Russian housing finance policy: state-led institutional evolution

Abstract

A public policy scholar sets out to investigate the reasons behind the exceptionally high interest rates for mortgage loans in Russia. The article argues that this situation can be explained by examining Russian government policy making in the area of housing finance during the post-Soviet period. Following comparative literature, the process of policy development over time is argued to be determined by the interaction of such factors as policy legacies, policy ideas, institutional environment and actors' interests. The article demonstrates how the agency model of housing finance was institutionalised in policy during the 1990s. The initial appeal of this model to the interest of diverse actors at different levels of government is explained. The subsequent evolution of this model towards the formation of a ‘state-led model of housing finance’ over the recent decade is traced and its limitations in producing sufficient volumes of mortgage funding are highlighted. The analysis, in addition, demonstrates that alternative policy ideas with the potential to generate extra volumes of mortgage finance are also available in Russia within the relevant policy community. Their adoption in policy is, however, presently blocked by the interests of the top policy officials seeking to increase and maintain the central role of the Russian state in directing the country's economy.

Acknowledgements

The author is grateful to Philip Hanson for his helpful comments on an earlier version of this article.

Notes

^1. The highest volume of housing construction was reached in Russia in 1990 with 61.7million sq metres of floor space completed. See Rosstat (2012, Table: Vvod v deistvie zhilykh domov v Rossiiskoi Federatsii).

^2. See Tables 6.38. Zhilishchnyi fond and 6.49. Raspredelenie domashnikh khozyaystv po vidam i blagoustroistvu zanimaemogo zhilogo pomeshcheniya.

^3. 22.6 sq metres of housing were available per person in Russia in 2010. By comparison in some developed European countries the figures were much higher: Denmark 50.6 sq meters, Sweden 44.4 sq metres and in UK 44 sq. metres per person (Burdyak 2008, p. 4).

^4. On how housing conditions in the Russian Federation compare with those in other OECD countries see OECD Better Life Index: Housing, 2012, available at http://www.oecdbetterlifeindex.org/topics/housing/, accessed 13 April 2013.

^5. Slightly higher rates are offered in Romania and Slovakia (5.25%, HICP 3.38% and 3.74% respectively), in Poland (6.98%, HICP 3.69%) and in Bulgaria (7.49%, HICP 2.39%), with only Hungary (12.77%, HICP 5.66%) and Ukraine (18.25%, CPI 8%) exceeding Russian levels (Source of data on mortgage rates: EMF (2013, p. 88); data on Ukraine for 2011 from EMF (2011, p. 94); source on HICP: European Central Bank, www.ecb.europa.eu, accessed 7 January 2014; for CPI in Ukraine: National Bank of Ukraine, www.bank.gov.ua, accessed 7 January 2014).

^6. Zavisca shows that while Russian policy makers adopted institutions of housing finance closely resembling those of the United States, Russian people, by contrast, have developed a set of attitudes towards mortgage credit that is remarkably different from those that exist in American society.

^7. In a separate publication (paper under review) I argue that the issue of restricted housing affordability in Russia involves such elements as insufficient income levels, sharp increases in property prices, as well as the conditions surrounding mortgage loans – in terms of high interest rates, large initial deposits and short borrowing periods. That publication considers these elements of low housing affordability as they are experienced by the Russian public, i.e. by the demand side of the housing process. The present article shows that the tough terms of mortgage borrowing in Russia are indicative of the underlying incapacity of the country's credit institutions to offer more affordable housing loans. Thus, it offers a ‘supply side’ banks' perspective on mortgage finance in Russia.

^8. Secondary mortgage finance describes different auxiliary resources that banks raise on capital markets or receive from the state budget to augment their own funds in order to provide greater volumes of mortgage credit to borrowers (see for instance: EBRD 2010).

^9. See Rosstat (2012, Table: Vvod v deistvie zhilykh domov v Rossiiskoi Federatsii).

^10. See Table: Rost material'nogo blagosostoyaniya i kul'turnogo urovnya naroda.

^11. On negotiations in the policy process between the Russian executive and the parliament during the 1990s see Remington (2010) and Chaisty (2005).

^12. This trend is now being reversed, however, across a wide range of diverse housing markets including the UK, the US, Australia and a number of continental European countries (Heywood 2012). Moves away from over reliance on home ownership in Russia are evident as well (Khmelnitskaya 2013, Tumanov 2013).

^13. This, however, appears modest both in comparison to the countries with developed housing markets and in comparison to some of the former socialist countries. For example, the residential mortgage debt to GDP ratios were for the UK – 83.7%, Germany – 45.3%, Czech Republic – 13.0%, Poland – 19.6% and Estonia – 36.7% (EMF 2011, p. 77).

^14. Expert at the Association of Russian Regional Banks.

^15. In circumstances particularly relevant in some of Russia's regions, where average house prices fell by over 15% (see Yazykov 2012).

