gazprombank - russian infrastructure - research
TRANSCRIPT
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Research Department Copyright 2003-2015.Gazprombank (Joint Stock Company)
1
Russian InfrastructureMikhail Ganelin
+7 (495) 983 18 00 (ext. 54583)[email protected]
Yakov Yakovlev
+7 (495) 988 24 92 (ext. 22492)[email protected]
Matvey Tayts+7 (495) 980 43 89 (ext. 54389)[email protected]
To build or not to build
that is the question
Low oil prices and a fall in budget revenues have forced the government
to reduce spending on infrastructure, though this is partially
compensated by recovery of the accumulated pension system and money
from the National Wealth Fund. Meanwhile, changes to laws on
concessions and the securities market heighten the attractiveness of the
sector for private investors. In this report, we analyze how the volume and
structure of investment in infrastructure will change by 2020. We focus in
particular on Chinas policy relating to investment in assets of foreigncountries, including Russia.
Reduction of infrastructure investment... In 2015, investments will be cut
by 10-15% of the scheduled volume due to a decrease in budget spending,
while about RUB 11 trln will be spent on transport and energy infrastructure
(RUB 2.2 trln or $40 bln on average) until 2020, in line with investments made
over the past five years. However, investments will contract in real terms
depending on the inflation rate and their proportion in GDP wi ll decrease from
3.5% to 2.5%. The energy sector will see the steepest decline (-37%),
followed by airport and port infrastructure (12% and 45%, respectively). Road
development will account for half of investments, but their growth will not
exceed the inflation rate. The priority will be on projects associated with the
World Football Championship in 2018, the Moscow-St. Petersburg Highway,and the Central Ring Road. Investments in railway infrastructure are
stagnating and the greatest growth in investments will go toward expansion of
the subway system.
while the proportion of off-budget investments will be on the rise.
Pension savings will become a large source of financing for infrastructure
projects. This is the main internal source of long money, i.e. over RUB 300 bln
per year amid restricted access to external markets. An additional source will be
NWF (up to RUB 1.7 trln on infrastructure), which will help to complete on
schedule a number of projects in progress. Amendments that have been
passed concerning laws on the securities market, on joint stock companies and
on concessions aim to expand the ability to draw investments into infrastructure
and lower risks for investors, who maintain a keen interest in high-yield projects,especially road concessions and airports. The scope of infrastructure bonds is
set to increase dramatically, perhaps exceeding RUB 1.5 trln by 2020.
Cooperation between Russia and China in the development of
infrastructure is strengthening. Over the past 10 years, the volume of
Chinese investment in foreign assets rose from $19 bln to $150 bln per year. In
2014, direct Chinese investment in Russia doubled according to CBR estimates
to $1.3 bln, with a goal of increasing this figure to $20 bln. This is being
facilitated by the project envisioned by China entitled the Silk Road Economic
Belt, which proposes active cooperation in growth and integration between
neighboring countries, including through Chinese financial resources under the
auspices of the Asian Infrastructure Investment Bank (AIIB), in which Russia is
participating as a founding member.
Investment in infrastructure, RUB bln
Source: Federal Special-Purpose Program,Gazprombank estimates
Infrastructure investment breakdown
Source: Finance Ministry, CBR, Gazprombank estimates
Pension savings dynamic, RUB bln
Source: Finance Ministry, CBR, Gazprombank estimates
Top 15 country-recipients of Chinese directinvestment
Source: Heritage Foundation
0 500 1,000 1,500 2,000 2,500 3,000 3,500
PORTS
AIRPORTS
METRO
GRIDS
RAILWAYS
GENERATION
FEDERAL ROADS
REGIONAL ROADS
2016-2020 2011-2015
28%
24%14%
12%
9%
8%3% 2%
REGIONAL ROADS FEDERAL ROADSGENERATION RAILWAY INFRASTRUCTUREGRIDS
AIRPORTS PORTS
0%
10%
0
5,000
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
NON-STATE PENSION FUNDSPRIVATE AM
VEB% OF GDP
7261
3931 31
24 24 21 21 20 18 17 17 15 15
01020304050607080
US
AUSTRALIA
CANADA
INDONESIA
BRAZIL
UK
KA
ZAKHSTAN
RUSSIA
NIGERIA
SAU
DIARABIA
V
ENEZUELA
IRAN
PERU
ALGERIA
A
RGENTINA
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CONTENTS
Investment in infrastructure ............................................................................................................................ 3
Investment in Russian infrastructure ................................................................................................................................................................... 4
Railroad infrastructure ................................................................................................................................................................................................ 7
Core investment projects ........................................................................................................................................................................................... 8
Highways ......................................................................................................................................................................................................................... 11
Russias seaports .......................................................................................................................................................................................................... 17
Airports ............................................................................................................................................................................................................................ 23
Sources of financing .......................................................................................................................................... 29
State budget ............. ............. .............. ............. ............ .............. ............. ............. ............. ............. ............. .............. ............. ............. ............. ............. .. 29
NWF.................................................................................................................................................................................................................................... 31
Pension savings ............. ............. ............. ............. ............. ............. ............. ............. .............. ............. ............. ............. ............. ............. ............. ......... 31
Bank loans ....................................................................................................................................................................................................................... 34
Legislative amendments ................................................................................................................................. 35
Chinese investment in foreign assets ......................................................................................................... 37
Chinas investment in Russia .................................................................................................................................................................................. 40
New Silk Road.................................................................................................................................................. 42
Appendix 1: Russian-chinese joint projects ............................................................................................. 46
Appendix 2: List of infrastructure bonds .................................................................................................. 48
Appendix 3: Russias largest public infrastructure companies ......................................................... 50
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INVESTMENT IN INFRASTRUCTURE: BEST TOHEIGHTEN EFFICIENCY DURING A CRISIS
It is well-known fact that an increase in government spending to develop infrastructure is
a good instrument with which to fight recession, as it facilitates a multiplication effect
within the economy. Companies from various sectors become involved in construction,
which leads to the creation of new jobs, while growth in employment helps support
consumption. However, in Russias current economic conditions, the multiplication effect
from such investment will be minimal, as the country continues to enjoy a low level of
unemployment (5.8%), while the cost of capital is high. This means that there are no
resources for new jobs, and companies will use a significant part of their income to
service current debt rather than make new investments. On the other hand, given the
current economic downturn, a decision to reduce public investment would exert further
pressure on the economy and thus may be unacceptable.
