The Man Behind The Federation Tower
- By Bela Lyauv
How did you end up in real estate? There is a lot of gossip about the issue. What's the real story?Sergei Polonsky: At the beginning of the 90s people were importing sugar and butter from Ukraine. My partner Artur Kirilenko and I wondered what the point was - what was to stop you going yourself? In 1993 we got our first contract job with finishing up a new building. We started bringing in people to St. Petersburg from Ukraine on train wagons. Our migrant workers mainly did plaster work.
Why plastering in particular?
SP: Because all bricklayers are alcoholics. To be precise, out of every 100 bricklayers 40 are alcoholics, 40 are leeches, 18 are idiots and 2 of them have laid bricks at some time or another. Because of this we decided that women are much better. They earn money, because they need to feed their family while men tend to mess around. Women have the ability to plaster for hours on end. They are better when it comes to monotonous work.
What kind of start-up capital did you have?
SP: Capital? What capital? There was no money. It just so happened that one of our acquaintances had 100 railway tickets on which the holders' surnames hadn't been filled in. This is how we initially brought people to St. Petersburg. We collected our migrant workers, and since at first we were paid in kind with apartments, it was very tough initially. No one had any money. We got our first apartment and tried to sell it for four months through an agency but were not successful. We had to borrow money from anyone we could in order to feed ourselves. But in 13 years no one's salary has ever been delayed. We have an unspoken rule: workers at the construction site get their salary first, management comes second.
Do you get a salary?
SP: Yes, because I am partly involved in management.
Is it a large salary?
SP: I don't remember exactly, but it's fairly decent - around $50,000 per month.
When did your first property appear?
SP: When the agency was unable to sell the apartments we decided to do it ourselves. In 1994 we set up Stroimontazh and a year later we sold almost half of the apartments of another company, Stroitelny Trest, in addition to our own. But the developer demanded that the name of their company be shown on the advertisements. It got complicated. We realized that we were too heavily dependent on one organization and in 1996 we took on our first contract job.
Was it really that simple to go and put up a building without any experience?
SP: We had this idea that anyone could construct a building. Our reckless nature made it seem easy. But nothing's ever quite as easy as it looks. This building belonged to Lenenergo and was already half complete. But Lenenergo had not been allowed to budget any money to finance the construction work. We offered to complete the building provided they gave us half of the apartments. I think the more you know, the more you're afraid to do something new. For example, a lawyer will never make a businessman, because he knows too many laws. If someone told me 13 years ago that I would construct the Federation Tower I wouldn't have believed him.
Do you remember when you earned your first million?
SP: Of course I do. It was in 1995. I was sitting with my business partners and had a dream of earning a million dollars, such a beautiful and magical figure. We were living in rented apartments and had fairly modest cars. I read somewhere that to get something you must give up something else. Artur and I agreed that until we earned a million dollars we would not watch television. It worked! In 11 months we bought new televisions and were ecstatic. Now whenever I make some kind of decision I remember: if you want to make your mark, then you have to give up something, to sacrifice something. This gives you the will power. In general, people say that you don't get the biggest kick out of reaching the actual summit of Mount Everest but when you're 3 to 4 meters away from it. And we were happier not when we had actually banked our first million dollars but when we were in the process of earning it.
How did you spend the million?
SP: Invested it in the business.
Why make personal sacrifices to invest the money in your business?
SP: If a man earns a million dollars and then goes and blows it on a car or apartment, then he's an idiot and will never be a good businessman. The Americans have done research that shows that if a businessman has a house of more than 1000 square meters, then that means the shares in his company are falling. When a man's got a big, comfortable house, then he believes that he will always be okay and starts to relax. And 90 percent of the time the exact opposite happens.
In 2000 you moved to Moscow. What was your reasoning?
SP: I believe that a company should not occupy more than 15 percent of the market in any one place. At that moment in St. Petersburg we were building a lot - about 80,000 square meters in a year - while the city was building a million square meters. We could have increased the volume of construction but that would have increased the risk.
