General Overview of Russia and Russian Investors Market

1
General Overview of Russia and Russian Investors
Market

• Real Estate Investors and Developers Market
  Study
• 2004

2
Opinions

• The common perception of Russian financial
  markets differs substantially from what the
  international press proclaims, said William
  Browder, CEO of Hermitage Capital recently.
  Browder, a known advocate of corporate governance
  in Russia and one of the most influential foreign
  investors, spoke at The Fletcher School as part
  of the International Business Relations Global
  Speaker Series. The investment environment under
  President Vladimir Putin is improving and
  liquidity is returning to the Russian market as
  the psychological aftereffects of the currency
  crisis wear thin. The Russian stock market (RTS)
  is becoming more liquid as oil prices remain high
  and the government fights to control the
  appreciation of the Russian ruble. However, the
  market remains one of the cheapest in the world,
  trading at only 8.9 times earnings. Mr. Browder
  said that this is not another bubble where the
  RTS in 1997 and the NASDAQ in 2000 traded at 120
  and 100 times earnings respectively. The
  economic situation in Russia is unique. GDP
  growth in 2004 has so far been the second highest
  in the world after China. Improving tax
  collection through reforms that simplified the
  taxation system and lowered personal income and
  corporate tax has led to a government surplus of
  1. High oil prices have led to a current account
  surplus and a trade balance surplus. The
  consistency in all of these areas is very
  unusual, making it difficult to keep the price of
  the currency low. High oil prices are not the
  only thing carrying the liquidity wave in Russia.
  The recent elections gave President Vladimir
  Putins party, United Russia, 56 of the
  parliament. Mr. Browder argues, This is good
  news for Russia. No more need for coalitions or
  compromises in the reform program. Some would
  argue that this is a checks and balance issue,
  but in Russia it is a question of economic rent
  extraction. Putins reforms in the last few years
  show he is not an evil dictator. He has been a
  radical reformer and his losses are due more to
  the compromises he has had to make.

3
Opinions

• Michael Lange, managing director of the CIS
  office of real estate management company Jones
  Lang LaSalle considers Russia a vast marketplace
  with immense potential. He compares the 65.5
  billion-dollar market in Moscow to the 49.9
  billion-dollar market in Prague. "Russia have a
  buzzing and very large market," he said. "I have
  to say that the size of Russian country is
  underestimated by investors.
• To cross Russia by train from west to east would
  take from Monday to Sunday. You have 11 cities of
  over 1 million people 33 cities of over 500,000
  people."
• Typical for an emerging market, Russia offers
  higher returns than stable economies. According
  to Hines International, overall returns in the
  United States are 9-12 percent. For emerging
  markets in Europe the figure is 12-15 percent,
  while returns in Russia are between 15 percent
  and 30 percent.
•  

4
Facts

• Present List of U.S.-headquartered Companies
  Active in Russia (this list is not comprehensive,
  and only represents some of the more well-known
  U.S. companies in Russia)
• Cargill Caterpillar Chevron Texaco
• Cisco Systems Coca Cola Corning Dow DuPont
• ExxonMobil Ford GE Gillette
• GM Hewlett-Packard IBM ICN Pharmaceuticals
• Intel International Paper John Deere Kraft
• Lucent Technologies Mars McDonalds Motorola
• PepsiCo Pizza Hut/Yum! Procter Gamble Wrigley
• Xerox 3M United Technologies/Pratt Whitney

5
Facts

• INVESTMENT (Source of investment data Government
  of Russia Goskomstat, 2004)
• Principal foreign direct investors in Russia The
  United States is the leading foreign direct
  investor into Russia (other countries have higher
  levels of total investment, often due to other
  investment such as trade credits, e.g., Germany,
  Cyprus.)
• Country Cumulative FDI
• 1st United States 4.220 billion
• 2nd Cyprus 3.927 billion
• 3rd Netherlands 2.398 billion
• 4th. Great Britain 2.190 billion
• 5th Germany 1.714 billion

6
Facts

• More foreign investors announce their plans to
  enter Russian real estate market. Last year it
  was Flemming Family Partners which formed
  Flemming Family Partners Russia Real Estate
  Investment fund. This year it is Knight Frank, a
  U.K. real estate consultancy vowing to attract
  billions of dollars in Western investment to the
  local real estate sector. The company says it is
  motivated to take the Russian plunge because the
  market has become less risky for investment and
  at the same time, offers higher yields than in
  Western Europe. The British newcomers are
  focusing on real estate in the Moscow and St.
  Petersburg markets. According to the companys
  market studies, the real estate sector is one of
  the most attractive investment areas from a
  growth potential point of view. Moscow takes
  second place in the companys investment
  attractiveness rating for developing markets,
  behind only Bangkok.

