Sting in Serpent Island tale leads to political strife in Romania

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)

When the International Court in the Hague awarded the lion’s share of the hydrocarbon rich northwestern Black Sea to Romania over Ukraine, many in the Latin county saw this as poetic justice for disrupted gas supplies in January. But Romania’s politicians have again showed their mastery of snatching defeat from the jaws of victory

Maritime border disputes are usually mind-bogglingly arcane affairs. So it was with the decade old dispute between Romania and Ukraine over maritime border delimitation in the North-Western Black Sea. The main bone of contention was an ‘insular feature’ known poetically as Serpent’s Island, the size of a few football pitches, and located not far off Romania’s Danube delta. Ukraine is the proud sovereign of what it claimed was a fully fledged island, replete with a Potemkin village of settlers – and entitled to a zone of exclusion giving Ukraine control over resource-rich seabed.

Romania was intent on calling a rock a rock, denying Serpent Island was an island, and thus arguing it had no implications for the maritime boundary.

However arcane the arguments, at stake was sovereignty over an estimated potential 70bn cubic meters of natural gas – enough to supply Romania’s entire gas needs for five years – and 12m tonnes of oil.

The significance of these reputed riches was greatly heightened by January’s gas dispute between Russia and Ukraine, which saw supplies to Europe, including Romania, severely disrupted. Both sides claimed the resources could limit dependency on imported gas.

After years of deliberations, the International Court of Justice in the Hague reached a decision February 3 – and awarded the four fifths of the disputed area question to Romania. 9,730 square kilometres of the continental shelf of the Black Sea.

Ironically the entire rock / island issue turned out to be a red herring. “The ICJ decided that it was not necessary to determine whether Serpent’s Island is a rock or an island in order to delimit the maritime boundary,” says Martin Pratt of Durham University’s International Boundary Research Unit.

Ukraine put a brave face on yet another international setback, while Romania celebrated, with President Traian Basescu calling it a “big success for Romanian foreign policy”. Prime Minister Emil Boc immediately promoted Romanian representative at the ICJ, Bogdan Aurescu, to a senior post in Romania’s Ministry of Foreign affairs. And commentators pointed to the poetic justice of the award after Ukraine’s spat with Russia had cut off gas supplies to Romania in January. And the even more enthusiastic called it a victory for Western civilization, with the NATO and EU border shifting to its easternmost point.

A sting in the tale

But the Serpent Island tale quickly proved to have a sting to it.

On the day after the celebrations, the hangover set in. It transpired that two weeks before the November 30 2008 elections that voted out the government led by Calin Tariceanu of the National Liberal Party (PNL), a cabinet resolution had granted a production-sharing concession for blocks in the Serpent Island area to Sterling Resources Ltd, a little-known Canadian firm. The agreement, some annexes of which were classified secret, had apparently awarded Sterling Resources production rights in addition to existing exploration rights, in the event that ICJ ruled in Romania’s favour.

The government’s reactions was immediate, with new Democratic Liberal PM Emil Boc dismissing the head of the National Agency for Mineral Resources (ANRM), Bogdan Gabudeanu, Romania’s natural resource regulator, on the same day.

Romanian investigative reporters quickly claimed murky ties existed between ueber-oligarch Dinu Patriciu, head of Romania’s largest energy company Rompetrol, and regarded as sponsor of Tariceanu’s PNL, Sterling Petroleum, other foreign concession holders, and sundry officials.

Apart from Gabudeanu, attention is focusing on current Environment Secretary, former head of the prime minister’s chancellery, Doru Badulescu. It was Badulescu and Gabudeanu who signed off on the concession agreement. Question marks also hang over the role of former justice minister Catalin Predoiu.

Of course, with the economic situation for Romania in 2009 looking increasingly grim, PM Emil Boc is keen on blackening the name of his predecessor, adding fuel to the fire. For his part, former PM Tariceanu has said he will sue Boc over publicly-made corruption allegations.

Sterling Resources says that all relevant ministries signed and approved the resolution. “The Eleventh Amendment took over 20 months to be approved and followed the approving process by the line ministries, as provided by the existing regulations, until final approval by the Government on November 12, 2008,” the Canada-listed company said in a statement denying all allegations. The company admits however that the November 12 agreement “transfers greater control and decision-making to the operator”.

