Crisis Is Putting Brakes on Russia's Construction Boom

Russia's MICEX was quiet after trading was suspended. The global crisis is starting to affect the wider economy.
Russia's MICEX was quiet after trading was suspended. The global crisis is starting to affect the wider economy. (By Alexander Zemlianichenko -- Associated Press)
By Philip P. Pan
Washington Post Foreign Service
Tuesday, October 7, 2008

MOSCOW, Oct. 6 -- Less than a year ago, one of Russia's wealthiest tycoons, along with the nation's powerful railways chief and the mayor of Moscow, unveiled plans to build a glittering new neighborhood of apartment towers, skyscrapers, schools, parks and shopping malls on a vast stretch of the city's west side.

Polonka Parkline was billed as the next step in the transformation of a booming capital on its way back to greatness, "a city within a city" that would be an architectural marvel, too. For the first time "in the history of the world," the developer boasted, a 160-acre complex would be built on a platform over an old rail line -- without ever stopping the trains underneath from running.

The trains still haven't stopped. But now, in the reverberations of the global financial crisis, Polonka Parkline itself has been put on hold, along with all of billionaire developer Sergei Polonsky's projects, except those on which construction has already begun.

"We have decided to freeze implementation of all facilities that are in the development stage," Polonsky, 35, flanked by the board members of his company, the Mirax Group, said at a recent news conference. "The decision to enter construction sites will only be made if the market stabilizes."

Polonsky's move, suspending more than 80 percent of his company's portfolio of projects, is one of many signs that the global turmoil that has pummeled the stock markets and banking system here is also beginning to be felt in the rest of the Russian economy, especially a real estate sector that has been soaring for more than a decade.

Russia's leading stock markets crashed again Monday, suffering another record one-day loss and hitting three-year lows. The benchmark MICEX and RTS indexes plunged 19 percent as regulators repeatedly suspended trading in an attempt to slow the free fall. The markets are down nearly two-thirds from their highs in May.

Meanwhile, the Russian banking system is enduring a severe liquidity crisis triggered by a flight of capital and foreign loans.

Prime Minister Vladimir Putin has responded by tapping the government's immense cash reserves, built up during the long oil boom, and injecting as much as $100 billion into the financial system.

The crisis has not been felt by much of Russian society. Only a fraction of the public invests in the stock markets, and the Kremlin's moves to support the banks have prevented any run on deposits. But there are hints of trouble. Inflation is rising, industrial production is shrinking and several firms have said they are cutting bonuses or laying off staff.

The impact of the crisis is clearest in real estate construction, one of the fastest-growing segments of the economy over the past few years but also one of the most heavily dependent on bank loans. With credit disappearing, other developers have joined Polonsky in announcing plans to halt construction.

One of the hardest hit is Sistema Hals, the construction firm owned by Vladimir Yevtushenkov, the politically connected billionaire who also counts Russia's top cellular provider among his assets. Sistema Hals, which had borrowed heavily to gain market share, now plans to unload a quarter of its portfolio to raise up to $500 million to pay down debts.

"Our clients are panicking, and that is affecting our business," said Dmitri Lutsenko, a member of Polonsky's board of directors, adding that the interest rates demanded by Russian banks for loans have nearly tripled to about 25 percent and that the terms offered are shorter. "Given the environment, it's a good time to be cautious."

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