7
Real Estate Market in Moscow and St. Petersburg

• Recent years have been marked by a retail boom
  and a massive expansion of European retail chains
  into the Moscow market. Although the development
  of retail space is in full swing, it will still
  be at least another five years for foreign and
  domestic companies to provide a sufficient number
  of supermarkets in Moscow to meet the demand. In
  2004 turnover of the Moscow retail market reached
  almost USD 42 billion, or one third of Russia's
  total retail turnover, which was about USD 135
  billion. The Moscow retail sector caters to
  almost 12 million customers. Analysts estimate
  that in 2005 retail turnover will grow beyond USD
  200 billion. In 2004 per capita turnover was
  about USD 4,300 in Moscow, and averaged USD 930
  across the country

8
Real Estate Market in Moscow and St. Petersburg

• Despite the size and importance of Moscow's
  retail market, there is still a sharp deficit of
  retail space in Moscow, especially beyond the
  Garden Ring. According to the Moscow city
  government, in the late nineties the combined
  retail space in Moscow was about 1 million sq.
  meters, which did not include open door markets,
  kiosks and stands in pedestrian underground
  crossings and railway and metro stations. To
  solve this lack of space, in 2001, the Moscow
  City Government approved the Master Plan for the
  development of retail facilities through 2020.
  The plan foresees building a total of 8.2 million
  square meters of retail space by 2020

9
Real Estate Market in Moscow and St. Petersburg

• The retail boom in 2001-2004 provided almost 2
  million sq. meters of retail space. In 2005
  another 450,000 sq. meters of new space will
  appear in Moscow, and about 470,000 sq. meters of
  space must be completed by the end of 2005. But
  even with these additions, the space ratio per
  capita will lag behind European level, where the
  average retail space ratio is about 120-140 sq.
  meters per 1,000 residents. Presently the
  average shopping center space rate per 1,000
  residents in Moscow is about 50 square meters.
  Market insiders forecast that the retail space
  market will remain super profitable in Moscow
  until the retail space ratio reaches the average
  European ratio. With an average cost of a sq.
  meter of retail space of about USD 1,600, the
  market potential is estimated at USD 10 billion.

10
Real Estate Market in Moscow and St. Petersburg

• The share of foreign retailers in the market is
  booming. Just to name a few, Metro Cash Carry
  is a market leader. In 2004 Metro opened three
  new stores. French Aushan hypermarket chain also
  added three new stores, German Obi opened two
  stores and announced plans to open 30 stores in
  Russia in the next 5 years. IKEA announced
  launching second 230,000 sq. meters Mega-2 Mall
  in Moscow in 2004, and plans to extend its chain
  to 22 stores in Russia. Aushan and Obi will open
  their stores in Mega-2 as well. The total project
  cost of Mega-2 Mall is estimated at USD 300,000.
  German Real recently announced a USD 600 million
  project of 20 stores of 160,000 sq. meters total
  space, five of which will be commissioned in
  2004. All stores will be located in residential
  areas.

11
Real Estate Market in Moscow and St. Petersburg

• Recently the market has registered strong growth
  in rental rates. Increase in rental rates is
  dependent upon location and retail space
  category. The first floor rates in buildings
  located on Moscow's main business street,
  Tverskaya, are between USD 3,800 and USD 5,000
  per square meter per year. Average rates for
  retail space on traditionally popular streets
  within the Garden Ring range from USD 1,000 to
  USD 1,300 per square meter per year. The biggest
  spread in rental rates is outside of the Garden
  Ring, from a high of USD 1,400 on Leningradsky
  prospect to a low of USD 400 the north of the
  Garden Ring.

12
Real Estate Market in Moscow and St. Petersburg

• Moscow has the highest real estate returns and
  development prospects of any city in Europe,
  while remaining one of continent's least
  developed markets, according to a new survey
  released jointly by the Washington-based Urban
  Land Institute and Pricewaterhouse Coopers.
  Emerging Trends in Real Estate Europe 2004" is
  the first European version of the report, which
  has been published in the United States for the
  last 25 years. The report, based on responses
  from some 210 real estate experts throughout
  Europe, was published at ULI's European Property
  Development and Investment Conference in Paris on
  Jan. 22 2004. According to the study Moscow, as
  well as the Central European capitals of Prague,
  Budapest and Warsaw, ranked highest for
  investment opportunities and total returns.
  Brussels was the only European Union capital
  where total returns are expected to be at least
  "moderately good" in 2004. Moscow, which was
  described as the "least developed and least
  integrated real estate investment market in
  Europe," was nonetheless selected as the top
  choice for investment -- with 58.3 percent of
  respondents recommending buying real estate and
  25 percent recommending selling real estate in
  the city. Moscow also ranked first by total
  returns, rent increases, capital growth, supply
  and demand balance and development. There
  remains strong demand for high-quality offices,
  retail space, housing and warehouses in the city.
  The report echoes the "European Cities Monitor,"
  a report released by international commercial
  real estate consultant Cushman Wakefield Healey
  Baker last October, which placed Moscow near
  the bottom in terms of availability of office
  space or qualified staff, but still tipped the
  city as the top expansion target for European
  corporations.

