By Simon Pirani
Massive funding will be needed to fulfil Russia’s ambitions for its creaking infrastructure. But resources are limited
The success of Russia’s multi-billion-dollar infrastructure renewal programme will depend largely on how private investors respond to the state’s invitation to join in funding it.
The programme is being driven from the top. President Vladimir Putin said last year that $1,000 billion needs to be invested over the next 10 years. Without investment on that scale, Russia’s dilapidated transport networks, overloaded power grid and aging housing stock will put the brakes on economic expansion, ministers acknowledge.
The private sector agrees on the need to act. Eduard Faritov, analyst at Renaissance Capital, and author of a recent survey of infrastructure, says the depreciation of Russia’s fixed assets is “unsustainable”.
Russia’s road capacity per person is one-seventh of Canada’s, he points out, and only 40% of the roads meet government standards. Of the 1,302 airports operational in 1992, only 351 work today. Current energy generating capacity struggles to meet peak demand for electrical power.
Finance minister Aleksei Kudrin has estimated that investment in fixed assets, already up to $168 billion in 2006, can rise to $370 billion in 2010. The real question is what finance can be raised in tandem with these sums, and in what form it will be provided.
Ministries, Vneshekonombank (now reorganized as the Russian Development Bank) and the government’s Investment Fund, an onshore budget-backed fund devoted to infrastructure, are seeking partnership deals with corporate Russia on the one side and international investors on the other. The transport ministry is pushing ahead with its first public-private partnership project, the western High Speed Diameter Road project near Petersburg. The winner of the concession is expected to be announced this month.
Tendering procedures are underway for several other projects, notably an expansion of the Moscow–St Petersburg highway, the Odintsovo bypass near Moscow and the Orlovsky tunnel. The Nadex light railway and the Pulkovo airport expansion, both in St Petersburg, are seeking funding.
There are four obvious sources of finance to partner the Russian state institutions: the multilaterals, including the EBRD; the foreign project finance banks; the Russian commercial banks (with three dominant players, i.e. Sberbank, Gazprombank and VTB); and bond financing.
To bring in foreign project financiers, bankers believe that two main problems have to be solved: currency (it’s difficult for them to lend in rubles) and tenor (they cannot lend in Russia for 30 years, the length of the road project concessions). Steve Thunem, the newly-appointed head of global markets at VTB-Europe, whose team will play a key role in bringing Russian infrastructure projects to the markets, says: “There is no question that, for larger transactions, there will have to be a significant ruble component.
Where to go
“There’s a restricted pool of large ruble players, and they will have to be involved. We’ll also be looking at accessing the ruble bond market and will need to raise funds in the western markets. We will use swap markets, and hope to get financing out to 10 to 15 years. There will be some refinancing risk exposure: most of the PPP concessions will be for 30 years. But that’s not unusual.”
VTB-Europe has a team of 60 bankers working on loans (including structuring complex transactions in areas such as infrastructure and project finance transactions; acquisition and leveraged finance; and real estate finance) and the syndication of loans made by VTB to customers in Russia. It hopes to expand the team to 200.
Western bankers who know Russia well say the infrastructure boom will in many respects be the country’s biggest challenge yet. Steven Fisher, corporate bank head (Russia and CIS) at Citi, believes that the infrastructure projects will need a combination of long-term loans from the state institutions, some form of state guarantees, and project bonds issued on the western markets, which would have to be hedged. “Most of the projects are purely ruble-based, and no one has the rubles in such quantity,” he points out.
Michel Perhirin, CEO of MDM Bank, tells Emerging Markets: “Very large projects – that I regarded as unrealizable or unrealistic, when invited to participate – have in most cases always got done in Russia, in the end! I’ve always been surprised at the ambition and magnitude of projects here, and amazed to see them completed eventually.”
Perhirin points to the astonishing success of power-sector restructuring – where the state monopoly, United Energy Systems, will cease to exist next month [June] and be replaced by successor companies it has created, which have attracted big strategic investors.