Sergei Kuchikhin: The Central Bank’s policy doesn’t promote the construction industry’s development
The President of “Stroymash - Vibropress” and the Vice-President of the Russian Constructors’ Union, Sergei Kuchikhin, answers questions from the magazine “Construction.ru”.
— Mr. Kuchikhin, 2015 is going to be a very uneasy year. How much, do you think, will construction volumes decrease?
— We are still a primary production country. When the prices for energy supplies fell, the volume of investments inside the country decreased. It’s regrettable, as the less investment, the less construction. We are promised that in three years we shall overcome everything, but what will remain of the population’s buying capacity? This is the main criterion of housing availability.
How much more expensive is the water in the river?
— Let’s consider a typical family: a husband, a wife, and their child. To buy or to improve their dwelling, the family must have a monthly income of 3,000 dollars. A maximum 40% of this sum may be saved for a future dwelling purchase. How many families can afford such a budget? With the current buying capacity of the population, the average index of a dwelling price is about 26-30 thousand rubles for a square meter: with such figures, people would be interested in buying a place. But the cost is only growing…
Besides, about a third of the price of a square meter is accounted for by different kinds of bureaucracy: all kinds of restrictive technical specifications which energy, gas and heat suppliers place on developers, who in their turn shift them on customers. But if we consider the energy industry… In Russia it was built by our fathers and grandfathers, and for the last 20 years little has changed from the point of view of its potential power. What, water in the river that rotates a turbine has become more expensive? No. But energy suppliers, through different facilitating agencies, annually raise prices by 15-20%. Who ever heard of such a thing? If monopolists, earning billions from this, continue doing their own private business and the rest of the country doesn’t prevent them from doing this but actually encourages them – we won’t achieve any progress in the sphere of production in general and construction in particular. It is a crucial point.
There is a common formula for any production: if somebody receives 100% or more profit on raw materials, the rest of the chain loses its head.
— What must profitability be?
— For any production, profitability must constitute 15%, maximum 20%, of its primary materials cost. And the state is to control it. We saw that a month ago President Putin, by his own resolution, restored about 500 abolished regional timetabled trains. When pricing specialists started studying this, it turned out that during the last 5 years, prices for track exploitation have grown 25-fold. But tell me, did JSC “RZD” (Russian Railways) lay the tracks? No, it was the state. And in this case, the railway company simply collects money from poor passengers. This is monopolization as it stands. And if control is not organized properly, a crisis in the country is inevitable.
The same monopolization of all spheres (raw materials, finance, production etc.) last century led to the Great Depression in the USA. And only due to the strong will of president Franklin Delano Roosevelt and the people’s support, did they manage to overcome the monopolies. We should do the same. One won’t achieve progress without overcoming a dragon.
World champions in loan rates
— Recently the Government adopted an Anti-crisis Plan, which includes dwelling construction and utilities support. And a bit later, the Minister of Construction and Utilities, Mikhail Menn, promised the Head of the “Morton” Group of Companies, Alexander Ruchiev, that he would organize construction business credit provision by 9% in exchange for their taking part in projects in the sphere of utilities engineering. Will it help to stimulate the construction and utilities industries?
— 9% is, of course, very important. But from our previous experience we know that the construction industry, for our banks, is almost the last area in which they grant loans. So it won’t be easy to overcome this situation. And if our highly respected Minister manages it, all honor to him. But it must be done not for “Morton” but for the whole country, and especially for small real estate developers. But large-sized developers, being monopolists of land properties (I’m again talking about the above-mentioned monopolization), boost prices to get more profit.
— As far as primary anti-crisis measures are concerned, the state programs and mortgage loans support are being stressed. As the Minister of Construction remarked, the construction industry and new projects will get support together with requirement stabilizing through the mortgage loans market. Do you approve?
— The whole world has worked with mortgage loans for a long time. But the mortgage loans we have now are nonsense: 17%, 18%and even 13% annual rates are unreal. All over the world the mortgage loan rate is 3—6%, or even lower. If we had such rates, everything would be all right.
