
access to finance and building materials given to large state construction enterprises; (4)
comprehensive review of the rules and regulations affecting the design and construction of
housing; (5) total revision of the urban planning system that was designed to fit the need of
large-scale industrial housing production; and, (6) reorganization of large industrial housing
enterprises currently using large concrete panel construction to ones capable of employing
multi-purpose building components, and coordination and management of the construction
cycle through contractual, rather than centralized bureaucratic means.

10.1.4.2 Reform of the Urban Planning System

To remedy the problems associated with the costly and time-consuming Soviet urban
planning system, the !MF study proposes the following actions: (1) systematic review of the
large number of urban laws and regulations with a view to eliminating unnecessary or
repetitive approval steps; (2) reconsider the role of the Soviet master planning process; (3)
accelerate the trend toward decentralization of the administration of the development
process to the level of local government, particularly with respect to private development
projects; (4) make optimum use of existing urban land, particularly infill sites, to encourage
more efficient patterns of urban investment and the emergence of small- and medium-sized
private builders and developers; and, (5)adjust system of infrastructure provision and pricing
to incorporate secondary and tertiary networks into specific project development and to
decentralize administration to the local level.

10.1.4.3 Strengthen Role of Local Government

The role ;Z local government as facilitator of housing production should be strengthened

with respect to three principal elements: (1) regulation of land transfer, land use and the
urban planning system; (2) the provision and financing of infrastructure in conjunction with
other levels of government; (3) management of local public assets including the sale, transfer
and/or continuing management of land and public buildings.
 -97­

10.2 Topics for Further Investigation

Given the rapidly evolving nature of the composition of the Soviet Union itself, it is
assumed that some of the observations and findings in this study will be superseded by
events. Several clear streams of reform have been noted, however, that relate directly to the
housing sector. Yet, since the implementation and mechanics of these rmforms are, in many
republics, still under debate, it has been impossible to gain a full understanding of these
efforts. It would be extremely useful to pursue the following topics for further investigation:

1) Housing Finance - The precise structure of current financing for housing construction
is unclear. While funds are now under the control of the republic governments rather
than the central government in Moscow, the extent of this new authority or the
mechanisms for finance are still unclear. Previously, a city would submit a project
request to the provincial or republic government, that would then be incorporated
into a plan one or two years later. It is unclear whether plans are still utilized, and
at what levcl, or if a "pay-as-you-go" strategy is in effect. Additionally, it is not known
what new tools for municipal finance, such as bond flotation and other types of
taxation, are under consideration. Finally, it is presumed that funds from privatization
are playir.g a major role, but it is not known to what degree.

2) Commercial banks - Little information is available on the profusion of new

commercial and cooperative banks under cooperative and joint stock forms of
ownership following the promulgation of the Law on Cooperatives in 1988, or the
possible role they might lay as new lenders of flexible, unsubsidized mortgages. While
most commercial and cooperative banks have been formed by a particular industry
or collection of enterprises to serve their respective credit needs, it is not clear
whether they have the capacity or authority to diversify their lending. In any case, it
is imperative that financial instruments and institutions be developed for the housing
sector as overall reforms are undertaken in the financial sector.

3) Privatization - Details of the activities of privatization of the housing stock are

readily available for Moscow, yet given that all cities have the power to substantially
modify the law for themselves, it is important to ascertain what is happening outside
of the capital. Resistance and conflicts with local municipal officials have been
encountered in some municipalities, while others have provided support for the
privatization process. As various municipalities formalize and customize the privatize
process for themselves, it will be important to document their levels of success.
 ANNEX A

