Almost three years after Vladimir Putin launched his assault on neighbouring Ukraine, the Russian construction industry has failed to adapt to the new market realities and is one of the sectors most affected by the ever-tightening sanctions pressure on Russia by western countries.
At the end of last year the industry received a major blow then the Russian central bank decided to increase the interest base rate to 21%, a record figure in the modern history of Russia. The aim was to hold back rapidly increasing inflation caused by the booming military-industrial complex and skyrocketing military costs.
The massive increase in interest rates led to a deepening crisis in the Russian construction industry with the biggest casualty being large-scale residential construction, a market segment that historically has accounted for the bulk of the state鈥檚 construction activities.
One of the major signs of the deepening crisis has been a huge slump in mortgage applications. Last year, the level of mortgage applications dropped by 35% and was down by 80% in November-December 2024 on a year-on-year basis. This in turn has led to a widespread suspension of primarily residential new-build projects.
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In July 2024 the Russian government decided to cancel two large-scale preferential mortgage programmes which awarded loans to millions of people at favourable rates: mortgages for housing under construction at 8% and family mortgages at 6%.
These mortgage deals had been launched to support the real estate market during the depths of the covid-19 pandemic but ultimately proved hugely popular with home-buyers and were repeatedly extended. Eventually it created a property bubble which saw house prices double.
Last year鈥檚 interest rate increase pushed mortgage rates up to more than 23% at most of Russian banks, making real estate purchases senseless for most of ordinary people.
According to recent predictions by analysts at the Russian state-owned mortgage lender Dom.RF, the volume of new residential construction projects in Russia will decrease significantly this year, from 48 million square metres to less than 35 million square meters 鈥� a drop of 38%.
The Russian property website Sravny.ru 鈥� a kind of Russian Zoopla 鈥� reported that around 66% of Russians have already decided to postpone the purchase of a new home. Despite this, most local developers have no plans to reduce prices for their housing projects, mainly due to record inflation which topped 35% in 2024.
Instead, many developers are considering refitting at least part of their commissioned volume and turning them into commercial developments. Planning laws are more flexible in Russia than in most of Western Europe.
Svetlana Razvorotneva, a member of the State Duma (the Russian parliament) hopes that the cost of housing in Russia will decrease as developers are forced to sell off a huge amount of unclaimed apartments. And she points out that, according to the latest statistics, 70% of Russian new-build housing failed to sell in 2024.
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鈥淎 similar crisis was observed in China at the beginning of the 2010s, when mass housing construction in the country led to the accumulated stock of up to 80 million unsold apartments and houses in many cities across the country,鈥� says Razvorotneva. 鈥淭hat led to defaults of several major local developers, such as Fantasia Holdings, Sino-Ocean, Evergrande Group and Sinic and a sharp drop of prices.鈥�
Volume house-building is currently active only in a few isolated regions of Russia, like the north-west, where the average income is as much as twice that in the rest of Russia. House-building is also continuing in specific areas where people such as the military and residents of the occupied Ukrainian territories of Kharkiv, Donetsk and Luhansk can still use preferential mortgages.
But elsewhere demand remains low because of high prices 鈥� even in the city of Belgorod, close to the Ukranian border, and the Kursk region which is currently occupied by Ukrainian forces.
President Vladimir Putin鈥檚 priority for the past three years has been to push ahead with his war against Ukraine. And when it comes to building and construction, his focus remains on the so-called 鈥渘ew territories鈥� 鈥� the land he seized from Ukraine in 2014.
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According to recent statements by Russian deputy prime minister Marat Khusnullin (who is also responsible for the development of the construction sector in the Russian government) there are currently plans to build up to three million square metres of new housing in the regions of Donetsk, Luhansk, Kherson and Zaporizhzhia.
"Now we are pursuing a strict policy to accelerate housing construction in the former Ukrainian territories. We are identifying free land plots, communication opportunities and making urban plans,鈥� says Khusnullin.
Construction of housing and associated infrastructure in the occupied territories is the largest and the most important development project for Russia today, he adds.
This confirms statements made by Russia鈥檚 construction minister Irek Faizullin during the St. Petersburg International Economic Forum in June 2024.
