Over the past several years, wealthy Russian oligarchs have prompted international headlines by paying jaw-dropping amounts of cash for first and second homes in prime city and resort locations world-wide.
In fact, in 2011, Russians topped the list of the most significant second home buyers abroad, exceeding by far all other nationalities.
This may be about to change—or perhaps, to some extent.
Challenges currently facing Russia
The following items provide some context to my trip.
- Negative net capital outflow. In 2011, Russia experienced an $84.2-billion negative net capital outflow. An estimated $15 billion of that amount is attributable to Russian residential purchases abroad. The Russian government seeks to staunch some of this outflow by encouraging its increasingly wealthy citizens to buy their leisure homes domestically.
- Lack of suitable Russian leisure homes. At present, however, few suitable leisure properties exist to satisfy the tastes of Russia’s elite, many of whom wish to emulate the lifestyle of the rich in the United States and Europe.
- 2014 Winter Olympics in Sochi, Russia. The upcoming Olympics make development of additional homes and accommodations an urgent priority. This will benefit, not only Olympics attendees, but will help jumpstart anticipated vacation and tourist business after the last torch is extinguished.
- Amortizing investments by Russia and other countries in the Olympics. In addition, profits from leisure home development are needed, to amortize investments of billions by Russia (and recently $3 billion by China). This money is going into much needed infrastructure for the Olympics (i.e., water, sewer, roads, utilities, etc.) and new sports facilities, including a planned six-area ski complex which at completion would be the largest in the world, exceeding in size Vail, Colorado.
- Tight global credit markets. The need for significant capital investment in Russia comes at a difficult time when credit is tight in many parts of the world.
- Difficulty in attracting foreign investments. Introductions to an article in the October 2011 OPP magazine by Ashley Rigg about Russian overseas buyers refer to Russia’s “notoriously overbearing business environment” that is “not always kind to entrepreneurs.
How my partner and I spent ten days in Russia
I had been invited to Russia by my partner Arkadiy Amelin. (All foreigners traveling in Russia must be invited by a citizen.)
Arkadiy is a lawyer, entrepreneur, Founder and CEO of FractionalRussia.com. He arranged our entire itinerary that included two speaking engagements for me and introduced me to his numerous personal contacts in real estate development, as well as those in banking, business and government.
The purpose was for me to speak, as a former Wall Street attorney, about how to raise capital successfully from large financial institutions. A second aim was to share my experience as a hands-on developer of fractionally owned leisure homes, an ownership structure new to Russia.
In St. Petersburg, I addressed the XV National Real Estate Congress of the Russian Guild of Realtors. I spoke about “Overcoming Obstacles to Institutional Real Estate Financing.” Among other items, I mentioned my strategic alliance with a private investment group within an international bank. The purpose of the alliance is to source financially sound fractional real estate and whole ownership vacation home developments for review by the bank.
My speech was well-received. Among those responding favorably was a leading Russian banker who invited me to speak at the International Real Estate Investment Forum, PROEstate 2012 in St. Petersburg this September.
In Moscow, I spoke to members of a private club composed of the elite among professionals in many fields including especially real estate and finance. The topic was “Fractional Vacation Home Ownership and Its Potential in Russia.”
The address, scheduled for one hour, lasted a total of three due to the audience’s intense interest in fractional ownership that led to a lengthy question and answer session. Once again, the concepts presented met an enthusiastic reception.
In the days that followed, Arkadiy and I met privately with numerous individual developers who presented their projects.
We spent a day meeting with the government and business leaders of one of Moscow’s satellite cities located an hour away by car. This municipal district is known for its relatively well-developed leisure infrastructure, including a number of winter ski resorts and golf and polo clubs. Every weekend, it attracts thousands of people from the over fifteen million residents of Moscow and its suburbs.
The local officials as well as the heads of the area’s resort development industry are quite friendly and open to overseas investment.
Doing business in Russia today—Game change
Arkadiy and I were privileged to have met and established rapport with several key people in real estate, financing and the government. We were especially pleased at the opportunity to meet face-to-face with several government consultants.
Russia recognizes that in the past, some entrepreneurs and investors from abroad have found government bureaucratic processes too challenging to negotiate. Therefore, the government has appointed consultants whose role is to provide a bridge between capital sources and the power structure. This is essential to doing business successfully in the country.
We were fortunate to have met personally with several of these government consultants. They have pledged their support of projects that we would undertake or advise.
Some personal impressions from my experience in Russia
- The Russian people we met with were, on the whole, warm, inviting and very open to input from the West. Most sessions ended with great big bear hugs.
- At the same time, it is essential to arrive either accompanied by a Russian friend or partner who knows you well or through the introduction of an intermediary who can vouch for you.
- It is of utmost importance to have the imprimatur of the government on one’s proposed development. A Russian friend or intermediary can be useful for this purpose, as well.
- The one appointment where Arkadiy and I did not experience the typically warm reception was one where we had not yet had previous personal contact with the principal.
- It is challenging to do business in Russia absent a strong relationship to someone in the power structure. One needs already to know or be introduced to the right people and gain their confidence in face-to-face meetings.
This rule applies to many countries, but especially to Russia where personal relationships are of utmost importance, and skepticism toward strangers still runs high.
- The economic climate—and perhaps even the political one—in Russia are changing. This may be due in part to the needs of the economy and a sense of urgency created by the 2014 Winter Olympics. The Russian government appears now to be more open to substantial capital investments from abroad and more willing to co-operate with the developers and developments they favor.
In summary, the familiar old saw, “Even a live wire is dead without connections,” applies in many places, but especially in Russia. “It is difficult to do business in Russia,” my partner advised me. “Money alone is not enough. One needs to know the right people with the right connections.”
Parting words I’ll always remember
Among the most moving of my experiences in Russia occurred at our meeting with a government consultant. The meeting took place in a complex of government buildings close to the Kremlin, in a building where foreigners are not normally allowed.
A plaque in the meeting room attested that it had formerly served as the office of President Vladimir Putin.
At the end of our meeting, the Russian consultant offered me a gift—a box containing a Russian flag lapel pin. He then hugged me, saying, “We’re all just people.”
It was a great trip!
David M. Disick, Esq. is internationally recognized as a fractional pioneer and a leading figure in the industry today. A prolific writer, he is the author of Fractional Vacation Homes: Marketing and Sales in Challenging Times. His blog posts are frequently republished in leading trade media such as Fractional Trade, Fractional Report and RCIVentures. He writes a monthy fractional column for the magazine, Overseas Property Professional. Get in touch with him at http://www.