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Economy


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Credit Interest rates and down payments remain barriers to an evolving class of home owners


Home Buyers Tripped by Mortgage Market Hurdles


Russia’s mortgage industry remains in its nascent stages, making a new home out of reach for many people without the paperwork or cash upfront.


BEN ARIS BUSINESS NEW EUROPE


Victoria Sherbakova needed to move. As doctor at a private li- posuction clinic in Moscow, she lived outside the city in the Mos- cow region and commuted every day on the train. The problem was that her three- year-old daughter Sasha was going blind, and because the family didn’t live inside the city itself the capital’s hospitals wouldn’t treat her. “The hospitals in Moscow are


the best in the country, but you have to have a Moscow city reg- istration to be admitted,” said 36-year-old Sherbakova. “So we decided to give up our place in the region and move into the city.”


Sherbakova is a member of


Russia’s emerging middle class, who are increasingly on the hunt for a new home. Born in the Belgorodskaya region, in the south of European Russia, she moved to the Moscow area sev- eral years ago to find work. Her husband works in the


same clinic, where they make $5,100 a month between them—nearly four times the na- tional average. Like many, they desired a house in Moscow's surrounding region rather than the city, as “you get more for less.” However, this also placed them under the Moscow region administration, placing them outside Moscow city status. Hence Sasha's treatment and medical services could only be provided by regional authori- ties.


Finding an apartment in the


city was easy; raising the money to pay for it was more compli- cated.


Russia’s mortgage market first appeared in 2003 and grew rap- idly, but the process of borrow- ing to buy a home remains bu- reaucratic, and a mortgage is still far from being a mass-mar- ket product. The first challenge is the


paper chase involved, merely to provide the basic informa- tion needed to fill in an appli- cation. Sherbakova is lucky in that her clinic is “white” and


was prepared to give her doc- uments to prove her income. Many companies operate in the grey economy and pay only a small part of their employees’ salary officially through the bank, with the rest paid in cash to avoid taxes. That means many would-be apartment buy- ers struggle to prove their real income. Next, after a month searching


for a mortgage lender, Sherba- kova stumbled across Kreditmart, Russia’s only mortgage broker.


SOURCE: KREDITMART


The company was founded by James Cook, an American who pioneered the mortgage busi- ness at the start of the decade as CEO of Delta Credit, a mort- gage specialist backed by U.S. government money. Kreditmart was set up to resell mortgages for the dozen commercial banks in the business and, because it gets a discount, can offer better interest rates than the banks themselves. The demand for new hous- ing is huge, and eight out of


10 Russians want to buy a home, according to Cook. How- ever, the crisis hurt the mort- gage business badly and it has been difficult for many home- buyers to qualify. A few years back, the mortgage market was just beginning, but booming. Most of those dozen commer- cial banks put their mortgage programs on ice in 2009, leav- ing two massive state-owned banks—Sberbank and VTB Bank —with some 80 percent of the business.


Macro For the first time in the history of modern Russia, interest rates beat inflation


For the First Time, the Economy Gets Real


It took 20 years and more than one crisis, but the Russians are getting interested in saving again. This will fuel Russia's cash- poor economy.


TIM GOSLING BUSINESS NEW EUROPE


Since the introduction of a mar- ket system, interest rates in Rus- sia have been below the rate of inflation. In other words, the country has suffered from neg- ative real interest rates for the past 20 years. However, they turned positive last month (beating inflation), and this has huge implications for what is now a genuine economy. “The changes will be pro-


found, but not dramatic,” said Peter Westin, chief economist at Aton investment bank in Mos- cow. “We’re talking about less than 1 percent, so no one is going to get rich on the spread, but the motivations have com-


pletely changed.” The turnaround is the silver


lining of the global economic crisis for Russia: The sharp drop in demand it provoked stopped inflation in its tracks. The gov- ernment now predicts a mod-


Refinancing Rate vs. Inflation SOURCE: ROSSTAT, CBR ALFA RESEARCH


est (for Russia) 6 percent infla- tion rate by the end of the year, which is comfortably below the Central Bank of Russia’s (CBR) current overnight rate of 7.75 percent, despite this benchmark having been slashed around a


dozen times over the last 18 months in a bid to boost growth. What does that mean for the average person? Russians, whose deep distrust of banks stemming from the 1998 crisis has been slowly easing, have the motivation to deposit their money in a bank. This could make a huge difference to the funding of the country's finan- cial houses. “The banks are building up bigger and bigger supplies of capital, and so get- ting stronger each day,” Wes- tin said. “We’re still early in the cycle—for every ruble a bank takes in as a deposit it only lends out 50 kopeks [cents]; they’re still very nervous, but it’s only a matter of time before they feel confident enough to start financing growth again.”


