Europe & International Real Estate Slide 7-1

Chap

ter 7

A Lo

ok a

t Rus

sia

Europe & International Real Estate Slide 7-2

Geo

grap

hy

Europe & International Real Estate Slide 7-3

Moscow St Petersburg

Largest city

National capital

Government and business center

Magnet for foreign investment and business

“Venice of the North”

Second largest city

Cultural capital

Past names: Petrograd , Leningrad

Traditional imperial capital

Europe & International Real Estate Slide 7-4

2 x land area of U.S., half the population

75% live in western-most quarter

Mismatch between resources and needs

Aging population and negative growth

Lowest life expectancy in Europe: 59 for men, 73 for women, 66 average

Population

Europe & International Real Estate Slide 7-5

Dissolution of the Soviet Union

7 decades of Soviet rule

Mikhail Gorbachev last communist leader of USSR

Perestroika and glasnost opened way

Policy of non intervention in satellite countries

Christmas Day 1991, USSR dissolved, Russian Federation created

Europe & International Real Estate Slide 7-6

Coincided with Asian Financial Crisis

Extreme capital flight

60% devaluation of ruble

85% inflation

Chronic inflation continues

Extreme capital flight again

Stock market collapse

Some foreign capital returning as loans to companies

Investment by expatriates through offshore companies

1998 2008

Economy—Two Crises

Europe & International Real Estate Slide 7-7

Economy

Europe & International Real Estate Slide 7-8

Oil-dependent economy Minerals and petroleum in isolated areas,

extreme climates Out-of-date, inefficient industrial capacity, low

capital investment Uneven adoption of modern methods Soviet-era “monotowns” remain Energy supplies as a diplomatic bargaining chip Large Moscow-based banks dominate

Economic Factors

Europe & International Real Estate Slide 7-9

Ministry of Economic Development central point of contact

American Chamber of Commerce

Association of European Businesses

Russian Union of Industrialists

“Problems with administrative barriers” (bureaucratic obstruction)

Economic Initiatives

Europe & International Real Estate Slide 7-10

The Ruble

Unconvertible outside Russia

€ and US$ circulate freely

Prices in Y.E.s (equivalent units = € and US$ )

Payment in rubles

Many personal savings in dollar- and euro-dominated accounts

Europe & International Real Estate Slide 7-11

Privatization through “loans for shares” Government default de facto privatization Banks purchased the shares Gradual renationalization to regain control of

certain economic sectors Russian government still committed to

privatization and economic development

Renationalization?

Europe & International Real Estate Slide 7-12

Real Estate Professionals

No real estate license required

Russian Guild of Realtors provides: Standards for professionalism and

competency

Voluntary Brokerage Services Certification System

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Purchase agreement and down payment Buyer puts cash in a bank safe deposit box Investigate encumbrances, privatization Meet at the bank to complete the deal, sign

Acceptance Act Transfer of ownership after state registration

paperwork complete Safe deposit box funds released to seller

Buying Real Estate—Cash Deals

Europe & International Real Estate Slide 7-14

Residential Real Estate

Foreigners cannot own agricultural land or in sensitive areas or near borders

Government owns most land Must be reclassified for private use 1991 Law of Privatization gave people

possession of living quarters

Soviet-era housing stock, poorly constructed, needs repair or replacement

Property ownership versus right to use World’s foremost owners of 2nd homes—the country

dacha

Europe & International Real Estate Slide 7-15

Moscow 57% of deals, St. Petersburg, 35% High vacancy rates

Commercial Real Estate

Europe & International Real Estate Slide 7-16

No trial by jury Regular courts: criminal cases, civil disputes

between individuals Arbitration courts: Commercial disputes

between companies Court cases do not set precedent Supreme Courts issue guiding instructions to

lower courts

Judicial System

Europe & International Real Estate Slide 7-17

83 Federal Subjects 46 oblasts: provinces, 1 autonomous oblast 21 republics based on ethnicity 9 krais: territories 4 okrugs 2 federal cities: Moscow, St. Petersburg

8 Federal Districts (administrative) 12 economic regions (statistics and economic

development)

Russian Federation Structure

Europe & International Real Estate Slide 7-18

President: head of state Prime minister: head of government Executive branch stronger than

legislative Legislature

Federation Council (upper house) Duma (lower house)

Russian Federal Government

Europe & International Real Estate Slide 7-19

Tax Residency: 183 days within a consecutive 12 month period

Nonresident foreigners: 30% income tax Corporations: 20% VAT: 18% Social tax: 34% paid by employer No capital gains tax on property held 3 years

Taxes-Taxes-Taxes

Europe & International Real Estate Slide 7-20

Beyond the Basics

Proud of cultural history, endurance

Svyasi (connections) cut red tape Firm handshake, eye contact Be punctual, be prepared to wait Detailed presentations Hierarchy important, prefer to

meet with same rank Protocol summarizes the

discussion , not agreement “Win-lose” negotiators