Earlier this year, Moscow was recognized as the most expensive city in the world.  On the one hand, getting top honors was a proud moment for many Russians.  On the other hand, however, it underscored the divide in the city as well as throughout the entire country between those who can afford a lavish lifestyle and those who cannot.

The growth in real estate development in Moscow is unprecedented – and so is the growth in real estate prices.  One square meter costs on average around $3,500 and can go as high as $30,000 the closer you get to the downtown.  High prices have long pushed people in the low income brackets out of the market, and now prices are leaving the middle class behind, too.

Increasingly, there is talk in the government to implement measures to halt the rise in prices.  For example, this week the government announced that it will investigate price collusion by real estate companies through the federal anti-monopoly agency.  In Moscow, price increases are commonly linked not to market forces, but rather to collusion among the developers, who seek to extract the very last penny out of their customers.  That, however, is the view of people in the streets and government officials.

Dmitry, a young professional working in one of Moscow’s large companies, told us that real estate prices have grown to the point where it is unaffordable to buy anything, and the developers are to blame.  “They increase the prices because there is nothing we can do,” he said. “We are struggling to get loans to buy the smallest of apartments.” 

Real estate developers, however, will tell you a different story.  They will tell you that the growth of prices is warranted by high demand, and more important, by high levels of corruption.  The high demand is partly explained by the lack of investment opportunities in other sectors.  More and more people prefer to invest their money – of which they have plenty as the result of high oil prices – into real estate.  In the event of a financial collapse or economic downturn, the real estate will be tangible collateral.  This shows that economic worries on the part of investors do exist and they are not to be ignored.  Another aspect of the increase in demand is the growing population of Moscow, mainly due to immigration.  Frequently, migrant workers squeeze dozens of people into tiny apartments. 

Direct corruption and the numerous kickbacks received by government officials are pervasive and drive prices up considerably.  It is not uncommon to hear that bribes and kickbacks add as much as 10-20% to the construction costs – and sometimes more.  This is not often talked about in Moscow, it is simply assumed as a cost of doing business – you accept that it is a necessary evil to facilitate the process.  When corruption gets institutionalized in this form, you know you are in trouble.

Alex pointed out to Dmitry that maybe the prices are going up because of high demand and the large appetites of government officials.  He did not seem to accept the argument, but at the same time did not really have anything to say about it either.  Maybe it will take time for people to link the rise in prices to supply and demand and to recognize the corrosive effect corruption is having on the workings of the real estate markets.

Interestingly, Russian businesspeople are more pessimistic about corruption than their foreign counterparts doing business in Russia.  This point also came out in the recent anti-corruption workshop organized by the Transparent Agents and Contracting Entities (TRACE), which works with intermediaries to eliminate bribery from business deals.  Russian participants in the workshop noted that government officials are adapting to the environment, and they are less likely to approach non-Russians directly and are more likely to work through intermediaries.  In some cases, government officials simply demand that firms hire special companies to perform inspections and certifications.  These firms, of course, are owned by the relatives or friends of these very same officials. 

In light of this, the Russian government’s decision to explore price collusion among the real estate developers is puzzling.  Some say it will only lead to more extortion and kickbacks, in exchange for diverting attention away from companies.  In Russia, corruption is becoming more than a danger to the system; Russia is becoming a country governed by corruption.  It will take more than a few strongly worded speeches to combat corruption at this level – it will take a complete overhaul of government institutions and the development of a culture of national integrity.