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.


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