In the weeks that followed, the banking and financial services sector shelved its expansion plans. Developers and investors reined in plans for hotels, and commercial and leisure schemes. Heathrow-to-Moscow flights landed a third full. For many UK construction firms, it was time to pull out their staff from Russia and leave a token presence, or a nameplate.
Since then, the rouble has stabilised, but there is little talk of recovery and no mention of another boom. However, for stalwarts such as Bovis, Ove Arup & Partners and Waterman, normal life has been re-established, and there are some comforting signs of clients and developers re-entering the market at the bottom of the cycle. "A clever developer can get bargains now," comments George Antoniades, director of contractor Waterman.
Others are more cautious, pointing to the unpredictability of Russian politics, and the International Monetary Fund's recent decision to delay handover of $4bn (£2.5bn) in loans. Their downbeat view is that Russia is unlikely to attract further inward investment until the outcome of the parliamentary and presidential elections in December 1999 and April 2000 respectively. "Enquiries are starting to come back, but there's unlikely to be a strong upturn before the elections," says Hanscomb director David Whitehouse.
Almost every UK firm has a long list of projects that fell victim to the August crisis. Hanscomb found that its burgeoning facilities management business had contracted from 40% to 10% of its Russian workload. Waterman saw the collapse of Russian banking clients and William Alsop Architects, the Moscow office of Alsop & Störmer, saw its banking and financial fit-out work slip from 25% to 5% of its total. Ove Arup saw preparations for two major commercial schemes grind to a halt and the death of a Centre Parcs-style water theme park.
Where to pitch for work
Other projects, however, may be back on the verge of viability. Bovis has high hopes for a phased start to the £62m refurbishment of the GUM department store on Red Square, where the architect is BDP's Manchester office; and Hanscomb is optimistic about a £50m hotel for the Hilton chain. Tanya Kalinina, director of William Alsop Architects, sums up the mood: "A while ago, clients just weren't building. Now they have started considering the possibility of maybe doing something sometime in the future."
It’s like the difference between night and day. The Russians aren’t stupid – they learn very quickly
Liggett-Ducat Project Manager Charles Bachelor on Russian Contractors’ Improvement over the past six years
The future strategy at Bovis will be to target the industrial sector, in the belief that Russia is aiming to produce goods that it currently imports. The firm is construction managing a pet food factory for Mars, a Philip Morris cigarette factory in St Petersburg and a number of projects for PepsiCo. It believes the car industry will be next to invest in Russia, a view shared by Ove Arup.
"The next stage is higher value goods, like motor cars. That's slowed down as a result of the crisis, but we're still getting enquiries," notes associate director François Raulier.
Waterman has traditionally charted a different course, preferring to market itself to Russian clients. "We adopted a long-term policy of not just concentrating on the multinationals," explains Antoniades. "The fees are sometimes even better [than Western clients offer], though there's a bigger risk of not getting paid."
The business has been left with "outstanding fees" from August, and a recruitment drive was put on hold. However, the firm believes that the relations it has built up with Russian clients mean that "the minute the market changes, they'll be back to us".
For UK expatriates and other hard currency earners, there have also been positive side effects of the August devaluation. Moscow has lost its slot as the second most expensive city in the world, sky-high accommodation costs have fallen, and eating out is more affordable. Expats can still enjoy the quirks of post-Soviet pricing that mean, as Ove Arup engineer David Kelly says, that a ticket for the Bolshoi Ballet can cost the same as the beer in the interval.
For old Russia hands, a recurring theme is how Russia has been tarnished by association with criminal activity and political instability. Most believe that Russia's reputation for protection rackets has been mythologised, and that, in any case, construction is an unlikely target. "The Mafia are interested in casinos or nightclubs," comments Bovis general manager Peter Titus. "We're visible here and we've had no problems of that kind."
The fees are sometimes even better [than Western clients offer], though there’s a bigger risk of not getting paid
Waterman director George Antoniades on the attractive pros – and one big con – of working in Russia
Power, corruption and three Toyota cars
However, even the most committed Russophiles have to agree that corruption is still a problem. Steering a project through dozens of approvals by using only legitimate channels is perfectly possible, but is not necessarily compatible with Western clients' fast-track projects and completion deadlines. One client with a near-complete project and no electricity complains that the amount he is being asked to pay to be connected is enough for "me, you and a couple of others to retire on".
Hooking up a building to gas, water and electricity supplies is often the bottleneck. As far as the officials in charge of the state-owned utilities are concerned, Western developers are the answer to the problem of dangerously outdated infrastructure and lack of investment. Bribes are often channelled into city coffers and paid in kind rather than cash, for example the three Toyota cars that were bought for one fire authority on a Hanscomb project. However, Hanscomb, Ove Arup, Waterman and Bovis all stress that bribes take place directly only between clients and officials.
And all the firms quoted say they are staying for the long term. To prove it, they have recruited Russian staff on a ratio of perhaps five for every expat. The Russians earn 40-50% of their UK equivalents, although Hanscomb finds that their rarity allows some senior staff to command more than a UK counterpart. Licences to practice have to be renewed regularly, and adjusted for every new service undertaken. And the Russian tax authorities' legendary inefficiency does not apply to the "captive" foreign market, where companies pay 20% and individuals up to 45%.
Construction in Russia is still in the shadow of 17 August 1998, and it would take an eternal optimist to predict a return to headlong growth. But if president Yeltsin can refrain from too many crises before the elections, there are grounds for believing that construction clients may soon be able to build again.
Two schemes that made it through last year's storm
The next stage is [building factories for] higher value goods, like motor cars. That’s slowed down, but we’re still getting enquiries
Associate Director François Raulier on Ove Arup’s Strategy
Two factory schemes, one in central Moscow and one in the countryside to the south of the city, are typical of the type of project that weathered the 1998 crisis. Cigarette maker Liggett-Ducat has spent £20m transforming an abandoned Russian factory into a production centre for 30 billion cigarettes a year; and PVCu profiles manufacturer Veka is hoping to supply the Russian replacement windows market from its greenfield factory.
Liggett-Ducat appointed Ove Arup client's engineer on the design-and-build contract, which went to Italian firm Codest and its Russian or Russian-staffed subcontractors. The construction of the Veka project is being managed by Bovis, which tendered the work principally to Turkish subcontractors.
Both projects are now nearing completion, and the overall quality achieved is acceptable, even if sites use far less plant and are more labour-intensive than in the UK. Incidentally, both firms claim that the image of the vodka-tippling labourer is a myth.
Liggett-Ducat's project manager Charles Bachelor, a Moscow veteran of six years, believes that improvements in that time have been considerable. "It's like the difference between night and day. The Russians aren't stupid – they learn very quickly." Bachelor cites the immaculate McDonald's restaurant next door to his site. The fast food company's first schemes in Russia were built by Skanska, but later ones were built by Russian contractors.
Bovis contracts manager Steve Sullivan agrees that "in general terms, the quality isn't bad", but finds that time management and pre-planning are still weak points for local subcontractors. He adds that their culture is one of "make do" – if a long ladder is needed, it'll be knocked up on site from odd pieces of timber. Another problem was the winter climate. "In the UK, you don't know what –25°C is. Work slows down and concrete is a huge problem." Both projects have sourced components from Russian factories producing building materials under licence from well-known Western names. Clients' preference for Russian products over imported ones is another side effect of last summer's crisis, which has also seen construction costs fall by as much as 40%, bringing them into line with Poland and the Czech Republic.
