The Hype is Moving West-ward

A few years ago, it was not uncommon to see ads for Dubai real estate in the US, specifically the DC and New York newspapers (those being the two US cities in which I spend the most time). There were even quasi-fraudulent "get rich investing in Dubai real estate" weekend seminars held in hotel ballrooms. Now that the market has stabilized (and may even go down a bit as more buildings are finally completed and go online, the marketing fury has moved on. I initially assumed it had just died down a bit to more rational levels, but my recent extended stay in Moscow suggests otherwise. There, ads for Dubai real estate about, with even flashing neon billboards and banners hanging from high rises touting apartments (sometime it is villas, but mostly apartments) here in DXB.

The advertising has even gone a step further. I am currently considering purchasing an apartment in Moscow (I would have done so already, but spending 1,300,000 Euros for a one bedroom, even a nice one, seems a bit much, and there isn't a lot of real estate that isn't either over budget or poor quality, which means I'm still looking), and I am starting to get annoyed by the number of listings, officially in Moscow, that are really for units in Dubai. I guess the idea is that anyone with money to buy real estate in Moscow could be tempted to spend instead in Dubai. The tactic must work, as these listings are everywhere, enough so that real Moscow sellers stopped using them and I've basically given up on independent listings and am sticking to Moscow real estate agencies and their own vetted listings. It's a real pain though - Moscow agencies don't usually cross list, which means that I have to work with several agencies to see a good range of places.

A Thoughful Russian Mindful of His Country's Reputation

I was running late this afternoon to meet a friend for coffee, so I took a taxi, and at the end of the admittedly short trip, my driver (not a taxi driver- just a regular citizen who picked me up for the fare - a common phenomenon in Russia. You just put your hand out, cars stop and you negotiate the fare) told me that the ride was on the house, the gift of the Russian people to their visitor on Women's Day (really yesterday, but its become a de facto three-day event starting on Friday). Seriously. He would not take payment. It was a very nice, generous thing to do and was also appreciated. Thank you, Respected Driver!

My First Hawala Transfer

Being in Moscow, but without a Russian bank account, and wishing to transfer money from Dubai to here, I have a few options. I could put it in the account connected to my debit card, which is fine as long as I don't mind paying 0.5% and a daily withdrawal limit, which is is good for security reasons but bad for convenience reasons. I'm sure I could work out a way to wire oneself the money here, after a day or two of forms, faxes and arguing, but I decided to try something new, partially for convenience and partially because I'm interested to see how it works.

I am trying hawala, the traditional system of money transfer in the Muslim world (technically not just the Muslim word, but that is where it is the best known to Decadent Westerners such as myself). An Afghan friend of mine in Dubai graciously set it up, and this morning he called me with a man's first name, a phone number and a code. I called, gave that man the code (we spoke in Russian, but I have an accent that screams "Decadent Westerner" and I got the impresison that he is just as curious to see me as I am to see him), and we are going to meet tomorrow morning at a major metro station landmark to hand over the amount, all in cash. It would be today, but today is Women's Day, a major holiday in Russia, and we are both too busy to work out a schedule when we can both meet. My friend in Dubai is keeping an eye on it all (he asked me to call when we arranged on a meeting time, and was quite unimpressed that I have to wait until tomorrow), and asked against that I confirm when I have my money, which may be speeding the efficiency along, but I have to say - in less than a day, it transferred money from Dubai to Moscow with much less fuss of bureaucratic hassle than if I did it the more official way. If I weren't busy today it could have been even sooner.

I can also see how this system could be the bane of any law enforcement operation, as there are no official records and no way of tracking it (it even has a scandal named after it in India for this reason), but I can also see how attractive this would be, especially in places where banks are not reliable or the recipients and/or senders are unbanked. Money transfer services such as Western Union also do not have universal reach (and should sometimes be avoided for other reasons - I saw on in Sri Lanka with a gold shop in the same office as the Western Union, ready to take the remittances before the potential spenders made it out the door), but because it relies more on informal connections and less on official ties, it seems a lot easier for hawala to find a guy who knows a guy.

I will provide an update once I actually have the cash.

