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. Last Updated: 07/27/2016

Construction Firms, Protesters Square Off

Accusations and complaints were traded at a round table held by the Russian Builders Association last week in response to protests over construction companies' failings.

The association, known as the ASR, called the meeting after a series of rallies, pickets and hunger strikes involving several groups of people who paid for apartments in planned housing developments, only to have the construction drawn out indefinitely or ownership claims disputed.

Round-table participants included a spokeswoman for Sotsialnaya Initsiativa, one of the companies named by the Moscow region government as having failed to fulfill obligations under construction contracts, along with representatives of other construction companies, real estate experts, government officials and "co-investors," as buyers into yet-to-be-built or incomplete apartment blocks are termed.

Asked whether the problems were due to fraud or poor financial planning, Natalya Karasyova of Sotsialnaya Initsiativa enumerated the reasons why several of the company's projects were having problems.

Firstly, she said, the company had underestimated the consequences of the panic that arose among co-investors when new bills aimed at bolstering housing construction were discussed by the government in the spring of 2004. Law 214, designed to protect consumer rights, has cut builders' financing options, nearly halting all new construction. Karasyova said that as frantic co-investors dissolved contracts, the company had to take 2 billion rubles ($69.3 million) out of its operating capital to settle claims.

The second reason she named for the company's problems was an overestimation of the help it would receive from the local government. She said that instead of compiling blacklists, the region's government should have provided support. Karasyova said St. Petersburg authorities had taken a different approach to the company's troubles and had helped it to attract additional financing, enabling it to resume building.

Thirdly, Karasyova said, the company had failed to account for the growing prices of construction materials. She cited other costs, such as that of demolishing decrepit buildings at new construction sites, as adding up to more than the company had expected.

Construction materials prices are estimated to have grown by 30 percent over the last year.

Sergei Kanayev of PIK-Region, a construction company that has taken over the work at several Moscow region sites where building by companies Stroimetresurs and Stroyindustriya had stalled, spoke out about four mistakes that he said these companies had made and that PIK-Region had to unravel. He said that all builders intending to take over troubled sites should watch out for the following issues, which he said were the same in every case.

The first sign of a problem, he said, was sales contracts with prices 15 to 20 percent below market value. The second was poor record-keeping of apartments sold, he said, adding that double sales were inevitably discovered. The third problem was faulty accounting of costs and expenses.

The fourth problem, which he also said was a sign of a financial pyramid, arose in cases when co-investors, upset with the slow pace of construction, broke off contracts and demanded their money back. In many of those cases, he said, they received only part of the money and were satisfied to wait for the rest. In the meantime, the company would resell the apartment to obtain the rest of the funds to pay back the co-investor. However, the apartment had not become legally available for sale after the partial payback. Because of this, Kanayev said, sometimes up to three potential owners could claim a particular apartment.

Sergei Ambartsumyan, the deputy head of construction operations at Moscow City Hall, added that companies that were unable to finish their projects were also guilty of underpaying construction workers and subcontractors.

At the same time, he said, Moscow had no right to bar any company from participating in tenders for construction projects. He said that the city would try to help out families hurt by the stalled construction, but said that he did not feel that the city was obligated to do the same for commercial organizations that had purchased space in the troubled buildings.