How “Perestroika” Started
“Before I came to Moscow, I worked as a lawyer in the US at a large American law firm specialising in property. Amongst my clients were all kinds of property development companies and banks. When the large banking and mortgage crisis began in the West, and work dried up, I decided to go on leave and do business in Russia. To me it was little more than a crazy adventure. My reasoning was thus: I’d work for a year or two at most until the market situation stabilised; it would add to my experience, and then I’d return to my former life.”
The GVA Sawyer Group (member of the international association GVA Worldwide) has been operating on the Russian commercial property market since 1993, and offers the full range of services: development, project management, consulting, brokerage and capital market services. It has offices in Moscow, St. Petersburg, Krasnodar and Krasnoyarsk. Presently, on the company’s website, there are more than 300 investment proposals, totalling over $100m.
“That was in 1991, when the Soviet Union still existed, but the power from the KPSS had passed to the Congress of People’s Deputies: the first parliament in Soviet history. I arrived in Moscow from the warm Atlantic in October when, in the Russian capital, it had already started snowing. I had to get used to a different climate, a different country. I immediately threw myself into my work, became Deputy Director General of the “Perestroika” joint enterprise. That was the kind of business permitted by president Mikhail Gorbachev. It was the Soviet Union’s first development company in commercial property. We were building the first modern office blocks. The possibilities for us were endless. And it was very interesting!”
“Apart from your native English language, you are fluent in German. But how did you get on with Russian?”
“I didn’t know Russian, and that was a big problem. Because, in the 1990s, not so many Russians knew English. Communicating was difficult. I had no choice: I started to learn Russian from day one. I have to admit that I still don’t know all the rules. It is a very difficult language. You can’t learn it by ear.”
My reasoning was thus: I’d work for a year or two until the market situation stabilised and then I’d return to my former life.
“What kind of problems did you have to overcome?”
“I encountered problems every step of the way. For example, you weren’t allowed to simply go and buy stone. There was no market, no business culture, nothing. Very few people in Russia then knew what “property developer” meant. I had to explain that it is an entrepreneur whose business involves making profit from building new property sites. I remember we tried to buy a plot of land and start building, and people quoted prices they simply plucked from the air. We tried to explain what, in principle, land prices are based on, and the reply went: “None of this interests us. It is all the same what kind of income you can receive later on. Isn’t it important to you that what you build is in a prestigious location? What do you need profit for?”
“Carrying out construction work wasn’t straightforward either. Hardest of all was understanding a system which included all manner of permits and restrictions. It was the Soviet system, based on a centralised, planned economy, and it had its own rules of the game distinct from those in the West.”
There was no market, no business culture. Very few people in Russia then knew what “property developer” meant.
“A lot of foreigners who come to Russia consider it to be a third-world country. That the rules in existence are nothing serious and, to put it crudely, are only there to enable bribes to be extorted. This is not the case! It is a real system, and the laws are indeed laws, and they have to be kept. And that doesn’t mean having to pay bribes. Here, certain officials would gladly accept money, but they would still make you come back and do the work, and in a way which meets legal requirements.”
“It is a profound, and in no way stupid system, many of the rules of which are in effect to this day. To understand how it operates is a huge task on which you could spend many years. But it does have its failings. The whole world lives in a market economy: there has to be a balance between how much something costs and what the result of it will be. We are not going to spend a million dollars on each building so that they have, for example, the capability of detecting a fire five seconds before we can with the usual technology. It’s not feasible. We are counting this money. The Soviet system didn’t count: it simply didn’t know how to. The present Russian system is the heir to that. I remember being surprised by the requirement for hotel kitchens to be three times bigger than necessary. But this is all down to specific health and safety regulations. And the route along which the rubbish is taken out shouldn’t cross the route by which food is delivered. Designing such a kitchen requires a large area. This is irrational, in my opinion. Overall, architects in Russia don’t have the same kind of freedom as they do in the West. Although in most cases, it isn’t too bad.”
Everybody Wants to Make Money for Today
“When did you set up your own company?”
“In January 1993, I, and three Russian partners, left “Perestroika” and established GVA Sawyer.”
“Was it difficult renting premises?”
“In those days you couldn’t just go and rent an office. Office buildings, as such, were virtually non-existent. There were administrative buildings filled with the vestiges of the Soviet Union. And it was possible to bribe some organisation and rent a room illegally. But we didn’t need one room, we needed a normal office to receive business partners in. So we negotiated with another company whose partners owned a mansion building on Novinsky Boulevard. It had more space than they needed. We split all of the costs fifty-fifty. We had an all-purpose secretary, and one interpreter. It was a rational solution.”
Officials would gladly accept money, but they would still make you come back and do the work, and in a way which meets legal requirements.
