Money-Growing: Banking on Golden Gate


Anyone can learn about the Sherrizone zone by reading a label on a can of the energy drink Adrenaline, which says it was produced by PepsiCo Holdings. Thousands of such cans are on sale at stores across Moscow.

It transpires that the history of these cans is not so straightforward. PepsiCo’s offices are situated in the Solnechnogorsk district outside Moscow, one of the most rapidly growing areas of the Moscow Region. The area, situated in the immediate proximity to the Sheremetievo international airport, has recently been granted the status of a special economic zone, also referred to as a free trade zone or a free economic zone.

The phenomenon is new to Russia. There are only a few places that have been granted this status and they include some obscure and remote places such as the site of a meteorite impact. For every local market, the free economic zones are an experiment. The model was conceived by the Russian government and certain territorial entities at the beginning of the 1990s.

A number of zones have been established across the CIS, in Kalmykia, Belarus and Ukraine. One of them is in the Kaliningrad Region where imported goods are not subject to any customs duties or VAT. Ukraine exempted the residents of special zones from customs duties and 20% VAT on imported goods and introduced a lower profit tax rate of 20% instead of 30%.

But the experiment has not always been successful. Companies based on such territories can work chiefly on the domestic market, thus enjoying advantages over other producers, who are not registered there. Kalmykia’s offshore zones were widely used by firms seeking to minimize taxes.

This summer Russia passed the federal law “On Special Economic Zones” (No.116, of July 22, 2005) envisaging the creation of two types of economic zones – technology innovation zones and industrial production zones.

Some of the special zones will enjoy a duty-free regime with foreign goods not subject to import duties and Russian-made goods exempt from export duties. Regional governments may free companies operating in those zones from land-use and property taxes in the course of the first five years of operation.

Technology zones and industrial estates established under the new law will provide great opportunities to commercial property developers, in particular, to those involved in the construction of technology parks, market analysts believe.

“Today, technology parks focusing on innovative hi-tech businesses are rare,” says Boris Stavissky, head of the Kurchatovsky technology park.

Andrei Petrov, head of office real estate at Knight Frank, believes that free economic zones in the immediate proximity to airports are especially attractive for logistics operators, customs brokers and other companies offering air transportation-related services.

A source at Moscow city hall’s construction department has reported that free economic zones have a favorable effect on the local economy and attract foreign investments.

Sheremetievo Experiment

The first ever free economic zone to emerge near Moscow was a territory adjacent to the Sheremetievo I airport, a 10-minute drive from Sheremetievo II, between the towns of Skhodnya and Lobnya.

The zone took about a decade to create. The project was launched after the president of Russia decreed on the creation of the free economic zone Sheremetievo (Decree No. 1,572, 1992).

The decree was followed by the Moscow mayor’s order on measures to establish the free economic zone Sheremetievo (Aug. 25, 1994, No.1,556) whereby city hall authorized ZST Sheremetievo, a specially established agency under the Moscow government, to oversee the project.

A disputed plot of land of nearly 165 hectares was set aside for the project. A source in the Moscow government’s construction department reported that city hall was involved in a court dispute with the regional government over the border between their territories that ran right through the area of the future zone. The regional government won the case in an arbitration court.

Today, the project is being overseen by the Moscow Region’s government and has been transformed into a free economic zone of 125 hectares, next to the Sheremetievo I airport, 15 kilometers northwest of the Moscow outer ring road (MKAD). The zone is run by the company Sherrizone, set up by the regional government. Market analysts sometimes tenderly refer to the territory as the “Sheri Zone”.

Tax Haven

Sherrizone was set up at the initiative of the regional government, with a chartered capital of $1 million, and registered with the district authority of Solnechnogorsk on Feb. 8, 1993, the company reports.

The co-founders of the free economic zones are the Solnechnogorsk district authority in the person of its property management committee, the Aeroflot airline company, the Moscow-based Vozrozhdenie Bank, and the Academy of People’s Economy under the Russian government.

