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Emil Górecki

This August’s conflict over South Ossetia has put yet another brake on the growth of Russia’s economy. 
The events may have put the fear into foreign investors, but do not seem to have had such a great effect on real estate

The Russia-Georgia conflict adds yet another damaging blow to the Russian economy following the slump in crude oil prices, the boardroom strife at TNK-BP and Vladimir Putin’s intervention in the pricing policies of Mechel. As a result, foreign capital is now fleeing to safer havens. The exchange rates between the rouble and the euro and US dollar are falling and, one month after the outbreak of fighting in South Ossetia, have reached their lowest values for half a year. The Moscow Stock Exchange is experiencing steady daily falls in share prices, with bankers calling it the greatest crisis since 1998. Although the European Union has not imposed any formal sanctions on Russia, much is being said of an evident lack of enthusiasm among western investors to bring their capital here. The Russian central bank admits that Russia’s foreign currency reserves have been reduced by USD 16.4 bln – one of the largest reductions in more than 10 years. Russian experts claim that around USD 22 bln has left the country since the conflict erupted, which is a sizeable sum bearing in mind that the Central Bank’s earlier expectations were that USD 40 bln would be invested in Russia throughout 2008. However it is not only the conflict in Ossetia that is to blame for this state of affairs, but Russia’s current antagonism with the Ukraine and falling crude prices for oil haven’t helped the situation either.

Joerg Banzhaf, the managing director of ECE Projektmanagement International – a German developer with a number of shopping centre projects in Russian cities – expresses some concerns abut the future: “I am not afraid that the Ossetia-inspired crisis will negatively affect our company’s operating conditions in Russia, but the general run of foreign investors shows that the situation is being interpreted as a bad omen. The question that inevitably arises is: and what’s going to happen if . . .”

Gold, by itself, is just not enough

The Russian Federation’s bank reserves are one of the world’s largest, which is one of the reasons why its economy does not really need foreign investment to grow. However, Russian banks prefer to grant short-term loans, which results in an acceleration of the real estate turnover cycle and hampers stabilization of the whole market. Chris Conner, director of DTZ’s investment consultancy department, points out that: “Western banks have become much more careful in lending for Russian projects. Developers can be granted loans in Russian banks but only for a shorter term. The lack of bank financing is starting to affect the market and might lead firms, which were intending to enter Russia, to decide on Poland instead – a large country, more stable and comprehensible, free of such political risk, while still offering excellent profit-making opportunities. Many western companies are deciding to do this, so the Ossetia crisis might prove to be beneficial to Poland.”

However, Chris Conner – who has worked in Central and Eastern Europe for umpteen years – feels sure that the companies that have already built or bought properties are not going to leave Russia. He adds that: “Only those listed on the stock exchange and who can sell their shares quickly are going to take to the hills. Selling properties takes a lot longer and it would take much greater turbulence to force investors to behave in such a manner.”

The conflict can exert a direct visible impact on real estate business in the immediate regions around the military hotspots. Krasnodar is the nearest large Russian city that is situated beyond the mountains 300 km from the Ossetia frontier. But no spectacular panic movements can be seen there. Vadim Vikolov, director general of the Investment Promotion Agency of the Rostov region, feels that: “Although the zone of conflict is relatively close – around 650 kilometres from here – I have not noticed any drop in interest in the Rostov on Don region from foreign investors. The same number of arrivals are coming, while those already working here are showing no signs of anxiety. Of course it would be better for the conflict to be resolved peacefully. Rostov is a much sadder place without Georgian songs.”

As analysts see things

Russia ranks 5th out of 50 countries analysed in A.T. Kearney’s most recent report on the world’s best locations for real estate business. Risk was one of the factors in the study, with Russia being given the highest marks out of all the Eastern European countries. The question that now arises is: will those two high positions be maintained in the next report? Anton Poriadine, A.T. Kearney’s Moscow office director, takes a calmer view: “It is nigh on impossible to speak of the influence of the Ossetia crisis on the Russian real estate market in general. The economy’s foundations and the risk element remain the same prior to the events in South Ossetia. If there really are any fears, they concern investments undertaken for the Sochi Winter Olympics, although that is also not a certain factor. Economic indicators such as risk, supply and demand remain unchanged.”

Mr Poriadine does admit that Russia’s position in the ranking list of the best places to run a real estate business will fall away somewhat. Political risk is greater in the minds of foreign investors. In addition, the country is losing out due to the falling price of crude oil. But the economic foundations remain firm, he adds.

Real estate operators should keep calm. The success of their projects mainly depends on their skills and not on any external factors. Anton Poriadine is firmly convinced that “the Stock Exchange has suffered the most so far from the crisis. The money which has been taken out must go somewhere and property is one of the best places for investment.”

Sochi not the best place for investing

Though real estate companies and market analysts continue to speak reassuringly, in recent months Russia has lost much of the good opinion it once enjoyed as a good place to make money. The ‘Financial Times’ warns that the real estate and banking sectors will suffer the greatest losses, due to the lack of sources for finance. Adrian Baker, managing director of Raven Russia, a British company developing warehouses in Russia, offers this opinion: “Risk is a part of Russian business. We cannot control politics, but the Georgian problem has no significant influence on the area of the economy in which we operate. Russia and its economy are, today, a much greater attraction to us than Britain. The requirements of tenants have grown substantially and the demand for the warehouses we build is increasing, with the needs of consumers on the market also surging.”

More than a year ago the international community was not afraid to invest near hotspots on the map of Russia and the post-Soviet republics. The International Olympic Committee decided that the 2014 winter Games would be held in Sochi near the border with Abkhazia, which is not rated as exactly ‘safe’. Investors in these regions today are developing a large number of projects, and though the authorities are not always satisfied with the speed of what is being done, there is no sign of a sense of danger taking hold in the city.

The Russians, too, seem not to be afraid of any danger. On the initiative of Moscow city mayor Yuri Luzhkov, the SU-155 Russian development and construction company will soon be going to Tskhinvali, the capital of South Ossetia. The purpose is to assist the city in its reconstruction. Tskhinvali has contracted SU-155 for the construction of 80,000 sqm of housing in low-rise buildings on a 69-ha plot by September 2009, in which 4,000 people will live. Mr Luzhkov has designated as much as RUB 1.5 bln for the project (almost EUR 70 mln). ν