Update: I have the cash and it worked quite well. I arrived early and stood outside the metro station entrance where we agreed to meet. A Russian policeman came and stood directly in front of me about 15 feet away, which confused me a little until the next train load of metro passengers started to exit and he picked out a few Caucasian (in Russia this doesn't mean white, it means form the Caucuses), and Central Asian passengers and asked to see their documents. The station serves the largest outdoor market in Moscow where a lot of people form those regions work, and given prejudices against them here and the fact that the markets do provide work for many illegal immigrants, it would make sense for a policeman to choose that point on the morning before the big Sunday market operations.

Hamid eventually showed up. Officially I was supposed to give him the code but I was clearly not there to work at the market, nor shop there, and once I started speaking with my Decadent Westerner accent it was pretty obvious it was the same person he spoke to on the phone. It turns out he is Afghan so I tried out my basic Dari which surprised him even more (Decadent Westerner hawala users who speak Dari, no matter how bad, are rather rare I think). We walked to a small Uzbek cafe (Uzbek and Georgian food in Moscow are what Chinese and Lebanese food are in many other wares) called Bishkek (actually the capitol of Uzbekistan's neighbor Kyrgyzstan), ordered some Central Asian tea, complete with small tea bowls and the proper Central Asian ritual of using steaming hot tea to rinse the cups three times before using them while listening to a rather cheezy English-language ballad about the troubles in Belfast while a documentary on marmots played on mute on the TV over the cashier's corner.

He then provided the cash and asked me to count it, which I did as unobtrusively as possible. It was all there, as I expected. I'm getting good at counting cash - my goal is to be able to flip through it quickly with just three fingers, and I'd say I'm about a third of the way there.

We chatted a little more about life in Moscow and the operations of the market (in addition to being the cash delivery man Hamid also runs a store in the market selling sneakers, mostly knock-off Nike and Pumas. He came to Moscow from Afghanistan last year, has been learning Russian ever since, and after working for another store selling ladies handbags until his Russian improved, his family lent him the money to open his own stall, and he trusted as well enough to be the cash delivery point). His brother has a similar store in a Petersburg market.

Hamid also told me he knew my Afghan friend in Dubai (I know him from Afghanistan, where he performed a Very Good Feed and earned my gratitude ever since) who set the whole thing up, and that he himself was a friend of a friend, and that the typical transfer fee had therefore been waived. Which was appreciated, but was also a little disappointing from the true hawala experience side of it. I could see he was dying to ask me how exactly I was involved, but he didn't, and I figured that they really were good friends, my friend would have told him (as the perpetual solitary decadent (female!) Westerner I really am a very odd case in Afghan society, and as such don't invite any more gossip about myself than isn't already coming), and so didn't volunteer.

Update on the Russian Presidential Election Results

An update on this story...

It appears that Team Putin/Medvedev got what they wanted. Voter turnout was the highest on record (Official turnout in Chechnya was 91%, which was interesting, seeing as I didn't think that 91% of the registered population still lived there at all), and Medvedev won with a high percentage of the vote, 67.5%, the combination of both which made his victory look like it really was the result of the majority's will, even if his candidacy was created by Putin.

In further good news for Medvedev, his official victory results were not so high that they embarrassed Putin. The latter's highest election win was with 70.1%, and to exceed that might make Medvedev look more popular than his mentor, which would not due. Fortunately,
with 67.%, he scored high, won big, but did not exceed that threshold.

Cool Sights Around Moscow

Moscow architecture, though attractive (large Soviet era apartment complexes excepted), is usually fairly conservative, so when I saw this building near the Patriarch Pond, it was a very pleasant surprise:


The following monument not far from the Kropotkinskay Metro is also pretty cool. It is a memorial to Mikhail Aleksandrovich Sholokhov, an author most famous for writing And Quiet Flows the Don, and depicts the author on a boat, taking a herd of horses across that river in a scene based on that book.