Dinu Patriciu for his part also denied the allegations in a Rompetrol statement, and is dismissive of the Black Sea resources as a whole, adding his voice to that of other experts in saying that the potential reserves are over-stated and the costs prohibitive.

This week is likely to see the scandal continue to roll, as the government has now ordered the disclosure of the secret annexes to the agreements.

Whatever the truth of the affair, it bodes ill for Romania’s corruption-dogged relations with the EU that have led to suspension of billions of euros of structural subsidies.

The EU called on Romania February 12 in its biannual review of corruption and judiciary to “regain momentum on judicial reform and the fight against corruption so as to reverse certain backward movements of recent months.” The EU pointed to parliamentary obstructionism in hindering anti-corruption measures. Victor Alistar, executive director for Romania of corruption watchdogs Transparency International Romania, backed up the EU’s findings, saying that in Romania “the air is thick with corruption.”

Romanians will be worrying lest their courtroom victory over Ukraine, at least in the short term, costs more EU subsidies than it produces gas and oil revenues.

Eurasian frontier markets are top reformers in World Bank ranking

Graham Stack for business new europe

Azerbaijan is today celebrating its meteoric rise in the World Bank’s authoritative annual “Ease of Doing Business” ranking, released September 11. The Caucasian oil oasis shot up from last year’s place 97 to this year place 33, just one below Israel, making it the world’s top reformer. And it is not alone at the top: placed two, three and four among the world’s swiftest regulatory streamliners were fellow Eurasian frontier markets Albania, Kyrgyzstan and Belarus respectively.

The World Bank ranking, that surveys legislation and regulation and includes feedback from companies on registration and tax matters, is the recognized global benchmark for business environment and market entry conditions, in particular for small and midsize business.

And, according to the results of the new survey, Eurasian countries are proving to be the World Bank’s most diligent students: 34% of all reforms improving the business environment across the world 2007-2008 were enacted in Eastern Europe and Central Asia.

The surprise is, however, which countries within this regions were responsible for the lion’s share of reforms. Not the heartland of Poland, Russia and Ukraine, but a splurge of frontier markets, led by Azerbaijan.

Azerbaijan notched up improvements on seven out of 10 indicators of regulatory reform, according to the World Bank. Azerbaijan started operating a one-stop shop in January 2008 that halved the time, cost, and number of procedures to start a business. Business registrations increased by 40% in the first 6 months. Azerbaijan also eliminated the minimum loan cutoff of $1,100, more than doubling the number of borrowers covered at the credit registry, and set up an e-government system allowing taxpayers to file and pay taxes online.

Belarus, aka ‘Europe’s last dictatorship’ and where the state still owns most industry, this year shot up to place 85 from a lowly 110 in 2008.

This was the result of a year’s concerted reforms that won it the number 4th top reformer spot in the ranking. Starting a business became a whole lot easier thanks to a unified registry database, a time limit for registration, and halving of the minimum capital requirement. In addition, a one-stop shop for property registration caused time required to register property to fall from 231 days to 21.

As mountainous as Belarus is flat, and as politically turbulent as Belarus is authoritarian, Kyrgyzstan came in one place below Belarus in the overall ranking, but third place globally as reformer, with one-stop shops for registration and streamlining of construction permission.

Follow my leader

The trailblazer among Eurasian countries, however, remains Georgia. Previous years’ star reformer is this year’s star performer. Georgia takes place 15 in the world for ease of doing business, making it number 1 among the post-Soviet states, far ahead even of the Baltic states, and only one place behind business paradise Finland.

This has made it an example to follow in countries across the region. For as the World Bank’s Doing Business team explains, “if there is any advantage to starting late in anything, it’s that you can learn from others.”

This copycat effect could lead to further sudden leaps towards liberalization in states that seem to be suffocating in red tape. Belarus reformers for one often refer to the Georgian example when arguing that their goal to reach the ranking’s top 25 is feasible.

One example no one is following is Russia’s. Russia languishes at place 120, a drop of eight places over last year. The World Bank comment on Russia is brief and sad: “In the Russian Federation no major reforms were recorded.”