Consequently, we believe that the best solution is to maintain public investment on alevel seen over the several past years until interest rates decline to a comfortable level
and the economy resumes growth. However, during the current period of high interest
rates and marginal private activity, the government should focus on expansion of
funding mechanisms for infrastructure projects and improvement of legislation, including
for the purpose of reducing risks for investors. As soon as robust economic growth
resumes, these factors will drive an inflow of private investment. We note that such
solutions aimed at supporting investment in infrastructure projects that are under
government consideration generally coincide with our views.
Need to support investment at a high level amid a shortage of funds is forcing the
government to seek effective solutions more quickly
Over the past year, the Russian government has made a range of important decisions
that significantly improve the attractiveness of investing in domestic infrastructure.
The government decided to preserve the cumulative part of pensions, which will
become the most important source of funding for infrastructure projects.
A range of substantial amendments that heighten the potential to attract investment
in infrastructure projects and reduce risks for investors have been introduced into
laws on the securities market, joint-stock companies and concessions.
The government is working on a mechanism for collecting tolls from heavy trucks
for access to federal highways. which will supply budgets with additional funds that
can be used for road construction projects.
The quality of presentations on large infrastructure projects implemented by such
corporations as Avtodor is improving noticeably. This helps to attract manyparticipants to the relevant tenders (3-4 large consortiums) while increasing the
competitiveness and efficiency of investments.
The government also continues to reorganize the countrys airports. Moscows
largest airports have been merged into holdings, the controlling stakes in which will
be owned by private investors. Regional airports have been transferred to the
ownership of local authorities, which should organize the privatization process and
attract private investors for further development of these airports.
Russia has intensified talks with China regarding joint development of
transportation corridors. The construction of a high-speed mainline from Moscow to
Kazan is consistent with Chinas large-scale project dubbed the Silk Road
Economic Belt.
An increase in government spending on
development of infrastructure is a good
instrument with which to fight recession, as it
facilitates a multiplication effect within the
economy. However, in current economic
conditions, the multiplication effect from such
investment will be minimal.
During the current period of high interestrates and marginal private activity, the
government should focus on expansion of
funding mechanisms for infrastructure
projects and improvement of legislation,
including for the purpose of reducing risks for
investors.
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Investment in Russian infrastructure projects stagnating, notdeclining, but their share in GDP is decreasing
As in our previous infrastructure overview report entitled A Big Ship Sails Far
(published in 2014), we based our research on updated and revised programs as well
as documents aimed at stimulating investment in Russian infrastructure projects.
Federal Budget Spending for 2015-17;
Federal Target Program: Development of the Transport System of Russia until
2020, updated in April and June 2015;
Transport Strategy until 2030;
Federal Law on Concession Agreements on Securities Market;
Investment programs of Russian Railways, Avtodor, airport operators, and large
stevedoring and electricity companies;
Throughout 2016-20, a total of RUB 11 trln will be invested in transport and energyinfrastructure (RUB 2.2 per annum on average, or $40 bln), comparable to overall
investments made over the past five years. Zero growth will lead to a decline in the
share of investment in GDP from 3.5% to 2.5%. Utilities will face a major decline in
investment (-37%), while the figure for airport and seaport infrastructure will grow by
12% and 45%, respectively. Road development will account for almost half of all
investment. The top-priority projects include those that need to be completed before
the 2018 World Football Championship: the MoscowSt. Petersburg highway and the
Central Ring Road (TsKAD). Investment in railroad infrastructure, which accounts for
12% of all investment, is stagnating as well. Essentially, extension of the BAM and
Trans-Siberian Railway remain the only large-scale projects in the near term. Should
construction of the MoscowKazan HSR commence (our estimates do not yet
incorporate this project), infrastructure will see another spike of investment totaling
RUB 1 trln.
Transport infrastructure spending to rise in nominal terms but decline in real terms
We estimate that RUB 9 trln (around RUB 1.8 trln per annum, $32 bln) should be
invested directly in transport infrastructure (roads, railroads, airport and seaport
construction, reconstruction and extension) within the next five years (2016-20), equal
to around 2.0% of GDP vs. 2.3% over the past five years. Compared with our analysis
from last year, the nominal figure will remain nearly flat but in real terms will be lower
given the higher level of inflation. Our analysis reveals that transport infrastructure
spending in 2015-16 will be cut by around 10-15% of the initially planned volume,
although the figure will not be lower than the 2013-14 nominal spending of around
RUB 1.6 trln. A cut in federal budget expenditures will be offset by higher financing
from the NWF and the pension savings system. Thus, although the financing issue ischallenging, it is far from critical.
Not feasible to cut financing of many projects
Moreover, we believe it is impossible to cut the financing of many infrastructure projects.
Many projects, including the Moscow St. Petersburg HSR and Moscow Metro, are
under currently construction, and reduced funding will merely complicate the situation.
Moreover, Russia is committed to providing high-quality infrastructure for the 2018
World Football Championship (e.g. the TsKAD) and thus there is no leeway to slash
investment. Another example is the surprising boost in passenger traffic on domestic
flights, among other reasons caused by ruble devaluation and the growing popularity of
domestic travel. Thus, reducing investment in airport modernization also seems risky
(thus the extension of Sheremetyevo airport is underway, while construction of a new
airport in Rostov-on-Don has begun). Lastly, ruble devaluation has triggered anincrease of raw material exports, which has created a need for more intensive
investment to expand seaport export capacities.
Throughout 201620 a total of RUB 11 trln
will be invested in transport and energyinfrastructure (RUB 2.2 per annum on
average. or $40 bln), comparable to overall
investments made for the previous five years.
Zero growth will reduce the share of
investment in GDP from 3.5% to 2.5%.
It is impossible to cut the financing of many
infrastructure projects.
http://www.gazprombank.ru/upload/iblock/007/gpb_russian%20infrastructure_eng_150714.pdfhttp://www.gazprombank.ru/upload/iblock/007/gpb_russian%20infrastructure_eng_150714.pdfhttp://www.gazprombank.ru/upload/iblock/007/gpb_russian%20infrastructure_eng_150714.pdf -
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As for weaknesses, we note the challenging situation in regional roads funding. Many
regions are in much poorer financial condition than the federal center. The total budget
of regional road funds will decrease by 12% to RUB 713 bln in 2015, according to
Federal Treasury estimates. However, we expect actual spending to be even lower, i.e.about RUB 540 bln (-23% YoY).