13
Real Estate Market in Moscow and St. Petersburg

• Moscow has the highest real estate returns and
  development prospects of any city in Europe,
  while remaining one of continent's least
  developed markets, according to a new survey
  released jointly by the Washington-based Urban
  Land Institute and Pricewaterhouse Coopers.
  Emerging Trends in Real Estate Europe 2004" is
  the first European version of the report, which
  has been published in the United States for the
  last 25 years. The report, based on responses
  from some 210 real estate experts throughout
  Europe, was published at ULI's European Property
  Development and Investment Conference in Paris on
  Jan. 22 2004. According to the study Moscow, as
  well as the Central European capitals of Prague,
  Budapest and Warsaw, ranked highest for
  investment opportunities and total returns.
  Brussels was the only European Union capital
  where total returns are expected to be at least
  "moderately good" in 2004. Moscow, which was
  described as the "least developed and least
  integrated real estate investment market in
  Europe," was nonetheless selected as the top
  choice for investment -- with 58.3 percent of
  respondents recommending buying real estate and
  25 percent recommending selling real estate in
  the city. Moscow also ranked first by total
  returns, rent increases, capital growth, supply
  and demand balance and development. There
  remains strong demand for high-quality offices,
  retail space, housing and warehouses in the city.
  The report echoes the "European Cities Monitor,"
  a report released by international commercial
  real estate consultant Cushman Wakefield Healey
  Baker last October, which placed Moscow near
  the bottom in terms of availability of office
  space or qualified staff, but still tipped the
  city as the top expansion target for European
  corporations.

14
Real Estate Market in Moscow and St. Petersburg

• INVESTMENT OPPORTUNITIES OF MOSCOW BUILDING
  MARKETDuring the last decade the Moscow City
  Government has been consistent in their efforts
  to develop a free market economy, as well as in
  creating a favorable business climate to attract
  foreign investors. According to the Moscow City
  government, Moscow can utilize about USD 10
  billion annually with a good profit rate and
  efficiency. Moscow is the most developed
  megapolis of the Russian Federation and the major
  financial and business center of Russia.  Moscow
  hosts 607 credit organizations (or 44 percent of
  country's total), 192 investment institutions,
  and 109 banks (of total 177 in Russia) with
  foreign capital participation, 17 of 20 banks
  with 100 percent foreign capital are established
  in Russia, are based in Moscow.  Moscow has trade
  and economic relations with 178 countries around
  the world.  Over 3300 foreign firms have
  accreditation in Moscow.Political and economic
  changes of the last decade have allowed Moscow to
  create attractive terms and conditions for
  investors.  Moscow has become a leader in the
  volume of accumulated foreign investments
  compared to other developed regions of the
  Russian Federation.  In 2001, the non-financial
  sector of Moscow's economy attracted about USD
  5,65 billion of foreign investments. .

15
Real Estate Market in Moscow and St. Petersburg

• Among the priority programs of the General Plan
  for City Development are the following -       
     Construction and development of the city main
  business area - International Business Center
  "Moscow-City".-          Reorganization of
  industrial territories and areas, including full
  or partial reconstruction, modernization, and
  change of functional purpose of the areas
  -          Housing construction, renovation of
  5-storey houses and dilapidated housing stock,
  development of new residential areas, as well as
  renovation of Moscow historical
  center.-           Development of social and
  public infrastructure (health service, education,
  culture, religion, etc.)-          Development
  of recreational and tourism areas, construction
  of hotels, leisure, and sports facilities.  The
  recently approved plan of comprehensive
  development of the tourist and recreational area
  "Golden Ring of Moscow" suggests implementation
  of about 100 associated projects.  The total cost
  of this project is estimated at USD 3 billion.