The only silver lining for Russia might be that newly-elected President Dmitry Medvedev has named improving the regulatory environment for small business and tackling corruption priorities for his presidency.

But even that may not help much: Ukraine for all its four years of Orange liberal rhetoric, fares even worse than Russia in the ranking. It came in at place 145, between Surinam and Madagascar.

Cosmetic surgery

However, there are question marks about the report’s findings.

One problem is that the ranking could become a victim of its own success. Governments actively boost their Doing Business ranking by initiating reforms on paper that lack follow-through in enforcement – and thus remain largely cosmetic.

World Bank representative in Belarus Martin Raiser sounded a cautionary note in comments made to bne in July.

“The Belarus authorities have set themselves ambitious goals to improve their rankings in international rankings on the costs of doing business,” Raiser said. “While we welcome the ambition to tackle these challenges broadly, we recognize that the authorities are aiming at efficiency improvements rather than wholehearted institutional change.”

Indeed, the Belarus government’s commitment to moving up the ranking in did not stop hundreds of individual entrepreneurs taking to the streets to demonstrate against the government in early 2008, a bold undertaking in Aleksandr Lukashenko’s Belarus. They were protesting against new government regulations forbidding individual entrepreneurs to hire additional workers, demanding they re-register as firms. The new regulations forced many individual entrepreneurs to quit their business.

“There were demonstrations on the part of individual entrepreneurs in the centre of Minsk, but nothing appeared about them on TV, it was all hushed up and then they were dispersed by force,” a former stall owner forced to turn taxi driver told bne in Minsk in June.

So, before rushing off to set up a bar in Azerbaijan – placed higher than Israel in the Word Bank ranking – listen to what people on the ground are saying as well.

A high-placed foreign advisor in Azerbaidzhan recently made the following comments to the bne blog:

“Petty corruption has indeed been reduced here – you don’t really see policemen hassling people for bribes anymore. But this is not the kind of corruption that anyone is worried about. We’re talking about massive corruption on a scale that is unimaginable by Western standards.”

“Take for example a well-known international oil and gas company which has been working in Azerbaijan for many years. When they have to import a small, specialized part such as a pump, say, that is only worth some $500, they end up paying around $10,000 to get it across the border,” claims the source.

“In the West, when people consider Azerbaijan, they expect corruption but they have no idea about the level it has reached. If someone were to say: ‘give me 100% of the value of the goods’, people would be like ‘are you crazy?’ But here 100% is nothing – 500%, 600% or 700% is completely normal. It’s ridiculous, but that’s the reality.”

“It’s human habit, you push things as far as they’ll go. No one has done anything to stamp out corruption, so it’s gone completely out of control and is killing the country.”

SMEs top Russia agenda, but will Medvedev succeed where Putin failed?

Graham Stack for business new europe

Putin was a small man with big ideas, but Russian President Dmitry Medvedev is a small man who is turning to the small details. He launched his first term as president by inviting 5,000 small- and medium-sized enterprise (SME) bosses to the Kremlin to listen to their gripes.

This is new for Russia. Over the last 15 years, the Kremlin has always been first and foremost concerned with big issues, big companies and has made some big mistakes. The little people in the street have largely been ignored and bore the brunt of the suffering. However, if Medvedev is successful in cutting the red tape that entangles small businessmen, as he is promising, it would have a big effect on the Russian economy.

Medvedev has so far been hitting all the right notes when it comes to making life easier for the beleaguered SMEs. Barely a week into his new job, Medvedev called a meeting with SME representatives and prepared decrees slashing permit and licensing requirements. “You know what I am talking about,” he said at the meeting May 14 with the assembled small business bosses. “Firstly, I mean reducing the number of inspections to one every three years, with extra inspections requiring special permission from the procurator’s office… I mean a transition to predominantly notification procedure for registering small businesses, and wide-ranging introduction of compulsory insurance for small business instead of bureaucratic licensing… I remind you that our goal is that by 2020, 60-70% of the workforce should be involved in entrepreneurial activities.”

Is this a break with gigantism of the Putin area, and its focus on oligarchs, state monopolies and massive pipeline and infrastructural projects?