The Dilemma of Voting Results

Today are the presidential elections here in Moscow, and although everyone expects Dimitri Medvedev to win, the big question is at what percentage. There is a major push to get people to vote; advertising is everywhere, including on my metro fare card:

Translation: March 2 - Presidential Election of the Russian Federation

This effort is not just from above; governors, and in the case of Moscow, Mayor Luzhkov, are falling over themselves to get high turnout in order to show support for President Putin (and soon to be Prime Minister) and future President (and current Deputy Prime Minister) Medvedev. This is because high voter turnout numbers are necessary to provide legitimacy to the elections. It was always obvious than whomever Putin chose would be the next president (just as he became president after Yeltsin chose him), and if the elections are to appear legitimate, then a really high percentage of the electorate must vote. That way, when Medvedev wins, he can say that it really was the will of the people, despite the circumstances of his candidacy. If 80% of the country votes, and he wins 70% of the votes, then he has a case. If only 40% votes, then even 80% of that 40% won't be enough to show that he has a true mandate.

At the same time, he doesn't want too much of the actual vote. Putin got almost exactly 70% of the vote during his last election; to exceed that number would embarass his patron (and Prime Minister), and Medvedev has been very cautious not to do that. Even in Medvedev's own campaign billboards (some of which he shares with his patron) Putin stand a little forward.

Diaghilev Burns, the Moscow "Elitny" Scene and Property Raids

Moscow club burns itself down to avoid going out of style?

One of the more annoying features of life here in Moscow is the obsession with "elitny." A cognate of the English word "elite," and sometimes used to mean exclusive, it really means expensive. There are elitny apartments, elitny restaurants* and even a free HR and employment newsletter available at my gym, "Elitny Personnel." The reason this is so annoying is that Moscow doesn't have much "in the middle" - most of the city is either cheap, and not that nice, or "elitny," which means you have to buy into the whole "I am visibly and vocally better than everyone else" vibe. Which is a pain if you're me, who likes nice things, and even a flashy time sometimes, but lacks the patience, insecurity and (hopefully) pettiness that means it needs to be about being better than others more than just a good time with the people I came with. The whole vibe makes me feel guilty and is a real turn off. It also calls to mind one of my favorite sayings by former British Prime Minister* and chancellor of my undergraduate university Margaret Thatcher; "Being powerful is like being a lady. If you have to tell people you are, you aren't."The same applies to being elite, and while Moscow does have some of the truly elite, they aren't at most of these establishments, and most of the people aren't them.

The main focus of all this is a few night clubs, where a door policy called face control (really money control. People like to say it is wealth for men and beauty for women, but I’ve noticed that the former goes a lot farther than for both genders). It can be strict, or arbitrary, and groups of friends are sometimes broken up to increase the social pressure. The weird part is how pushy it can get; I’ve seen people bunch up at the door and push, so that there is a dense cluster at the entrance and empty space a few feet back. Everyone wants to be in front of the bouncer and is afraid to wait their turn.

Of course this isn’t a very line-friendly country anyway (trying to navigate the aisles at my Perekrestok grocery store during peak hours can be hazardous), but the tight ball of people/empty space pattern is fairly extreme, and a little silly. Back in the day (I think it was in 1999) I went to a Versace show in Milan where the Backstreet Boys performed. The entrance was swarmed with girls wanting to see their idols (one of which kissed the gay director’s cheeks to kiss the Backstreet Boy molecules which might still be there after he cheek-kissed them hello). Face control involves less people than that shriek-fest, but is more intense.

That said, I occasionally yield to the temptation and abandon my one-woman abstention from the elitny fuss. They are flashy, they are trashy, they are overpriced and they aren't elite, but they can be a lot of fun.

Which is why I was torn between Schadenfreude and dismay when Diaghilev burned down. Arguably the most famous of the elitny clubs, Diaghilev has been promoted by a thousand reviews and travel guides calling it "the most exclusive club in Moscow." This was not entirely true, but it was elitny, and it was one of the best clubs in the city. Named after Sergei Diaghilev (who really was elite), it was for a time the premier club of Moscow, or at least the hardest to get in. So hard, that when a Moscow Diskoschnitte actually risked denial and insulted the chief bouncer, a local expat paper wrote an article about it.

This started to change last summer; new competition combined with the natural life cycle of any "next big thing" meant that face control relaxed a little (although not so much, as to do that would immediately make all the people who still wanted to go there, stop). The holiday week following New Year's even brought an advertisement for Diaghilev's events in a banner over Tverskaya Street.