16
Real Estate Market in Moscow and St. Petersburg

• The Moscow government is going to carry out one
  of the most important social programs -
  renovation of 5-storey houses, which were built
  during the early stage of industrialized house
  building and slum clearance.  This equates to
  about 6.5 million square meters of dilapidated
  housing that will be demolished by 2010, and over
  10 million square meters of modern residential
  space will be built for re-housing of inhabitants
  from 5-storey buildings scheduled for
  demolition.  This program was launched in 2002
  and the attraction of investors for this project
  is of paramount importance for the City
  government. projects.  The total cost of this
  project is estimated at USD 3 billion.
• Modernization and upgrading of building industry
  production facilities, introduction of innovative
  technologies and production of new building
  materials and products are also the fields, where
  Moscow government will welcome investors as
  well.  According to the Moscow City government,
  Moscow can utilize about UDS 10 billion annually
  with an attractive rate of profit and investment
  efficiency

17
Real Estate Market in Moscow and St. Petersburg

• The Moscow City government is very actively
  promoting the city development plan and is very
  keen on attracting foreign investors both to
  large scale projects, such as "Golden Ring of
  Moscow" tourist recreational zone, the
  International Business Center  "Moscow-City",
  Children Miracle Park, as well as to other
  projects with high investment attractiveness. 
  For those interested to participate in these
  projects the Moscow City declares they will
  facilitate all necessary administrative, legal,
  and business development support, and provide
  land leasing incentives.

18
Real Estate Market in Moscow and St. Petersburg

• The Moscow commercial real estate market is now
  growing at its fastest pace since the last
  recession caused by the 1998 financial crisis.
  All segments of the commercial real estate market
  are enjoying a period of expansion, and in one
  sector retail shopping centers rapid supply
  growth has already started to erode at rental
  rates. The main trends in the office market this
  year would include market entry by major Western
  developers and investors (Hines Interests started
  on its first office tower, and AIG Lincoln is
  expected to announce its first office project
  before year's end) continued decentralization of
  the development growth in build-to-suits
  (Siemens announced the largest build-to-suit to
  date) and emergence of business parks. Local
  developers are actively consulting with real
  estate professionals as the market is set to
  become more competitive, and differentiation of
  product more important. Two projects which will
  be shaping the market in 2004 will be Moscow City
  and Krylatsky Hills Business Park. Moscow City is
  Moscows Docklands area the only location where
  the municipality allows the construction of very
  tall buildings. Despite increasing levels of new
  office construction we do not see oversupply on
  the horizon for 2004. In fact for the last three
  years in the Moscow office market take-up of
  offices has been greater than new construction,
  pushing vacancies to low single digits. There is
  today significant latent demand from companies
  that delay relocation projects until more space
  comes on to the market and competition among
  developers kicks into a higher gear. of these
  markets.

19
Residential Prices Soar in 2004

• Residential real estate prices in Moscow
  skyrocketed in 2004, surpassing all the
  predictions made a year ago and beating the
  previous record set back in 1995 by a hefty
  margin. Gennady Sternik, a senior analyst at the
  Russian Guild of Realtors, estimates that the
  average per-square-meter price of a Moscow
  apartment reached an all-time high of 1,530 in
  November. This is 60 percent more than two years
  ago and 40 percent more than in December 2003.
  And in September 2004, Moscow prices surpassed
  the 1,360-per-square-meter record that was set
  in March 1995. One of the results of the
  escalating prices, analysts say, is that more and
  more people are looking for apartments in the
  areas bordering Moscow, where the prices are
  significantly cheaper. The same is true of the
  real estate market as a whole, as the
  construction of shopping centers and warehouses
  in the Moscow region has been particularly active
  this year. The growth in prices appears even more
  spectacular when put against the predictions of
  market watchers a year ago that prices would
  stabilize in 2003. This time around, they are
  more divided. "The prices in Moscow are not
  sky-high, as some claim they are," said Yevgeny
  Leonov, head of the future projects division of
  City Hall's investment program department, during
  a round-table discussion last week on the 2003
  results for the capital's residential real
  estate, organized by the Moscow Guild of
  Realtors. "The prices are low, they will continue
  growing, and this growth will be fast." Leonov
  added that an average 10,000-per-square-meter
  price for an apartment in the city's historic
  center would be a "normal" price and would soon
  be reached.

20
Residential Prices Soar in 2004

• Currently, the price can be up to three or four
  times cheaper than 10,000 per square meter, even
  in the most prestigious parts of Moscow. Grigory
  Kulikov, chairman of the board at MIEL, one of
  Moscow's top realtors, agreed. "Moscow housing is
  really undervalued," he said. But Sternik said
  Moscow prices might have already reached their
  optimal level. "The current level appears about
  right, although it doesn't mean the prices will
  stop growing immediately. But this will be their
  baseline, to which they will return when the
  market stabilizes," he said. However, Sternik
  added that the market is not likely to stabilize
  before the presidential election in March, and
  that another important factor driving up
  residential property prices was high oil prices,
  income from which was being invested into real
  estate. "Once the cash flow from the electoral
  campaigns and oil decreases, the price growth
  will go down," he said. And dollar-to-euro
  exchange rate instability has been forcing some
  people to "flee from the dollar" and invest the
  U.S. currency, which has been losing value for
  months, into real estate, he said. A year ago the
  dollar roughly equaled the euro, but since then
  the European currency has strengthened and is
  currently at 1.24. But other market watchers saw
  no signs of a future stabilization.