He said: "A programme for the socio-economic development of the new regions has been prepared 鈥� these are Donetsk, Luhansk, Kherson, Zaporizhzhia regions. Each region has been examined today in terms of opportunities provided by the urban development situation and the security situation. About six million people live in the new regions, that is, in total, about four million square meters of housing need to be built by 2030鈥�.听
As well as new-build schemes, an enormous volume of restoration work is now needed to replace infrastructure destroyed during the war. "No one has invested in the construction of infrastructure and housing in these territories since the collapse of the USSR in 1991,鈥� claimed Faizullin. 鈥淪o for 30 years they have only plugged the holes. There are facilities where the elevator has not worked for ten years. Now we are planning to restore all this.鈥�
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Faced with these ambitious plans to rebuild territory seized from Ukraine, Russia鈥檚 beleaguered construction sector is having to look outside its borders for materials and expertise. China is quietly bolstering Russia鈥檚 war economy by buying its oil and gas and providing high-tech manufacturing equipment and North Korea has supplied cannon-fodder to resist Ukrainian incursion in the Kursk region. But for construction materials and services, and despite extensive sanctions, Russia is 鈥� perhaps surprisingly 鈥� looking for help from western suppliers.
Despite the harsh sanctions imposed by Western nations including the UK, US and European Union, the Kiev School of Economics estimates that only around 10% of the Western-owned business operating in Russia have exited the country following the 2022 invasion of Ukraine.
For many western businesses, any continued trade with Russia has been unthinkable. BP pulled out just three days after the outbreak of hostilities; BMW halted Russian production and imports a few weeks later, and Heineken sold its Russian business to a local packaging firm in 2023 for 鈧�1, taking a 鈧�300m hit as a result.
JCB also announced that it had halted all exports to Russia in March 2022, although an investigation by the Guardian newspaper last year found evidence in Russian customs documents that suggested that JCB products were still available well after that date.
Boycotting Russia might be the moral thing to do but the cost of shutting up shop and leaving Russia can be very high, as Heineken discovered. Many prefer to risk a bit of reputation damage and keep trading, citing contractual commitments and loyalty to the local workforce. But it is difficult to justify ongoing trade with Russia when that involves business that directly supports Putin鈥檚 hostile war aims.
In spring last year an investigative team from German TV channel ARD revealed the involvement of several German companies, including Knauf and brickmaker WKB Systems, in Russian construction projects in occupied Mariupol.
The city, the second largest in the Donetsk Oblast, has been under the control of Russia since May 2022, and is strategically vital to ensuring land access to the Crimean peninsula.
The ARD investigation found that cement and plaster from Knauf were used on many construction sites in the city. And while Knauf denied all allegations of involvement in the occupied Ukrainian territories, it was ultimately forced to quit Russia after 30 years and cede ownership of its huge Russian business to its former management.
In August 2024 Knauf said it was still negotiating with the Russian government about the conditions of its departure.
Knauf was historically a very important player in the Russian construction market and operated 20 plants throughout the country. In its official statements, Knauf said that its departure from Russia was made necessary by 鈥渢he current state of affairs鈥� but it did not rule out a return one day, citing the need to safeguard more than 4,000 jobs at its Russian plants.
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Another western company, Austrian brick manufacturer Wienerberger, has also had a very strong presence in Russia. Its two Russian factories have a combined annual production capacity of around 450 million bricks 鈥� equivalent to a month鈥檚 output of the entire Russian brick industry.
In March 2024, Wienerberger sold its factories to local companies at a price which, according to some Russian analysts, was roughly half their real market value: about 鈧�45m.
Not surprisingly, many Western business prefer to continue their operations in the Russian market. Since the invasion of Ukraine in 2022 the Russian government has made it increasingly complicated for foreign businesses to disentangle themselves, for example by introducing new requirements to obtain special state permissions for the sale of their local business and assets, even at half price.听
Still, the Russian construction sector and local companies have traditionally been heavily dependent on western partners and their technologies. Most of the construction equipment and machinery used on Russian construction sites are traditionally of western origin.
Currently many Russian construction companies and local producers of construction materials continue to experience serious problems associated with the end of cooperation with their former western partners.
Lenar Abdullin, head of ASPK, one of Russia鈥檚 largest brick producers, says his company invested heavily during the 2000s to build new production lines at its factory in the Tatarstan Republic. The factory, and most of its equipment were supplied by western companies including Keller and Siemens. Today, ASPK finds it almost impossible to maintain its production equipment, says Abdullin:
鈥淭he Germans don鈥檛 communicate at all. Although we had good partnerships for 15 years, they ended suddenly. It is clear that this is a political decision. The service of all foreign equipment is put on the shoulders of our plant employees. We have already replaced many components and software. And we will continue to move in this direction. There is no other option for us at present鈥�.
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