Guiding Lines: Why Skanska Left?

Skanska was used to hold the lead everywhere. It was one of the first foreign construction companies to arrive in Russia at the time, when one had to be a die-hard optimist to believe that Russia’s property market was ‘civilized’. Skanska was the first foreign corporation to become a co-owner of a major domestic building company after it took over Moscow-based ‘Olson’ in 2001 and bought an 80% stake in ‘Peterburgstroi’, a housing construction company.

Projects built by Skanska were far from being insignificant and included IKEA mall, business centre on Novinsky boulevard, ‘Kulon-Baltia’ warehouse, ‘Rolf-Mercedes’ trading and technical centre and several dozens more. The rumours about problems that Skanska encountered in Russia began to spread as early as in 2005. One year later the whole market was discussing Skanska’s departure.

However following Vedomosti’s last year report about the concern’s plan to leave Skanska immediately issued statement refuting the rumor. The company took the same position during sale of its commercial property arm in Moscow. Skanska explained then that it intended to focus on residential market.

In early 2007 Skanska announced its departure. ‘The company has very high labor safety and ethics standards. Few clients in Russia are ready to pay for observance of these standards. Besides, we oppose corruption,” such were the reasons for the move as explained by the company’s spokesperson Peter Gimbe. The claim that the ‘company is against corruption’ is quite daring considering that Skanska was working in Russia for 13 years.

The company decided to leave as early as in 2003 as part of its plans to withdraw from markets with little prospects. Along with Russia, several more countries were considered as such, including China. That seems strange. According to Jones Lang LaSalle, real estate consultancy, Russia, China and the U.S. were at the top of property investment returns league.

If Skanska decided to leave Russia a long time ago it is not clear why they denied it, confusing not just journalists, but their own partners as well. “For some reason we were not informed about this [past] decision” – says Valery Gutovsky, former first deputy general director of Peterbugstroi-Skanska.

One of the former company employees explains Skanska’s departure as follows: the Swedes were just too ‘sluggish’, which is lethal in the fast changing Russian environment. Instead of acquiring available sites (and there had been a wide choice of such) Skanska had spent money on increasing headcount and staff training. The company had allocated excessively huge funds for engineering networks and infrastructure.

Moreover, Skanska was undermined by bureaucracy, so well known to each Russian. The large company with excessive hierarchy just technically could not take quick decisions. As a result, when 2005 crisis broke in St Petersburg residential property market, Skanska actually suffered huge losses. According to the company staff, Swedes were unable to sell up to 50% of apartments. It was unpleasant, though not lethal for the concern with combined annual income of $13 bn.

Russian market is growing. The leading developers, builders, investment funds and banks are actively investing in real estate. Many companies are ready to pay for Russian projects with their own shares. Many experts fail to explain why the world’s leading firm with vast financial resources is leaving Russia in this environment.

Skanska is far from being the first large construction company which failed to succeed in Russia. For example, in 2005 $26bn-asset US fund Prologis, a no less powerful firm, left Russia as well. Experts explained at that time that Americans didn’t like the way land plots were registered. However, the lure being so huge, Prologis decided to return, buying out the whole logistics business of British developer Parkridge Holdings for $1bn. Perhaps Skanska will do the same in the future. But it’s unlikely. It looks like every Swede in Russia finds his own Poltava.