21
Residential Prices Soar in 2004

• One of the factors that will be driving prices up
  is the emerging mortgage market, which will
  become a "locomotive" for growth, MIEL's Kulikov
  said. Sternik said 10.5 billion rubles (350
  million) worth of mortgages had been handed out
  since a law allowing mortgages was passed
  recently. This figure is expected to increase
  dramatically in the years to come, particularly
  in Moscow. One of the factors pushing prices ever
  higher is that Moscow real estate has become one
  of the most profitable forms of investment in the
  country. A lot of people are buying apartments
  not to live in long-term, but to resell six to 12
  months later for a handsome profit, thus driving
  the demand -- and prices -- even higher, said
  Alexei Drobashin, general director of Krost, a
  residential investment and development company.
  "Prices will only drop when there appear to be
  opportunities to invest money for a better profit
  elsewhere," he said.

22
Residential Prices Soar in 2004

• Another aspect, experts said, is that the
  possession of a good Moscow apartment is viewed
  as almost mandatory by members of the regional
  business elite. Ilya Shershnev, development
  director at Swiss Realty Group, said that while
  supply was clearly not meeting demand, it was the
  "irrational boom" caused by this demand that was
  primarily to blame for the current situation.
  "The market is resembling a bubble that keeps
  growing only to burst later. Since a lot of
  people look at buying an apartment as a secure
  form of capital preservation, this attracts those
  whose actions are not brought about by vital
  necessity," he said. It is only when the "boom"
  dies down that the market will be regulated by
  more "rational" expectations, Shershnev added.
  But City Hall's Leonov remained skeptical that
  any predictions could be made at all. "In
  reality, there is no analysis of consumer demand
  going on like there is in America. Here people
  are trying to analyze the supply, but not the
  demand." And until demand starts to lag behind
  supply in Moscow, all predictions would remain
  just guesswork. "It is not until we have empty
  new houses standing around that the true demand
  analysis will emerge," Leonov said.

23
 Moscow house prices continue to rise

• Real estate prices, especially housing prices,
  have been gaining pace in Moscow since last
  year's hike, contrary to predictions that the
  market would slow down in 2005. One square meter
  of residential space is now selling at a
  record-high 1,600, on average. Few European
  capitals can rival this figure. In 2004,
  Moscow's real estate market grew by 40.
  Financial forecasts made at the end of last year
  were quite comforting they promised that the
  leap would be followed by a period of stability,
  with the prices climbing up at a rate of under
  20. As for the weakening US currency, many
  small Russian investors now are trying to get rid
  of their dollars by putting them into the real
  estate market. Investments in housing yielded
  greater profit last year than bank deposits, unit
  investment trusts, and the purchase of metal
  values. Speculative transactions in real estate
  trade have grown sharply, and their overall value
  now accounts for up to 30 of the total amount of
  capital. Housing is sold even before the
  foundations are laid and once commissioned will
  go at double its original price. The Russian
  capital has a huge demand for housing, which may
  take decades to fully satisfy. Sociologists have
  estimated that Moscow's per capita share of
  housing stands at a mere 18 square metres today.
  In large European cities this figure is 40
  metres, on average. Every other Moscow resident
  wants to improve his/her housing conditions.
  Another factor is the ever-growing influx of
  migrants from the Russian provinces, as it has
  always been prestigious to live in the capital.
  All of them will, too, need somewhere to live

24
Real Estate Market in St. Petersburg and the
Leningrad Oblast

• LOCATION IS KEY
• Known as Russia's window to Europe, the city has
  an international airport and seaport and the
  region borders both Finland and Estonia. The
  attractiveness of the city and oblast are likely
  to only grow as the European Union expands and
  production outside the EU - but only a stone's
  throw from its markets - becomes compelling.
• Not only does the city look west, but it is also
  Europe's gateway to Russia, handling about a
  third of all imports and 25 percent of all
  exports. Inland waterways and railroads connect
  the city well in all directions inside Russia.
• The city port - already the largest in the Baltic
  - is growing, and the development of oil exports
  has led to the expansion of new oil terminals in
  the oblast that will further raise economic
  activity.
• Expert magazine last year rated St. Petersburg as
  second on its list of the investment
  attractiveness of Russia's 89 administrative
  regions. The. Many major multinationals are
  represented in the city or oblast, including
  Lucent Technologies, Philip Morris, Coca Cola,
  Henkel, Volvo, Skanska, IKEA, Ford and
  Caterpillar.
• "Many large industrial projects seeking to set up
  a greenfield facility and with possible
  environmental impact naturally are attracted to
  the Leningrad Oblast," said Olga Litvinova,
  office managing partner of Ernst Young and EY
  Law in St. Petersburg.