Which is why, when the club burned down (on a Thursday morning - three people were injured but no one waas killed), my first reaction was aggravation, as the Leading Man was visiting from the US and this meant that a lot of Diaghilev's customers would be at Rai, the club to which I planned to take him. Russia must be wearing off on me because my second thought was "whom does it benefit?" This is a Russian phrase used to work out the true machinations behind any government conspiracy and/or shady deal. There are a few explanations, all of which are completely crazy, but which shed interesting light into some of the craziness at work in this wild city.

The first theory was hinted at in the Associated Press story which, in a parting sentence, mentioned that "more recently a Moscow government-linked construction firm has been pushing to redevelop the building, which occupies valuable land." Real estate in Moscow's center is very hard to come by; 140 million people want to live there, but only 1.5 million do, and raids on companies lucky enough to occupy it are common. In the early nineteen nineties, when the city was even wilder and property rights less clear, this could take the form of an actual raid, with mafiosi thugs physically taking possession of a building and then arguing that it was theirs to being with. Now it is a bit more complex, and often business owners are charged with crimes, or forced out in some other way. This may be what happened to Diaghilev; someone wanted their property, but they weren't leaving.

Diaghilev was fairly high-profile though, making it that much harder to launch a raid, but add in an an unfortunate accident in the form of a fire, and then all of a sudden, it becomes a bit more possible. What is more, it occupied city land, and Mayor Luzhkov is expected to leave office soon after the upcoming presidential elections. He and his associated patronage networks including his wife - quite possibly Russia's wealthiest woman - and her multi-billion dollar business empire, much of it in Moscow real estate). Someone may be feeling the pressure to move now, while their own position and influence is more certain.

The story I prefer, if only because it is more dramatic, and, in a way, more principled, is that the people behind Diaghilev may have burned the place down itself. Ad I mentioned before, although still popular, its star was on the wane, and the management, aware of how much their status and that of all their establishments (they own several clubs and other businesses, both within Russia and without) hinges on the hyper-fickle wind of popular opinion and reputation, may have opted to burn out rather than fade away.

It could also be some combination; knowing that Diaghilev was doomed to fade eventually, the arsonist may have gambled that it was a bit safer to go after Diaghilev when the management wouldn’t mind quite as much, or the management could be sing the fire as part of the larger real estate scheme, this way preserving their reputation and eliminating some restrictions on building/renovating/tearing down yet another historical building.

Of course, it could really have been just a fire. My gym was a strip club previously, before a fire gutted it and it became my gym. It's a nice gym and the prices relatively steep, but such a moneymaker it isn't.

*Cafe Pushkin is perhaps the most famous, and is the subject of way too much hype, but it is exempt from the above complaints. I really like it, in spite of (and perhaps a little because of) all it's theme-iness. That the first floor is open 24 hours is the icing on the cake.

Corporate Raids for Moscow Real Estate

A nice article from the Moscow Times providing an overview of the risks faced by businesses in possession of valuable real estate. One day I will write a full post on the reasons behind the insane real estate prices in parts of Moscow, but for now, here is a piece by someone else on one of the consequences.

Wednesday, February 13, 2008. Issue 3841. Page 2.

Corporate Raiders Use Cash, Friends

By Francesca Mereu

When the police came to search his office in central Moscow, Andrei was surprised but calm. He had nothing to hide, after all.

But that sunny spring morning two years ago turned into a nightmare. The policemen showed Andrei a transparent bag with a white sugar-like substance that they said was cocaine found in his office. They detained Andrei and shoved him into an isolation cell. He was not allowed to make any telephone calls to his family or to speak with a lawyer.

"I racked my brains for two days trying to understand what was going on and why someone wanted me in jail," Andrei said.

The mystery was cleared up when a smiling lawyer came to the cell on the second day and announced that he had a solution. He said the criminal case would be dropped if Andrei signed a contract transferring ownership of his office to a company that he represented.

"I couldn't believe what I was hearing. I had read about people losing their property this way, but I never thought that something like that could happen to me," Andrei said.

"I signed the contract, and they got my property. I had no choice," he said.

Andrei's business is among thousands that are taken over in illegal raids every year in and around Moscow. The number has soared in recent years, creating such a huge problem that the State Duma intends to consider legislation to fight the raiders this spring, Duma Deputy Speaker Oleg Morozov said last month.