Normality The appearance of normal rates of return should produce


a raft of specific benefits for the economy. “Negative rates are like having a leak in the petrol tank of your car. No matter what you do, eventually you run out of gas and stop,” Westin said. “The arrival of positive rates means that gas (money) is now accumulating in the tank, and the car can start traveling fast- er and faster.” For a start, banks will be able


to manage their cash better, di- viding it among equities, bonds and cash, which will make the financial system more robust. At the same time, lower rates are already feeding through to the nascent mortgage market, and growing house sales are having a domino effect on the crucial construction sector. Real interest rates will also allow bonds to continue to mature, and so make it easier to draw up long-term investment plans, a much-needed element to pro- tect the economy against the caprices of international mar- kets.


Finally, and most significant-


ly, real interest rates mean that the CBR’s overnight rate will now actually have weight, and will therefore allow the central bank to control both inflation and the strength of the ruble. However, the CBR still needs to bulk up the financial system with


more cash, and introduce more flexibility to the exchange rate, economists say. Over the last year, the CBR


has been in transition regard- ing its control of the economy, concentrating on adjusting in- terest rates rather than simply buying up dollars. However, the supply of money in the Russian economy remains less than half of that generally found in the West. “You need a very liquid monetary base and, in particu- lar, a big and liquid bond mar- ket before you can really use interest rates as a tool to en- courage people to save or in- vest,” Westin added. The good news is that the


bond market is deepening. Pri- vate companies have been is- suing a flood of paper, as that is currently the only realistic route to bank lending. The state also plans to issue domestic bonds of $38.9 billion to finance the budget deficit this year. The fly in the ointment is the catastrophic heat wave, which has devastated the grain har- vest. “The upshot is this could drive up inflation,” warned Chris Weafer, head of strategy at Ura- lsib in Moscow. “It’s already making bond investors nervous, and the state could be forced to start raising interest rates be- fore the end of the year.”


However, the market is now


starting to pick up again. “The number of loans has gone up dramatically in the last two months,” said Cook. “We're still expecting a wobbly six months, but most people in Russia be- lieve the worst of the crisis is behind them. Concern over Eu- rope's sovereign debt is the wild- card that will determine what happens in the rest of the year.”


Russia’s state-owned Mort- gage Agency (AIZhK) forecasts


Potential home-owners face huge hurdles in getting a mortgage. Number of mortgage transactions IVAN SHAPOVALOV_KOMMERSANT


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that mortgage lending will in- crease to $2.3 to 2.8 billion be- tween April and June. Still, the market has some way to go to recover all the ground lost last year: the mortgage business reached a peak volume of $22 billion in 2008 (including the last quarter where almost no business was done at all). The total volume of deals expected in 2010 is around $7.3 bil- lion.


Thanks to her job and the


fact her family had built up sig- nificant savings, Sherbakova is the ideal customer for a Russian bank, and she sailed through the process relatively easily. “It all went very quickly. We got the documents from the clinic in a week and the bank loan was approved even faster,” she said.


However, even more oner-


ous than writing the applica- tion is the huge down payment the banks demand. Sherbako- va was asked for a 40-percent down payment on a $200,000 loan. “We had already saved up about half of the down pay- ment, and because we work in the medical business we have the opportunity to make extra money on the side, so it didn’t prove a problem to raise the rest,” she explained. Then the family hit a real


An expensive mortgage...


