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Maturing Russia
In last months issue of Passport, we wrote the first in a three-part series on Maturing Russia. In that article we discussed various legal and economic changes that we have noticed over the years as Russia matures. In this article, we will touch upon various visible changes that have been part and parcel to development of this country; changes we can see, touch, and feel.
By James Logan

Airports

All the major Moscow airports are in the process of major transformation. Sheremetovo I just opened its new high tech, orange-colored Terminal C. Its neighbor, Sheremetovo II is in the process of a long-needed overhall, and Terminal III is slated for a May opening. Moreover, Domodevdo and Vnukovo are currently overhauling their facilities, so that by next year, air travel to Moscow will soon no longer be a regrettable experience. One of the biggest complaints about traveling to Moscow is no doubt the lack of public transport options to the center. That is all about to change as both Sheremetovo and Vnukovo will soon start high speed rail service to Moscow City. It is already possible to take a train from Vnukovo to Kiev Rail station but the new link will be quicker and more efficient once it opens in the next year or so.

Retail

One aspect of Russian life that probably has changed the most is retail. Retail by its nature is the pulse, character and culture to a city. Retail is what we see when we drive down the streets of Russias capital. Retail in the early nineties was all about buying goods from the boots of cars, from lorries, and old women lining up near metro stations peddling goods that they held literally in their two hands. Virtually all of initial retail in Russia in the early 90s was a pure cash business selling goods that were smuggled across the borders. Not only were taxes and customs not paid but the whole business environment was a hornets nest plagued by money laundering, corruption and crime. In the past fifteen years there has been a huge transformation from the purely outdoor selling experience; to establishing temporary structures to protect from the rain, to indoor markets and more recently shopping centers. The government has been now closing markets, and dismantling temporary retail structures, which are located on the high street and near metro stations; to discourage cash trade and beautify cityscapes. Russia has flipped from one extreme to the other; from old women selling goods near metro stations to having the largest and most advanced malls in Europe; from 20% of non-market retail sales to almost 80% in the span of about six years alone.

The retail landscape is a hodgepodge of retailers, malls and hypermarkets from Finland, France, Germany, the UK, Korea, Turkey, Netherlands, Spain, Sweden, Austria, and many other countries, and of course Russians. In terms of Russian retailers some have been setting trends, others have been following trends and emulating Western brands. These emulated Russian versions of Western brands go so far as to use similar store formats, logos and branding colors. Some Russian retail entrepreneurs have been so successful on their home turf that they have been able to bring their Russia-invented concept to other markets such as Eastern Europe and even the UK. Probably by far the most successful retail story has been trend-setter IKEA, which created its own Russian concept that it actually has not yet used for other markets: MEGA Shopping Center. With eight already complete the network will be almost twice that by the end of next year. According to Herman Gewert, Director of MEGA Shopping Centers each center that operates in the regions is between 130,000 and 175,000 sq meters. According to Passport each MEGA Shopping Center is larger than almost any mall in Western Europe. The largest example is located at Belaya Dacha in Moscow, which just opened its doors to the final phase, making it a total of over 300,000 sq meters. IKEA has been so successful that they have decided to expand their concept to include hotels and even office buildings. IKEA pioneered Russias shopping experience and at the same time spawned a whole industry of copycat supermalls across Russia. According to Jeff Kershaw, Senior Director at CBRE Richard Ellis, even though Moscow has almost 400 sq meters of retail space per 1000 inhabitants, it has a long way to go before Moscow reaches levels found in London and Paris, where the figure is close to twice that. According to Daniel Klein, partner at Hellevig, Klein & Usov, retail growth has been strong but is missing out on its true potential since the legal environment has not been established to encourage franchising. As Mr Klein pointed out franchising is a mechanism used in the West to leverage and expand branded outlets by quantum leaps, and Russia, with relatively few true franchise examples, misses a huge opportunity due to the lack of a true franchise system. Mr Klein explains that most mult-store networks in Russia are corporate owned.

To update information in last months article, according to Troika Dialog, GDP per person will exceed $10,000 next year, up from $1,500 in 1999, implying that Russias total GDP is closing in on or about to surpass that of the United Kingdom. This would also imply that Russia has attained the status of Europes largest consumer market.