Heard it before

“Dear colleagues,” began the president. “We often say that it is very important for starting businesses to ‘find their feet’… Business in general – and small business in particular – has an enormous amount of complaints about unjustified administrative pressure. And this primarily comes from supervisory bodies and inspections. Hundreds of thousands of people oversee this order. Thousands of commercial organizations are accredited at these bodies to’ feed’ off inspections. Their dictates and fines, just like extortion and bribes, are an excessive burden and oppress enterprise… The government should ensure that these inspections are reduced to a minimum.”

Impressive? But this was not President Medvedev, but President Vladimir Putin in his presidential address to parliament in 2002, detailing a plan drawn up and subsequently implemented by German Gref’s reformist Ministry of Trade and Economic Development. So, six years later, why are we back to square one?

Currently, SMEs in Russia employ 24% of the workforce and contribute 22% of the GDP, compared with 78% of the workforce and 55% of the GDP in Japan, and on average approx 50% of workforce in developed countries. A study published December 2007 by the Centre for Economic and Financial Research (CEFIR) at Moscow’s New Economic School about the effects of the Gref de-bureaucratisation programme found there had been an overall average effect on SME development, but subject to massive regional differences. Federal measures only worked effectively where local government got behind them, and this only occurred in regions with, according to the survey, relatively high standards of transparency and information. In other regions, local authorities simply continued inspections as previously, ignoring the new regulations.

Another survey released in April, conducted by Trust Bank and Romir Monitoring, established that SMEs had never had it so good in terms of current business in 2007: 66% of SMEs said their market grew in 2007, compared with 51% in 2006 and 54% said business was better. But, paradoxically, despite feeling good, the same businesses say they lack confidence in their future. In comments on the survey, Trust’s managing director for development of SMEs, Nadia Cherkasova said: “for both small and midsized companies, the index of expectations was significantly lower than the index of current business. This indicated that entrepreneurs are in a permanent state of anxiety regarding the future.” Trust makes no secret of the reason for this: “administrative and criminal pressure.”

This indicates that, with small business revenues growing, the temptation for law enforcement and inspection agencies to line their pockets also grows. Entrepreneurs suspect that whatever legislative changes are introduced, local state organs will find new ways of extracting rents. SME confidence in the future falls as their business grows. In turn, lack of confidence in the future deters companies from accessing credit, and thus limits business expansion.

Big business looks out for small

The solution to all this is to replace the whole system of government licensing and inspections in favour of compulsory insurance, which was what Putin was calling for way back in 2002, in vain as it turned out. It failed to materialize then, as there was no insurance sector worthy of the name. Even compulsory third-party motor insurance was only introduced in 2003, and encountered significant initial difficulties.

But in 2008, the insurance sector has transformed beyond recognition, after five boom years, with almost all major European insurance companies now present in Russia, and professional standards soaring. This makes transition to an insurance system now feasible. Moreover, it means that there is a power lobby in favour of implementation and enforcing such a system: precisely the federal-level insurance companies. For the first time, big business is looking out for small.

In banking, as well, huge changes have taken place. And after the retail banking boom, banks are starting to look to the SME sector as a new source of business. According to Trust Bank, 2007 was the first year where the growth rate of loans to SMEs was higher than the growth rate of corporate and retail loans, according to Nadia Cherkasova. VTB has announced plans to increase SME financing by 80%. And Russia’s largest bank, Sberbank, has a special interest in small business: its new CEO, German Gref, was as economy minister the author of the 2002 deregulation initiative.

Large banks looking to do business with small companies constitute another lobby with an interest in protecting SMEs against local inspections. And not only in terms of legislation, but also in terms of enforcement. Local officials are less likely to harass entrepreneurs where this involves entangling with the corporate security services of federal–level insurers or banks.

New government legislation could work this time round if it’s backed by such powerful federal players, with money at stake where clients come under administrative pressure.

It is no coincidence that a leading lender to small business such as Trust Bank, with one of Russia’s largest branch networks, sponsors of the Romir Monitoring Small Business Index, lobbies both for extensive deregulation for small business, but also for criminal liability for creditors who fail to return loans.

Overtaking on the inside track: Israeli developers facelift Moscow – with a little help from their friend

One of Moscow’s best kept secrets is that Israeli developers are doing their bit to facelift the Russian capital and bring it into the 21st century. They benefit from their international experience, expertise and reputation, and from their Russian connections.

