Andrew Osborn








Moscow Dreams Can't Get off the Ground --- Building Boom to Rival New York and London Falls Flat, a Victim of Credit Woes of Overleveraged Developers

The Wall Street Journal, 19th August 2009 11:21

By Andrew Osborn

MOSCOW -- At the 2007 groundbreaking ceremony, Moscow's mayor, Yuri Luzhkov, called the Russia Tower skyscraper "a symbol of Russia looking upward to the future," promising completion in the fall of 2009. Since then, the tower, supposed to be the tallest in Europe, hasn't risen an inch.

Its fate reflects how sharply the recession has deflated Russia's oil-fueled construction boom, delaying plans to turn Moscow into a high-rise Dubai of the East. The sudden slump in oil and commodity prices ended eight years of economic growth. It also clipped property developers' wings.

Shalva Chigirinsky, the oligarch bankrolling the Russia Tower, suspended the project in November, wryly blaming former U.S. President George W. Bush for the financial crisis. Since then, Mr. Chigirinsky's problems have multiplied. The Russia Tower, Moscow officials now say, will probably never be built.

"Harsh economic conditions are forcing investors to junk the superfluous," Vladimir Resin, Moscow's first deputy mayor, told Itogi magazine. "We're ready to give up on the idea."

The $15 billion Moscow-City business district, where the Russia Tower was meant to rise, is one of the downturn's most eye-catching victims. Dreamt up as a rival to New York's Manhattan or London's Canary Wharf, the district was a showcase development the Kremlin hoped would reflect Russia's rising clout on the world stage.

But as global credit markets have atrophied, starving overleveraged developers of new funding, many of the migrant workers building Moscow-City have been sent home, cranes have been idled, and the interiors of several partly finished towers remain unglazed.

"Before the crisis, the concept was a perfect fit for the expansionist mood," said Michael Lange, former chairman of commercial real-estate firm Jones Lang LaSalle Russia. "Now, the Russia Tower is going to be turned into a parking lot."

For the Kremlin, delays to such a prestigious project are awkward. President Dmitry Medvedev says he wants to turn Moscow into a global financial center and Moscow-City is where his rhetoric is supposed to become reality. With a projected 44 million square feet, total floor space would be roughly comparable to 16 Empire State Buildings.

Conceived in the early 1990s as a forest of glass-plated high-rises just 21/2 miles from the Kremlin, Russia's then relative penury meant progress was slow at first.

A tubular pedestrian bridge over the nearby Moskva River led the way, followed by a high-rise office building with a swanky top-floor cocktail bar.

But it wasn't until 2005 and 2006, with oil prices ticking higher, that predominantly Russian investors began to pile in. They rushed to finance soaring mixed-use temples to modernity, including a twin skyscraper project called the City of Capitals and a futuristic-looking office complex named "Federation." At the same time, the Moscow city government spent big on infrastructure, opening two new metro stations.

Multinationals such as International Business Machines Corp. and Citigroup Inc. moved in, as did Russian banks. Today, seven completed towers and buildings loom over the site. Progress on 13 others -- on what is the largest construction project in Russia -- is patchy.

Although construction work on some high-rises is continuing, work on a transport terminal supposed to link the area with Moscow's airports has been frozen.

Construction of a high-rise municipal wedding palace where Muscovites were supposed to exchange vows has also been put on hold. Work on two other high-rise towers has ground to a halt.

"We believe that the reason for this is primarily a lack of finance," said Mark Pollitt of real-estate broker Cushman & Wakefield Stiles & Riabokobylko. He added that a realistic timetable for Moscow-City to be built is 2015-18.

To add to developers' problems, demand for office space has plunged, leaving almost one-quarter of Moscow-City's finished offices empty, the highest vacancy rate in Moscow.

Many developers have been forced to surrender or convert project stakes into collateral. As a result, Russia's two biggest state-controlled banks -- OAO Sberbank and OAO VTB Bank -- now own or hold mortgages on nearly every building on the site.