25
Real Estate Market in St. Petersburg and the
Leningrad Oblast

• LOCATION IS KEY
• St. Petersburg and the Leningrad Oblast, the
  administrative region that surrounds it, are some
  of the most attractive destinations for foreign
  investment in Russia.
• Both the city and the surrounding region offer an
  attractive location with good sea, inland
  waterway, air, rail and land communications,
  advanced industrial base and an educated
  population whose achievements in culture and
  science are among the highest in Russia.
• The city has a population of about 4.6 million,
  making it about the fourth largest population
  center in Europe. The oblast has about 1.7
  million inhabitants, covers 84,500 square
  kilometers - about the size of Austria - and is
  two-thirds covered by forest.
• All of these factors are important, but the
  investment process has not always been smooth in
  the Northwest region. While active measures to
  make investment easier are being taken by city
  and oblast authorities - with input from local
  and foreign businessmen through associations such
  as the American Chamber of Commerce (AmCham) and
  the St. Petersburg International Business
  Association (SPIBA) - many challenges remain.

26
Real Estate Market in St. Petersburg and the
Leningrad Oblast

• ACTIVE MEASURES
• The city elected Valentina Matviyenko, who is
  close to Petersburger President Vladimir Putin,
  governor last year and has vowed to learn from
  the oblast's success and become much more
  investor friendly.
• In line with Putin's promise to double national
  gross domestic product in a decade, Matviyenko
  has vowed to do the same for the city's economic
  production - currently about 425 billion rubles
  (14.9 billion) - in half the time, and to double
  the city's budget during her term of office. She
  has also spoken of providing St. Petersburgers
  with a "European" standard of living.
• Probably the biggest single investment in either
  the city or oblast is that of U.S.-based
  multinational International Paper, a concern that
  has already invested 150 million in the
  Svetogorsk pulp and paper mill and plans to
  invest another 250 million in the next five
  years.
• " Henkel, which employs 850 people at its factory
  at Tosno in the oblast. Henkel has invested more
  than 100 million euros in Russia.

27
Real Estate Market in St. Petersburg and the
Leningrad Oblast

• ACTIVE MEASURES
• James Sickinger, general director of the
  Caterpillar plant, which opened also in Tosno in
  2000, said "the location was chosen due to a good
  investment environment, excellent labor pool, and
  convenient transportation routes."
• Ford has invested about 150 million in
  establishing an assembly plant in the Vsevolozhsk
  district of the oblast that opened in 2002.
  Demand has been rising. The plant has about 2,000
  employees and recently began operating a third
  shift.
• The region has three modern tobacco plants,
  Philip Morris, British American Tobacco and JTI,
  which account for a substantial share of the
  national production of cigarettes. Total foreign
  investment in tobacco is about 1 billion.
• But entrepreneurs have not been idle since the
  end of the Soviet Union and new retail centers
  have sprung up, some of which are competing with
  the nation's best and most established Moscow
  chains.
• Local chains that have sprung up include
  Pyatorochka, Kopeika, Lenta, Nakhodka and Diksi.
  They have been joined by Germany's Metro Cash
  Carry, Finland's Siwa and Stockmann, Turkish
  venture Ramstore, and Muscovite Paterson and
  Perekryostok.

28
Real Estate Market in St. Petersburg and the
Leningrad Oblast

• ACTIVE MEASURES
• St. Petersburg had a retail market worth 8
  billion in 2003, about one-seventh the size of
  the Moscow market, according to real estate
  consultants at Colliers International. Although
  official figures are somewhat lower, they
  underestimate the true size of the market by 30
  percent to 40 percent, Colliers said.
• The construction industry has also revived with
  leading local companies including LEK,
  Stroimontazh, RBI and Peterburgstroi Skanska.
• The banking sector is well developed with foreign
  banks expanding operations. The legal and
  accountancy sector is also advanced, with leading
  multinationals including Baker McKenzie,
  Salans, Ernst Young, KPMG and
  PricewaterhouseCoopers all established in the
  city.
• Whether or not the city and oblast work this
  closely together, continued positive economic
  performance is likely to lead to a new wave of
  investment in the region.
• "Judging by the number of visits we are getting
  at AmCham, there are more and more foreign
  investors interested in considering the
  opportunity of investing in Russia," Kalinin of
  Baker McKenzie said

