Destination report: Moscow

The changing face of Moscow

Russia's capital is undoubtedly a city with huge commercial potential, but there is still a need for transparency and judicial reform, says Philip Parker.

From the streams of imported SUvs that clog its arterial roads to the upmarket boutiques that litter the historic centre to the large-scale construction projects throughout the city, Moscow is clearly booming.

Both the city, and its people, are almost unrecognisable from even a decade ago. The city's middle classes are now stylish, cosmopolitan and affluent. To meet their demands, Moscow's restaurants and retailers have taken a crash course in service culture and the lax, borderline-hostile treatment that once characterised shopping and dining out in Russia is a deceptively distant memory. However, despite the commercial buzz, in Moscow, image and reality are often still as far removed as they were at the height of the Soviet Union.

This is not to suggest that Moscow's current prosperity is fleeting. The decade since the 1998 default of the ruble has seen the country's immense commercial potential exploited across the board in a much more sustainable way than in the wild and wicked nineties.

The current global recession is being felt in Moscow's financial markets, but the State has acted with almost indecent haste to boost liquidity in the Russian banking system, which it can easily afford to do for the near future. consumer credit and mortgages are still something of a novelty in Russia and, while a new breed of consumers and lenders has been doing its damnedest to lay the groundwork for the country's very own credit crunch even as the bells of doom were beginning to toll elsewhere, the system has not had time to build its potential for wide-scale destruction.

Moreover, it is a distinct possibility that the more severe crises in Western markets will see much of the wealth created in Russia and siphoned out of the country over the last 20 years come scurrying back to the relative security of home.

Shares in state-run and state-supported blue-chip companies are likely to retain most of their value, and the Moscow property market is only dipping slightly despite seemingly insane rates of growth in recent history. This, rather than desperate guessing, may explain why the city was ranked as the top real estate market for investment and development prospects by the Urban Land Institute and Pricewaterhousecoopers' emerging Trends in real estate 2008 survey.

However, to the chagrin of international observers and much of the local business community, this relative economic stability has not come as a result of promoting transparency and judicial reform. The two catchphrases of Vladimir Putin's presidency were "the rule of law" and "the vertical of power". It soon became apparent that the former only had any significance when firmly in the context of the latter. The "rule of law" is the rule of resurgent law-enforcement agencies ultimately loyal to the Kremlin, not of an independent judiciary and a revised legal code. For business, this means that survival and 'legal' operation require allegiance rather than compliance. As has been seen again in the recent scandals concerning TNK-BP and coal giant Mechel, even Russia's largest commercial concerns are still subject to backstage conflict.

Further down the scale, this impacts in three ways on those wishing to do business in Russia. The most significant for investors is transparency. The majority of small and medium-sized businesses in the Russian Federation still have a policy of "black accounting" - providing entirely fictitious accounting records for the taxman.

For potential investors, judging the genuine value of Russian firms is never entirely reliable. For entrepreneurs, it severely limits potential for growth - one local expat with a fast-growing retail firm suggests 20 million rubles - roughly US$800,000 is the maximum turnover a company can declare without attracting unwanted attention from the tax police.

The second - and related - factor is the corruption in the country, which touches the public sector and every aspect of business life. not only can this create massive problems with contract enforcement and supply chains, but foreign companies and business people can be faced with tough decisions as to how far they are willing to be compromised in order to remain competitive.

The final factor is the general unwillingness of the Russian business community to consider anything other than short-term profit. This is a result not only of the issues mentioned above, but also of the origins of private enterprise in the Soviet black market and the gangster capitalism of the nineties, neither of which encouraged long-term investment or planning. After a decade of rapid growth and policy dictated by its demands, many medium-sized companies, particularly retail and service providers that have reached their ceiling for growth in Moscow and the region, need to consolidate their positions and expand into Russia's newly wealthy regions.

To do this, they need not only extra investment, but also strategic and managerial expertise that is not readily available on the local market. These should be ideal opportunities for foreign investment, but it remains to be seen whether there are enough owners willing to share control and potential profits, or enough foreign investors willing to take the risk. There have been several instances - the TNK-BP dispute may be the latest - of businesses trying to dump their foreign partners as soon as they have shared their expertise.

