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Israelis in Russia

by: Dina Kraft - Last updated: 2007-11-13

Moscow

Moscow

A sprawling shopping centre along the banks of the Moscow River and a pair of luxury residential skyscrapers and office towers nearby are among the growing number of projects Israeli companies are spearheading in Russia.

From investment houses to clothing chains, Israeli firms are pouring money into Russia and former Soviet republics, tapping into their potential as emerging economic powerhouses and consumer societies as they shake off their communist pasts.

“Of course Russia has its risks,” says Jacques Zimmerman, vice president of corporate communications for Africa Israel, whose company, AFI Development, is building the 1.5-million-square-foot shopping centre as well as the residential towers. “But we think it's the right place to be doing business."

Israelis are eager to pursue business opportunities prompted by Russia’s newfound wealth.

Russia represents a market of 170 million people with a new and growing middle class. As they undergo a lifestyle revolution, they are eager to buy everything from cars to clothes to condominiums.

Meanwhile, the government is flush with oil revenues and is offering tenders on massive infrastructure projects.

"It is a place we want to be and have to be,” Zimmerman said.

AFI Development, Africa Israel's £3.8 billion Russian real estate division, is capitalizing on a surge in internal migration to cities like Moscow and St. Petersburg by building residences, office buildings and roads in Russia's large cities.

As the emerging Russian middle class seeks places to live, shop and work, Israeli companies are stepping in to provide the infrastructure. In Russia, as in neighboring Poland and Romania, Israeli companies have been purchasing land at relatively inexpensive prices and building quickly, raking in handsome profits.

"There has been a huge shortage throughout Eastern Europe of building residences for the emerging middle class," said Dan Galai, a professor of finance at the Hebrew University of Jerusalem. "There is a demand but not enough local capital to do it.” The Israelis “brought the money, people and the initiative."

The primary owner of Africa Israel, Lev Leviev, immigrated to Israel from the Uzbekistan capital of Tashkent as a teenager and was among the first Israelis to invest in Russia in the early 1990s. Today he is one of Israel's wealthiest men.

Other companies have followed Africa Israel’s lead despite warnings of political and economic instability in Russia.

While there are no precise figures for the scope of Israeli investment in Russia, the sharp increase in trade between the two countries is indicative of strong investment growth. The first quarter of 2007 saw a 38 percent increase in Russia-Israel trade over the first quarter of last year, according to the Israel-Russia Chamber of Commerce. The total for the first three months of 2007 is £265 million.

Investing in Russia is not without its risks.

The Russian economy’s heavy dependence on the oil market means that a major downturn in oil prices could send the country's economy into a tailspin. As the middle class establishes itself more firmly, however, rising internal consumption and demand for goods likely will bring greater stability to the economy.

There are other risks associated with doing business in Russia.

Some of Israel’s wealthiest men made their fortunes in Russia — in the oil trade specifically — but ultimately fled the country to escape the Kremlin’s tightening grip on the country’s oil wealth and, in some cases, to escape prison.

Three Jewish oil executives that once were listed as billionaires in Russia — Mikhail Brudno, Leonid Nevzlin and Vladimir Dubov — all live in Israel and have warrants out for their arrest in Russia.

Other Jewish oil oligarchs, notably former Yukos oil company CEO Mikhail Khodorkovsky, never made it out.

Khodorkovsky, who in 2004 was Russia’s wealthiest man, is serving a nine-year prison sentence in Russia for fraud and tax evasion. Today the Kremlin dominates much of the oil market once controlled by Yukos.

Nevertheless, as Russia experiences surging demand in fields where Israelis have special expertise — including telecommunications, high-tech, medical devices and manufacturing — Israelis are accelerating the pace of their investments in the country.

Ehud Ganen, director of the Central and Eastern European Department of Israel’s Trade and Industry Ministry, said the large workforce of Russian speakers in Israel gives Israelis a great advantage.

"If you are going to enter the Russian market, you need to hire people who speak the language," he said.

Galai said, “Since we have so many Israelis who came from Russia, they understand the language and culture and have connections. It is much easier for them to make an investment."

Russia and other former Iron Curtain countries also make for easier and less competitive markets for Israelis to enter compared with the U.S. and European markets.

Moshe Meydan, CEO of the Reuter Maydan Investment House, which manages securities and mutual funds, says he has begun considering helping clients invest in Russia because Russia is likely to offer a good yield on their money.

"We are looking for markets that are cheap relative to their basic value. We think Russia is one of those places," Meydan said. "We are looking to diversify our portfolios in regards to location and considering putting money into markets other than Israel and the United States, and one of those markets is the Russian stock market."

Another plus for Israeli companies: Russia and the former Iron Curtain countries are not too far away. Businessmen need spend only two or three hours on a plane to get from Tel Aviv to Moscow, or to Tashkent or Kiev.

One of Russia’s largest investment groups, ATON, whose 2006 deals amounted to more than £47 billion, recently held a conference in Tel Aviv to attract Israeli capital to the Russian securities market.

"Our reputation as an experienced and reliable partner for years enables us to take a step forward and establish ourselves in new markets," Michael Rozin, the CEO of ATON said. "Israel was chosen as one of the countries with a potential for cooperation, as we see it as a large economic power that could contribute to the Russian economy."

(c) JTA