In 1995, Sherrizone joined the World Economic Processing Zones Association (WEPZA). Sherrizone’s general director, Valery Lynnik, has reported that the Sheremetievo zone is one of the three Russian economic zones recognized internationally; the two others are Nakhodka in Russia’s Far East and Yantar in Kaliningrad.

In brief, Sherrizone’s concept envisages the development of aircraft equipment, radio, electronic and home appliances assembly lines, food processing and producing factories, multiple use warehouses, a customs terminal and a wholesale market. Some of those have already been built, others are under construction.

The zone is made up of five sites. The first site of 10 hectares is located 800 meters away from the River Klyazma and 2 kilometers from Sheremetievo I, 0.5 km west of the village of Dubrovka. The site has been earmarked for the development of a multifunctional business center.

The second site of 8.1 hectares, 100 meters away from Dubrovka, has been set aside for the construction of a production and warehouse facility.

The third site of 29 hectares – the largest of the three sites in that part of the Sherrizone – situated 0.5 km away from the village of Parshino, houses the head offices of Sherrizone and PepsiCo Holdings. The warehouse terminals of Stat-Cargo and FreightServiceZone are large properties that are already in operation.

The third site also features the City Hotel – a project by GAO Moskva – the office and hotel complex of Sherrizone. Knight Frank, the marketing agent for the project, has reported that offices of 300sqm and larger are already available for rent there, at the rate of $325 per square meter per year. The total office space is 3,600sqm; the 3-star hotel has 150 rooms.

Site No.4, situated on the left bank of the Klyazma River, near the village of Isakovo, covers an area of 39.5 hectares. Production and storage facilities are situated there. The fifth site is situated near the village of Chashnikovo. Construction is projected at 500,000sqm; the Pepsi-Cola factory occupies 117,000sqm.

Companies involved in the project say they are interested in Sherrizone because of its location rather than any tax exemptions or privileges. “Sherrizone is not a free economic zone proper,” says Andrei Petrov. “The objective of the project is to streamline the process of development in one of the most popular areas of the Moscow Region.”

Natella Klimova, head of strategic development at the Sheremetievo II hotel, believes that Sherrizone is attractive for office and warehouse tenants given the favorable lease terms, offering, for example, large amounts of floor space at relatively low rental rates.

It is convenient to stock large supplies of goods here and sell goods to wholesalers. In Klimova’s opinion, Sherrizone’s model is similar to Europe’s technoparks and business incubators, but the privileges offered in such zones should not be limited to low rent alone.

“The development of our zone began in the 1990s as an experiment,” Valery Lynnik comments. “In those days Russia still had no laws governing special economic zones. Yet, for all those years we have been granting tax exemptions, such as profit tax exemptions, to our partners on the level of the municipal government of the Solnechnogorsk District.

“All the other preferential terms laid down in the new law did not apply to our territory. But today we do not think it is that necessary to revise our concept because we believe our project has already proved successful. The law is more applicable to the newly established special economic zones. Of course, we cannot deny that Sherrizone is also one of the special economic zones.”

Another advantage is that the management company assumes all the administrative risks assisting entrepreneurs in taking care of various issues arising in their relations with local authorities, securing the necessary permits to launch construction work. It is possible to develop new facilities within Sherrizone quite quickly.

In the opinion of Andrei Petrov, the support Sherrizone receives from the regional government considerably enhances the zone’s image. At times, this plays a decisive role in the development of warehouses and industrial facilities.

Lynnik reports that Sherrizone has already attracted a total of $325 million in direct investment, while the projected investment stands at $500 million. One of the new projects of the zone is a business incubator on the third site of the zone. Business incubators, designed to help businesses establish themselves and start making a profit, are quite common in Europe. Tenants are offered preferential terms for development, in particular, preferential rental rates at 25% of the market rate.

Moscow Gates Will Open Again

Sherrizone’s status is clear. But it is still an island – albeit a rather large one – in an enormous, strategically important part of Moscow’s northwestern countryside, outside the outer ring road.