Overview of investment in infrastructure, RUB bln
2011 2012 2013 2014 2015 2016 2017 2018 2019 20202011-2015
2016-2020
Federal roads 349 442 505 527 505 500 567 528 537 610 2,329 2,743
Regional roads 425 646 731 709 545 586 616 642 672 710 3,056 3,226
Railroad infrastructure 234 288 275 222 266 196 264 280 273 342 1,284 1,355
Metro 50 96 100 144 178 171 176 181 181 181 569 891
Airports 31 41 64 79 85 76 76 65 60 61 301 337
Seaports 18 26 43 38 71 79 69 57 46 36 196 286
Total transportinfrastructure
1,108 1,540 1,717 1,718 1,651 1,608 1,768 1,752 1,769 1,941 7,735 8,838
CAGR 21.4% 39.0% 11.5% 0.1% -3.9% -2.6% 10.0% -0.9% 0.9% 9.7%
% of GDP 2.0% 2.5% 2.6% 2.4% 2.2% 2.0% 2.0% 1.9% 1.8% 1.8% 2.3% 1.9%
UTILITIES
Generation 603 523 637 546 392 367 333 330 309 306 2,701 1,646
Grids 355 329 325 284 177 174 179 213 216 216 1,470 998
Total electric utilities 958 851 962 830 569 541 512 543 525 522 4,170 2,644
CAGR 5% -11% 13% -14% -31% -5% -5% 6% -3% -1%
% of GDP 1.7% 1.4% 1.5% 1.2% 0.8% 0.7% 0.6% 0.6% 0.5% 0.5%
Total infrastructureinvestment
2,066 2,391 2,679 2,548 2,220 2,149 2,280 2,295 2,294 2,463 11,905 11,482
CAGR 13.5% 15.7% 12.0% -4.9% -12.9% -3.2% 6.1% 0.7% -0.1% 7.4%
% of GDP 3.7% 3.8% 4.0% 3.6% 3.0% 2.6% 2.6% 2.5% 2.3% 2.3% 3.5% 2.5%
Source: Gazprombank estimates
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Investment in infrastructure, RUB bln
Source: Gazprombank estimates
Investment in infrastructure, 2011-2015 vs. 201620, RUB bln Breakdown of investment in infrastructure, 201620, RUB bln
Source: Federal Target Program. Gazprombank estimates Source: Federal Target Program. Gazprombank estimates
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%4.0%
4.5%
0
500
1,000
1,500
2,000
2,500
3,000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FEDERAL ROADS REGIONAL ROADS RAILWAY INFRASTRUCTUREMETRO AIRPORTS PORTS
GENERATION GRIDS % OF GDP
0 1,000 2,000 3,000 4,000
PORTS
AIRPORTS
METRO
GRIDS
RAILWAYS
GENERATION
FEDERAL ROADS
REGIONAL ROADS
2016-2020 2011-2015
28%
24%14%
12%
9%
8%3% 2%
REGIONAL ROADS FEDERAL ROADS GENERATION
RAILWAY INFRASTRUCTURE GRIDS
AIRPORTS PORTS
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Railroad infrastructure: Eastern Polygon is the only major projectslated for implementation. Will there be an HSR?
The volume of investment in the railroad sector under the Federal Special-Purpose
Program entitled Development of the Transport System of Russiawill amount to
RUB 2.1 trln ($38 bln at a RUB/USD rate of 55) in 2016-20. This is 46% more than
was spent over the previous five years (2011-15), although at the projected annual
average inflation rate of 7-8% in real terms investment could remain virtually
unchanged. According to our estimates, about 60% of all spending under the
program RUB 1.3 trln or RUB 260 bln ($5 bln) per year is expected to be
earmarked directly for the expansion of railroad infrastructure. The rest will go
toward purchasing locomotives, railroad cars, R&D and social projects not directly
related to infrastructure.
Over the next few years, the largest projects in the sector will be as follows:
construction of the Eastern Polygon (expansion of BAM and the Trans-Siberian
Mainline), expansion of approaches to Russias northern and southern ports, and
construction of the Northern Latitudinal Railway the SalekhardNadym railway spur
and a bridge across the Ob River. A new project in the program calls for construction
of the 748 km Prokhorovka-Bataysk railway line, which should bypass Ukraine. So far,
this project is not included in Russian Railways investment program and it can be
implemented only with support from the federal budget. Furthermore, a project to build
the Moscow-Kazan High-Speed Railway (HSR) has still not been included in a
special-purpose investment project or in Russian Railways investment program,
although the design stage has already kicked off.
ElegestKyzylKuraginostate-private partnership in railroads
Construction will soon commence of the 410 km Elegest Kyzyl Kuragino railroad,
which will connect coal deposits in the Republic of Tuva with Krasnoyarsk region and
Russias main railroad lines.
Road building is part of a large-scale vertically integrated project that includes
development of the large Elegest coal field, construction of a mining and processing
plant, a railroad to deliver coal, and a coal terminal in the Far East at Vanino port.
The key aspect of the project is that it is being implemented with funds from a private
investorTuva Energy Industrial Corporation (TEPK). A total of RUB 133 bln will be
directly invested to build the railroad, while RUB 86.9 bln will be contributed from the
National Wealth Fund. Following the completion of construction, its throughput
capacity will allow to transport around 15 mln tonnes of coal per year. A memorandum
of intention to build the railroad was signed with the Chinese contractor China Civil
Enginring Construction Corporation ().
The project has great potential for further expansion the railroad may be extendedto West Mongolia and further to China, which will give Russia a new transportation
corridor for trade with Asian countries.
At the projected annual average inflation rate
of 7-8% in real terms, investment in railroads
could remain virtually unchanged.
Over the next few years, the largest projects
in the sector will be as follows: expansion of
BAM and the Trans-Siberian Mainline,
expansion of approaches to Russiasnorthern and southern ports, and construction
of the Northern Latitudinal Railwaythe
Salekhard-Nadym railway spur and a bridge
across the Ob River.