^16. It may appear inaccurate to call Gazprombank a state bank. Formally it is a stock company whose shareholders' structure is available at http://www.gazprombank.ru/eng/about/shareholders/, accessed 3 March 2012. Yet in the literature Gazprombank is widely regarded as a ‘state’, ‘state-controlled’ or ‘indirectly state-controlled’ bank (e.g. Juurikkala et al.2011, Vernikov 2012). At the same time, the close connection between Gazprombank's parent company, Russia's gas giant, Gazprom, and the use of the latter by the Russian authorities for their ‘social and political aims’ is documented in the literature as well (Victor and Sayfer 2012, p. 665).

^17. According to Standard & Poor's, Gazprombank and VTB had BBB stable ratings (Standard and Poor's 2013).

^18. For instance: Moscow Mortgage Agency (MIA) www.mia.ru; Delta Credit www.deltacredit.ru; Gorodskoi Mortgage Bank www.gorodskoi.ru.

^19. Head of Treasury at one of Russia's mortgage issuing banks.

^20. Formally housing privatisation is still continuing until March 2015 (O vnesenii izmenenii, 2013).

^21. One way around this problem was to introduce, in addition to private ownership, other forms of housing tenure, such as housing cooperatives and housing rental options (Khmelnitskaya 2013, Tumanov 2013).

^22. It has to be noted that providing affordable housing and particularly devising housing finance policies that would allow banks to issue mortgages accessible to middle and low-middle-income households represents a policy challenge to governments around the globe from Japan to India to South Africa to the US and Latin America (Economic Commission for Europe 2010, Rust 2012).

^23. Among Duma deputies who supported the alternative housing finance ideas were Ivan Grachev, Anatolii Aksakov and also advisers such as Oleg Ivanov. Grachev worked in the Second and Third Dumas as a deputy chairman of the Committee for Property. In the Third Duma, Grachev chaired the Commission for Mortgage Lending which became an important vehicle for the promotion of mortgage finance in the post-1998 crisis environment and for the development of the Law on mortgage securities (Ob ipotechnykh 2003). In the current, Sixth Duma he is chairman of the Committee for Energy (Grachev, 2013, available at http://www.duma.gov.ru/structure/deputies/131232/, accessed 11 June 2013). Anatolii Aksakov worked in the Third to Sixth Dumas as a member of the Committee for Financial Markets. In the Sixth Duma he is a vice-chairman of the committee (see personal page on the State Duma website: Aksakov, 2013, available at http://www.duma.gov.ru/structure/deputies/131222/, accessed 10 June 2013; and Anatolii Aksakov Persona, 2013, available at http://www.aksakov.ru/ru/person/, accessed 10 June 2013.) In the early 2000s Aksakov also participated in the Duma Commission for mortgage lending (International banker, personal communication, 14 September 2009, Anatolii Aksakov Persona 2013). Through Aksakov the Committee for financial markets was connected to the Association of Regional Banks of Russia – Aksakov is the chairman of this organisation (Assotsiatsiya regional'nykh bankov Rossii, 2013, available at http://www.asros.ru/ru/, accessed 10 June 2013). The Committee used the advice of the association's experts like Oleg Ivanov who from the late-1990s had participated in the development of a number of major legislative acts regulating the Russian banking system, including the Law on mortgage securities. In 2013 Oleg Mikhailovich Ivanov was a Vice President of the Association of Regional Banks and a member of the expert council of the State Duma committee for financial markets (Ivanov Oleg Mikhailovich, 2013, available at http://www.asros.ru/ru/about/governance/detail/?group_id = 2&id = 4, accessed 11 June 2013).

^24. Banker at the Association of Mortgage Banks.

^25. The debate on the benefits of the agency-based and bonds-based systems continues. Recent research – that emerged after the financial and banking crises – on one hand points out that the latter more decentralised bond-based system performed better than the system involving a mortgage agency. Yet, at the same time, it also argues that under strict supervision and on the basis of a clear set of rules both of the systems have their advantages for delivering certain types of finance for the housing sector (Weinrich and Schudrowitz 2012).

^26. Specialists working at Gosstroi and the IUE were assisted by lawyers from the USA (O'Leary 1997) and a number of joint initiatives were launched to promote American housing ideas within the State Duma (Gosudarstvennaya Duma 1998b, Novye Izvestiya 11 November 1998).

^27. On the use of ‘zero reading’ in the process of policy elaboration by the Russian parliament see Chaisty (2005, pp. 127, 136).

^28. The question of the origins of institutions and reasons for their stability and transformation is among the most engaging themes that have recently been examined by economists and political scientists (Engerman and Sokoloff 2008, Hall and Thelen 2009). New foreign influences and contacts are considered to be important sources of institutional origins.

^29. For a discussion of relevant experience in Latin America, a region with a recent history of establishing a well-functioning system of housing finance, see Sanchez (2012).