Far-sighted market operators describe the entire stretch of approximately 17 kilometers between Sheremetievo and the Northern River Port of the capital as a golden area. The area lies between the towns of Skhodnya and Lobnya in the north, and between the Pyatnitskoye and Dmitrovskoye motorways.

That area is often referred to as the Golden Gate of Moscow, with Leningradskoye Shosse turning into the Moscow-St. Petersburg motorway crossing through it as an axis. Khimki, Dolgoprudny and some of the northern Moscow districts (Molzhaninovo and Levoberezhny) are parts of that area. Market participants say the area is a source of billions of dollars.

The territory seems to be impatiently looking forward to the arrival of investment pioneers to unearth its treasures.

For example, Leonid Belaga, marketing director at Krost, believes that in the long-term numerous commercial property developments both in and around Sherrizone will pay back handsomely, as the construction of the Sheremetievo III airport and further development of the zone itself will turn the entire area into an active commercial district.

Sergei Riabokobylko, senior executive director at Cushman & Wakefield/Stiles & Riabokobylko, sees further prospects for the development of the area around the Khimki water reservoir.

In the mid-1990s, city hall was mulling an ambitious plan entitled “The Gate of Moscow”, hoping to attract about $500 million in investment from Great Britain and Australia. The project envisaged the development of a business park with offices and hotels between the banks of the reservoir and Leningradskoye Shosse. But with time the initial concept grew obsolete.

Nowadays, construction sites are scattered chaotically across the spacious plot of land in question. Some of them are recently launched developments such as the $120 million 200,000-square-meter Leningradsky warehouse terminal 13 kilometers from the capital. It is located near the village of Chyornaya Gryaz on Leningradskoye Shosse, and is being constructed by Multinational Logistics Partnership.

Some others are at sites where abandoned projects are now being revived. The map of the region with commercial developments springing up across its territory is reminiscent of the map of California in the early days of the gold rush, when the first settlers arrived there in the hope of getting rich, digging for gold rather intuitively, without any concerted plan of action. But a few years later California grew to become a prosperous state. It is quite likely that the Golden Gate of modern-day Moscow will also open up with time.

From Hotels to Warehouses

Sheremetievo Airport, where new terminals are due to be built, and Sherrizone are attracting more and more commercial property developers. New satellite projects are multiplying around Sherrizone, forming a chain of building sites all along Leningradskoye Shosse.

Given all the specifics of the northwestern part of the Moscow outskirts, the diversity of transport routes and proximity to the international airport, developers’ interest in the area is quite understandable, experts say.

Commercial property operators are not inclined to temporize, which is why before Sheremetievo III is built and the development of Sherrizone is completed the tastiest morsels of land will be snapped up.

For example, construction of the class A Greenwood business park has already been launched at the 71st kilometer of the Moscow outer ring road, or MKAD, by Coalco and the Moscow Consulting Center. Cushman & Wakefield/Stiles & Riabokobylko is the consultant for the project.

Country Park, situated close to Greenwood, was developed by Race-Communications. The project was commissioned in March 2004. Colliers International, Jones Lang LaSalle and Cushman & Wakefield/Stiles & Riabokobylko are the leasing agents for the project.

Nikita Yemets, head of marketing and advertising at Race-Communications, reports that the 19,531-square-meter Country Park is situated outside the outer ring road, between Leningradskoye Shosse and Svoboda Street. The landlord is the company CityPro, which also acted as a co-investor in the project together with Sberbank and SDM Bank.

The Sheremetievo airport is situated a 20-minute drive from the offices. To be more exact, the business center stands on the bank of Butakov Bay on the Khimki reservoir. It has its own embankment and a berth for motorboats and yachts, which is currently under construction.

Country Park’s neighbors are the Metro and Mega shopping malls, the Grand furniture store, the Swedish retail center Bumans, and the Ramstore-City and Grand II shopping centers. Khimki is one of the fastest growing districts of the Moscow Region, says Nikita Yemets.

