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Cablegate: Russia's Latest State Corporation: Housing

VZCZCXRO7910
RR RUEHLN RUEHVK RUEHYG
DE RUEHMO #5924/01 3551431
ZNR UUUUU ZZH
R 211431Z DEC 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5978
INFO RUEHLN/AMCONSUL ST PETERSBURG 4715
RUEHVK/AMCONSUL VLADIVOSTOK 2575
RUEHYG/AMCONSUL YEKATERINBURG 2914
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 MOSCOW 005924

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/RUS WATSON, PATTERSON
NSC FOR WARLICK

E.O. 12958: N/A
TAGS: ECON PGOV SOCI RS
SUBJECT: RUSSIA'S LATEST STATE CORPORATION: HOUSING
MAINTENANCE FUND

REF: MOSCOW 00510

1. (SBU) Summary. In an effort to revitalize Russia's
housing, President Putin on July 27 signed the law creating
the Fund to Assist Housing Maintenance. Minister of Regional
Development Kozak will head the Fund's supervisory board and
his protg, Konstantin Tsitsin, a Federal Council member,
will head the Fund. With a budget of 240 billion rubles (USD
$9.6 billion), the Fund will finance projects to upgrade
dilapidated housing and resettle people from uninhabitable
homes to better ones. The GOR hopes the Fund will also
encourage development of a market for repair companies and
jump start the formation of homeowners associations. While
most experts consider the Fund well-targeted, they express
concern over its small size, the potential for corruption,
and its ability to attract investors into the home repair
market. End summary.

-----------------------
Crumbling Housing Stock
-----------------------

2. (SBU) Russia's dilapidated housing stock has been ignored
since privatization in the 90s, as the GOR passed
responsibility for maintenance and repair onto first-time
homeowners who were unaccustomed to such responsibility and
lacked sufficient financing to carry the new burden. Most
urban Russians live in apartment buildings where they own the
individual apartments. The rise of a do-it-yourself culture
has led to improvements in individual dwellings, but weak
homeowners associations have left maintenance of the building
infrastructure, including elevators, communal spaces, and
utility systems in disarray.

--------------------
The Fund Takes Shape
--------------------

3. (SBU) The Fund is the latest in a series of state
corporations that the GOR has created to address the
country's economic problems. Money has been allocated in the
2008 federal budget and beginning January 1, regional and
municipal governments can receive 500 million to eight
billion rubles (USD $20-320 million) in assistance. Sixty
percent will finance the repair of existing housing and 40
percent will finance resettlement into better homes. Kozak
will head the Fund's supervisory board, which will consist of
17 members representing the Presidential Administration,
State Duma, Federation Council, and Public Chamber.
Konstantin Tsitsin, a Federal Council Member, will direct the
Fund. According to Tsitsin, board members will not receive
salaries and staff employees (100 have been named so far)
will receive wages somewhere between public and private
sector averages -- meaning a pay hike for government workers
moving to the Fund. While Tsitsin is reported to be Kozak's
protg, some experts have expressed concern over his lack of
experience in the sector.

4. (SBU) According to Tsitsin, the regional and municipal
governments must agree to 12 criteria -- three of which have
generated the most attention and criticism. First, the
regional government must ensure that 25 percent of the
service companies doing home repair in its region are
privatized by January 1, 2009, and 80 percent by 2011.
Second, the regional government must guarantee that five
percent of apartment buildings in their region will form
homeowners associations or cooperatives by January 1, 2009,
rising to 10 percent in 2010 and 20 percent in 2011. Such
associations would be responsible for choosing and overseeing
companies repairing their building. Finally, the regional
government, together with the Fund, would finance 95 percent
of the total cost of repair, but homeowners must finance the
remaining five percent. According to Tsitsin, 70 regions are
ready to file the necessary applications to receive funding.

-------------------------
Resistance in the Regions
-------------------------

5. (SBU) Regional and municipal authorities have objected to
these last two criteria. They claim homeowners associations
are developing, but slowly. Citizens are reluctant to take

MOSCOW 00005924 002 OF 002


control of their own buildings for fear of being saddled with
huge costs and instead are waiting for local governments to
finance repairs. In addition, they argued that homeowners
would balk at paying even five percent of the total repair
cost. According to recent press reports, authorities in 67
cities have lobbied Duma and GOR officials to relax the
requirements. Duma deputies from the "A Just Russia" party
have take up their cause and submitted amendments to the law
for the Duma's consideration in spring 2008. However,
Tsitsin and Kozak have strongly opposed changes to the Fund's

SIPDIS
criteria.

----------------------------------
Fund's Idle Capital to be Invested
----------------------------------

6. (SBU) The Fund's budget will not be entirely spent in its
first year and up to 80 billion rubles (USD $3.2 billion)
will be invested in federal, regional and OECD-country
government obligations. Further diversification will be
considered later and could include investment in Russian and
OECD-country stocks and mortgage obligations. While the GOR
wants to keep the money safe in low-yield investments, some
experts believe that the only way to expand the Fund's
capital -- or to simply keep up with inflation -- is to
invest it in stocks, instead of low-yield securities.

------------------------------
Good Idea, But Rising Concerns
------------------------------

7. (SBU) While most experts and officials support the idea
of the Fund, there are concerns about opportunities for
corruption in the distribution of the money and the small
size of the Fund in comparison to the scope of the problem.
Sergey Sivaev, Director of Municipal Economy at the Institute
of Urban Economics, said that the Fund is too small to
address the vast amount of repairs needed and would only
provide 10 percent of what is necessary. He added that
attracting private capital would be key to any program
seeking to improve the situation. He also suggested changing
current banking policies to allow homeowners to use
apartments as collateral when applying for bank loans could
spur more home improvement projects.

8. (SBU) Andrey Shirokov, Head of Real Estate and Urban
Infrastructure Management at the Moscow Institute of State
and Corporate Governance, reiterated that the Fund is just
too small. He said that up to two-thirds of Russia's
housing, or 3.8 billion square meters, is in need of repair
and requires 5-10 trillion rubles (USD $200-400 billion) to
fix -- 20-40 times greater than Fund's budget. Remir
Mukumov, Head of Territorial Development at the MEDT and one
of law's authors, argued that the Fund must start somewhere.

9. (SBU) Comment. The Housing Maintenance Fund has the
potential to jump-start the stalled National Priority Project
in Affordable Housing, which has led to little improvement in
the housing situation (reftel). The Fund tackles a
fundamental problem that the National Project, with its focus
on construction and mortgages, has not addressed. Targeting
capital repairs fills this void and while initial monies may
be low, positive results could spur additional funding.
However, like other GOR projects, it is a waiting game to see
if the Fund will reach those Russians in most need or if it
will be hindered by corruption, inadequate funding and an
inability to attract private investment. End comment.
BURNS

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