Moscow has, for the second year running, held on to the dubious title of Europe’s most expensive place for foreign workers, according to the Mercer’s 2011 Cost of Living Survey. On a global scale, Moscow retained the No.4 slot for a second year, having fallen from third place in 2009, following three consecutive years as the world’s most expensive city for expatriates.

The inclusion of some African countries as expatriate destinations in this year’s survey has helped Moscow put some shine on its tarnished reputation as one of the world’s most expensive cities. Luanda in Angola again took the No.1 spot this year, largely due to the high costs associated with security and guaranteeing safe accommodation, the report said. Tokyo remains in second position and Ndjamena in Chad in third place. Moscow is followed further down the rankings by Geneva in fifth place and Osaka in sixth place. Karachi, in 214th place, is ranked as the world’s least expensive city according to the survey.

The cost of rental accommodation is a major component of the expenses that foreign specialists have to contend with in many of world’s most expensive cities, and Moscow is no exception. And the cost of housing – often the biggest expense for expatriates – plays an important part in determining where cities are ranked, Mercer said. “Global mobility is an expensive undertaking for companies and the cost of housing – often the biggest expense for expatriates – plays an important part in determining an expatriate’s overall relocation package,” Mercer Senior Consultant Noel O’Connor said.

During the global economic crisis, many construction projects in Moscow were mothballed, while demand for apartments plummeted as many companies cut back on workers. But with the economy showing strong signs of recovery, real estate developers are back in business with a vengeance. “The cost of apartments will surely go up in the near future,” Yelena Yurgeneva, Head of International Residential Sales, Knight Frank, said. “The job market has recovered and wages are going up. We do expect Russia to attract more foreign experts in the near future and this will ultimately jack up the costs of accommodation in Moscow.”

Moscow has long had notoriety among expatriate workers as a city that always defies the law of physics: when prices go up, they stay up. This phenomenon is reflected in a study released this week by consulting firm ECA International, which found that Moscow is one of the world’s most expensive cities to rent a home. The average rental cost for a two-bedroom apartment in Moscow is $3,500 per month, the study said.

Mercer’s report came at a time when the Kremlin was redoubling efforts to attract more foreign specialists to Russia, a move officials said is vital for the modernization of the Russian economy. President Dmitry Medvedev signed a law in March, which exempts Russian employers from getting special permits to hire highly skilled foreign specialists willing to work at Russia’s higher educational establishments and research institutes. Moscow has also embarked on an ambitious expansion program, which could see up to 40,000 federal officials and their families relocating to the city’s outskirts.

However, despite the fact that foreign specialists now need only confirmation of their status from their employer to receive a three-year work permit, many are still put off by the high cost of living and the country’s spooky investment climate. Federal Migration Service head Konstantin Romodanovsky said earlier this year that only about 20,000 highly-skilled foreign professionals and researchers come to Russia annually, while the Kremlin needs some 46,000 skilled foreigners a year to implement its ambitious modernization plans, especially in the hi-tech hub centered in Skolkovo outside Moscow.

Moscow, which is home to the largest number of billionaires in Europe, has traditionally absorbed the bulk of investment and development in Russia but experts now say that the high cost of living could dampen the urge among businesses to strengthen their foothold in the city. “There are several signs that business’s overwhelming preference for Moscow is coming to an end,” Darrell Stanaford, managing director for CB Richard Ellis in Russia, said in a recent opinion piece for The Moscow Times. “Moscow’s overloaded infrastructure, new authorities with a different set of priorities, and exorbitant costs of living and doing business all are factors that are prompting businesses to explore Russia beyond Moscow,” he said.

While many wonder what ever happened to the dictum that expatriates in Moscow must pay three times as much as permanent residents, others say the answer comes down to the basic laws of supply and demand. “The question is not that foreigners are paying more – the issue is the increase in demand for rental properties leading to a rise in rental prices in places like Moscow,” Yurgeneva said. “The increase in demand for accommodation without a corresponding increase in supply from real estate developers inevitably leads to high rental costs. Most construction projects frozen during the crisis are now at the initial stages of development and the market is not expecting any new apartments within the next six months. So the number of potential tenants will grow and the cost of apartments too, will grow.”

This year’s survey covered 214 cities across five continents and measured the comparative cost of over 200 items in each location, including housing, transport, food, clothing, household goods and entertainment. Mercer claims its research to be the world’s most comprehensive cost of living survey. It is designed to help multinational companies and governments determine compensation allowances for their expatriate employees. It also advises employers on how to retain talented employees by offering competitive compensation packages that are tailored to the needs of the expatriate on the ground. New York, as usual, is used as the base city and all cities are compared against it but Mercer consultants said recent world events, including natural disasters and political upheavals, had impacted the rankings for many regions. 

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