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. Last Updated: 07/27/2016

Petersburg's Property Puzzle

With one-quarter of its historic downtown housing sector on the verge of collapse, St. Petersburg asked the World Bank in 1995 for a financial lifeline. Six years on, The Moscow Times looks at the progress being made in what Fyodor Dostoevsky called a city filled with nothing but "windows, holes and monuments."

ST. PETERSBURG — In 1995, even before a comprehensive scientific analysis was commissioned, Anatoly Sobchak knew something had to be done about the appalling condition of residential buildings in the heart of this city.

With his own budget too tight, the former mayor, who died last year, asked the World Bank to help finance a novel reconstruction project that would help put in place the market mechanisms needed to put a safety net under St. Petersburg's collapsing housing sector.

That move proved prescient when, in 1997, the city completed a comprehensive study that found that a quarter of all downtown housing was "extremely worn out and in urgent need of complex reconstruction." Roughly 4.8 million square meters, or 26 percent of all residential apartments downtown, were considered on the verge of crumbling, while another 30 percent were listed as "unsatisfactory."

Every year, the study found, the cash-strapped city repairs only about 5 percent of the buildings that need it — a pace that would see no less than 22 percent of all downtown housing become uninhabitable by 2007, with half of the rest downgraded to "emergency state."

"When Russia started to reform itself in the early 1990s it became clear that the housing sector was the most underdeveloped and the most conservative," said Boris Smirnov, deputy head of the Moscow-based National Foundation for Housing Reforms, in a recent interview.

"It just could not work in the market economy the way it used to in the past," he said. "We needed to make crucial changes."

The World Bank agreed. It gave the city two groups of loans: $30 million for a pilot project to reconstruct the downtown area in a way that would attract investment for housing renovations; and a series of loans totaling $74 million to both the city and to private companies to develop ways of building inexpensive housing.

The $30 million loan from the World Bank was designed to create a successful rejuvenation model for downtown that could be applied to other parts of the city in the future.

For this, two areas were initially chosen: Kappella's Courtyards near the St. Petersburg State Cappella along the Moika River, and the area between Nevsky Prospekt and Vosstaniya, Mayakovskaya and Zhukovskogo streets, also known as Block 130.

As part of this project, the city modernized the infrastructure under Nevsky Prospekt, improved the lighting and traffic-control system, and repaved the sidewalks.

So far, 67 percent of the $30 million has been spent, said Alexei Vasilyev, general director of the Foundation for Investment Projects of St. Petersburg, the agency set up by the city to run the World Bank projects.

Felix Jakob, the project manager for the World Bank's Urban Project in Russia, said in a telephone interview from St. Petersburg that the city has done "a good job" with the loans — the housing project is finished and the infrastructure project is "substantially completed."

Six years on, however, the majority of St. Petersburg's downtown buildings remain dilapidated and fragile pieces of real estate, and the city is still facing the same problem: a lack of private investment.

Kappella's Courtyards

The passage connecting 20 Moika with Bolshaya Konyushennaya Ulitsa was once a row of old stone buildings connected by unkempt courtyards lined by walls with collapsing plaster.

Under the project, the courtyard was turned into an orderly, replastered, bench-lined and tiled corridor with new balconies and lampposts.

What is not visible is the infrastructure — outdated pipes, wires and telephone lines in the area were all replaced. Ground-level tenants of the surrounding buildings — 28 people in all — were relocated to new apartments of their choice, and their old apartments were converted into retail space. A few shops are already open.

Vasilyev said that that the city will now earn much more from leasing out this space than it could have earned before.

"The Cappella Courtyards [project] provides a good example of what a city can do to improve pedestrian traffic on one hand and, on the other, rejuvenate the urban fabric of its city center by cleaning out interior courtyards to make them attractive to the public," Jakob said.

Indeed, the city is hoping the project will attract investors interested in purchasing buildings around Kappella's Courtyards. To that end, the city recently resolved a major problem — it managed to persuade the federal government to demote the status of the buildings in the area, some of which were listed by the Culture Ministry as national monuments, Vasilyev said.