Israeli newspaper headlines erupted December 2007 with the news that high-profile tycoon and religious benefactor, Israel’s richest man Lev Leviev, was leaving Israel to set up house in London. Where upon the London headlines erupted with the news that another “Russian-Israeli” oligarch was on his way, and had just snapped up London’s most expensive house for $70m – and an Bombadier 5000 luxury executive jet for just a little less.

Speculation was rife as to the reasons for relocation – running from his distate of Ehud Olmert’s ‘appeasement’ of Palestinians to the popularity of London as tax haven.

However, the official reason given by Leviev’s real estate holding Africa Israel was that as of December 2007 Leviev had become chairman of the board of directors of AFI Development, Africa Israel’s Russian subsidiary, listed in London, and that he intended to focus his entrepreneurial efforts on the Russian market.

With some of Moscow’s most grandiose projects under way, and a total of $10bn in investment pledged, this argument was not only official, but also the most plausible: Lev Leviev deemed the potential of the Russian market so great, and his personal influence so vital to execution – that it demanded his hands-on attention.

‘Mr. Leviev regards Russia as being one of the main growth engines for Africa Israel,” confirms AFI corporate director Igor Solomon.

Building the 21st Century in Moscow

Russia is undergoing a real-estate revolution, with prices spiraling at double, and occasionally triple digit, figures per year. In 2006, Moscow residential real estate famously grew by over 100%. In commercial real estate, prices in 2007 leapt by over 50%, and in 2008 should grow at only slightly lower rates for all the global credit squeeze. Construction is booming everywhere you turn, but it is still decades away from meeting demand.

This is the backdrop to Israeli companies’ taking Moscow by storm.

Pride of place among their projects goes to AFI’s Moscow City Central Core, the space-ship like heart of Moscow’s futuristic “City”. This is Russia’s answer to London’s City: the country’s financial centre, where office space will accommodate around 144,000 work places. To get an idea of the scale, add an on-site metro station, high-speed rail links to two of Moscow’s three major airports, direct access to major traffic arteries, 300 retail outlets, a 6,000-seat concert hall, and an ice rink,. AFI’s stake in the project is valued at $1.2bn.

A close second is AFI’s Tverskaya Zastava development, at the top of prestigious Tverskaya Ulitsa, 3 km from the Kremlin, where AFI is basically redesigning an entire district in the heart of Moscow. The combined projects will incorporate both a built-from-scratch interchange at Moscow’s busiest intersection, Moscow’s largest underground shopping center and over 224,000 sq m of office, retail, hotel and residential space, with total value over $2.1bn.

Impressive as this is, AFI Development is only of four major Israeli developers at work in Moscow. Mirland, affiliate of Israel’s massive Fishman group, showed it can hold its own with AFI by securing the rights to built the aptly named ‘Skyscraper’, a 48-storey premium class office and retail tower in downtown Moscow, to be completed in 2011. The company’s 100% stake in the project is valued at $141m.

Israeli-run RGI International implement exclusive ultra high-end projects, such as the recently-completed Butikovsky office complex in the exclusive Ostozhenka district adjacent to the Kremlin, valued at $55m. They have just broken ground on a a similarly high-end retail development on Moscow’s famous Tsvetnoy Boulevard, with six floors of retail space valued at $141m.

RGI is also creating an ultra high-end residential development two kilometers from the Kremlin, aptly named Chelsea. Moscow’s Chelsea will be worth $528m – double the price Roman Abramovich payed for his.

Big boys in a small country

For a small country, Israel breeds big industrial groups. According to Ben-Gurion University professor Daniel Maman, around 12 business groups dominate the economy, among them Leviav’s group, Fishman and Gaidamak’s Ocif. Such big groups have in recent years being looking further afield – with great success.

“Israel is a very small place, and at some stage if you want to keep growing you need to get out,” agrees AFI Development’s corporate director Igor Solomon. “The other thing is that business in Israel is so competitive, so the big guys are simply very good at it. In Israel you’re playing for several basis points spread, so when you have the opportunity to enter a market with great returns, you certainly take it.”