A spacious plot of land described as the Golden Gate has already seen a number of major retail property projects implemented in the area, starting with Ramstore-City, at the intersection of Leningradskoye Shosse and MKAD, and Mega II in Khimki. Logistics operators and warehouse developers, too, attach the utmost importance to the development of the land along the Moscow–St. Petersburg motorway, which accounts for the lion’s share of packaged goods transported along regional highways, says Nikolai Tityukhin, logistics expert and general director at KIA Center. Leningradskoye accounts for approx. 18% of cargo traffic, second only to Ryazanskoye Shoose (21%), he says.

Nikolai Tityukhin anticipates further growth in the demand for wholesale facilities and technology parks in areas like Leningradskoye Shosse. A survey by the Russian Logistics Service has revealed that territories along Leningradskoye account for 34% of all the warehouses operating in the region. As for free economic zones, those ‘tax havens’ are justifiably considered to be the best sites for developing customs and wholesale storage areas, as well as major distribution centers.

Leonid Belaga says his company’s choice of Skhodnya as a venue for the development of its technopark – the Industrial District Sheremetievo – was down to the proximity to Sherrizone which is only a couple of miles away and the prospects the area offers for such projects. The technology park near Skhodnya, 5 kilometers from Moscow amounts to a total of 50 hectares and has 14 hectares of production facilities including Krost’s five construction materials production units. Those enterprises produce construction materials for sale on the open market and supply them to Krost’s building sites. The group plans to open a total of 12 factories in the area.

The total project investment is set at $15 million; the payback period is expected to run to 3-5 years. “Even before the technopark was formed the site had all the necessary infrastructure,” Leonid Belaga says. “We are also pinning our hopes on Krost being a firm of repute in Europe, which should help attract foreign investment.”

The Skhodnya park was the project Krost presented at the latest Exporeal show in Munich. The group plans to let about 36 hectares of land here and hopes that the Sheremetievo brand being well known to foreign businessmen, too, will play a role in attracting investment from abroad.

No comprehensive plan for the strategic development of that vast area has been officially adopted yet. The Golden Gate is a site where the interests of Moscow, the Moscow Region’s government and the federal authorities collide. Given their failure to agree on terms with regards to Sherrizone, it is difficult to see them ever agreeing on the status of the entire district.

However, if such a plan were adopted, some market operators assume that the Golden Gate could then attract even more domestic and foreign investments despite certain disadvantages, such as problems with energy supply, a shortage of engineering lines and heavy traffic jams on Leningradskoye. On the whole, says Boris Stavissky, the idea of developing the area with a view to making it attractive for investors is interesting. But if it is to be implemented, it would be better to involve operators experienced in that field.

The construction of a new rail link between Moscow and Sheremetievo is also on the drawing board. Sheremetievo is the only Moscow airport that cannot be reached by train. The Aeroexpress company authorized to design the necessary 6-kilometer link and attract investment for the project puts the required investment at 3.5 billion rubles, with payback expected within 5 years. A similar project has been proposed by the Russian Railways (RZhD) company.

The project was conceived in the late 1990s as part of the plan to build Sheremetievo III. The first two Sheremetievo terminals are to undergo redevelopment, following which Sheremetievo II will feature a new 3-star hotel and a business center.

Natella Klimova does not expect the new hotel and business complex to become a rival of Sherrizone, as the two projects belong to different niches. “Sherrizone could become our rival, perhaps, only because it is operating on the same territory,” she explains. “But as far as I know, the free economic zone is designed to accommodate small and medium-size businesses. Our project is designed as a venue for corporate events, in other words, we position ourselves as a business center with offices for rent and conference halls for meetings at any level.”

Projects in the Offing

After the law on special economic zones in Russia was passed, a rumor spread that the government planned to establish two special zones in Moscow. City hall issued official decrees on the creation of a technology innovation zone in Nagatino and a special economic zone in Zelenograd.

Speaking at the latest session on the General Plan’s pre-project proposals, Yuri Roslyak, Moscow’s first deputy mayor, reported that the concepts of both zones were submitted for consideration to the Ministry of Economic Development and Trade. Roslyak said such zones could help boost the development of innovative production and scientific research in the capital.