Russia starts to get to grips with infrastructure funding
In an exclusive article for InvestmentEurope, Gary Litman, Vice President, International Strategic Initiatives, at the US Chamber of Commerce, assesses how Russia is addressing its infrastructure challenges
All 11 times zones of the Russian Federation are alive with economic ambition that primarily manifests itself as hunger for infrastructure development.
Over the last couple years, the markets have registered substantial growth in Russia’s infrastructure build-out. According to Rosstat, infrastructure investment last year was RUB 4 trillion ( about $130bn), or 7.3% of GDP, up 26% from 2011.
Morgan Stanley analysts note this was the highest level since the end of the Soviet Union, driven by a surge in Gazprom investment, as it completed two major projects (Nord Stream and Bovanenko).
Since the peak of the crisis, infrastructure has been accounting for one third of Russia’s fixed asset investment, which should have provided a substantial stimulus to the economy. Morgan Stanley forecasts the current level of infrastructure investment (over 7% of GDP) will continue to 2018.
As a stimulus, Russia’s financing of shovel-ready projects may be on a par with the rest of the world but the projects’ potential to substantially modernize the economy is debatable.
Russia, spanning almost half the Northern Hemisphere, has a special, sometimes tragic, relationship with infrastructure investment. In the newly popular Anna Karenina, Tolstoy’s alter ego Levin complains: “…in our unsettled condition of the land, railways, called into being by political and not by economic needs, were premature”.
This nation still sees its own roads as obstacles to overcome, rather than the stitches that hold the market fabric together. At the start of 2012, the total length of the transportation system was 86,000km of common use railways, 38,000km of industrial use railways, 903,000km of public roads, 101,000km of internal water routes, 485km of underground and 639kkm of air routes.
The share of transport costs in total finished product costs is now at 20-25% percent, which is 2.5-3 times higher than for developed countries.
The Government’s own Transport Development Strategy recognizes the need to spend over $664bn on the development of transport infrastructure up to 2020, in order to move Russia up in the global ranking of competitiveness.
While ministries pile up plans and stats that may inspire awe or skepticism, personal observations speak volumes and give ground for optimism.
At a recent exhibition of architectural projects from across the Russian Federation, it was exciting to see dozens of new and revived Russian publishers of all sorts of architectural and construction magazines vie for the attention of young developers and architects from over 20 regions. None of the publishers was a state-owned behemoth. Clearly they feel their market expanding, both in volume and the sophistication of demand.
The increasingly frequent roadshows by Russia’s18 special economic zones present a very sophisticated understanding of both Russian capacity to absorb investment and its appeal to international investors.
In a January update, the Special Economic Zones management company reported over $12.8bn of committed private investment. It is now working out a detailed plan for presenting each of the zones to potential American partners.
Even US politicians have responded to this new Russian approach. On March 18, the US Department of Commerce and the Russian Ministry of Economic Development agreed to an action plan that will let Russian infrastructure projects benefit from the political cache in a series of presentations of large investment projects across the United States.
In a step toward higher relevance to global investors, Russians offered their own side show at the March 2013 Infrastructure Summit in Berlin. The Russian Direct Investment Fund (RDIF) hosted a meeting of major asset managers, funds, multilateral development banks and institutional investors on global investment challenges in infrastructure.
RDIF’s no-nonsense CEO Kirill Dmitriev personally chaired the meeting because Russia hosts this year’s G20, and Russian business has taken it upon itself to help global private sector players interact with G20 policy-makers.
In addition to the practitioners of infrastructure investment, the meeting included the largest business federations of US, Turkey, Germany and France, keen to influence the policy messages passed to G20 policy makers as they reshape capital markets and try to rebalance growth between the high debt, crisis stricken mature markets and high-saving, emerging export-driven markets.
In Berlin, Russian players treated as respected equals were keenly interested in grasping the challenges of everyone else around the table, from Australian superannuation funds to European green infrastructure equity firms.
RDIF, around for slightly over a year, has already made possible investments of over $2bn in Russian companies, of which its own stake is $480m. It has struck a deal with the China Investment Corporation for a new investment fund with a billion dollars from each side to underwrite projects to further boost trade between the two neighbors.