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President of the Group of companies "GERZ" Alexander Rotov in an interview with UNIAN talked us through the possible moment when we can expect the recovery of the construction industry, he also shared his views on government initiatives of launching a program of rental housing, as well as on the causes of the conflict in Donbass and the future reconstruction of the region.

20 February 2015

INTERVIEW WITH ALEXANDER ROTOV, PRESIDENT OF THE GROUP OF COMPANIES "GERZ"

Alexander, when was the last time You were in Donetsk? Can you talk us through the current situation in the city?

Unfortunately, the last time I was in Donetsk, was in May 2014, after the presidential election. I arrived there for one day to hold a meeting with the Client at the Rose Park Shopping Mall. I remember when we went to the roof of the mall we saw the airport under heavy attacks. It was a real shock for us. A quiet, peaceful city and suddenly… a real war. Then I left Donetsk and never returned because it was really unsafe to stay there. The city fell into anarchy, and various gangs and mercenaries could kidnap people in broad daylight for ransom. If those hostages returned from captivity, they were gravely injured at the very least.

Your company does not actually perform any works in Donetsk?

We have suspended all our activities (4 buildings) in Donetsk. The first reason is that it’s simply become impossible to ensure the delivery of construction materials, and the second one is that nobody can work there under the current circumstances. No-one can actually negotiate with those ever-changing authorities. Having agreed upon something with one person today, you can be sure that tomorrow others will come with new problems. The factory, where we used to buy concrete for our construction projects got taken by “DNR” guys which call themselves some kind of Cossacks. By the way, I’m not the one who gets scared easily. I used to meet a lot of bandits, who came to me with various proposals in the 90's. But still, it was possible to negotiate with them. In the end, they only asked to build something for them, and they paid every single penny. In my entire life, I have never paid any kind of ransom. Therefore, I am not going to do it now or in future.

Do you know the actual ratio of Russian soldiers, mercenaries and local separatists who joined the terrorists in Donbas?

Most of them are mercenaries, who came from Russia for the money of Yanukovich. I would say that there are no separatists at all. There are many deceived people and simple puppets. For example, the political figures standing for the separation from Ukraine. Are they real politics? Of course not. They are people who get paid by Moscow. No-one in the city has ever known them. Someone of them was a kind of puppet master, someone appeared as the animator of different events, and now they are heads of "republics". But the real problem is that the local people have been scared to death. Earler Yulia Tymoshenko frightened them saying that the Donbass needed to be enclosed by a barbed wire fence in order to become a kind of a "prison". Those casual phrases - they are actually very scary. And when those poor people heard after all they had been told, that the city was expecting the upcoming Ukrainian army, they got even more scared. So that’s how people started becoming “separatists”. For instance, imagine a person who has been working at a factory and suddenly it gets destroyed by a missile. The same evening, this person decides to join the rebels. During the day, he is working there, and in the evening he is on duty at the checkpoint. I don’t blame those people. They want but one thing - peace. The situation is getting worse because of Russian secret services and propaganda escalating the situation. I think the Russian Federation has been preparing such scenario long time ago.

But how did they manage to mislead people so easily?

Donetsk was a contemporary, progressive city. But one should not underestimate the power of Russian media. By the way, it all began with the seizure of Ukrainian TV-towers and cutting of Ukrainian channels. And if one tried to watch some kind of "Russia 24" or any similar channels, one would understand how difficult it is to resist to the propaganda they broadcast. You start watching, you know it's a lie, but after a while you start believing.

Their propaganda has been so perfectly developed, that people become totally brainwashed. People in Donetsk have changed completely. I have many friends and acquaintances there, but I can’t recognize them now.

After Pesky got devastated by shelling, they said it was Ukraine who did it, after Dokuchaevsk – the same thing, the Malaysian aircraft tragedy - also Ukraine. People actually do believe that nonsence, despite the fact that it is allabsurd and completely insane. They believe that Ukrainian fascists will come for them and cut them all because they hear it on Russian television. The more incredible the lie is, the less it’s plausible - the more they believe. They keep all of Russia subjected to such brainwashing. No wonder that Donbass has become its victim.

What do You think could the Ukrainian authorities have done in order to prevent all of that in the first place?

At that moment, we simply didn’t have any authorities. We didn’t have a president and there was no army at all.

What kind of a way out of this situation do You see?

I believe that there can’t be any concessions, but we still need to negotiate, in particular, with the help of mediators from Europe and the United States.

But with whom can one negotiate? With those mercenaries?

Of course not, only with the first person, with Putin, with the one who has made that mess. Nobody else is able to solve this problem. Il must be his order to stop it. Unfortunately, he is out of control right now and his behavior is quite unpredictable. But still, I don’t think he will go for a full scale invasion.

Vladimir Konstantinov, the former head of the Supreme Council of the Autonomous Republic of Crimea, in fact, contributed to the annexation of Crimea by Russia last spring. Before going into politics, Konstantinov was  the CEO with the construction company  “Console” ltd.

