Moscow: Making the Russian Capital Attractive to Investors

“Moscow is open for business,” declares Andrei Sharonov, Moscow’s deputy mayor for economic policy, “but we still have challenges to overcome in increasing the city’s attraction to both domestic and international investors.” This realistic assessment of Moscow’s current position is typical of the man who was appointed by the city’s mayor, Sergey Sobyanin, in late 2010 to make Moscow a global business–friendly center capable of attracting investment.

As a former state secretary and deputy minister of economic development and trade in the Russian Federation, Sharonov supervised the reform of the country’s monopolies and its state procurement system. But he is no career politician: his most recent role was as chairman of Troika Dialog Investment Company, Russia’s oldest and largest private investment bank.

Sharonov is aware of the damaged reputation Moscow has suffered as a result of corruption, as well as the widespread perception that, historically, the city has been a challenging place in which to do business. “Our main aim is to make government as open as possible, and we hope Moscow’s reputation will be changed and enhanced through this increased transparency,” Sharonov says. “We are as open as possible in all of our dealings. Our budgets, spending, and procurement contracts are all online for anybody to see.”

The crusade for open government is being combined with a drive to cut red tape. Russia is currently ranked 112th out of 183 countries in the World Bank’s Doing Business report, but aspires to make the top 20. If this national goal is to be achieved, Moscow’s role in the process will be critical.

The city has already made significant progress in simplifying procedures, says Sharonov, citing the issuance of construction permits as a key area of improvement. “It’s a huge challenge to radically improve the situation, but we have made a start,” he notes. “In the past, developers needed to go through 48 procedures to obtain a construction permit. This has now been reduced to only ten.”

It now only takes six days to register a company, one of the shortest times in the world, Sharonov says. “We see some improvements. We are trying to facilitate business planning with very practical procedures. We hope that the next rating by the World Bank on Russia as a country for doing business will demonstrate some improvement.”

But are these measures having an effect? International developers and investors seem to think so.

Hines has been active in the Moscow market since 1992 and has operated under both communist and post-Soviet governments. “The recent change of administration in Moscow has been tremendously positive,” says Lee Timmins, Hines senior managing director responsible for operations in Russia. “Previous regimes were very opaque, and this seriously hampered our ability to deploy capital in the city. Unfortunately, they leave behind a legacy of bureaucracy which will take some time to remove and reform. This is a long process, and it won’t just happen overnight.”

International investors face a number of obstacles, Timmins says. “We find the challenges facing investors in Moscow are very consistent with other emerging markets around the world,” he says. “There are issues of outdated building codes, inexperienced contractors, a still-developing legal system, and a lack of long-term equity capital. But these very challenges are why the rewards for success and investor returns are higher than other core European markets. If you are a well-financed business with the skills and expertise to tackle these challenges, you can achieve great things.”

Timmins notes that demand for high-quality real estate is there. “Every scheme we have undertaken in Moscow has opened 90 percent leased, oftentimes fully pre-leased, and the demand is not just from international companies, but also comes from domestic occupiers,” he says.

There are signs that the changes made by the city’s government so far are leading to increased investment. “The volume of investment in Moscow has increased by 18 percent over the last year to approximately 1 trillion rubles [$32.2 billion], with two-thirds coming from the private sector and one-third from the public sector,” says Sharonov.

This significant increase in investment is borne out by Hines’s experience. “Our first three funds which invested in Russia deployed $300 million of equity in total and were wider emerging-market investment vehicles,” Timmins says. “We have recently closed our more specific Russia Poland Development Fund that raised $500 million of equity, which will enable us to undertake approximately $2 billion of development once we have formed JVs [joint ventures] with local partners.”

Hines’s latest fund, combined with other investments the company is making in Moscow, is likely to take the company’s holdings in Russia to nearly $4 billion in the next few years, with most of these assets based in Moscow. “The Moscow market is dominant in Russia in the same way the Paris market is dominant in France. I would estimate that 75 percent of our asset allocation will be focused on the capital,” Timmins says.

Sharonov seems satisfied with the recent increase in investment in Moscow. “It is not bad, considering the current global economic situation, but we are not just after any ruble, dollar, or euro. We are after the smart money,” he says, alluding to the city government’s plans to change the base of its economy. “Our aim is to transform the city into a successful and innovative postmodern megalopolis. Trying to revive traditional industries is a dead end for us, and we are looking instead to create a knowledge-based economy. Russia traditionally has [had] a strong scientific background. The challenge has been, and still is, how to turn this into money.