In the West, corporate raids are run-of-the-mill affairs: A stronger company legally takes over a weaker one, and both sides usually benefit from the deal.

Not so in Russia. Raiders here use their links to corrupt officials to illegally seize businesses, often with the aim of acquiring prime real estate. The raiders often include former intelligence officers, policemen, lawyers and people with ties to well-placed state officials. On their payrolls are judges, prosecutors and bureaucrats on all levels. Through them, the raiders can order a search of a business, gather information about the owner, and falsify whatever documents they need to take over the business.

"Unfortunately, raiders are people who work for the system, and through it they can falsify anything they want," said Gennady Gudkov, former head of a working group that tracked the issue in the previous Duma.

There are no exact figures for how many raider attacks occur annually. Gudkov said his working group registered about 1,000 cases per year in Moscow and a similar number in the Moscow region. But these, he said, "were only the tip of the iceberg." The real figure is probably four to five times higher, he said. Media reports have put the countrywide figure at around 70,000.

Other than Moscow and the surrounding Moscow region, the favorite targets for raiders are in St. Petersburg and the Leningrad region. Real estate commands top prices in these areas, and competition is brutal for the few properties that are available for legal purchase.

Many businessmen, police officers and other officials interviewed for this report spoke on condition of anonymity, citing the sensitivity of the issue and fear of reprisal. The businessmen also asked that their former companies not be identified. They said they had not complained to police, prosecutors or the Federal Security Service because they believed the raiders had links to these agencies.

Konstantin, a Moscow businessman, said he learned in 2006 that he stood no chance against raiders. He said two tall men in their mid-30s entered his shop in central Moscow one day, looked around and announced that the location was perfect.

Konstantin told them that the shop -- his main source of income -- was not for sale. But the men laughed and said they did not intend to buy it. "You can make things easy and sign a sales contract. If you don't, we will get a signed contract anyway, but we'll have to hurt you and your family first," one of the men said, Konstantin recalled.

Days after the visit, tax and fire inspectors carried out separate checks of the shop. The taxmen accused Konstantin of evading taxes, and the fire inspectors said the electrical wiring was in such a state of disrepair that it had to be reinstalled completely.

Konstantin tried to stall the inspectors, hoping to find a way out of the dilemma. He said, however, that he gave up within weeks -- after he was beaten by unknown assailants, his wife was threatened and his daughter -- who never drank alcohol -- was detained on suspicion of drunk driving.

"I understood then that they really had powerful ties and that it was impossible to refuse their offer," Konstantin said.

He signed the sales contract, and the men got his shop. He said they even helped him to pack up and, in parting, asked him whether he knew of anyone who owned similar real estate.

How It Works

Raiders are split into two groups -- those who raid for their own gain and those who organize raids for money.

Those seeking their own gain scout locations on their own and work out a takeover plan. These raiders usually target small -- and easy to get -- businesses, like those of Andrei and Konstantin.

The hired raiders tend to work for big businesses and to target medium-size companies. The client tells the raider what kind of company or property he wants, and the raider estimates whether a takeover is feasible.

"Companies with a strong security service are difficult to get, and raiders prefer to ignore them," said a police officer who works for the Moscow force's anti-organized crime division.

He said many of these raiders are former officers from special units that were set up within the intelligence agencies in the early 1990s to keep an eye on new growing businesses. The officers' duties included checking whether the businesses acted within the law and did not sell sensitive technology abroad.

"They use their links and experience to make money," the police officer said.

The small-time raiders pay bribes out of their own pockets, while the hired raiders get their expenses covered by their employers. They charge a fee of about 20 percent of the value of the targeted business.

The police officer said a judge could be bought for $5,000 to $9,000, while it cost $5,000 to $70,000 to get someone arrested. Through their connections with intelligence officers, raiders are able to listen in on the telephone conversations of their targets at a cost of several thousand dollars per week.

The police officer said Andrei's arrest probably cost around $5,000, while $3,000 was more than enough to get his daughter detained.

In other words, the raiders paid no more than $50,000 to seize Andrei's and Konstantin's businesses but walked away with assets worth millions of dollars.