Having "national monument" status with the Culture Ministry does not mean that the buildings are maintained or guarded by the federal government, it only means that they cannot be sold. To sell them to developers who otherwise would not be interested, the buildings needed to be downgraded to at most "municipal monument" status.

But while the city managed to win a potential investment victory with the declassification, not everyone is happy.

Residents of the buildings along Kappella's Courtyards said they have not benefited from the renovations at all, and complain of outdated radiators, peeling walls and dangerously tangled wires in their foyers, which have no security and are often used as toilets.

"It's a kind of Potemkin village built here," said Olga Zhiltsova, a resident of one of the buildings along Kappella's Courtyards. "I really can't get it — why did they make all these decorations, put nice tiles on the ground, when they later want buildings to be reconstructed and all this will be ruined?"

Block 130

Block 130 is a series of buildings and courtyards just a few meters off Nevsky Prospekt, the city's main thoroughfare, and resembles the remnants of a war zone.

Like the Kappella's Courtyards project, the reconstruction of Block 130 included an infrastructure overhaul and a series of cosmetic improvements designed to attract investors to upgrade neighboring buildings.

New water and heating pipes replaced the massive, hodgepodge system of older ones that blocked pedestrian walkways. And two large boilers were built so residents in the area no longer had to heat their water by gas.

Since the project started, private investors, who are now busy relocating residents to new apartments, have purchased four apartment blocks.

Valery Shevchenko, a 35-year-old resident of the building at 104 Nevsky Prospekt, is one of those waiting to be relocated.

"I want to get out. My neighbor was offered an apartment on Moskovsky Prospekt, and I don't think I'll mind leaving my room in a communal apartment," Shevchenko said.

The project has also helped generate interest in four idle land plots in the area that the city expects to sell for a total of $4 million, which will go toward servicing the World Bank loan, Vasilyev said.

The city is hoping these plots, which are located about 100 meters from Nevsky Prospekt along an unnamed lane just off of Mayakovskaya, are slated to be developed into hotels, offices, retail stores, restaurants and housing.

The starting prices for the plots, which range in size from 1,131 square meters to 2,271 square meters, run between $320,000 and $735,000. But city officials believe that the price could double, which would cover the cost of setting up the area's infrastructure.

The tender for the long-term lease of the land plots will be held March 21. The deadline for applications is March 19.

Inexpensive Housing

St. Petersburg's role in upgrading the infrastructure of Block 130 and Kappella's Courtyards proved invaluable for the project to build inexpensive housing, under which roughly 2,000 families have already relocated to new apartments in the suburbs of Kamenka and Kolomyagi.

This work was done as part of a larger deal Russia and the World Bank signed in 1995, when the National Foundation for Housing Reforms was set up by the Russian government to manage the project.

Since then, the bank has allocated $370 million to implement housing reforms, mostly in St. Petersburg, the Altai territory capital, Barnaul, Nizhny Novgorod, Novgorod and Tver. Recently, 10 other cities also joined the project.

Of the $33.46 million given by the World Bank to St. Petersburg (to which the city added $7.9 million of its own money), the city spent $13 million on building infrastructure in Kamenka and Kolomyagi. Both areas are about a 15-minute drive from the city's metro system and about 40 minutes northwest of the city center.

The rest of the loan was spent on rebuilding a downtown water pipeline system, a pumping station in the Parnas industrial zone and a sewage collection facility along the Karpovka River embankment.

In the past, such infrastructure projects were an extremely complicated process full of red tape and delays.

The city had no zoning plan, so it used to take months and thousands of dollars in bribes to get technical documents approved by officials for such projects.

"It would have taken us at least twice as long to agree to documentation and build infrastructure if the city hadn't done it," said Mikhail Salenko, general director of the construction company Elf, which is building town houses in Kamenka for the project.

Elf was one of 10 companies that purchased the rights to develop land plots at auctions organized by the city in 1996-97.

When the project is completed, the new flats and cottages in Kamenka will house 3,130 families and cost between $300 and $500 per square meter.

In 1996, when the city first announced the project, it was talking about developing ways to provide St. Petersburgers with cheap housing. Alexander Vakhmistrov, who now heads the city's construction committee but at the time was the committee's head of investment, said that prices for housing built within the World Bank project would be three times cheaper than the average market rate and would be affordable for average-income families.