“Our role is not just to invest public money directly, but is also to create the infrastructure required for people to start up new businesses. Special economic zones with tax concessions, technology parks, and business incubators are all strategies we are employing to encourage growth in the types of companies we really want to attract.”

The core of any knowledge-based economy is an educated and skilled workforce, a fact that Sharonov is quick to recognize: “We have more than 1 million students in Moscow, and it is a challenge not to lose them to other cities in Russia or to the wider world.”

Timmins agrees that this is a priority. “Moscow must avoid a brain drain,” he says. “Keeping young talent in the city will enable the growing knowledge economy to flourish. This younger, more educated demographic typically wants to live in the city center and access world-class retail and leisure facilities on foot or by using clean and reliable public transport.”

So what must Moscow do to achieve its aspiration of being mentioned in the same breath as New York, Paris, and London? Timmins is clear: “If you look at all of the world’s truly global cities, they all offer a great quality of life. Moscow really needs to concentrate on continuing to improve the city’s livability.”

The Moscow government has been looking to learn from the experiences of other leading cities around the world. In December 2011, the government commissioned a ULI advisory services panel to provide counsel on the city’s future. The panel of eight industry leaders was drawn from four countries, had wide cross-sector experience, and included Tom Murphy, a ULI senior resident fellow and former mayor of Pittsburgh.

The ULI panel concluded that geographic expansion of the city was appropriate as a long-term strategy, but panelists noted that 37,100 acres (15,000 ha) of industrial land in the city center should be regenerated through mixed-use projects incorporating significant amounts of public space. The research also demonstrated that Moscow was not as dense as many other leading world cities, having fewer residents per square foot than either central London or Manhattan.

“The city needs to focus on regenerating the former industrial sites near the center of Moscow,” Timmins explains. “Approximately 30 percent of brownfield land in Moscow is undeveloped, which compares to cities such as London where the figure is only 4 percent.”

While regeneration of these industrial areas is essential, the question is what will replace them. “We are not looking to change one type of mono-district for another,” Sharonov notes. “If we replace former industrial areas with just housing or offices, we will be swapping one problem for another. We are looking instead to create mixed neighborhoods with housing, offices, retail, leisure, and education facilities
all in the same area.”

Under the guidance of Moscow’s chief architect, Sergey Kuznetsov, a number of improvements will also be made to the city center and its public realm. There are plans to regenerate New Arbat, a pedestrianized street lined with Soviet-style housing blocks that runs westward from the Kremlin, as well as Tverskaya Street, an area that has long had a high number of gambling establishments. Meanwhile, a new city center Artkvartal, or Arts Quarter, planned for the eastern bank of the Yauza River, has been approved by the developers, owners, and city authorities.

The government’s plans are not limited to rejuvenating the existing city, but also call for expanding its boundaries to the southwest, which will double size of Moscow over the next 20 to 30 years. The expansion will include moving some government departments to a new federal capital outside the city, as well as creation of a number of mixed-use communities. The city began master planning the expansion last year and intends to finalize plans by 2014.

The ULI panel also emphasized infrastructure improvements as the key to keeping the city moving and increasing livability for its residents. Areas of Moscow need to be connected by above-ground rail to support the overloaded underground metro system. In addition, both traffic- and parking-management systems are in urgent need of review, according to the panel’s report.

“Our biggest area of spending is now transportation,” Sharonov notes. “We are investing more than 300 billion rubles [$9.7 billion] each year to improve the situation. Our focus is now very much on public transportation, with a particular attention on the metro system. The metro already has 305 kilometers [190 miles] of track, and we are planning to increase this by 50 percent in the next nine years, adding 70 new stations and increasing the interchange with our underutilized over-ground rail network.”

Sharonov accepts that solving the challenges of the city’s aging road network is more complicated. “The city’s current road plan was laid out 50 to 60 years ago and was based on car ownership of three vehicles per 100 people. Car usage has grown rapidly in Moscow and now stands at 38 vehicles per 100 people,” he says. “We are adopting a carrot-and-stick approach. The carrot is the provision of high-quality public transportation. The stick is high fines for improper parking. It is a challenge though: the private car in Russia is still a matter of prestige.”

Moscow will not achieve its aim of becoming a world city overnight. “Change will happen in an incremental manner,” says Timmins. “Five, ten, 15 years—you can pick a number. What is clear is the city has a strategy, and it will get there, providing it continues to empower its people to deliver.”

And how will the city evaluate its success? “We can measure our progress through any number of metrics,” says Sharonov, “but what really matters is the satisfaction of our citizens.”