To get the assets of a medium-size company is relatively simple, according to the people interviewed for this report. Typically, raiders send a falsified protocol of an extraordinary shareholders meeting to the tax authorities, showing that the company has nominated a new general director. The new director signs a contract to sell a company asset -- usually the main building -- to a fictitious buyer, who in turn quickly resells the asset to someone else. If the real owner wants to prove his rights, he has to go through complicated bureaucratic procedures -- and even then he is unlikely to hang on to his business since it has been sold and resold so many times.

"All of this is impossible to achieve without the cooperation of people in high posts," said a former intelligence officer who is familiar with the issue.

In this scenario, the raid costs $200,000 to $250,000, and the new owner usually makes a profit of 1,000 times more. Companies unable to protect themselves might lose their property within two weeks.

A New Trend

The tactics for illegal acquisitions have evolved over the past 17 years, the former intelligence officer said.

"When someone opened a shop in the beginning of the '90s, bandits would visit him to offer protection in exchange for money," he said. Those who refused to pay lost their businesses.

"Now, these bandits have been replaced by the police and FSB," the officer said.

Also, big companies were the main targets of raiders in the early 1990s. Those companies now have organized themselves into powerful holdings or state corporations, putting them out of reach of even the most experienced raiders.

"Big companies have good juridical and security departments to protect them from those predators. They are difficult to get," Gudkov said.

So raiders instead have set their sights on small and medium-size businesses. An estimated 50 percent of all illegal takeovers involve shops and offices. The raiders are rarely interested in the businesses themselves but in the real estate where they are located. The properties can be rented for a high price or demolished to construct higher buildings.

"It is impossible these days to hang on to a property in Moscow if you don't have really good protection. And by that I mean people from the police and the FSB. I'm not talking about ordinary guys, but people who have good links," the police officer said.

As a result, small and medium-size businesses are bringing in former intelligence officers, policemen and bureaucrats with good links as co-owners.

Sergei said he spent several years worrying that someone would notice his flourishing factory, located 10 kilometers outside Moscow's city limits, and take it away. His worries lessened three years ago, when he made a well-connected intelligence officer a co-owner.

"If you don't have someone protecting you these days, anyone can take what you have. And as you are running like an idiot from court to court to prove that you are the owner of your property, they will sell and resell it so many times that you'll never get it back," Sergei said.

The intelligence officer got 30 percent of Sergei's business and, in addition to offering security, he deals with fire and tax inspectors and local bureaucrats. Besides intelligence officers, businessmen take police officials and local bureaucrats as co-owners.

"You really need people who can fire back if you want to keep your business away from the raiders," the former intelligence officer said.

Sergei said he was not aware of any small or medium-size businessman in Moscow or the Moscow region who had been able to hold onto his property without protection.

"If in the '90s the bandits protected us," he said. "Now I see former bandits giving shares of their now-legalized businesses to police officers or intelligence officers to protect themselves from the raiders."

A [Literal and Figurative] Sign That the Revolution May Be Over For Good

It's an ad from the Moscow metro for ArbatPrestige cosmetics and accessories stores, and says "Great October Price Revolution."

PS The owner of the ArbatPrestige (Arbat is a nice area here surrounding the charming Old Arbat and busy New Arbat streets) chain may have been adhering to free market principles a little too well; he was just arrested for tax evasion. I believe he did it (almost everyone does), but I wonder whom he upset to be arrested now? Maybe someone wanted his stores' real estate?

Update: It turns out that Semyon Mogilevich and Arbat Prestige are not the victims of a real estate raid or some other, more prosaic, type of conflict. That may be part of why he was targeted for prosecution now, but Mr. Mogilevich's history is not that of an honest businessman. He is wawnted by the FBI for racketeering, fraud and money laundering and is also accused of running drug, prostitution, smuggling and stolen art operations. He hasn't been on the run or in hiding - he's been operating quite openly here in Moscow, but now something happened so that he could be arrested. According to the Economist, he is also tied to a company that trades gas between Russian and Ukraine, a very sensitive issue, and one which makes the issue that much more complicated. Shortly after Mr. Mogilevich's arrest Ukrainian Prime Minister Yulia Timoshenko came to Moscow to discuss just that, with little real progress.