Despite these difficulties, Russia and are markets too tempting for foreign investors to ignore, and the UK has lead FDI in for several years. In 2007, 24 per cent of foreign investment in came from Britain. According to figures from UKTI, UK exports to grew by 36 per cent last year, totalling £2.8 billion, cementing the country's place on the organisation's list of High Growth markets. UKTI identifies five key sectors for UK investment in - advanced engineering, financial services, ICT, power/energy, and sport & leisure infrastructure - with further opportunities in transport and utilities infrastructure and creative industries. The organisation recognises as "a long-term market of great potential for UK exporters and investors," but adds the proviso that this potential relies on "a range of institutional and economic reforms necessary to complete transition to a stable, rules-based economy."

Such wide-scale reforms have been promised for so long without significant developments that investors might be expected to have grown tired of waiting.

With slowing economic growth, however, pragmatism may win the day. In a speech to foreign investors, new president Dmitry Medvedev said: "We are only now realising how important it is for us to ensure a comprehensive protection of property of both citizens and foreign investors." There is a chance that the premier may push through much-needed reforms while taking the heat for whatever economic downturn there turns out to be. If so, there will at last be more to for business travellers than a tempting facade.

Airlines
Bmi has just doubled the frequency of its service between Heathrow and Domodedovo, adding a second daily departure from October 2008. And an expanded commercial agreement with Russian Federation carrier Transaero, which has also increased its flights to two a day to Domodedovo, means the two carriers can now match the frequency of Aeroflot's four daily departures - including a new overnight flight - from Heathrow to Sheremetyevo 2. British Airways operates three flights a day from Heathrow to Domodedovo.

Airports
Sheremetyevo 2 International Airport is about 35km north-west of central Moscow. The Aeroexpress rail link provides a shuttle service from the airport to Savelovskiy Station near central Moscow. Trains run every 30-50 minutes from 05.20 to 00.20. Taxis and transfers take around one hour to reach the centre. Sheremetyevo 2 is in the middle of a huge reconstruction project. By 2009, Sheremetyevo-2 will become Terminal B in the new three-terminal airport, with capacity for 18 million passengers per year and the ability to service the 'super-jumbo' Airbus A380. Accommodation near the airport is provided by the 4-star Novotel Moscow Airport and the 3-star Sheremetyevo Hotel.

Domodedovo International Airport is the largest in Russia, serving 18.7 million passengers in 2007. Located 55km south-east of central Moscow, the airport has an express rail link to Paveletskiy Station. Trains run every 30-50 minutes between 07.00 and midnight, and take 40 minutes to reach the centre. Taxis and transfers take around 90 minutes. Domodedovo is also being expanded, and by the end of this year the airport concourse will have doubled in size to 220,000 m2. The only hotel near the airport is the Domodedovo Aerotel, a 294-room, 4-star property owned by the airport.

Accommodation
The Grand Hyatt Residences and Spa, scheduled to open in December, will be Moscow's first internationally managed boutique hotel. It is located in Tower West of the massive new riverside Federation Complex, close to Moscow's World Trade Centre. 2010 will see the opening of the even taller Tower East, which will house the 368-room Grand Hyatt Moscow, adjoining the Ararat Park Hyatt, already one of finest luxury hotels in the historic centre. Rivals include the Ritz-Carlton, Le Royal Meridien National, Metropol, Baltschug Kempinski, and the Marriott Royal Aurora. Modern business 5-stars include the Crowne Plaza, Radisson Slavyanskaya, Sheraton Palace, Swissotel Krasnye Holmy, and the new Hilton Leningradskaya. Boutique hotels are under-represented, but Savoy Hotel and Golden Apple Boutique Hotel are both first class.

Meetings and exhibitions
Venues include the neighbouring World Trade Center and Moscow Expocentre on Krasnopresnenskaya Embankment, where the Grand Hyatt is being built. The Crowne Plaza is part of the WTC, and has its own meeting facilities.

CrocusExpo Center on the Moscow Ring Road also hosts international events. The only remotely convenient hotels are the 4-star Planernoye and the 3-star Okhotnik.