What were your first steps when you came to the capital?
SP: Over the first two months I held about 200 meetings with bankers and builders in order to understand the market and the rules of the game. I arrived in May and by August we had signed our first agreement on Korona, a big project consisting of 100,000 square meters. The Moscow Medical Academy was commissioning it but because of a lack of funds the project was frozen for seven years and the plot was grown over. We met with the management and they said that they wouldn't give us any money, instead they'd take part of the floorspace. We had enough start-up capital to dig the foundations and drive in the piles - we allocated about $4 million to Moscow. We put up a fence around the plot and started sales. We didn't even need connections with the Moscow government, because we were effectively the contractor. At the ceremony for laying the foundation stone, Yury Luzhkov was very surprised that a company from St. Petersburg was doing work in Moscow.
Did you select an entirely new team?
SP: At that time 1000 people were working for Stroimontazh in St. Petersburg. I only took our structural engineer, Dmitry Komarov, with me because we needed to do the Korona project quickly.
Why did you decide to share your business with Artur Kirilenko [right now Kirilenko is the main owner and president of Stroimontazh - editor's note]?
SP: It's entirely logical. He works in St. Petersburg and I work in Moscow.
They say that to carve out a niche on the Moscow real estate market, you need a lot of money or very good connections. In a short period you have managed to put together a pretty sound portfolio of projects - around 5 million square meters. What kind of resources did you have at your disposal?
SP: A development company is a complicated control system, it's about the management and people. You can't just give out money and say, "Do this." All of Mirax's projects were acquired long ago. The plot of land in Moskva-City cost us $10-$11 million dollars. Deputy Mayor Iosif Ordzhonikidze was trying to persuade everyone to participate in the project but no one wanted to take the risk and we were called idiots.
Five years later people were fighting over these plots. We bought the Fili-Krovlya factory three years ago and all told it cost us $25 million. The list of projects can be continued. These days you have to pay around $50 million just for the land to start doing a 100,000-square-meter project. This means you won't see any new companies because not many people have this kind of money. But this is the normal situation in similar markets around the world, where there are no more than five to ten companies. And all the problems with shareholders who have been defrauded have all come because the companies are small and obscure.
They also say that you have connections with the head of Inteko, Yelena Baturina.
SP: I've told you everything about the money. If it had to do with anything else, you'd find it on [dirt-digging website] compromat.ru. We have a joint project with Inteko, redoing power lines in Beskudnikovo. There are big power cables of 110, 220 to 550 kilovolts. But to this day no one in Russia has constructed any 550-kilovolt power lines. The design is very complex. We worked out the idea jointly with Inteko Vice President, Oleg Soloshchansky.
What is the present day credit profile of your company?
SP: The general sum is less than $400 million including long-term and non-bank debts.
Not long ago you allowed a share option plan for managers of your company. Why did you do this?
SP: We gave out 15 percent of the company's stock through this program. All the members of the board of directors who participated had helped found the company. They include Alexei Adikayev, Dmitry Lutsenko, Maxim Privezentsev and Maxim Temnikov. They got 5 percent of the company's stocks. They will get another 5 percent of the stock during the second stage of the program in two years' time and the remainder two years after that.
Do you have any plans to conduct an IPO?
SP: We don't need money as such right now. We have enough funds from our current portfolio. Therefore in the near future we will not be going public anytime soon. On the one hand, public companies are viewed much better on the market, but on the other hand it makes it much more difficult to work. What gives us the edge over the competition is that we make decisions very quickly and effectively. For example we find a plot of land that we like and off we go - we don't need approval from our stockholders or the permission from the stock exchange. Of course there is no set recipe for success for any company. If all the companies on the stock market were successful then we would sell stock too. But not that many world developers conduct IPOs. Basically the companies that do, like aluminum and metal companies, have stockholders who aren't directly involved in the management process.
In other words you don't plan on standing down as head of the company anytime soon?
