Russia: if this is autumn, how bad will winter be?
Last Updated: November 10, 2015
It's an illusion. Apartment prices, in nominal terms, rose by 2.86% during the year to Q2 2015, but when adjusted for inflation the price index for resale apartments plunged by 11.19%, according to the Federal State Statistics Service (Rosstat).
In Moscow, inflation-adjusted apartment prices fell by 6.78% y-o-y to Q2 2015.
In St. Petersburg, inflation-adjusted apartment prices fell 10.33% y-o-y to Q2 2015.
Russian house prices have been falling for nearly two years. And this is likely just the beginning.
"As you can see, growth is very weak," said Paul Lutsenko, Mir Kvartir’s director general. "The secondary market has been killed with the disappearance of the mortgage market, which took place late last year."
Even in nominal terms, there were price declines in all except six out of 51 Russian cities during the third quarter of 2015, according to the portal Mir Kvartir, the exceptions being Moscow (up 2.3% in nominal, i.e., non-inflation adjusted terms), Tula (1.9%), Sochi (1.5%), Kostroma (0.5%), Astrakhan (1.3%), and Ryazan (0.2%).
Yields poor in Moscow, good for very small apartments in St. Petersburg
An apartment in an elite neighborhood in Moscow costs on average EUR 10,000 to EUR 14,500 per sq. m. If you have a million Euros, you can only buy a small apartment. A 75 sq.m. apartment costs on average EUR 750,000 or EUR 10,000 per sq.m.
Monthly rents per sq.m. in Moscow range from EUR 32 to EUR 41. This means that a 120 sq.m. apartment can be rented out for around EUR 3,800 per month.
In St. Petersburg, prices per sq.m. of apartments range from EUR 3,860 to EUR 6,600. This means that a 120 sq. m. apartment costs on average EUR 590,000 or EUR 4,900 per sq. m.
Monthly rents per sq. m. in St. Petersburg range from EUR 18 to EUR 20. This means that a 120 sq.m. apartment can be rented out for around EUR 2,100 per month.
Gross rental yields from apartments if fully rented range from 3.07% to 3.82% in Moscow, while in St. Petersburg, rental yields range from 3.46% to 6.20%.
Round trip transaction costs can be very high for foreigners buying residential property in Russia. See our Russia residential property transaction costs analysis Italy residential property transaction costs analysis and our Residential property transaction costs in Russia compared to other countries.
High, flat taxes for non-residents
Rental Income: Rental income for nonresidents is taxed at the flat rate of 30%.
The rental income of foreign legal entities without a permanent establishment in Russia is subject to withholding tax, levied on gross rentals at 20%.
Effective Tax Rate on Rental Income
|Click here to see a worked example|
|Source: PWC Disclaimer|
Capital Gains: Capital gainsrealized by nonresidents for selling Russian property are taxed at a flat rate of 30%.
Effective Tax Rate on Capital Gains
|Property Value||€25,000||€2 million|
|Click here to see a worked example|
|Source: PWC Disclaimer|
Inheritance:There are no inheritance taxes in Russia.Residents: Residents are taxed on their worldwide income at a flat rate of 13%.
Buying costs in Russia are among the highest in Europe
According to Global Property Guide research, total roundtrip costs are between 20% and 25.5% of the property value, among the highest in Europe. Bulk of the cost goes to VAT at 18%. Brokerage fees amount to 2% for properties more than US$2 million, otherwise the fee is 5%. The buyer should be cautious when buying unfinished units.
Pro-tenant rental market in Russia
Russia’s rental market is pro-tenant.
Rents: Rent is by agreement between the parties. However, rents can only be adjusted after one year.
Tenant Security: The tenant can only be evicted after non-payment of rent for six months. However, the tenant is given up to a year to amend the violation. The tenant can also cancel the contract anytime simply by giving a three months’ notice.
Gloomy economic outlook at end of 2015The country’s economic outlook in 2015 has been downgraded to a 3.3% contraction, from a 2.8% decline predicted earlier this year, according to Russia’s Economy Minister Aleksei Ulyukayev. The Ministry of Economic Development expects a positive outlook in 2016 with a 1% to 2% growth, although this too was a downgrade from an earlier forecast of 2.3%. The announcement of an outlook downgrade happened a day after crude oil prices, Russia’s main export, hit its six-year low in August 2015.
The economy is believed to already have reached its bottom, but is still delicate, according to Minister Ulyukayev. "I think that we won't go further downward, but whether we will achieve significant growth is difficult to say".
In September 2015, both the IMF and the World Bank also downgraded their economic forecasts for Russia in 2015 and 2016. Both institutions expect a 3.8% decline on Russian economy in 2015, and a 0.6% GDP drop in 2016.
As of October 30, Brent crude, the global benchmark for crude oil prices, was trading at US$ 48.3 per barrel. The US benchmark West Texas Intermediate started trading at US$ 46.02 per barrel during the same period.
"If the price falls below $40 per barrel, then we, most likely, would be faced with a production decline," according to Deputy Energy Minister Alexei Teksler. "With a price of $40-$45 per barrel, the companies will revise their models, if the low price persists long term," Teksler added.
Aside from plunging energy prices, the economic sanctions imposed on Russia by the international community were another factor in the country’s currently ailing economy. The European Union and the United States lead other countries and international organizations in imposing economic sanctions to Russia in response to the latter’s annexation of Crimea in early 2014. The sanctions imposed on Russian individuals, companies, and officials played a role in the collapse of the ruble which eventually led to a financial crisis.
In June 2015, the European Union extended its economic sanctions until January 31, 2016. “This follows an agreement at the European Council in March 2015, when EU leaders linked the duration of these sanctions to the complete implementation of the Minsk agreements, which is foreseen by 31 December 2015,” noted to a press release from the European Council. Later on, the supposed deadline of January 2016 was moved further to March 2016, aiming to put pressure on Moscow to accomplish the Minsk ceasefire agreement. In July 2015, the US imposed additional sanctions on Russia, adding 11 individuals and 15 companies on the sanctions list.
The ruble's decline was partly due to policy initiated in late 2013 by the central bank allowing the currency to fall in hopes that an anticipated major currency devaluation would boost exports.
In September 2015, the depreciation of the ruble continued with a depreciation of around 2% with respect to US dollar. It was rather moderate as compared to the previous month’s 2.3% fall, as the ruble hit a seven-month low, trading at around 70 rubles to a dollar. According to the World Bank, the increased pressure on the ruble and other emerging market’s currency in September was due to the uncertainty on the US Federal Reserve decision on interest rates.
The collapse of the ruble in 2014 has prompted the Central Bank of Russia to intervene by using its foreign currency reserves in order to sustain the ruble. Russia, which had the sixth highest total reserves in the world amounting to around US$ 400 billion, spent almost US$ 2 billion worth of reserves in December 2014.
In September 2015, Russia’s unemployment reached 5.2%, its lowest rate this year, according to Rosstat. The unemployment rate is still lower than the EU’s average unemployment rate of just below 10%.