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Largest railway infrastructure projects
PROJECTINVESTMENTS IN 2011-15,
RUB BLNINVESTMENTS IN 2016-20,
RUB BLN
EXPECTED TIMELINE FORCOMPLETION OFCONSTRUCTION
Expansion of Trans-Siberian Railway and Baikal-AmurMainline (BAM)
145.0 415.0 2014-18
Construction of the ProkhorovkaBataisk railway(bypassing Ukraine)
0.0 479.8 2017-20
Expansion of railway approaches to seaports ofRussias North Basin (Baltic)
74.4 43.0 2010-18
Expansion of railway approaches to southern seaports 6.5 30.9 2010-20
Expansion of the TobolskSurgut railway(transportation of petrochemical feedstock)
38.3 14.4 2017
Construction of the SalekhardNadym railway (for gasproduction in Yamal)
0.0 84.7 2017-2018
Construction of a railway bridge across the Ob Rivernear the city of Salekhard
2.0 67.1 2015-19
Moscow-Kazan High-Speed Rail Project 0.0 1,068.0 2016-18
Source: Federal Target Program Development of Transport System of Russia, Gazprombank estimates
Core investment projects
Source: Expert magazine, citing data provided by the Institute of Economy and Transport Development
Expansion of BAM and Trans-Siberian Mainline (Eastern Polygon): construction is
underway
Among the projects approved for the next three years, the bulk of investments will go
toward one expansion of the Baikal-Amur Mainline (BAM) and the Trans-Siberian
Mainline (the Eastern Polygon) at a total cost of RUB 560 bln. Sources of financing will be
as follows: the federal budget (RUB 110 bln), the National Wealth Fund (RUB 150 bln),VEB and state banks (which buy infrastructure railway bonds), as well as the operating
cash flow of the railroad monopoly itself (around RUB 300 bln). (We provided details on
this project in our report of last year).
Moscow
Saint Petersburg
Vladivostok
Khabarovsk
Ussuriysk
VaninoTynda
Chita
Severobaikalsk
Irkutsk
Murmansk
Taishet
Lena
Achinsk
Novokuznetsk
Barnaul
NovosibirskOmsk
Tobolsk
Surgut
Noyabrsk
Vorkuta
Chelyabinsk
Perm
Samara
KazanSaratov
Volgograd
Yaroslavl
Rostov-on-Don
Novorossiysk
TuapseSochi
KonoshaAPPROACH TO FAR EAST
PORTS
Komsomolsk-on-Amur
EXPANSION OF TRANS-
SIBERIAN RAILWAY AND
BAIKAL-AMURMAINLINE
EXPANSION OF EXPORTS
TO CHINA
SHIPMENT OF FEEDSTOCK
FOR PETROCHEMICALS
INDUSTRY
RECONSTRUCTION OF BOTTLENECKS ALONG TRANS-
SIBERIAN RAILWAY AND ENSURING COAL SHIPMENT
FROM KUZBASS
Yekaterinburg
EXPANSION OF RAILROAD CARRYING
CAPACITY FROM URAL TO CENTRALREGION
Ufa
PASSAGES TO
SOUTHERN PORTS
ENSURING GAS PRODUCTION
ON YAMAL
CARGO BYPASS OF
MOSCOW HUB
DEVELOPMENT OF PASSENGER
SERVICE BETWEEN MOSCOW AND
ST. PETERSBURG
EXIT TO PORTS OF
MURMANSK AND
ARKHANGELSK
2012 20152020 Sections
2012 20152020 Stations
2012 20152020 Electricity supply, electrification and dispatching control
LIMITING ELEMENTS
Among the projects approved for the next
three years, the bulk of investments will go
toward oneexpansion of the Baikal-Amur
Mainline (BAM) and the Trans-Siberian
Mainline.
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Planned investment in railway infrastructure projects, RUB bln
Source: Federal Target Program Development of Transport System of Russia, Gazprombank estimates
Sources of financing for Russian Railways capex, RUB bln
Source: Russian Railways, Gazprombank estimates
Who will build BAM?
The first tender for construction of the Eastern Polygon was held in August 2014. It was
won by a construction consortium consisting of Bamstroymekhanizatsiya,Setstroyenergo, Stroytrest and Transstroy-DV. The contract is valued at RUB 133.5 bln,
including VAT (30% of the total cost). The contract provides for construction of 306 km
of new railroad track and reconstruction of more than 230 artificial facilities, bridges and
tunnels. The new tenders have yet to be announced. Russian Railways does not yet
intend to bring in foreign contractors, including those from China.
Moscow-Kazan HSR: China is ready to invest
Last year, it seemed that the Moscow-Kazan HSR was one of the infrastructure
projects that would be put on hold until better times. With total declared investments
reaching RUB 1.068 trln, only 40% was covered by specific sources of financing.
However, China showed interest in the project: the countrys authorities at the end of
last year unveiled a concept for creating the Silk Road Economic Belt (see below).Among other things, it calls for developing transportation channels from Asia to
Europe, including through Russia.
198234
288 275
200
141
56
139 155
273
342
4
22 125
125
125125
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
INCL. TRANS-SIBERIAN AND BAIKAL-AMUR RAILWAYS EXPANSION INVESTMENTS INTO RAILWAY INFRASTRUCTURE
9850
10038
2852
107
12039
89
7172 98 98
110216
217
250 234149 204
317
395
480 467
389414
438 450
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015E 2016E 2017E
INFRASTRUCTURE BONDS BORROWINGS ON MARKETFUNDS FROM SALE OF SUBSIDIARIES' SHARES CONTRIBUTIONS TO CHARTER CAPITALOWN CASH FLOW
China has shown interest in the project: the
countrys authorities at the end of last year
unveiled a concept for creating the Silk Road
Economic Belt
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A memorandum on collaboration signed in early May 2015 between Russia and China
calls for the HSR to be built by a company with capital owned by the Chinese Silk Road
Fund (under the management of Asian Infrastructure Investment Bank (AIIB), which is
being formed by China), which will contribute up to RUB 100 bln. A similar amount is tobe invested by Russian authorities. In addition, Chinese banks are ready to allocate
another RUB 250 bln. On the part of Russia, RUB 150 bln could be contributed by the
NWF, about RUB 100 bln by the federal budget and Russian Railways, and about RUB
140 bln as an infrastructure bond issue that would be bought up by VEB. Thus, it
remains unclear where the other RUB 330 bln would come from. Part of these funds
could be contributed by Russian banks, while the cumulative part of pension savings
would make it possible to boost the size of the infrastructure bond issue.
Sources of financing, RUB bln
National Wealth Fund 150
Federal budget 21
Russian Railways budget 31
VEB pension savings via infrastructure bond issues 150
Silk Road Fund (HSR capital) 100
Chinese banks (borrowings) 250
Other unidentified sources 366
Total 1,068
Source: Interfax, Gazprombank estimates
The railroad is currently in the design stage. The tender was won by a Russian-
Chinese consortium consisting of Mosgiprotrans, Nizhegorodmetroproekt and China
Railway Eryuan Engineering Group. The total cost of the work to be carried out in2016 is RUB 21 bln. It should take two years to build the railroad, which would be
finished in 2018, although it seems to us that such a rapid construction period looks
too ambitious. In any case, while the railway is in the design phase, the interested
parties have time to discuss the details and figure out whether the Russian economy
can handle such a big project.
