Flush with petrodollars, the Russian state has begun a programme under which hundreds of billions of dollars will be spent on the dilapidated Soviet infrastructure. Well aware of the failings of central planning, the aim is to match public money with private investment in nearly ever sector.
Russia has not touched its infrastructure for more than 15 years – despite the incoming oil revenues, the state has had its hands tied: the budget has been in surplus since 2000, but the government has been trying to spend as little as possible as part of its efforts to control inflation.
All that changed at the start of this year when inflation fell to single digits for the first time in modern history. With the battle against inflation won and more than $100bn in the stabilisation fund – a special off-budget fund into which excess oil revenue is siphoned – the Kremlin finally decided it could loosen the purse strings and begin the job of rebuilding Russia’s crumbling infrastructure.
According to Russia’s ministry of economic development and trade, state investment will grow from Rbs505.4bn ($19.4bn) in 2006 to Rbs977.5bn in 2009. State companies will invest even larger sums. Oil transport company Transneft will invest $14bn from 2006 to 2008; Gazprom will invest about $20bn per year from 2007 to 2009; and utilities company UES invested $10bn in 2006 and will invest $29bn in 2009.
However, this is just the state’s contribution. In all, the state is hoping to attract hundreds of billions of dollars into sectors such as power, rail and roads. United Energy Systems (UES) and gas monopolist Gazprom will between them spend upwards of $600bn to rebuild their processing and transport assets by 2030, much of it being financed by foreign investors and borrowing.
The state investment fund, financed from the stabilisation fund, was created last year and started accepting applications for projects at the beginning of this year. Each of the projects has been undertaken in partnership with a private investor, and companies and regions have to raise a significant part of the financing before they can apply to the state investment fund commission for the rest of the money needed to complete a project.
The Kremlin is also trying to involve professional managers and commercial interests wherever it can to ensure efficient, profit-motivated management of all these projects.
“We are in contact with the Russian government development agencies to see how we can help add value by bringing in the lessons learned from our international experience of PPP and work with other banks, such as the European Bank for Reconstruction and Development (EBRD) and other commercial banks, to assist the process,” says Mr Leatherdale. “What is key in these countries is being able to hedge the interest rate risk over the long term. If this ability is questionable, there is a natural constraint about the maturity you can get for this type of financing, which undermines one of the benefits that PPP deals present: matching the long-term financing with the long-term nature of the underlying assets. You can’t do this if the capital markets are relatively immature; you can’t hedge the interest rates for the life of the loan.”
Moreover, playing against Russia are fears of the renationalisation of the oil and gas sector following the high profile bankruptcy of Yukos oil company. On the other hand, the state has also been going out of its way to bring in foreign investors to the big projects, albeit offering less than blocking stakes.
The sale of 20% of Lukoil to American oil producer ConocoPhillips created the template for foreign investors in strategic sectors. The deal was personally brokered by Russian president Vladimir Putin rather than Lukoil’s CEO, Vagit Alekperov; and ConocoPhillips promised not to buy more than 20% of the company.
More recently, the state has been offering foreign strategic investors a minority stake in the massive Shtokman gas field, but negotiations have proven difficult because the Kremlin is asking for reciprocal stakes in foreign companies’ downstream assets and access to their home markets.
Between these two extreme examples lies the power sector. Since November 2006, UES has been auctioning off shares in the newly created power generating and transmission companies in an effort to raise investment to create more energy for the domestic economy. UES CEO Anatoly Chubais says he is willing to sell majority stakes in these state-owned companies – whatever is needed to raise the finance to build new capacity and get it to market. And the offer has been well received by investors.
UES invested $2bn in 2005, before the privatisations began adding to the coffer. Investments increased to $6bn after UES received this much from sell offs – $2bn more than it was expecting to raise. “This year we are planning to invest $20bn, but I am very confident that we will now actually raise $26bn,” said Mr Chubais during EBRD’s annual meeting in May.
An impoverished basket case economy only six years ago, Russia is rising and confident again. Foreign investors are welcome but the conditions under which they can participate have become worse in some cases.
Chris Weafer, head of strategy at Alfa Bank, says the rules have become fairly clear for foreign investors. “Foreign strategic investors are allowed to invest in strategically important companies or projects, but only up to a maximum of 49%. For more sensitive companies and projects in strategic sectors, that limit is reduced to a maximum of 25%,” he says.
