VZCZCXRO7204
RR RUEHLN RUEHVK RUEHYG
DE RUEHMO #1536/01 1511352
ZNR UUUUU ZZH
R 301352Z MAY 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 8317
INFO RUEHLN/AMCONSUL ST PETERSBURG 4965
RUEHVK/AMCONSUL VLADIVOSTOK 2842
RUEHYG/AMCONSUL YEKATERINBURG 3189
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 MOSCOW 001536 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/RUS 
 
E.O. 12958: N/A 
TAGS: ECON EIND PGOV RS SOCI
SUBJECT: RUSSIAN CONSTRUCTION SECTOR NGO EXPLAINS HIGH 
HOUSING PRICES 
 
REF: A. MOSCOW 1450 
     ¶B. MOSCOW 1501 
 
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Summary 
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¶1. (SBU) Numerous reasons have been cited for Russia's lack 
of affordable housing, an issue of increasing importance for 
the country's new government.  Continuing our series of 
cables on the topic, Econoffs met with Vladimir Ponomarev, 
Vice President and Head of Housing and Mortgage Finance at 
the Russian Builders' Association (ASR).  Ponomarev told us 
that the construction industry had failed to meet rising 
demand for affordable housing because of the lack of 
construction materials and labor, excessive profit margins, 
barriers to new entrants to the sector, and limited financing 
options for infrastructure development.  Ponomarev argued 
that the sector would take a long time to self-adjust and 
that government action was needed.  End Summary. 
 
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Housing Prices Beyond Most Russians' Reach 
------------------------------------------ 
 
¶2. (SBU) Ponomarev said the ASR is a non-profit NGO aimed at 
solving a range of issues in Russia's construction industry. 
It represents more than 500 members working in construction, 
insurance, real estate, banking, and mass media and also 
maintains close links with relevant governmental committees. 
The ASR's latest efforts have focused on the construction 
industry's underdevelopment, and in particular the lack of 
housing stock and sky-rocketing home prices. 
 
¶3. (SBU) According to Ponomarev, there are a number of 
factors that account for rising housing prices.  On the 
demand side, many Russians received homes for free during 
privatization in the early 1990's.  However, much of this 
housing was poorly constructed and has further deteriorated 
with time and neglect.  He agreed with statistics we cited 
that approximately two-thirds of Russia's total housing stock 
needs renovation and that nearly the same percentage (60 
percent) of Russians are in need of better housing. 
 
¶4. (SBU) Ponomarev said that in the face of this rising 
demand, the supply response from the industry has been 
inadequate.  Last year, total housing construction was only 
700,000 units, enough for only 1-2 percent of Russian 
families.  Ponomarev said that the supply response has been 
inhibited by a limited supply of construction materials and 
qualified labor.  These shortages have increased construction 
costs, limiting new construction and driving up housing 
prices. 
 
¶5. (SBU) Ponomarev told us that the limited supply and high 
cost of construction materials and labor were especially 
problematic for new businesses to overcome.  Add to these 
impediments the usual bureaucratic and costly obstacles 
associated with starting a new business in Russia, and it is 
clear why new housing construction has lagged behind demand. 
 
¶6. (U) Ponomarev told us that the imbalance between housing 
supply and demand has led to an average real estate price 
increase of 26 percent annually nationwide since 1999. 
However, another contributing factor to rising home prices, 
according to Ponomarev, is the excessive profit margins 
charged to the home buyer, ranging from 60-150 percent in 
Moscow and 30 percent in the regions for the residential 
construction business as a whole ) including investors, 
developers and construction companies. 
 
¶7. (SBU) In addition, Ponomarev said the lack of long-term 
financing options available to developers to cover their 
increasing costs further contributes to the lack of supply of 
new housing.  In particular, he noted that lack of available 
land near city centers was driving new developments further 
out into the countryside where basic infrastructure, roads, 
sewers and the like was non-existent.  Developers had to 
create the infrastructure from scratch.  While they 
ultimately passed the costs on to the home buyers, further 
driving up prices, the lack of financing options to build 
this infrastructure significantly raised the amount of start 
up capital needed. 
 
MOSCOW 00001536  002 OF 002 
 
 
 
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What is to be Done 
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¶8. (SBU) Ponomarev said he expected the problem of rising 
prices to worsen with continued economic growth and rising 
incomes, which would further stoke demand.  While market 
solutions were preferable, the sector clearly needed a 
jump-start from the government to respond to this demand. 
 
¶9. (SBU) Ponomarev said the government should intervene to 
bring down costs, for instance by making long-term financing 
and land more available and by developing needed 
infrastructure.  Absent this intervention, it was difficult 
to predict how long it would take for market forces to 
correct the imbalance between housing supply and demand, and 
thus to bring housing prices into the range that the average 
Russian could afford. 
RUSSELL