HSR construction in China and impact on the countrys economy
The construction of an HSR would definitely have a positive economic impact on the
expansion of any countrys economy.A considerable amount of economic research
points to the agglomeration effect. The areas through which an HSR runs show
heightened GRP growth averaging 0.5-0.7% per annum, while the householdincomes of peripheral areas approach the higher income levels seen in large cities, a
factor which promotes consumption. In addition, an HSR would develop tourism.
Small regional companies have an incentive to speed up growth, which heightens the
level of competition.
Despite the advantages that HSRs offer the economy, the ROI offered by these
railways remains questionable and requires detailed analysis. For example, there is
an opinion that many HSRs in China are loss-making. The most successful project is
the 1,318 km Beijing-Shanghai HSR, which was built in 2011 at a cost of $32 bln. In
2014, for the first time it generated net income ($192 mln), while total revenues
reached $4.6 bln. In addition, the HSR was used by more than 100 mln passengers
per year. The line is expected to have a payback period of 14 years.
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Export of Chinese HSRs
China created the longest and most efficient HSR system in the world and has taken
steps to export HSR construction services to other countries, particularly since the
construction cost of HSRs in China is about half as much as in Europe.
Aside from Russia, China is in talks on building HSRs with Mexico, Turkey, India,
Thailand and other countries. To date, however, negotiations have been successful only
with Turkey, where a Turkish and Chinese consortium is building a 533 km HSR
between Istanbul and Ankara. The consortium consists of Railway Construction
Corporation, China National Machinery Import and Export Corporation, as well as
Turkish construction companies. The total cost of building the railway is about $4 bln. As
part of this project, China has provided a $750 mln loan.
This year, the Mexican government was forced to terminate a similar contract with
China for the construction of a $3.7 bln HSR due to the decline in oil prices, which
reduced budget revenues. The contract itself was stipulated in 2014 with China Railway
Construction Corporation. All in all, 16 contenders placed bids at the tenders (includingSiemens, Bombardier and Mitsubishi), but none of these companies were able to
compete with China in terms of price. In addition, Export-Import Bank offered to provide
85% of project funding.
Length of HSRs with allowed speed limit of more than 200 km/h
Source: International Union of Railways
Highways: all resources for completion of current projects
According to the Federal Special-Purpose Program entitled Development of the
Transport System of Russia until 2020, the total amount of investment to be spent on
expanding highway infrastructure is planned at RUB 2.7 trln ($47 bln at a RUB/USD rate
of 55) or RUB 550 bln per year. This is 17.8% more than was spent over the past five
years (2011-15), and assumes average annual growth of about 3.3%. However, the
economic crisis has forced the government to decrease budget spending, including for
the construction and repair of federal roads. This year, spending will be reduced by at
least 10-15% of the earlier budgeted amount. So far, the government has not decided
by how much spending will be decreased in subsequent years. One radical option would
be to cut all expenditures by 5% in real terms. In 2015-16, the government had planned
to boost spending on road infrastructure by 15-20% and the reduction will essentially
return spending to the level seen in previous years RUB 500 bln.
The decrease in spending will likely prevent full-fledged reconstruction of such federalroads as M5 Ural (MoscowChelyabinsk), M7 Volga (MoscowUfa) and M8 (Moscow
Arkhangelsk). All funds will be concentrated toward completing the construction of current
projects of which state concern Avtodor is in charge: the MoscowSt. Petersburg toll
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
US
RUSSIA
TURKEY
JAPAN
EUROPE
CHINA
EXISTING UNDER CONSTRUCTION/INTENDED
China created the longest and most efficient
HSR system in the world and has taken steps
to export HSR construction services to othercountries, particularly since the construction
cost of HSRs in China is about half as much
as in Europe.
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highway and the Central Ring Road around Moscow, which should be completed by 2018.
The reconstruction of M4 Don (MoscowNovorossiisk) will likely continue. A major road
project in future years will be the construction of a bridge across the Kerch Strait, at an
estimated cost of over RUB 200 bln. The structure and bulk of funds will come from thefederal budget and the NWF. This project should consume funding from other sources.
We estimate total spending on federal roads at 0.5% of GDP over the next five years
(RUB 500-600 bln) vs. 0.7% for the previous five years. In addition, consolidated
spending of regional budgets to support regional roads, including Moscow, account for
another 0.6% of GDP (RUB 600-700 bln) vs. 0.9% for the previous five years. Thus,
total budget spending on road infrastructure will decline to 1.1% in 2016-20 vs. 1.5% in
2011-15. This is a moderate level of expenditure, which will make it possible to
gradually improve road infrastructure and implement several large-scale projects.
However, it will not allow infrastructure to expand at a pace exceeding overall growth of
the economy.
Dynamic of costs for road infrastructure development, RUB bln Structure of costs for road infrastructure development, 201620
Source: Federal Target Program Development of Transport System of Russia,Gazprombank estimates
Source: Federal Target Program Development of Transport System of Russia,Gazprombank estimates
Program for building and reconstruction of major federal highways
INVESTMENTS IN20112015, RUB MLN
INVESTMENTS IN20162020, RUB MLN
SHARE OF TOTALINVESTMENTS
5 Ural Highway (MoscowChelyabinsk) 66,287 227,575 14.14%
11 MoscowSt. Petersburg (toll highway) 157,917 205,971 12.80%
7 Volga Highway (MoscowUfa) 45,356 152,448 9.47%
051, 053, 055 Baikal Highway (from Chelyabinsk through Kurgan,Omsk, Novosibirsk, Kemerovo, Krasnoyarsk, Irkutsk, Ulan-Ude to Chita)
18,159 144,065 8.95%
060 Ussuri Highway (KhabarovskVladivostok) 29,207 111,979 6.96%
4 Don Highway (from Moscow through Voronezh, Rostov-on-Don,Krasnodar to Novorossiysk) 126,159 107,875 6.70%
56 Lena Highway (from town of Never to Yakutsk) 39,751 93,324 5.80%
8 Kholmogory Highway (from Moscow through Yaroslavl, Vologda toArkhangelsk)
43,305 88,547 5.50%
1 Belarus Highway (from Moscow to the border with Belarus) 45,015 87,424 5.43%
03 Ukraine Highway (from Moscow through Kaluga, Bryansk to theborder with Ukraine)
11,104 52,349 3.25%
Central Ring Road (Moscow region) 29,857 50,368 3.13%
29 Caucasus Highway (from Krasnodar though Grozny, Makhachkala tothe border with Azerbaijan)
31,677 46,171 2.87%
St. PetersburgPetrozavodsk 33,732 40,403 2.51%
Moscow-Nizhny Novgorod-Kazan high-speed railway 3,160 37,033 2.30%
6 Caspian Highway (from Moscow through Tambov and Volgograd toAstrakhan)
7,138 35,929 2.23%
Amur Highway (ChitaKhabarovsk) 3,380 29,211 1.82%
0
200
400
600
800
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FEDERAL BUDGET SPENDING SUBSIDIES TO AVTODOROTHER SUBSIDIES NATIONAL WELFARE FUNDNON-BUDGET SOURCES
60%
22%
2%
4%
12%
FEDERAL BUDGET SPENDING
SUBSIDIES TO AVTODOR
OTHER SUBSIDIES
NATIONAL WELFARE FUND
NON-BUDGET SOURCES
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20 St. PetersburgPskovPustoshkaNevel (to the border withBelarus)
5,671 26,230 1.63%
Kolyma Highway (from Yakutsk to Magadan) 17,973 25,831 1.61%
10 Russia (from Moscow to St. Petersburg) 11,346 25,141 1.56%
Total 726,194 1,587,872 99%
Source: Federal Target Program Development of Transport System of Russia
Creation of heavy truck toll system
Several years ago, the government decided to establish a truck toll system in Russia
for vehicles in excess of 12 tonnes that travel on federal roads. The point is that wear
and tear of roads increases because of heavy vehicles and requires repair. The
system would generate additional revenues that would be contributed to the road
fund. The creation and management of the system was granted on a concession
basis to RT-Invest Transportation Systems. The concessionaire must create a
system that will service 50 km of federal roads and record the movement of around
1.6 mln trucks. The overall cost of its creation is RUB 25.6 bln (excl. VAT). The IRRof the project is estimated at 12%, with a payback period of eight years. The project
will mainly be financed through borrowed funds provided by Gazprombank.