29
Real Estate Market in St. Petersburg

• LONDON - At the Seventh Russian Economic Forum
  in London this week the city of St. Petersburg
  was represented by its chief architect Oleg
  Kharchenko, who spoke at the real estate session.
  The choice of envoy illustrates the
  administration's hopes and priorities in
  attracting foreign investment
• Kharchenko was joined by Yury Molchanov, a city
  vice governor, to present the city as an investor
  and arts friendly environment.
• "St. Petersburg was built by Italian, French and
  German architects and today we are just as open
  to new ideas," Kharchenko said, citing the
  international architectural competition for the
  new Mariinsky Theater annex as one example.
  Competition participants included some of the
  best-known names in western architecture,
  including France's Dominique Perrault, Japan's
  Arata Isozaki, Switzerland's Mario Botta, Eric
  Owen Moss of the United States and Erick van
  Egeraat of the Netherlands. The jury chose
  Perrault's black marble and translucent golden
  glass design incorporating several asymmetrical
  cupolas. The new building is expected to open in
  2008.
• At the forum, the St. Petersburg delegates were
  promoting another ambitious project, "The
  Embankment of Europe." This 100 million complex
  occupying 4.5 hectares of land on the Malaya Neva
  embankment between Tuchkov and Birzhevoi bridges
  features a large business center, a fitness
  center, shopping arcades and a series of mansions
  offering upmarket accommodation. The complex also
  includes the Palace of Dance that would receive
  the renowned Boris Eifman ballet troupe, which
  has never had its own theater.

30
Real Estate Market in St. Petersburg

• LONDON - At the Seventh Russian Economic Forum
  in London this week the city of St. Petersburg
  was represented by its chief architect Oleg
  Kharchenko, who spoke at the real estate session.
  The choice of envoy illustrates the
  administration's hopes and priorities in
  attracting foreign investment
• "We make limitations in regard to height and so
  on clear from the start," Kharchenko said. "This
  attitude confirms our cooperative approach."But
  it is the city retail market that offers
  tremendous opportunities.
• "It is now even more dynamic than the Moscow
  market, although much smaller in size," said Igor
  Branovitsky, chairman of the board of KV
  Engineering, Moscow. "But St. Petersburg offers
  unique projects, like, for instance, 'The
  Embankment of Europe.'"
• Yury Molchanov, vice governor of St. Petersburg,
  confirmed Branovsky's opinion with figures.
  "There are 2,200 investment projects going on in
  town in the real estate sector," he said. "Retail
  has demonstrated particular growth, reaching 1.4
  million new square meters last year, and likely
  to reach 1.7 million this year. The demand is
  very high as well. Two thirds of flats are bought
  out during the construction of a house before it
  is completed."

31
Real Estate Market in St. Petersburg

• LONDON - At the Seventh Russian Economic Forum
  in London this week the city of St. Petersburg
  was represented by its chief architect Oleg
  Kharchenko, who spoke at the real estate session.
  The choice of envoy illustrates the
  administration's hopes and priorities in
  attracting foreign investment
• "Michael Lange, managing director of the CIS
  office of real estate management company Jones
  Lang LaSalle considers Russia a vast marketplace
  with immense potential. He compares the 65.5
  billion-dollar market in Moscow to the 49.9
  billion-dollar market in Prague. "You have a
  buzzing and very large market," he said. "I have
  to say that the size of your country is
  underestimated by investors. To cross Russia by
  train from west to east would take from Monday to
  Sunday. You have 11 cities of over 1 million
  people 33 cities of over 500,000 people."
• Typical for an emerging market, Russia offers
  higher returns than stable economies. According
  to Hines International, overall returns in the
  United States are 9-12 percent. For emerging
  markets in Europe the figure is 12-15 percent,
  while returns in Russia are between 15 percent
  and 30 percent.
• The St. Petersburg government is introducing new
  measures to reduce risks for foreign investors.
• "Every deal in the real estate sector has to be
  registered in a special state legal office, which
  answers directly to the Russian Justice
  Ministry," Molchanov said. "It is also very easy
  in our city for the investor to buy out land,
  unlike in many other Russian towns."

