BRICKS & MORTAR: Moscow's bonne affaire en France

By bne IntelliNews March 18, 2014

Ben Aris in Cannes -

There is growing tension between Russia and the West, but in the same week that the two sides were trading insults and threats over Crimea, the French Riviera resort of Cannes was packed with Russians chatting merrily with wealthy European investors over glasses of rosé and plates of oysters. They had come to the annual MIPIM conference, Europe's biggest real estate trade fair, where Russian opportunities were this year's special focus.

Moscow City government was out in force and a pavilion at the entrance to the conference hall held an impressive scale model of the rejuvenated Russian capital city as it will look in a decades time, if all goes to plan.

Sergey Cheryomin, minister of the Moscow City Government and head of the Department for External Economic and International Relations, didn't seem too phased by the international brouhaha. "The situation in Ukraine will not affect investment into Moscow's economy at all," he told bne rather wearily, having just got off a 15-hour flight from Singapore where he was at another investment event. "We don't have investments there. The trade with Ukraine is tiny compared with somewhere like Germany and like all these crises we have been through in the last two decades it will eventually be resolved. But it does make our lives more difficult."

Sergey Cheryomin

Cheryomin has the tricky task of selling Moscow to foreign investors - tricky not because of the geopolitical situation (although that doesn't help), but because Moscow is increasingly competing with the other up-and-coming cities in the emerging world like Istanbul and Dubai.

The number of European investors at MIPIM this year belies the tension in the corridors of power and most investors at MIPIM took a pragmatic view: as long as there are no sanctions on financial transactions, then Moscow will retain its appeal as one of the biggest and fastest growing cities in Europe. Too many investors have already made too much money from investing in Russian real estate to write it off yet. "The budget of the city is over $60bn and just the city procurement programme is $20bn," says the eloquent Cheryomin. The city budget was equivalent to slightly more than a third of Ukraine's entire economy in 2013. "That creates a lot of opportunity for companies that are providing services, especially those that can modernize municipalities or transport infrastructure."

Cheryomin's task in France was to persuade investors to take a closer look at Moscow, but half a dozen other regions, such as Rostov, Chechnya, Bryansk and St Petersburg, also had stands at this year's show. Part of the pitch is to try to get investors to distinguish between Russian risk and the specifics of investment into Moscow. "There is a big perception gap between the realities of doing business in Moscow and the perceived risks," says Cheryomin. "The Asian investors are much more pragmatic. They barely asked about Ukraine at all, but wanted to know instead what our privatization plans are, if we intend to issue infrastructure bonds, and so on."

Since the change of mayor in 2012, the Moscow government under Sergei Sobyanin has drawn up a new master plan to cover the next decade that will comprehensively transform the city. The new mayor has already introduced initiatives like bus lanes and paid parking in the centre that has reduced traffic by 25% and Moscow's legendary traffic jams. But the main work still lies ahead. The programme to turn Moscow into an international financial centre (IFC) is a top priority. "We are not trying to replace London or New York, but thanks to our geography there is an opportunity to fill a gap between markets in Asia and Europe. We will start by developing capital markets for our neighbours in the CIS and Eastern Europe, and go from there," says Cheryomin.

The major change in 2013 was the Russian government's decision to expand the territory of the Moscow City region (along with St Petersburg, one of two cities in Russia to be a region in its own right) by adding a new corridor of land to the south east. "Before we had only 1000 square kilometres of land for over 12m registered inhabitants," says Cheryomin. "It created enormous problems with traffic, housing, provision of kindergartens and the rest. Now the new territory will take some of the pressure off and also provides tremendous opportunities for foreign investors as the new region will be developed from scratch."

Thanks to the capital's predominance in the Russian economy over the last two decades, doing business in Moscow is already a lot easier than in the rest of the country. Surprisingly, contract enforcement in Russia is already strong, in the world's top 10 according to a recent survey by the World Bank, and the arbitration courts are well respected and considered fair when it comes to dispute resolution.

The arbitration courts were set up in the 1990s to rule on disputes when the legacy soviet laws were in the process of being rewritten. A recent decision to merge the arbitration court with Russia's supreme court and house the new entity in St Petersburg will not affect the working of the Moscow Arbitration court, says Cheryomin, as the two will remain separate at a regional level. "I should not boast of this, but companies win well over half of all the cases they bring against the city government. The legal system has been thrashed out by use over the last years and is very reliable," says Cheryomin.

Perhaps more worryingly is the general economic malaise that has taken hold in Russia in the last year, but Cheryomin points out that the regional economy is performing far better than the rest of the country. "We are expecting growth this year of 1.7-2.0%, which is not booming but is more or less stable, and is still better than Russia's growth expectations," he says. "But where we are doing a lot better is on inbound investment: Moscow received $10bn of [foreign direct investment] in 2013, which was 2.4-times more than the year before. That reflects the efforts of the city to create more effective government and the international communality has vote on our success in this task with their money."

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