“Later on, the possibility of renting premises arose. Companies and firms were paying $800-1,200 per square metre per year. After the default in 1998, prices fell to $400-450. Now the average rate has gone back up to 1991-levels: $800 per square metre.”
“What can you say about the mentality of Russians?”
“The business culture in Russia still leaves a lot to be desired. Everybody wants to earn a living for today, and what they will do for this doesn’t matter, and what tomorrow will bring, similarly doesn’t matter. Many want to make money very quickly. Unfortunately, such is the business philosophy in Russia. But we are waiting. A middle class, a management class has already started to appear in Russia. There are already quite a lot of large companies engaging in retail, in big business, on a professional level, who know how to manage people, who understand management ethics.”
“The problem of internal corruption in companies persists. For example, in the building trade individual suppliers and contractors arrange “kickbacks” amongst themselves. They steal and are prepared to risk their careers purely to make money now. That is a question of mentality. Before it was possible to say: look, I’m being paid peanuts. Now, wages in construction are at a normal level, but people brought up in those old circumstances carry on stealing anyway.”
What is a “kickback”? “It’s jargon, not a legal term. It’s a kind of bribe given to the company executive making the decisions on how the money is to be spent. Once he has decided to buy from a particular vendor and the deal has been struck, the representative for the purchaser receives part of the purchase price (either a fixed sum or a percentage) from the vendor as a kind of “reward”.”
“Have you ever been let down by Russian partners?”
“You bet. It is the same here as it is in any other country in the world. There are those who value their reputation highly, and then there are others who see no shame in deceiving people in order to make more money. That’s why you have to negotiate with any new partners very carefully, and to cover your back. But the Russian businessmen I work with today are very reliable partners.”
There is still so much yet to be built here.
“Do you succeed in attracting Western investors to your projects?”
“Our business very much depends on attracting Western investment. I frequently go on business trips. I fly to London practically every month. I’m constantly in meetings with foreign investors, persuading them to put money into projects on Russian territory. And, each time, I am amazed what a poor grasp they have of what is actually going on in this country. Sometimes I’m asked if private property exists in Russia! Or if people have the legal right to own land. I have to tell them that the consumer boom in Russia has been going on for the last 12 years. But they still see Russia as a very poor country. It happens that I’m asked the question: Do Russians have mobile phones? And I have to explain that, even in 2000, there were more mobile phones than people. There is no end to the surprise that evokes.”
Architects in Russia don’t have the same kind of freedom as they do in the West. Although, in most cases, it isn’t too bad.
“How would your business be different if you were working in the States today?”
“I would have less work. There would be fewer headaches. But life would be very boring. One would think that after two years of working in Russia I should have returned to America and carried on working as a lawyer. But the years I spent in Russia were so interesting that I couldn’t force myself to go back, and so I have been held up here for 20 years.”
“They say that Russians and Americans are very similar.”
“Yes, and it is purely down to geography. It is the mentality of the big country. People behave differently when they are surrounded by wide, open spaces, huge areas of land, big possibilities; different from someone who lives in a small country where they have to be more closed, more guarded. And people who live in massive territories are friendlier and more open.”
In the West there is standstill and stagnation: everything has already been built there. All the niches have been filled. But, in Russia, there is a huge area of operation.
“Is it worth it for the foreigner to go to Russia to do business?”
“Of course. This is the centre of the world as regards business. The very best place! Everything here is growing, there is so much of everything that still needs to be built. In the West there is standstill and stagnation: everything has already been built there. All the niches have been filled. All that needs doing, perhaps, is to replace one or two old buildings. But, in Russia, there is a huge area of operation. That is why there are so many of us here: somewhere in the region of 50-60,000 Americans alone work here.”
“I often come across a certain phenomenon. Large foreign firms with offices in Moscow complain that it is very difficult to transfer their employees here. They have a system of rotation whereby their managers have to move to a new place every three years: from one office to another. They do this specifically to distribute their technology, experience and knowledge. A sales manager works, for example, in London, then he’s moved over to Berlin etc. Nobody, at first, wants to go to Moscow. Sometimes, to persuade a manager, they have to offer him more money. Everyone is scared of this “wild country”. Then, once they have worked in Russia for the designated period, when they are about to be moved to another country, they beg to be allowed to stay in Russia. It really is like that. Living here is very interesting. The “hard times” of the 1990s have been left in the past. Don’t think that here it is worse than in some New York ghetto, and that you have to go everywhere with a bodyguard. Moscow is a very civilised city: it’s clean, with a relatively low level of crime. You can walk around here until the early hours. And Moscow’s cultural life is of a high quality. Here, for example, there are over a hundred functioning professional theatres. For me, each new play is source of amazing pleasure. And if you get fed up with Moscow, you can sit on the high-speed Sapsan train, and in 3.5 hours you are in St. Petersburg. And to see every corner of Russia would take more than a lifetime.”