LIST OF CONTACTS

Individuals Contacted Phone: 212-909-5091

Fax: 212-909-5299
Hugh Bredenkamp
Country Economist
International Monetary Fund Robert Medeads
Phone: 623-8881 Jim Garrison
Eselin Institute
Martha Demelo Phone: 415-326-5932
Country Economist
Bertrand Renaud Jack Howley
World Bank National Assoc. of Realtors
Phone: 473-2410 International Operations Division
777 14th Street NW
Diana Tasnadi Washington, DC 20006
Department of Commerce Phone: 202-383-1033
Basic Industries
Phone: 377-0132 Ms. Orttung
Center for Democracy
Leslie Brown Phone: 202-429-9141
Susan Lewenz
Department of Commerce June Koch
Eastern Europe and Soviet Affairs Construction Marketing and Trading
Phone: 377-4655 Phone: 202-296-8228

John Geraghty Bill Peterson

Department of Housing and Urban Devel- Construction, Industry, Manufacturing
opment Association
Policy & Research/International Phone: 202-479-2666
Phone: 708-0770
Bob Cullen
Barry Mundt "East-West Business", Editor
Nina Dimas (Formerly the "Soviet-American Trade
KPMG Project Coordination Newsletter")
KPMG Peat Marwick Phone: 301-907-8125
767 Fifth Avenue
New York, NY 10153
 A-2
James McKeller 457-7771 (h)
Professor
York University
Toronto, Canada Joint Ventures
Phone: 416-736-2100 x20104
Pacific Modern Homes Inc.
Michael Alexeev Elk Grove, CA
Professor of Economics Contact: T. M. Dyer
George Mason University President
Phone: 703-993-1143
Fax: 703-993-1133 Perestroika Joint Venture
Eugene Norden
Anatolii Nazarov Moscow
Chairman of the Presidium of Trade Phone: 7095-299-7013
Union Council of Workers Cooperatives Fax: 7095-299-3480
of Tadjikistan
ul Chekhova 5/2 apt. 10 Michael Blakely
Dushanbe, Tadjikistan World Housing Corporation
Phone. 27-32-25 (h) PJVUSA
36-68-81 (o) Phone: 404-261-9590
Fax: 404-261-8929
Leonid Solomin
President of the Assoc. of Independent Most JV
Trade Unions of Kazakhstan Moscow
Alma-Ata, Kazakhstan Phone: 7095-334-8171
Phone: 63-22-87 Fax: 7095-420-2262
Viacheslav Pekhochek Senie Kerschner International Housing
Coordinator Limited
All-Ukraine Association of Trade Unions 125 Main Street
Kiev, Ukraine Westport, CT 06880
Phone: 221-5507 Phone: 203-454-2454
Fax: 203-454-7890
Aleksei Grigor'iev Contact: Dawn Corchard
Deputy of the Supreme Council of Latvia Leasing Coordinator
Editor of "Baltiiskoe vremia"
Riga, Latvia Steffian Bradley Associates
Phone: 290-301 (o) Boston, MA
Phone: 617-227-6520
Andrei Cherniavskii Contact: Peter Steffian
Economist
Moscow, Russia
Phone: 433-2550 (o)

((
 A-3
Glavmosstroi
Sovietskaya Pl. 2/6
Moscow, USSR 103009
Phone: 7095-253-8915
Fax: 7095-200-3212

J.A. Jones Construction Company

One South Executive Park
6060 St. Albans Street
Charlotte, NC 28287
Phone: 704-553-3000
Fax: 704-552-8719

Polar-Bek
Birmingham, AL
Phone: 205-969-3600
Contact: Richard Trueb
Assistant to the President
Phone: 205-972-6906
Fax: 205-972-6924
Contact: Kullervo Matikainan

K. Hovnanian Enterprises
New Jersey
Phone: 908-747-7800

East European Construction

2140 Partridge Berry Road
Birmingham, AL 35244
Phone: 205-987-2948
Fax: 205-987-1812
Contact: Tuula Matikainen
Publisher

Mosinzhstroi
Malaya Bronnaya Street 15B
Moscow, USSR
Phone: 202-1643
Fax: 411-742
Contact: Mr. Viktor Schtill
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