Russians are among the wealthiest people in Europe, thanks to the transfer of apart- ment ownership from state to occupants following the fall of the Soviet Union. While this property is worth hundreds of billions of dollars, according to some estimates, few have been able to tap into their wealth without a functioning mortgage market. The wealth is tied up in bricks and mortar they struggle to sell. Around a dozen commercial


banks were offering mortgag- es before the crisis hit in Sep- tember 2008, but most have withdrawn since, leaving 80 percent of the business in the hands of Russia’s two biggest state-owned banks, Sberbank and VTB Bank. Banks can typically ask for up to 40 percent of the cost of an apartment as a down pay- ment, although in the last few months more banks are offer- ing 80-90 percent mortgages as the market revives.


snag: the owner of the apart- ment was willing to sell, but only wanted to register a percent- age of the contract sum be- cause of the threshold for tax breaks designed to stimulate the market. Cook said it's a common problem, with very many sell- ers insisting on declaring only part of the sale to the authori- ties, with the rest off the books. That's because after the collapse of the Soviet Union, everyone in Russia "inherited" the apart- ment they lived in from the state, and nowadays most peo- ple sell their communist-era home to finance the purchase of a new one, and therefore the bulk of private real estate deals are done in cash. The Sherbakovs of course


needed the full sum on the con- tract. In such cases, the seller usually demands that the buyer also pay the taxes on top of the asking price. The haggling went on for several weeks, but even- tually a compromise was found and the family moved into their apartment in the Zhulebino neighborhood of Moscow in June.


“The house was built in 1970


and we have a concierge and a kindergarten next door, which is perfect for Sasha,” Sherbak- ova said. “Of course, the apart- ment is only two rooms and much smaller than our old place, and my commute to work is longer; but Sasha is now getting the treatment she needs and we are happy with our new home.”


BUSINESS IN BRIEF


Wendy’s, Arby’s chains come to Russia


Wendy’s/Arby’s Group re- vealed plans to open up 180 restaurants in Russia over the next decade. The company will open the Russian restau- rants with local franchisee Wenrus. CEO Roland Smith said that


the country “offers significant long-term expansion poten- tial” for the company. Russia has the ninth-largest popula- tion in the world, but relative- ly few fast food outlets, al- though some domestic chains such as Teremok—which serves traditional filled crepes —are developing rapidly. McDonald’s was famously


the first fast food company to arrive in Russia in 1990, and now has 240 outlets in what is today the company’s fastest growth market. Burger King, Kentucky Fried Chicken and Pizza Hut are also present on the market. Wendy’s/Arby’s decided to


work alongside a local partner, “which knows the marketplace extremely well,” as a spokes- man put it. The first restaurant is set to


open in the Moscow area sometime in 2011, though many of the planned restau- rants will likely appear in trans- port hubs and in smaller towns.


Ruble Should Trade Higher, says Big Mac


PHOTOXPRESS


The Russian ruble is one of the world’s most undervalued cur- rencies, according to the Econ- omist’s Big Mac Index. According to the index, the


Russian ruble should be trad- ing at 19 to the U.S. dollar, about 38 percent higher than its current level. According to the 2009 index, the Russian ruble was 43 percent under- valued. In Russia, the Big Mac sells


for the equivalent of $2.33, the index showed. The Big Mac index uses the


cost of McDonald’s Big Mac burger in various countries compared to its price in the United States to determine the relative price of each currency to the dollar.


Russia: A Major Oil Supplier to the U.S.


Russia is becoming a key oil supplier for the United States, the Wall Street Journal stated in July.


“Imports have gone from


zero to an estimated 100,000 barrels a day in a matter of months since a pipeline bring- ing crude from deep inside Eastern Siberia came online,” the newspaper wrote. The paper said the increase


in oil supplies is because of the Eastern Siberia - Pacific Ocean (ESPO) pipeline system, which is designed to export Russian crude to the Asia-Pacific mar- kets.


Amrita Sen, a commodities


analyst for British investment bank Barclays Capital in Lon- don, said the United States is diversifying its oil sources be- cause OPEC members, who “historically have been key suppliers to the United States, are sending more of their oil to Asia.” She said production from other U.S. suppliers, like Mexico, is declining at “hefty” rates, and added that “Russian crude will be important.”


IMMIGRATION


CAN RUSSIA REVERSE A DEADLY DEMOGRAPHIC TREND?


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