Following the launch of the system, the owners of freight vehicles will pay a tariff of
RUB 3.7/km, indexed to inflation. Collections are estimated at RUB 50 bln per year,
equivalent to around 10% of Federal Road Fund revenues.
GK Avtodor: an efficient vehicle for investors in road concessions
Over the past several years, GK Avtodor has done a huge amount of work, practically
from scratch, to create large-scale concession projects in the roads segment and to
attract investors. Its main achievements over the past two years include the following:
The successful organization within tight time frames of four tenders to construct
segments of the MKAD (I, II, IV and V). For segments I and V, a contract was
signed with the winner and construction is underway. Tenders for segments III and
IV will be conducted in September 2015.
The holding of new tenders to construct segments of the MoscowSt. Petersburg
highway. In 2014, a contract was signed with a consortium of VTB and Vinci to
construct segments 7 and 8 of the road (543-684 km) at a cost of RUB 77 bln.
Preparation is underway for tenders to construct segments 2 and 3 (58-149 km and
149-208 km). In December 2014, the first toll segment of the road (15-58 km) was
launched (exiting to Moscow through Sheremetyevo airport).
The holding of tenders and the signing of contracts to reconstruct segments of the
M4 Don and M3 Ukraine roads, each at a cost of RUB 17 bln. Documents are
being prepared to hold tenders to reconstruct the M7 (Balashikha bypass) and M1
(Belarus) roads.
The preparation of a presentation is underway for regional concession projects in
Tatarstan, Bashkortostan and Novosibirsk.
Despite the large volume of work and tight time frames for construction, a large
number of investors (usually 3-4 consortiums) are taking part in Avtodors tenders,
which underscores the high investment attractiveness of the projects.
The tenders have been organized on a quality basis. For each tender, the
corporation prepares detailed technical, financial and legal documentation, which
allows investors to quickly and efficiently value a projects attractiveness.
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GKAvtodors budget: need for private investment totals around $500 mln annually
According to the Federal Target Program (FTP), GK Avtodors budget in 2016-20 should
amount to around RUB 1 trln (RUB 200 bln per annum), although the corporation itself
forecast its budget at nearly 30% less RUB 732 bln. Half of the budget is in the formof direct subsidies from the federal budget. Additional funds from the National Wealth
Fund RUB 150 bln will go toward construction of the TsKAD by 2018. In addition,
GK Avtodor plans to issue bonds in a total amount of RUB 89 bln until 2020. Proprietary
and borrowed funds of the concessionaire and investors must total RUB 186 bln (22%
of the planned amount) or around RUB 30 bln per annum. Of this amount, around 70%
(RUB 25 bln) may be attracted by the concessionaire in the form of borrowed funds
(bonds and bank loans), while 30% (RUB 5 bln) should be comprised of the
concessionairesown funds.
The peak of investment in GKAvtodors projects will occur in 2016-18 for construction of
the Moscow St. Petersburg toll road and the TsKAD, which should be completed by
2018 in time for the World Football Championship to be held in Russia. Therefore,
despite the economic crisis, these projects will be financed in full.
Dynamics and sources of financing for GK Avtodors projects,RUB bln
Financing structure of GK Avtodors projects (201520)
Source: GK Avtodor Source: GK Avtodor
Road concessions in Russia offer solid ROI
In GK Avtodors projects, the share of budget financing totals 60-90%, while that of
investors comprises 10-40% of required investment. The structure of financing depends
on the operational investment attractiveness of a given project. The higher the expected
automobile traffic, the lower the operational risks, the more attractive the project is forprivate investors and the larger their share in the project. The majority of GK Avtodors
projects are concluded based on the terms of a long-term investment agreement which
assumes that GK Avtodor will take operational risks (risk of traffic density), while private
investors are offered a guaranteed return on own and borrowed investment in the
amount of inflation +4-8%. The period of the concession is 23-30 years. There are also
concession projects with direct collection of tolls, by which a concessionaire receives all
of the revenues of a project from automobile traffic, while assuming risks of traffic
variability. Such projects offer higher returns amid greater operational risk.
In our view, the proposed return on GK Avtodors concession projects is extremely
attractive for investors. By comparison, the current premium for investment in Russian
equities stands at 8-10%, while the risk level for equities is higher than for road
concessions. Moreover, the risk premium for investing in equities will decline asgeopolitical risks subside. The historical risk premium for investing in equities is 4-5%
compared to 4-8% for road concessions. Admittedly, when tenders are held, a decline in
ROI requirements for own and borrowed funds is one of the criteria for winning tenders.