But now we should speak about the buying power of the population as it is. Mortgage loans themselves of course will help a lot, but won’t solve the problem. Well-paid working positions are needed, not only in base material sectors, but in the engineering industry, in ship-building, in electronics, in highly productive agriculture etc. If we create these working positions (our President has spoken of the necessity to create 25 million new working positions), all the others will rise.
It is necessary to create the production conditions which will open up working positions. These are quite obvious: low prices for raw materials, energy supplies etc. To move ahead, it is necessary to lower the prices by 20% as compared with last year. I stress: to lower, not to raise! And it won’t be very painful for the economy. Only one purse may suffer – that of the people who have monopolized the energy industry: their multibillion gains (profits) will go down a lot, but still they will have enough. But the economy of the country as a whole will thrive.
— But, for it to rise, production must be given loans at good rates…
— Right. The rates must be 3—5%, as all over the world. A very important factor is project credit granting. The Russian Constructors Union, and your humble narrator as its Vice-President, has been speaking about it at all levels for the last 6-7 years. As a specialist in construction materials production (armored concrete, brick, heat insulation), together with potentially interested people, I have constantly struggled for preferential loans for these.
— You know, the one who has money as a rule doesn’t want to invest in the establishment of new productions (enterprises) – he will be busy with the aforementioned monopolies (that is, price raising), why should he create something new? The policy of the Central Bank can be expressed in a formula - “I’ll give you a million, if you have two” - and it is wrong and utopian. All over the world, businessmen build plants with little money but a well-laid-out business plan, with which he attracts money. As a rule, he gets money in steps: not 50% at once, but 2%, 5%, 10%. On reporting the project, defending it and launching a line, he will get another part of it. And in the process of production, he is not crippled by the rate. Plant construction in the West takes 1.5–2 years. And if I borrow money from a Russian bank at a preferential 15% rate, I must pay this 15% back every month and then the main body of the loan. And where shall I as a businessman get this money?
And the Central Bank says: “We have no right to grant preferential loans to commercial organizations, only state organizations”. But a commercial enterprise has traditionally been considered as one organized on the principle, “buy, sell”. If somebody sells vodka or some other goods, he is not very much interested in the lending rate. The main thing for him is to get money quickly. All the Central Bank’s loan policy is based on servicing such businessmen. But they do not work for the production progress. And we are speaking about a producer who has land, and houses are being built or are already built. It’s he who must be granted loans. Of course, he must be controlled, but given money!
For him to build up a plant and to launch new production, we must reduce this monopoly and increase competition on the market.
If we do not solve this problem, we won’t solve anything. There will neither be construction volume growth, nor planned terms of rehousing. Both the buying capacity of the population and production volumes are now being reduced. During the coming 2-3 months we may lose 20-30% of existing jobs, in construction as well. What will millions of unemployed people of productive age do? Well, if they are lucky they will get severance and holiday pay, and what next? That’s what we must think about today.
A reader’s question: Kirill from Yaroslavl asks where the constituent parts of your technological lines are produced.
— I want to tell Kirill that it is in the Yaroslavl region that our enterprises (including our holdings) have already built and are currently building 7 plants. One of the basic principles of our holdings is that we take foreign technologies (they are more road-tested) and implement them in Russia, taking into account our particularities. It is beneficial to buy some elements abroad (hydraulic, electronic systems, high-precision mechanics), and to produce the main parts here. Cooperation like that.
We can produce everything in Russia, but the problem is the unpredictability of our pricing policy in the spheres of raw materials, energy etc. We had such a practice in 2005-2007 when Russian metal was 10-15% more expensive than on the Royal Exchange and it was unprofitable to buy it. Meanwhile, our metal producers exported 60% of their output. And foreign customers got better metal for lower prices and we got worse ones that were more expensive.
— Our traditional question: if you have spare time, how do you usually spend it?
— I’m fond of the arts, like classical music. I like travelling. Sport is among my hobbies: I go in for swimming and diving.