Did You know him and do You know why he had made such a choice?

Yes, I knew him. I we had got acquainted when he was at the top, when his company was growing. At that time, he was a normal, logical person. But then, it seems to me that he felt like a king of the world, he started to believe that he was the best of the best, he felt completely secure, he thought he was the master of his own destiny and those of the others. Finally, he lost all sense of reality. He found himself owing more than one billion UAH. He was withdrawing money from the company with serious violations. They were taking advance payments, spending money without even caring about building. So when Russians came, they knew exactly all his weak points, so they could manipulate him.

Does that actually mean that all decisions related to the annexation of Crimea, had been associated with his business activities?

Absolutely. Once again, they found some weak points in order to manipulate. He was a well-known person in the peninsula. His financial situation was quite complicated. They helped him out with his financial problems, but gained his soul. Maybe he wasn’t quite happy about it. But once he got caught in a vicious circle, it became impossible for him to get out.

Speaking once again of the activity of the "GERZ" company in Crimea, do You have any assets there?

We had completed all our projects in Crimea before the annexation. The last thing we had built in the peninsula was Radisson hotel. We had just had enough time to finish it, hand over the keys, so our clients had completely paid off. In general, our company has not lost anything in Crimea.

What kind of projects is the company implementing today?

We have some projects in Kiev, Donetsk and Poltava regions. I can’t provide you with any more details on those projects without the agreement o the clients. Of course, we have much less work right now. At the moment, we are working with "Auchan" and performing some works on small agricultural projects. In general, we are using only 15-20% of our capacity.

According to the State Statistics Service, the volumes of construction works fell across the country in 2014, which represents almost 22% (up to 50.2 billion USD). Do You think this downward trend will continue during this year?

I think yes, because the construction industry is one of the first to respond to negative trends in the economy. Global rating agencies forecast a drop of 3 TO 5% in Ukrainian GDP. With this scenario in view, I expect the decline in construction works to reach 15-25% compared to 2014.

By the end of 2014, a small increase in construction had been recorded only in residential real estate sector. How can You characterize the situation in terms of sales of real estate, is there a slump in real demand?

The situation of the residential real estate market situation is ambiguous. On the one hand, with the devaluation of the hryvnia and distrust in the banking system, people become more and more interested in buying real estate, but generally it’s not an expensive segment. No-one is actually investing in expensive housing at the moment. In addition, the demand in the housing market tends to be quite elastic - with a double-triple increase in prices, it can collapse, and that’s what we are currently seeing. Basically, it would be reasonable for people to invest in housing in order to preserve their money, which would fuel the development of the construction market and benefit the economy as a whole. However, in view of the current war in the country, many people prefer to keep their savings for a rainy day.

Given the current situation, which projects should the construction companies focus on?

At present, most companies are still finishing the existing construction projects, as it has become almost unreal to raise funds for the new ones. When it comes to business and money, it’s better to have a peaceful and calm environment, so as long as the war in Donbass continues and there is still a hypothetical probability of a full-scale invasion by Russia, investors will keep away.

In the absence of investors and bank lending, the state budget and some government programs for infrastructure or residential construction could also be a source of funding. However, we all understand that the possibilities of government are minimal and there are more important issues at the moment which require significant financial resources.

When do you think we can expect the recovery of the construction market in Ukraine?

No earlier than 2017. We all hope that 2016 will bring some stabilization, and we expect some positive developments in 2017. It’s quite difficult to make any forecasts, but I am convinced that as soon as the situation stabilizes with our north-eastern neighbor, the country will attract investments as there’s enough free money in the world. Moreover, I am convinced that Ukraine can become a financial haven in 2017 up to 2025. According to my estimates, during this period investment in Ukraine will be measured not in tens but in hundreds of billions of dollars.

However, prior to the outbreak of hostilities, foreign investors were in no hurry to invest in Ukraine …

You're right, there were lots of reasons, including excessive bureaucracy and corruption. For instance, in the construction industry we have a very complex and corrupt procedure for obtaining rights to land. The same can be said about the procedure for connecting utilities. In 2013, at the Confederation of builders we tried to initiate changing it, but the monopolists of natural resources decided to lobby their interests.

Now we’re going to work with the new government on changing the system. We will also insist on reducing the terms of land acquisition. According to the estimates of the Confederation, those terms could be 3 times shorter  eliminating the procedure for obtaining land development project in the presence of zoning areas, approved by local authorities.

After coming to power, the government of Yatseniuk suspended the implementation of government housing programs. Has it been a forced decision?

Decision is understandable - the budget is simply no money. And those that are, are more important things. For example - the rearmament of the army.

However, the State Fund for Youth construction, implementing a number of programs claim that the allocated money quickly returns to the state budget in the form of taxes and stimulate the economy by attracting funds from the public ...