According to Maman, the move by Israeli concerns to invest abroad is “a new phenomena, which started at the end of the 1990s and accelerated in the early 2000s. This development is the result of Israeli state policies – which by deregulation (changing the law, tax policy etc.) open the way for the big business and business groups to invest in other countries. Russia is only one example.”

Moreover, according to Maman, “most of the big Israeli business groups have real estate development components. Until the late 90s their real estate operation was mainly in Israel. Now its all over: US, Europe, East Europe, Asia etc.”

“It’s not just Russia and not just real estate,” says Solomon. “Israelis are very present in East European insurance, for example.”

And Russia, he says, is short of the world class development quality the Israelis bring, leveraging their parent company’s expertise.

The Israelis offer world-class quality and international experience: Africa Israel, AFI Development parent company, has over 70 years of multinational experience in development, construction and management of large real estate projects. The Mirland parent company Fishman group boasts over 20 years of experience in international real estate development, and a current portfolio of over 4 mln sq m, an estimated 80% of which is outside of Israel.

Aviv Ocif, acquired by Arkady Gaidamak for $200m in April 2007, which he intends to enter the top five Russian developers, is one of Israel’s oldest and largest development companies, specialized in advanced complex construction technologies and internationally active.

So, while these companies are newcomers in Russia, their backers are considerably more established than any Russian company. In comparison to them, as Brady Martin notes, many of Russia’s newly-floated development companies are “young” and “have limited operating histories overall and even less experience as public companies,” and are consequently facing “steep learning curves”.

The Russian connection

But it’s not just the need to grow outside Israel, and the booming Russian economy offering huge opportunities, that has induced Israeli developers to take the plunge. It’s hardly a coincidence that three of the four Israeli developers active in Russia today are Soviet émigrés.

“It’s the Russian connection,” explains AFI Development’s Igor Solomon.

The most high profile of these Russian Israelis is Lev Leviev.

“He’s easily the biggest benefactor of Jewish communities in the CIS,” says Solomon. “Two of our key success factors are AFI’s backing from the Israeli parent company – and Mr. Leviev’s contacts in Russia.”

Legends surround Lev Leviev, reputedly Israel’s richest man with a fortune of around $5bn. He emigrated from Soviet Uzbekistan to Israel as a 15 year old in 1971, went into the diamond business in the 1980s, and became a billionaire by breaking De Beers monopoly on marketing diamonds by sourcing raw gems in Africa.

A deeply religious man, Leviev perceived the collapse of the Soviet Union not so much as a chance to do business, as primarily to finance and support a large-scale revival of Jewish religious belief and culture on the territory of the CIS. He founded the Federation of Jewish Councils (FJC), an umbrella organization both providing financial support and Orthodox education to Jewish communities across the CIS, and lobbying on behalf of Russia’s Jews in the corridors of power.

The Moscow authorities in the 1990s were closer to another Jewish organization,  the Russian Jewish Congress, headed by media mogul NTV owner Vladimir Gusinsky, an ally of Moscow mayor Yury Luzhkov. N.B: Vladimir Resin, Moscow’s long-serving vice mayor who oversees Moscow’s entire real estate construction and development sector, was and is a member of the RJC’s presidium.

Lev Leviev seems to have initially had better links to the Kremlin, with Putin attending the opening of the FJC’s Moscow Community Centre in 2000. When Vladimir Gusinsky was imprisoned and exappropriated in 2001, subsequently fleeing to Israel, Leviev’s candidate Rabbi Berel Lazar replaced the RJC man Adolf Shaevich as Russia’s Chief Rabbi, apparently with the Kremlin’s backing.

However, to the extent that Moscow Mayor Yury Luzhkov became increasingly reconciled with the Putin administration, Leviev has seemingly managed to retain the favour of both the Kremlin and Moscow City Hall.

Arkady Gaidamak, owner of Israeli real estate giant Aviv Ocif, regarded as a controversial maverick and populist in Israel, has long been a prominent benefactor of Russian Jews. Gaidamak emigrated to Israel from the Soviet Union in the 1972 as a twenty year old for Israel, and then lived twenty years in France, with a variety of business interests, including partnership with Leviev in Angolan diamond dealing.

