It's Cold, it's Close, it's Big
- By Alec Luhn
- Nov. 02 2010 00:00
Finnish firms, already the leader in Russian construction investment, seek to increase their presence.
The reason Finnish firms find Russia attractive for construction-related investment projects can be explained with three simple adjectives: It's cold, it's close and it's big.
Finnish investment in the Russian construction industry was the largest of any country in 2009, accounting for nearly half of total investment, according to data from the State Statistics Service. Trade experts and businessmen involved in Finnish projects in Russia explained the prevalence of Finnish investment with these three adjectives, among others. The similar climate found across large parts of Russia allows Finnish builders, as well as construction materials and management companies, to employ the experience, technology and methods they've accrued at home. The proximity of the country to Finland cuts down on transportation costs and simplifies logistics. And Russia's large population and sheer geographic size means demand for construction is found on a large scale in a variety of regional markets.
"It's a big market, so big that Finnish companies don't always understand what kind of volumes we're talking about," said Ilpo Hanhisalo, head of construction trade group Finpro Moscow. Furthermore, the Russian construction industry is growing again following its nadir in 2008 and 2009, whereas the Finnish construction industry has remained relatively stagnant following the financial crisis, said Valtter Kari, the head of Pöyry CM Oy, one of the largest Finnish construction management companies operating in Russia. The total volume of construction activities in Russia for 2009 was $128.1 billion, the country's largest ever besides the 2008 volume of $149.9 billion, according to the State Statistics Service.
"It's quite natural to strengthen position in the Russian market, because it's huge and there are a lot of potential profits that we don't have in Finland," said Kari.
Finnish investors accounted for $425 million of the $1.012 billion total investment in the Russian construction industry in 2009, followed by investors from Cyprus, who put in $362 billion. Judging by predictions of growth in Russia's GDP and the frequent announcements of new Finnish construction-related projects in Russia, 2010 may be another blockbuster year. For instance, Finnish concrete elements producer Betset Ltd. announced in September that it will spend $32 million to build its second factory in St. Petersburg. As for residential construction, generally regarded as Russia's fastest-growing construction sector, Finnish builder Lemminkäinen Group announced in April that it will construct a 540-unit apartment building in the center of St. Petersburg.
After a slump during the height of the crisis, the Russian construction market is once again on the rise, according to several Finnish company managers. Whereas investors had cut off funding for many projects during the crisis, they are now looking to revive them and arrange new financing.
- Finnish companies built a series of hydroelectric stations in the Soviet Union in the 1950s.
- Three buildings worked on by Finnish firms in Moscow: the British Embassy, Japanese Embassy and Smolensky Passazh shopping center.
- Finland invested $425 million in the Russian construction industry in 2009.
- Hundreds of objects worth more than $15 billion have been built by Finnish firms in Russia since the 1940s.
"There was a small lull in business (because of the crisis), but this year we have a very good tempo of growth," said Alexei Savelev, business development manager at Abloy Oy, a Finnish producer of locking systems that has supplied systems for the White House in Moscow and the Hermitage in St. Petersburg, as well as new residential and commercial projects.
"2010 may be a better year for us than the years before the crisis," he added.
As a result of this rebound, Finnish companies are currently able to take advantage of a postcrisis window of low prices and high demand.
Jussi Kuutsa, country manager of Russia for Finland-based construction and development company SRV Group Plc., said that bureaucracy is the main hurdle for a construction management firm to overcome as a result of a "form over substance" ethos that stresses documentation above all else. The process of correctly drawing up documentation can significantly raise a firm's overhead cost: What can be accomplished by one clerk in Finland takes three to five clerks in Russia, he estimated.
Although the Russian market is on a growth trend, at the same time the crisis brought prices for materials and labor down, Hanhisalo said. The area with the highest demand is residential construction.
"In Moscow, there's a great need all the time because of the insufficiency of good-condition apartments," Hanhisalo said.
This deficiency is even more pronounced outside of Moscow, added Vladimir Skorlygin, a senior consultant at Finpro.
Finnish firms are poised to become even more dominant in the construction market because they possess an edge over competitors in terms of quality control, technological know-how and cost and environmental efficiency, Finpro maintains.
Finnish expertise in environmental efficiency consists partly of an emphasis on longevity of projects and planning not just for their construction, but also for the aging process.
"What is not traditional here in Russia is looking at the whole lifetime of a building and all costs during that time," Hanhisalo said. "The Finnish approach takes into account further exploitation of a building, how it must be maintained and when, and how to keep energy consumption at a certain level for the life cycle of a building."
In the Russian construction industry, Finnish firms are active in renovation work and the production of construction materials — mainly roofing materials — for use in the local market. Finnish companies' primary moneymaker, however, is construction management, Hanhisalo said. He estimated that effective construction management can reduce the total cost of a construction project as much as 20 percent by eliminating the common mistakes of constructors, who "don't question some things that should be questioned."
Finnish companies are especially well-suited to project management, as well as design and engineering, Skorlygin said.
"As a rule, Finnish management is much more detailed than is typical for the Russian approach," Skorlygin said. "The estimation methods used are much more detailed, and Finnish design, engineering and architectural companies ... keep a timeline better and have better accuracy in everything they do."
In Russia, Pöyry is mainly focused on construction management and engineering services related infrastructure and real estate, Kari said.
"We still have very good quality and price ratio, we deliver good quality," Kari said. "Speaking about construction management, we can deliver a project on time with reasonable investment costs and high quality."
Finnish companies are able to take advantage of a postcrisis window of low prices and high demand. The area with highest demand is residential construction.
However, Finnish firms face a number of challenges in Russia. First among these is bureaucratic red tape. In Russia, about 30 different organizations are typically involved in the regulation and documentation of a construction process, Skorlygin said.
"In Finland, general rules exist that are templates; if you follow them, you will have success," he said. "The biggest problem [for Russian and foreign developers] in the Russian market is there are no unified norms and rules in place for different ministries and government industries."
To obtain the go-ahead for their construction projects, Finnish developers should find local partners who can help streamline the documentation process, Finpro advised.
"The remedy we propose is local partnerships; you have to build a network to get to know who will decide these things in advance," he said, referring to the many regulatory decisions involved in approving a project.
If Finnish companies can overcome such obstacles, however, the Russian construction sector holds much promise, and its potential will likely continue to increase, Hanhisalo said.
"It's unpredictable, but if the development of the country proceeds as it is now, the possibilities could be unlimited," he explained. "If we see more encouraging signs of stability, there will be more Finnish companies in Russia."