It’s a bluff. Just look: the allocation of 200 million UAH from the budget will be enough to build only 2 houses for the whole country. Is that actually serious? We need 10 billion UAH. When the dollar exchange rate was of 8 UAH, the Confederation believed that from 2 to 4 billion UAH were needed. Now, when the exchange rate is of more than 16 UAH, we need to include at least 4 to 6 billion UAH to the budget in order to run those programs properly. But now there’s no money in the budget.

At the same time, it has been recently reported that the government is developing a program of rental housing. Do You know any details concerning this program?

As far as I know, the Ministry of Regional Development has different ideas about this program, but then again, there has to be a customer. And there are only two options - the customer is either a state or a private investor providing the means for construction of such apartments and people rent them without buying it. Such programs are quite common throughout the world. In fact, when the economy is stable, and people can plan their income, such a program can actually be interesting.

But now, given the current situation in the country, the implementation of such a program is simply impossible. Moreover, I believe that this program will not be relevant at least until 2017, even though residential developers are interested in the resumption of housing programs, because the participation in such programs benefits them.

There is a lot of talk about rebuilding the Donbass  after the war. Can you expand on the estimated cost of necessary works? Is “GERZ” going to participate in the reconstruction projects in the region?

At the moment, it’s extremely difficult to estimate the amount of necessary funds. But one thing is clear, it will entail astronomical costs. The restoration of the Donetsk airport itself will cost at least 500 million USD. According to various estimates, the reconstruction of the whole region may take from 2 to 10 billion dollars. With ongoing hostilities, the amount of necessary investments can grow significantly. The "GERZ" group is ready to participate in the reconstruction, but it’s not on the cards yet, so it’s too early to talk about any conditions. Now Ukraine should create some reconstruction funds. These funds should not be controlled by the officials, but by community organizations. If an official monitors any fund, he will always be tempted to steal a part of it. The contributors and investors to the fund should be members of supervisory boards thereof, and at the request of local authorities they should make decisions as to where exactly those funds should be allocated. The implementation of such a scheme would allow to protect money from theft, so this money will be allocated to the most important projects in the region.

In Your opinion, is the government coping with the program of assistance to migrants from the east?

I don’t think so. There are some initiatives, but there are no effective governmental programs. In fact, most migrants will not return to Donbass. Only some 20% actually will. The primary need of those migrants is not housing, but work. There must be a comprehensive state program.

In fact, the governmental program of compensation of rental costs implies that thanks to this scheme, migrants will be able to rent an apartment somewhere near their place of work, doesn’t it?

Such compensation could be a good mechanism. But the problem with regard to migrants from the east lies in huge distrust towards those people. It’s quite difficult for them to be employed, because they’re simply not accepted. I think that this issue must be addressed by the Government in the first place, rather than that of housing or rental compensation.

Together with the political party "UDAR", many players of the construction industry have actually gained power in the capital. The most famous among them is the CEO of the "KAN Development" ltd. Igor Nikonov, who is now the first deputy chairman of the KSCA. There are fears that the real purpose of the builders having come to power are business interests ...

Well, one can never know what’s on their mind. They all claim to have done that for the city and for the people. But knowing Nikonov, I shall say that it was not for the sake of his business interests. But I shall not speak for the rest of them. I think that there are surely those who came to the city council to earn money. In general, I think that there’s no place for politicians within local authorities. They should be business executives and professionals. They need to understand the problems of the city and ways of overcoming them. It’s the primary function of the city administration. Nikonov should also think outside his company. His company should now be the city. He must think of ways to build the city and to make it better. Nikonov is a really competent man. I think he knows what to do and he will do it.

In recent years, there have been many cases of protests against construction projects in Kiev. However, many construction companies often refer to such protests as being ordered. Is that true?

I shall say that 2005 brought us not only democracy, a brand-new profession called "Protester" appeared. This profession is associated with destruction rather than development. People who don’t know other ways of making money, apply to certain structures. Their list consists of 3, 4, 5 thousand people.  These people can quickly assemble for 100 UAH and more. So, in construction, there are 2 kinds of “paid” protests: a competitor’s order, or a simple extortion. Among these extortionists, you can find criminals and former law enforcement officers. They are looking for weak players who will get scared and pay them. Their scheme is perfect and very difficult to reveal. We have worked with the prosecutor's office in Kiev and with the police, but with no result.

Does that imply that all of those protests have been paid for while developers can be considered innocent?

No, of course not. But if the developer fails to comply with the law, gives bribes for a construction permit and wants to build in prohibited places, it’s one thing. But if technically everything has been done well, if they have taken all necessary legal steps without violating any rules or regulations, it’s not a question of willingness any more. In a democratic society the rule of law and not street protests should be the priority.

 

Alexander Rotov was born in Mariupol, but studied and started his career in construction in Donetsk. According to his words, it was only after decades of work in the city that he got to know it from the inside. In times of peace, our conversation with the owner of one of the largest construction companies in Ukraine would have started quite differently. Now, the conversation has to start with the most painful issue for the entire country - Donbas.