39
75
56
79 78 7538.4
50.9
35.725.0
20
2734
817
35
40
57
2711
0
50
100
150
200
250
2015 2016 2017 2018 2019 2020
FUNDS FROM CONCESSIONAIRES AND INVESTORS
AVTODOR'S FUNDS (MARKET BOND)
NATIONAL WELFARE FUND
SUBSIDIES FROM THE BUDGET
49%
18%
11%
22% SUBSIDIES FROM THEBUDGET
NATIONAL WELFAREFUND
AVTODOR'S FUNDS
(MARKET BOND)
FUNDS FROMCONCESSIONAIRES ANDINVESTORS
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Despite the fact that interest rates and inflation in Russia are very high at present, they
are gradually declining. There is a high likelihood that within a few years, inflation
indicators and the level of interest rates will decline to historically low levels. For
example, the CBR has set its inflation target at a level of 4% by 2017.
Tenders planned for 2015
MOSCOWST. PETERSBURG TOLL HIGHWAY
Road section 1558 km 58149 km 149208 km 208258 km 258334 km 334543 km 543684 km
Length, km 43 90 59 47.9 72.7 217.1 137.5
Expected traffic, carsper year
77,000 30,000 n/a 26,800 12,00015,000 15,50017,000 16,000255,00
Price, RUB bln(including VAT)
55.8 71.9 n/a 30.88 49.6 144.6 76.8
AgreementDirect payments
concession
Long-terminvestmentagreement
n/aLong-terminvestmentagreement
Long-terminvestmentagreement
Long-terminvestmentagreement
Availabilitypayment
concession
Current status Launched Preparing for thetender (in 2016)
n/a Underconstruction
Launched Underconstruction
Underconstruction
Investor/tenderparticipant
North-WestConcession
Company (50%Mostotrest, 50%
Vinci)
n/a Mostotrest Mostotrest MostotrestTwo Capitals
Highway
Construction period 20112014 20162018 2016-2018 20152017 20122014 20152017 20152017
Timeline forconcession
26 24 23 23 28 27
Sources of financing(public/private)
40%/60% 80%/20% 85%/15% 90%/10 90%/10% 89%/11% 75%/25%
Private investorsROE
n/a CPI+8.5% CPI+8.5% CPI+8.5% CPI+8.5%CPI+8.4%
(4.55%+3.85%)
Source: GK Avtodor, Gazprombank estimates
CENTRAL RING ROAD
Road section Start-up facility 3 Start-up facility 4 Start-up facility 5 Start-up facility 1
Length, km 105.3 96.5 76.44 49.5
Expected automobiletraffic, per year
34,100 21,300 26,600 33,100-39,500
AgreementAvailability payment
concessionAvailability payment
concessionLong-term investment
agreementLong-term investment
agreement
Price, RUB bln(including VAT)
80.5 79.8 42.2 52.39
Current statusTender results to be
announced soonTender results to be
announced soonUnder construction Agreement signed
Investor/tenderparticipant
North-East Mainline, Sok 24
Russia, Invest Finance, RoadBuilding Corporation
South-East Mainline, Capitala
Big Ring, Invest Finance Plus,Road Building Corporation
Koltsevaya magistral (100%subsidiary of ARKS) Stroygazconsulting
Timeline forconstruction
20162018 20162018 20142018 20142018
Timeline forconcession
30 30 24 23
Sources of financing
National welfare fund (32%),subsidies from federal budget
(25%), private investors(~40%).
National welfare fund (55%),subsidies from federal budget
(7%), private investors(~38%).
Public finance (89%), privatefinance (11%)
Public finance (87%), privatefinance (13%)
Private investors ROE 12-13% IRR n/a CPI+4.65% CPI+8.30%
Source: GK Avtodor, Gazprombank estimates
Long-term strategy: 12,000 km of highways
Acording to the long-term strategy for the development of GK Avtodors highway
network, 12,000 km of highways will be under the companys management by 2030. Outof the total, 6,000 km of roads will be built and 2,000 km will be renovated. The share of
toll roads will account for 75% of the entire network.
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GKAvtodors long-term targets, mln RUB
201020 BY 2030
Total investments * 1,569,130 4,650,000
Including subsidies from the federal budget 1,012,487 2,092,500
Non-budget financing 556,643 2,557,500
Range of investment projects 20 80
Expected total length of highwaysunder trust management by 2020, km
3,994 12,000
Automobile roads to be restored, km 894 2,000
Automobile roads to be built, km 1,333 6,000
Share of toll roads of the entire network 47% 75%
Capacity of market of GK Avtodors construction and assembly works,RUB bln per year
133 289380
Including the capacity of private finance market 46 125165
Source: GK Avtodor
* 2010 prices
Highway network under GK Avtodors management by 2030
Source: GK Avtodor
Moscow
St. Petersburg
Tver
Veliky Novgorod
Smolensk
11
4
1
Bryansk2
Yelets
Vladimir
Nizhny Novgorod
Kazan
Saratov
Volgograd
Rostov-on-Don
Voronezh
KrasnodarNovorossiysk
Sochi
Kerch
5
3
14
14 10
6
6 12
16 Orenburg
Yekaterinburg
Chelyabinsk
Tyumen
Omsk
9
15
8
7
13
Automobile roads and high-speed highways transferred under the trust management of the State
Company Russian Highways (GK Avtodor); roads under construction to be launched by 2020.
Projected automobile roads and high-speed highways
by 2030
1 M-1 Belarus
2 M-3 Ukraine
3 M-4 Don
4 M-11 MoscowSt. Petersburg
5 Central Ring Road
6 Novorossiysk Transport Hub
6 Road transport bridge
Through Kerch Strait
7 M7AMoscowNizhny NovgorodKazan
8 KazanYekaterinburg
9 YekaterinburgOmskKazakhstan border
10 Southwest Chord
11 Scandinavia automobile road
15 ChelyabinskYekaterinburg
13 KazanShaliBavlyKazakhstan border
14 OzinkiSaratovVoronezhKursk
Belarus border
12 KrasnodarAbinskKabardinka
16 Sochiseaport Kavkaz
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Russias seaports: state support, growth of cargo turnover and highprofitability
Russia has 63 cargo seaports with total capacity of 860 mln tpa. Regardless of the
economic situation in the country, the cargo turnover of Russian seaports has been
growing steadily each year. Over the past 10 years, turnover has increased by 67% to
623 mln tonnes in 2014. That said, devaluation supported exports of raw materials,
which has resulted in higher cargo turnover. In 2014, such turnover rose 5.8% and in
1Q15 the growth rate accelerated to 8.9%.