32
St. Petersburg Building Industry Update

• This report is a brief overview of recent
  developments in the St. Petersburg building
  industry market.
• The construction of the St. Petersburg Ring Road
  is continuing. Recently, a tender announcement
  has been made for the construction of five new
  sections at a total cost of 150 million. This
  project is financed by a loan of the European
  Bank for Reconstruction and Development (EBRD).
  Traffic at the new sections is scheduled to start
  in 2005. In the meantime, construction work on
  the three other sections of the Ring Road is in
  progress and is being performed by the local
  companies Mostotrest and Mostootryad-19. These
  sections are planned to be completed in 2004.
• The St. Petersburg administration announced a
  tender for the design of a VIP road stretching
  from the presidential residence at the
  Konstantinovsky Palace to the Pulkovo airport.
  The starting price of the contract is set at 1.5
  million with a design completion deadline January
  2004. The estimated cost of the whole project,
  which will be financed by the Russian federal
  government and St. Petersburg administration ,is
  roughly estimated at about 40 million.
  Construction work is scheduled to start in 2004
  and to be completed by the end of 2005.

33
St. Petersburg Building Industry Update

• This report is a brief overview of recent
  developments in the St. Petersburg building
  industry market.
• The Pulkovo Aviation Enterprise announced that it
  would invest 30 million in the renovation of
  Pulkovo-2 terminal by the end of 2004, in
  addition to the 27 million already invested in
  the project. Pulkovo officials are planning to
  utilize St. Petersburg administration guarantees
  to facilitate better borrowing terms for
  financing the project. The project envisages the
  reconstruction of several airport buildings,
  construction of an office building and a 3-story
  parking garage that will be connected with the
  terminal building by a pedestrian gallery. After
  the completion of the renovation, the total space
  of the terminal will rise up to 59,000 square
  metres. Further plans include the construction of
  a parking lot and a three-star hotel. Earlier in
  2003, the company completed renovation of the
  Pulkovo-1 terminal at a cost of 39 million.
• The St. Petersburg administration announced a
  tender for a feasibility study on the
  construction of a tunnel under the Greater Neva
  in downtown St. Petersburg. The starting price of
  the contract is set at 1.9 million, with a
  330,000 financing limit in 2003. The study must
  be completed by the end of 2004. The length of
  the tunnel is planned to be a little above one
  mile. Bids are to be opened in late October 2003,
  and project completion is scheduled for 2005. The
  total cost of the project is estimated at 300
  million.

34
St. Petersburg Building Industry Update

• This report is a brief overview of recent
  developments in the St. Petersburg building
  industry market.
• The Radisson SAS hotel chain, which is run by the
  Danish company Rezidor SAS, announced plans to
  build 50 new hotels in Russia within the next 10
  years. Two hotels will be built in St Petersburg,
  three in Moscow, and the rest within the
  so-called Golden Ring of Russia. The total
  project cost is between 1.5-2 billion. The
  Russian partner in the project is Delta Capital
  Management, manager of the US-Russia Investment
  Fund.
• The Mir Hotels LLC, a subsidiary of the German
  hotel chain operator Kempinski, announced its
  willingness to invest about 20 million in
  refurbishing a residential building and a
  municipal hospital in downtown St. Petersburg
  into a three- and a four-star hotel,
  respectively.
• The Russian company IVI-93 announced its
  intention to invest 35-40 million in building a
  chain of 10 small, four-star hotels in St
  Petersburg. Two of the hotels are already
  operational. Two others are under construction.
  Per company officials, the investment into small
  hotels in St. Petersburg will be recouped within
  three years.

35
St. Petersburg Building Industry Update

• This report is a brief overview of recent
  developments in the St. Petersburg building
  industry market.
• The Russian company Balttransservice announced a
  preliminary selection of prospective contractors
  to bid for the construction of a marine oil
  terminal at the port of Primorsk in Leningrad
  Oblast, approximately 80 miles north of St.
  Petersburg. The terminal will be used for export
  shipments of oil pumped by the Kstovo-Yaroslavl-Ki
  rishi-Primorsk pipeline. The project includes
  waterworks and port installations for the
  handling of tankers of 100,000 tons, a port-based
  oil storage facility with a total tank capacity
  of 360,000 tons, external communication networks
  and auxiliary facilities. The application
  deadline is October 29, 2003.
• The European Bank for Reconstruction and
  Development (EBRD) has announced an invitation
  for those who wish to express interest in
  consultancy services to assist with the
  management for the completion of the
  Saint-Petersburg Flood Protection Barrier. The
  proposed project will require an experienced
  consultant to carry out the project management,
  procurement and supervision of construction
  utilizing the best international practice
  methods. This Invitation for Expression of
  Interest follows the General Procurement Notice
  for this project published on the EBRD website on
  21st June 2002 and updated on 20 October 2003.
  Interested US firms are welcome to obtain all
  details at www.ebrd.com

36
St. Petersburg Building Industry Update
Price Fluctuation for Residential Real-estate
still under Construction From 2003-09-05 To
2004-09-04.
37
St. Petersburg Building Industry Update
Price Fluctuation for Residential Real-estate
still under Construction From 2002-09-05 To
2004-03-04.