|                                                                                                                                                             |  | NEVADA HOME BUILDER IN RUSSIA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsPublicationsSourcesof FinanceLeadsand EventsExchangeRatesState ExportsOtherSources** |  | June 1997by Deborah S. AdlerLas Vegas, Nevada home builder John Murtagh didn't know what to expect when he stepped off
the train for a month-long stint as a volunteer technical advisor in Nizhny Novgorod.  What he
found was a commercial environment brimming with opportunities for construction-related
businesses, but also full of challenges to be met before the possibilities can be realized.  Low per
capita income and the lack of a well-established mortgage-finance system will require U.S. home
builders, construction management companies, and building materials exporters to develop
coherent strategies for tapping the Russian housing market.Murtagh--who went to Russia under the auspices of the Building Technology Information
Center of Russia (see box below)--discovered a housing market quite different from the one he
was familiar with in the United States.  Despite Russia's abundance of land, the typical resident of
a Russian city does not live in a single-family detached home, but in an apartment inside a
10-to-14 story building constructed of precast concrete panels.  Since these complexes typically
have ten units on each floor, the average density is more than 100 units per building.  Often there
is no consideration for parking, so most residents have to park their cars in sheds located as far as
ten blocks from their housing complexes.  A relatively few very wealthy "new Russians" are
building single-family detached homes, but for now the lack of affordable credit effectively puts
home ownership beyond the reach of most consumers.Legal and administrative requirements regarding the use of land also pose problems for the
housing industry.  Murtagh found that in Nizhny Novgorod, "they have no conception of things
like property lines, first trust deeds, mortgages, and other aspects of real estate that we take for
granted.  The personal property laws are still in the infancy stage, so there is no sense of security
for buyers and sellers."  Indeed, the right to own and use land in Russian cities is held by the
municipal government, not by private owners.  City governments frequently grant the right to use
land for an indefinite period, but only for specific purposes.  Rarely, if ever, do land users have the
right to sell land.  As a result, "real estate" as it is understood in America--the right to own, use,
and dispose of land by private owners--hardly exists in Russia.Opportunities Exist
Nevertheless, a number of underlying conditions indicate that opportunities exist for U.S.
companies in the home building industry.  A recent study by the NAHB Research Center, a
subsidiary of the National Association of Home Builders, estimates that Russian citizens hold
$30 billion in hard currency "under the mattress"--outside the regular banking system.  Another
$200 billion is believed to be held in foreign bank accounts as a hedge against inflation and
unstable exchange rates.  The steady fall in inflation since August 1995 and the continuing
stabilization of the ruble/dollar exchange rate suggest that much overseas and hidden capital may
find its way into Russian banks and eventually become available for investment in housing.In addition to positive financial and macroeconomic developments, more than 50 percent of the
housing stock in large urban areas has already been privatized, making it available as collateral for
purchase of a new house.  Russian banks have  also begun to issue a limited number of residential
mortgages, as the spread between their cost of money and interest rates on savings narrows and
stabilizes.On the Ground
In Nizhny Novgorod, Murtagh worked with Sorbi, a joint venture between a U.S. company and a
group of Russian entrepreneurs.  Sorbi produces concrete blocks and is looking for more ways to
market its products.  Sorbi's management believes that building houses might be a viable option,
although they have no experience in building and selling homes.Murtagh saw that U.S. building materials could find wide application in Russia.  "The builders of
Nizhny Novgorod had never seen a sheet of plywood or sheetrock before," Murtagh said. "There
is no fiberglass insulation, no two-by-four construction, and no air space in the walls for the
wiring and plumbing.  The interior walls are finished with plaster, and [the builders] chisel into the
plaster to run their power and plumbing lines."Strategies
Murtagh is so excited about the opportunities in the Russian housing market, he plans to start a
business of his own there.  He indicated the first order of business upon his return will be to
explore opportunities to export modular homes, which could be assembled in Nizhny Novgorod
by specially trained Russian workers.  He also suggested that Sorbi consider building homes for
sale to large private employers, who in turn could rent or sell them to their employees. "It would
be like the factory town concept we had in America about 100 years ago," said Murtagh, who
intends to work on the details when he returns to Russia next spring.  "It's not a very glamorous
idea, but it would provide many Russians with much better living situations than they have right
now."  This article expresses the views of the author, and should not be construed as a
statement of U.S. Government policy.  To order the NAHB Research Center study, "Market for
Residential Construction and Building Products in the Russian Federation," which was prepared
under a cooperative agreement with the U.S. Agency for International Development, call the
NAHB Research Center at 301-249-4000, ext. 755.(Editor's Note: BISNIS will hold a
one-day seminar on the NIS construction industry September 18, 1997.  For information call
BISNIS.)Deborah S. Adler is Deputy Project Manager, Russia, at the NAHB Research Center in Upper
Marlboro, Maryland.This report is provided courtesy of the Business Information Service for the Newly
Independent States
(BISNIS)