The financial crisis of 1998 ruined that plan.

The National Foundation for Housing Reforms' Smirnov said that St. Petersburg took many steps to reduce the share of infrastructure in overall construction costs.

The cost-cutting, however, has not led to cheaper prices and new owners have mixed opinions about how much value they got for their money.

"We like living here," said Ilya Remeslo, a 17-year-old student. His father, a psychotherapist, has a private practice in St. Petersburg and bought an Elf-built house in Kamenka to move his family from Nalchik, the capital of the Kabardino-Balkaria republic.

"It's ecologically clean here and we, even [we] children, all have our own rooms. The conditions here are better than in any city apartment," Remeslo.

Unlike Remeslo, many residents of Kamenka and Kolomyagi said that they were disappointed with their new homes. Many complained of not having a telephone, while others said their roofs leak and their basements are partially flooded.

"My ceiling is 7 centimeters higher in one end of the room than in the other, and my corridor for some reason has five angles instead of the normal four," said one Kolomyagi tenant, who asked that his name be withheld.

Vera Martynyuk, who owns a 115-square-meter cottage on the same street, said "cracks appear in the walls one after one. Just after we fix one, another appears. We had to fix our bumpy floors and walls were uneven until now, the ceiling in our garage was caving in. But our construction company refused to fix the faults — it just gave us some construction materials, but we had to hire workers ourselves."

Martynyuk said that her family was effectively ripped off: "We paid $71,000 for the house [$617 per square meter] and then had to invest an additional $30,000 in repairs."

Martynyuk, who moved with her family from Almaty, Kazakhstan, said she did not know who to complain to.

Preparing Market Infrastructure

Although there is a special city-backed agency — the Expert Council for Reliability of Construction Companies, or ESON — set up to collect and analyze data on the quality of work being done by local construction companies and make it public, no one in Kolomyagi seems to know about it.

Mikhail Viktorov, general director of ESON, said in a telephone interview, "I know that low quality is quite a standard approach that many construction companies apply now trying to make prices look competitive to a client.

"This is a problem, but we are collecting such complaints and eventually bad [builders] may have their licenses withdrawn."

The city also prepared dozens of other schemes, technologies, facilities and regulations that together represent a new market infrastructure for developing downtown areas and constructing affordable housing.

Builders in Kamenka and Kolomyagi counted on low-interest loans from the World Bank to reduce construction costs, but the $28.9 million earmarked for the project was never used for this purpose.

"St. Petersburg construction companies have obtained low-interest loans via local authorized banks, but none of the builders for Kamenka and Kolomyagi could get these loans because they failed to provide collateral," said Valery Lipatkin, head of the Bank Credit Operation Center in the St. Petersburg administration.

To get around that problem, officials recently finalized a new scheme that allows construction companies to officially register unfinished buildings as collateral for loans.

The city has also prepared regulations for tenders to auction the rights to develop land plots and has set up a special exhibition for investors that provides details of the properties and explains the city's investment laws.

St. Petersburg also spent $11.7 million of the World Bank loans setting up three factories to supply materials used in housing construction — two lumberyards and one that makes heating pipes.

St. Petersburg this year will also narrow down a list of eight other areas where it intends to modernize infrastructure, Lipatkin said.

Overall, Smirnov said, a lot of new schemes and regulations throughout Russia have been established based on the St. Petersburg housing projects.

But despite the emergence of market and control mechanisms, the issue of where to raise the capital needed to finance the further development of the housing sector remains unresolved.

The 1998 collapse of the country's banking system, which has yet to be revived, and the absence of a proper legal system to protect investments force the majority of investors to wait.

More World Bank Money

Jakob said the World Bank keeps "strict close supervision" over the project and that "as far as we know no misspending has taken place."

After having established a proven track record, the St. Petersburg administration is currently negotiating with the bank for another loan. Jakob said the amount could be as high as $150 million, depending on the city's borrowing capacity and revenues.

"Our current plans are to get an agreement on the general features of this next project certainly by the end of 2001," he said.