Money Growing: In Expectation of a Miracle

The long term efforts of the authorities to find something that would allow for the diversification of the Russian economy are not in vain. Igor Levitin, head of the Ministry of Transport, recently said, “in view of the geographical advantages of Russia, logistics in our country can and should become a new branch of the economy on comparable scales with Russia’s traditional sectors, such as the export of energy and arms.”

According to data published by the ministry, in 2005, the volume of the Russian logistics market totalled $93 billion. It is expected that within the next five years this will increase to $125 billion. Only a decrease in transport-logistics costs of 10 per cent will allow for an increase in the commodity circulation of the country by 50 per cent. Currently Russia earns a little more than $3 billion a year from transit services. And, for example, Holland, an insignificant territory, earns $20 billion a year from it. Meanwhile DHL Russia has calculated that demand for logistics services is growing in our country by 18-23 per cent a year. For comparison, in Europe, this figure does not exceed 6 per cent.

Investments in logistics are becoming of more and more current importance. Analysts at Jones Lang LaSalle believe that this sector accumulates about 15 per cent of all investments in commercial real estate (up to $4 billion in 2006, according to Cushman & Wakefield / Stiles & Riabokobylko (CW/SR) and its share will only grow. Returns of 15-18 per cent per annum remain unprecedented for Europe and guarantee an inflow of investment for many years to come.

However experts note that western business invests only in large companies that already have a turnover in the millions. In a private conversation the representative of a foreign investor mentioned that western funds are ready to cooperate “with politically affiliated companies,” probably including those firms that have a big credit of trust with authorities. Obviously, only such investments are represented as safe for investors.

“There is interest, however they are cautious,” Igor Kazimov, director of the warehouse and industrial real estate department at Penny Lane Realty, says of foreign investors. “The period to recover the outlay of the project is up to 10 years, this is a lot. So if you offer them a ready, filled with tenants, class A warehouse complex, also desired among western companies, then they will buy it there and then.”

Maxim Shakirov, director of the department for warehouse and industrial real estate at Colliers International, reminds us that the warehouse market is still young and in many respects is focused on the regions, and such remoteness from the center some investors consider as a certain risk.

Robert Aubrey, head of the department for warehouse and industrial real estate at CB Richard Ellis/Noble Gibbons believes that caution in entering a new market “is natural for any investor.” This segment is the least developed; considerable barriers hamper penetration. Therefore, specifies Aubrey, “only a few Russian groups can offer a wide platform for development that many investors are looking for.”

Analysts pay attention to the fact that foreign investors practically don’t invest at all in average size companies with a purpose to “grow” them. Ilya Kutnov, director of the capital market department at CW/SR, in connection adds, in particular, that “the great majority of western funds interested in investments in Russian commercial real estate, want to acquire ready premises, instead of shares in development companies.”

There are not many funds that are prepared to invest in development companies. Morgan Stanley’s Special Situations Fund follows this policy most distinctly. However here it is a question of large players, such as RosEvroDevelopment and RGI. And from the so-called middle class of Russian business it is possible to pick out Russian Logistics Service (RLS). Last year American fund Great Circle Fund LP (GCF) invested $20 million in RLS owing to the head of the company Kirill Vlasova’s calculations that in 2007 RLS should double its turnover and reach $70 million.

The search for partners for such operations is long and careful. Moreover GCF has created a kind of insurance system guaranteeing it from any surprises. There is GCF itself, an American direct investment fund. There is Alfa Capital Partners, a regional management company of a fund. There is also Belgian Probel Capital Management, an unusual auditing company.

Logistics in Russia is not a simple branch but it is promising. Andrei Bushin, director of MIEL Commercial Real Estate, reminds us that in the USSR manufacturers or trading operators managed their own flow of production, and notes that “the majority of Russian companies still prefer to do it independently.”

In other words, the field of activities for professionals is still huge. The main thing is to try to create in the country a general logistics system of a new level in order to move the production flow from Europe to Asia onto the territory of Russia. This idea is rather attractive.

The turnover of goods between the US and countries in the Asian-Pacific region (ATR) totals $1 trillion a year. The US’ transport costs on the delivery of cargo to Europe and ATR countries totals $658 billion, to Japan totals almost $340 billion, to Germany stands at $185 billion, and to the UK totals $124 billion. To get hold of even a fraction of these "costs" on the territory of Russia is an interesting task.