After the collapse of the Soviet Union, Gaidamak backed the Congress of Jewish Religious Organisations and Associations of Russia, a successor to the Soviet-era Jewish organization. Now he is its president.

In addition, since announcing his move into Russian real estate in August 2007, Gaidamak has publicly backed the Kremlin in Israel, facilitating in December 2007 the return of two Orthodox churches to Russian ownership, and discussing funding the construction of a new Russian Embassy in Tel Aviv.

Compared to Leviev and Gaidamak, Boris Kuzinets, owner and CEO of RGI International, keeps a low public profile, and focuses instead on personal contacts. Kuzinets emigrated for Israel from Latvia in 1971, but relocated to Russia in 1990, building up his development business from scratch as one of the first developers to build contemporary architecture in Moscow, according to Alfa’s Brady Martin.

Despite Kuzinets’ Moscow location, RGI Development, registered in Guernsey, is a recognizably Israeli company, with five of seven board members Israeli citizens, and the remaining two Americans.

Kuzinets now has a string of successfully completed high end residential development projects to his name. For all the Israeli background, his long experience in Russia makes him the ultimate insider, considered be “extremely well-connected,” in the words of Iskyan. Indeed, according to Alfa bank, the main risk connected with RGI International is the company’s overweening “reliance on a single person for sourcing projects”.

Playing Moscow Monopoly

Such connections are a vital resource when it comes to playing the game of “Moscow monopoly’. Moscow real estate, agrees AFI Development’s director Igor Solomon, is a “pretty much a closed shop,” and largely out of bounds to foreign companies – with the Israelis the exception that proves the rule.

“Nothing in the real estate market in Moscow happens without the mayor playing some role, so you can make the obvious logical jump,” says UralSib’s Kim Iskyan. “Any real estate deal in Moscow has the city as a partner. Either they have about a 30% stake or they get in on the deal in some other way.”

“Put it this way,” says Iskyan, “You and I can’t just tomorrow decide to go into high end residential development in Moscow and get anywhere at all.” According to UralSib research, “lack of transaction transparency is a defining characteristic of the Russian real estate market.”

Such opacity restricts competition, meaning returns to those operating on the market are higher. As Renaissance Capital’s Alexei Yazykov says, this is hardly a great surprise when one of Moscow’s major construction companies, Inteko, is owned by the mayor’s billionaire wife, enjoying 20% Moscow market share, and another major player, Sistema Hals, also has, according to Alfa bank “strong connections with Moscow government both at the parent company level and through multiple infrastructure projects completed for the City of Moscow.”

The city government’s pervasive involvement in real estate is institutionally secured by the refusal to privatize land – a political victory won by Moscow mayor Yury Luzhkov over Kremlin reformers in the mid-1990s that has shaped the Moscow political economy ever since. The city makes land available only on long-term lease – meaning that every real estate deal is dependent on the goodwill of the authorities, and the city uses its bargaining power to the full

“They’ve had connections that have served them well,” says Iskyan of the Israeli companies. “It takes time to build these up. There’s certainly links to city hall, I wouldn’t want to speculate on their exact nature. These things you only see in the results. You and I can’t just tomorrow decide to go into high end development in Moscow and get anywhere at all. So the fact that these guys have, says something about their connections.”

AFI Development’s public relations manager Vladimir Rosin, says simply of Lev Leviev that “he’ s quite influentional in Russia and familiar with the Russian president, and has good relations to the Mayor of Moscow. Indeed, the Mayor of Moscow is very aware of Mr Leviev, and they met this year, several times throughout the year.”

Leviev’s personality seem important enough to the company for a sharp drop in AFI post-IPO share price to prompt him to take over in London.

“He wanted to pay more attention and participate in terms of more control more closely,” says Rosin. “Externally I think it’s a very positive and strong sign for the investment community and real estate players,” says Solomon. “But it won’t of course be a change for us internally because Mr Leviev was very closely involved in the activities of company since its inception.”

Surviving the credit crunch

If good connections in Moscow help Israeli companies get a foot in the door where other foreign companies stay outside, then the Israeli connection provides an advantage over Russian companies in times of financial turbulence.