Eye-Popping Projects for the next few years

Photo by Alevtina Kashitsina

In the next year or so Moscow City will be home to Europes tallest building, which will feature the Park Hyatts hotel reception area on the top floor. The adjoining, shorter 60-plus story building, with a pool on the top floor, will be the highest pool in the world. Ground already broke in September for construction of the tallest building in the world. However, by the time it is finished its 600 meter plus height will only put it at 3d tallest. Moscow plans to develop an area in Western Moscow that exceeds an area of 1000 hectares over the next fi fteen years. There are also plans afoot to cover the exposed areas of eyesore train tracks with massive retail/office developments.

With all these projects past, present, and future Moscow is in the process of setting a new global standard for what a city should be for the 21st century.

Next month: Some experts opinion on what to expect for the future of Russia.

Road Works

New roads are being continuously constructed in and around Russia. To fully upgrade Russian roads to attain European or American standards will not cost less than several trillion dollars. It is obviously a daunting task for any government and, even with all the infl ows from natural resources, clearly it is hard to imagine that significant improvements could be attained in the medium term. Having said that, Moscow and St Petersburg have both built new ring roads. These two major cities will also benefi t from an improved highway that will connect their centers by 2012. In terms of ring roads, Moscow just completed its third ring road and just recently opened part of the fourth ring road (also slated for completion in 2012), and there is also a fi fth ring road in the works. In terms of road works in and around Russia, projects are many, but it may be some time before signifi cant changes are attained due to the vastness of the country.

Trains

Russia is using some of its oil dividends to upgrade its extensive train network. As Russia is the worlds largest country it has the most extensive rail networks, and some journeys can last in excess of seven days. Russians are used to traveling by train and seem to have a higher level of tolerance to spending days on end in a train compartment, a seemingly nightmarish event for most westerners. One reason for this heightened tolerance is due to the fact that there are relatively few airlines that serve internal routes, and they offer infrequent fl ights at sometimes exhorbitant rates. For example: it costs almost $800 to fly round trip from Moscow to Krasnayarsk located in the middle of the country. For the same money one could certainly fl y to almost any city in the US and many Asian destinations, from Moscow and on a reliable carrier. Upgraded trains have been established between such destinations from Moscow to Kiev, St Petersburg, Minsk, Vladivlastok and many others. The Moscow/St Petersburg route is clearly at the head of the curve with its Grand Express (www.grandexpress.ru) which offers two-person berths for a minimum of $160 per person, and up to about $800 for the most luxurious berths that include showers, room service buttons, and remote controls for WiFi, air conditioners, and DVD players. The nine-hour journey on the Grand Express is nothing short of fantastic and ideal for a romantic evening with a spouse or girlfriend. Similarily, there is an orient-express type super luxury service now crossing Russia, as well. Construction recently started on a high-speed link between these two cities which will cut the fastest journey times from the current four hours thirty minutes to a little more than two hours.

Hotels

Both Moscow and St Petersburg are now home dozens of Western hotels like Hyatt, Ritz Carlton, Marriott, and Holiday Inn etc. In Moscow, hotel rates are among the most expensive in the world, and occupancy rates are very high. As a result there is no shortage of hotel projects in Russia. With Hilton planning fifty new hotels in `Russia and the Four Seasons and International soon to join the local landscape, hotel choices will certainly be enhanced. Moscow alone announced eighty new hotel projects over the next several years.

Restaurants

The choice of restaurants has also seem dramatic change, from hardly any restaurants at all to almost too many choices as in Russias capital, which has witnessed the addition of three restaurants on average per day in the past year alone. Trying to keep up on the latest eating hole has given the local restaurant guide books a real run for their money, never mind the average restaurant- goer. The increased competition has translated into both improved restaurant design and bigger menu selection and improved quality of food. Evidence of this is the Ritzs recent hiring of a three-star Michelin Chef and the opening two years ago of Turandot, a restaurant that cost an unbelievable $50 Million to construct.

Office Market

You dont have to drive around long in Moscow to notice the construction boom, especially in the office sector. Office building construction has been strong over the past several years but Moscow is still far behind its Western counterparts in terms of Class A space; and occupancy rates are close to 0%. Experts characterize the Moscow real estate market as landlord-hostile due to the supply-demand imbalance in favor of landlords. This is particularily the case for tenants seeking spaces smaller than 1,000 square meters, since only a few percent of total Class A and Class B space is geared towards these smaller spaces. In that regard, smaller tenants too often end up in sub-lease agreements which double the risk of rent hikes and early evictions. However, that will all soon change as Moscow City alone will soon have three times more square meters of space than its rival Canary Warf in London, increasing markedly the supply of office space in Moscow.







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