SP: Nobody in the industry has succeeded in doing this. Neither Harry Tregubov who is the biggest developer in Australia nor Donald Trump in America. I think that for a successful project the stockholder should be directly involved. It is impossible to back out of operational management with development, unlike, say, a factory where it is possible to put in place a technical director who carries out a mechanical function because there's no need for any creative input.
Today there's a fad among Russian companies for holding IPOs. And the capitalization of Russian companies sometimes exceeds all conceivable figures. For example, Forbes magazine values Donald Trump at $2.5 billion while, for example, the PIK group is worth over $12 billion and Lev Leviev's development subdivision around $6 billion. How realistic are these figures?
SP: These people include my friends and it would not be proper for me to comment. Apart from that, I think Trump has far less projects than we or PIK do.
At how much would you value Mirax right now?
SP: I don't think it would be right to put a figure on it. Our aim is for Mirax to be the number one brand in Europe.
How will you go about this?
SP: We would like to get some projects going of the same standard as Mirax Plaza or the Federation Tower in several European countries. This will add to the positive image of Russia. We love talking about how great we are. But that doesn't interest anybody. But if we were to put our highest building in the middle of Paris and it had 'Made in Russia' written on it, then that'd be it! You'd not be able to top that. The attitude towards Russia abroad would change immediately - you can have a talking shop, or else you can show your paces. After all, many countries represent themselves through their products. What do people think of first - Mercedes, BMW and Porsche, or Germany? If these brands did not exist, the world would view Germany differently. It's the same thing with France and Chanel No. 5 and wine. And Russia? It's all vodka, ballet and bears, and now oil and gas too.
How do you think the real estate market will develop in Moscow?
SP: I know the truth but I won't tell. I've been predicting the economy over the last five years - it's all come true and City Hall has asked me not to comment on prices. Our predictions coincide and I get stick because the market reacts to what I say in the same way as it does to what George Soros says.
You seem pretty full of yourself.
SP: People react differently to what someone who has $5 million or $500 million says. Suppose I were a student and gave a girl a bouquet of flowers on her birthday. Wow. And then Polonsky gives someone a bouquet. It's just that the same action is interpreted in diametrically opposite ways.
In the past you've argued that there shouldn't be cheap housing in Moscow.
SP: Everyone has finally come round to this. We don't have any other alternative otherwise Moscow will turn into a second New Mexico. Remember three years ago when prices were $2,000 per square meter and people said that that was expensive? The prices should keep going up until people from the provinces aren't able to come here and buy apartments. Otherwise we are going to be strangled by total gridlock. Apartments in Moscow should cost five times more than apartments in Boondocksville. If this had happened two years ago the traffic situation would be much better. But in fact it is quite the reverse. That is why it is better for everyone if only rich people can buy apartments. A person should be able to buy a second or third apartment, fit it out and then rent it out. If 120 people want to rent an apartment and there are 100 apartments then the prices will increase sharply. But if there were 120 apartments instead of 100 then prices would decline sharply. That's why in France people who want to buy several apartments get tax rebates. They increase the number of apartments for rent and in France 80 percent of the population lives in rented apartments.
How will you solve the problem of transport access in the business center where the Federation Tower is being constructed?
SP: I am not very worried about this issue because we plan to join the Federation Tower to Mirax Plaza [at the intersection of Kutuzovsky Prospekt and Ulitsa Kulneva] with a monorail. If there is heavy traffic our visitors will be able to reach us by monorail. In addition, we have a huge parking lot for 3000 cars.
You provided the initiative for the creation of the Russian Builders' Association. Has it been an effective organization?
SP: I don't want to take credit for this. All the builders came together and discussed setting up the association. Because of it we are able to sleep soundly. Not one law will be passed that isn't in the interests of the market. The Association has larger-scale tasks: bringing the market to the state where any buyer of residential real estate can rest assured and won't have to resort to hunger strikes to protest against being defrauded by a developer.