“It should be an advantage for them having access to the Israeli market, since the yield will be more attractive. Where the parent companies are Israeli, it opens up other channels in terms of financing,” says Alfa’s Brady Martin.
This argument seemed to be borne out in November, when, with markets reeling under subprime fall out, and debt financing tightening in Russia, RGI International still successfully placed an approx 128m shekel bond ($32m) in Israel.

Renaissance Capital’s Alexei Yazykov points out, that, in the case of AFI Development, should things turn really nasty, the Israeli connection will provide “the potential to tap emergency financing should unforeseen events prevent AFI Development from funding its projects through more traditional sources of capital. We feel the financing potential is a real benefit.”

AFI’s Igor Solomon agrees that the company is relatively secure in terms of funding: “of course the market has become quite tight, but we have negotiated and secured a major project finance for our Tverskaya scheme in August and we are negotiating further funding for our biggest schemes on a project basis, and it seems quite promising that we will get the financing at reasonable terms. Being a globally diversified company helps in terms of access and experience.”

“We’re just normal people”

The larger than life Russian-Israeli trio of AFI Development, RGI International and Arkady Gaidamak’s Ocif are focused almost exclusively on the giant Moscow market – and thus dependent on good relations with City Hall.

The odd one out among Israeli developers in Russia is Mirland, subsidiary of the Fishman holding, one of the largest Israeli business groups. The Fishman family have no sort of “family connections” to Russia.

As a result, their strategy in Russia differs significantly from the Russian-Israeli developers. 49% of portfolio value comes from projects outside Moscow, and the company aims in the future as well to keep the Moscow / regions balance at 50 / 50. Moreover, their business in Moscow is dominated by one single massive project – the Skyscraper – mentioned above, compared with dozens of projects spread through the regions.

Mirland also stand out among Russian developers in five of the nine directors being independent, ‘a rare exception’ according to Alfa’s Brady Martin.

“If at one end of the spectrum there’s insiders like Sistema Hals,” says Kim Iskyan, “who basically can say we know everyone, then at the other end of the spectrum, if there’s no one who says we don’t know anyone, but a company might say ‘we’re just normal people trying to get the job done’, then Mirland are closer to that end of the spectrum.”

“Of course,” he continues, “they’re not going to say we don’t know people, because you can’t get anywhere without knowing people, but they are not flashy about it and they don’t brag about it. They say ‘there are the rules, and we try to play by the rules.’”

“This explains their regional approach,” says Iskyan. “It’s much easier to do this in the regions, where you are dealing with regional administrations who are not spoiled for choice, they don’t have lines at their door wanting to invest, and therefore they facilitate investment, rather than repelling it by demanding 30% stakes and whatever else.”

Mirland has successfully pioneered this approach in Russian real estate development. However, when the Fishman Group tried to replicate their “we’re normal people” approach in another business direction, they very quickly and very publicly found themselves in major difficulties.

In 2007, Tamir Fishman Venture Capital in partnership with the European Bank of Reconstruction and Development submitted a bid for venture financing from Russia’s new state-backed venture investment fund. Their minority Russian partner was a certain Oleg Shvartsman, head of Finantsgroup, who had originally proposed the idea to Fishman.

The whole world now knows that, in early December 2007, Shvartsman proved to have been a poor choice as business partner, and Mirland were exposed as looking very foolish in the Russian context.

Shvartsman, a hitherto unknown financiere and amateur poet, became famous overnight when Russian business daily Kommersant published an interview he had given on the sidelines of a technology conference in Paolo Alto.

In the interview he claimed to act on behalf of the Kremlin in employing a whole arsenal of extra-legal means to pressure companies into “voluntary deprivatisation”. In this capacity, according to Shvartsman’s detailed and plausible account, he answered directly to Igor Sechin, presidential aide and the alleged leader of the much-feared ‘silovilki’, the Kremlin hardline faction. A collective shiver ran down the backs of Russia watchers and company directors, as his account chimed true with what many had long suspected.

On the scandal breaking, Tamir Fishman and EBRD pulled out of the venture capital deal with egg on their faces.

Elmad Fishman, who runs the venture capital side of the business, could only comment ruefully afterwards to the press that: “Russia is complicated – and it’s very important to choose the right people.”

Lev Leviev no doubt agrees.