Export goods (mainly crude oil, oil products, and coal) account for 80% of the total cargo
turnover of Russian seaports, which reflects Russias commodities export-led economy
100% of grain, around 80% of oil, and 75% of coal exported from Russia is shipped
via seaports. Imports account for just 9% of total turnover (cars, containers with
equipment, consumer goods, and car parts). The remaining amount of cargo accounts
for transit cargoes and cabotage.
Dymamic of cargo turnover in Russian seaports, mln tonnes Russias 10 largest seaports by turnover
Source: Association of Sea Commercial Ports, Gazprombank estimates * by 2020, the seaports capacity will increase to 150 mln tonnes
Source: Transportation Ministry, Gazprombank estimates
Structure of Russian seaport cargo turnover, 2014 Russias seaport cargo turnover, 2014
Source: Association of Commercial Sea Ports Source: Association of Trade Sea Ports
549591 630
699 731761 791
829 845 860
407 421451 455
496 526535 566
589 623
60%
62%
64%
66%
68%
70%
72%
74%
76%
0
100
200
300
400
500
600
700
800
900
1,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CAPACITY, MLN T CARGO TURNOVER, MLN T
CAPACITY UTILIZATION, %
7.9%20.7%
-15.8%5.3%
19.7%
-30.3%
10.1%
12.5%
24.9%
-1.2%
-40%-30%-20%-10%0%10%20%30%
020406080
100120140160
NOVOROSSIYSK
UST-LUGA*
PRIMORSK
BIGP
ORTST.
PETERSBURG
VOSTOCHNYPORT
MURMANSKCOMMERCIAL
SEAPORT
VANINO
NAKHODKA
TUAPSE
PRIGORODNOYE
CAPACITY, MLN TCARGO TURNOVER, MLN T (2014)CARGO TURNOVER DYNAMIC YOY
79%7%
8%
6%
EXPORTS IMPORTS TRANSIT CARGOES CABOTAGE
623 MLN T
30%
20%
19%
7%
4%
5%2%
1%1%
11%
OIL OIL PRODUCTS COALCONTAINERS FERROUS METALS GRAINFERTILIZERS ORE TIMBEROTHER
623 MLN
TONNES
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Russian seaport cargo turnover breakdown
Source: Association of Trade Sea Ports
Under the Federal Target Program for 2016-20, investment in seaport infrastructure is
planned at around RUB 280 bln. The government will contribute 30% of the total sum,
while the remaining 70% will come from private investors. However, in our opinion,
the actual investment amount could be half of that expected about RUB 140 bln
(RUB 28 bln or $0.5 bln per year). Some core projects have already been launched,
such as the expansion of capacities of Ust-Luga and Big Port St. Petersburg, and the
construction of Sabetta and Novoportovoye ports in the Yamal peninsula. At the same
time, projects such as the expansion of capacity of Taman seaport on the Black Sea,
construction of a universal deepwater port in the city of Baltiysk (Kaliningrad region),and expansion of capacities of coal terminals at Vanino seaport in the countrys Far
East are planned under the target program, but their implementation is in question.
Planned investment in extension of Russias seaportinfrastructure, RUB bln
Sources of funding for seaport infrastructure, RUB bln
Source: Federal Special-Purpose Program, Gazprombank estimates Source: Federal Special-Purpose Program
The mechanism of public-private partnership is most commonly used for the
construction of seaport infrastructure
The government is investing in preparation works in the water area of the port
bottom-dredging works, building of approach channels and moorage walls, andconstruction of access routes to the port. Private investors (stevedores) invest in the
construction of cargo terminals (funds are used for storage facilities, sheers, loading
machines). For example, the government fully financed the water part of Sabetta and
0%
10%
20%
30%
40%
50%
60%
70%
80%90%
100%
2010 2011 2012 2013 2014 2015
OTHER TIMBER ORE FERTILIZERS GRAINFERROUS METALS CONTAINERS COAL OIL PRODUCTS OIL
0
20
40
60
80
100
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ACCORDING TO FEDERAL SPECIAL-PURPOSE PROGRAM
GAZPROMBANK ESTIMATES
0
10
20
30
40
50
60
70
80
90
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
STATE BUDGET PRIVATE INVESTMENTS
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Novoportovoye seaports, which are currently under construction in the Yamal peninsula,
while private investors Yamal-LNG and Gazprom Neft are now building the cargo
terminals (in other words, the landside part of these projects). In some instances, private
investors take part in the construction of the water part of seaport infrastructure.
but a concession agreement mechanism that is widespread in other countries is
not yet used in Russia
The reason for this is that stevedores usually own the land plots on which cargo
terminals are located (or rent them for long periods at a relatively low price). However, in
other countries (i.e. Greece, the Netherlands, UAE) land plots for the construction of
seaport infrastructure are assigned to the operator under concession agreements. Due
to low payments for land, Russian stevedores show higher margins than their foreign
peers with similar types of cargo turnover. For example, the EBITDA margin of sea grain
terminals can reach 80%, and the margin of container terminals can approach 60%. Oil
and petrochemical terminals show a margin of around 40-50%. Coal terminals stand
apart, as most of them are controlled by coal producers (Mechel, Kuzbassrazrezugol,SDS-Ugol). These terminals show lower margins, which is not surprising given the fact
that high transportation costs are factored into the sales price. Hence, full control over
the coal transportation chain is an important part of coal producers business .
EBITDA margin of Russian and overseas stevedores, 2014
Source: companies, Bloomberg, Gazprombank estimates
Despite high margins, the construction of seaport infrastructure is a capital-intensive
business. Globally, the average return on capital invested in this segment reaches 12-15%.
In Russia, it is more difficult to calculate the ROI in seaport assets, as most new projects are
implemented by raw materials companies in order to improve the efficiency of their logistics
operations and gain control over transportation costs.
61% 61%
55% 54% 52%47%
36%
25%23% 22%
0%
10%
20%30%
40%
50%
60%
70%
NCSPGROUP(UNIVERSAL)
GLOBALPORTS
(CONTAINER)
VOSTOCHNYPORT(COAL)
COSCOPACIFIC(CHINA)
TUAPSECOMMERCIAL
SEAPORT(UNIVERSAL)
DPWORLD(UAE)
STPETERSBURGSEAPORT
(UNIVERSAL)
HHLA(GERMANY)
DALIANPORT(CHINA)
PERAEUSPORTAUTHORITY
(GREECE)
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Largest projects to construct port capacities
Source: Gazprombank estimates
Largest port infrastructure projectsProjects currently in active construction phase
LOCATIONON MAP
DESCRIPTIONSEAPORTCATEGORY
TOTALAMOUNT OF
INVESTMENT,RUB BLN
INVESTORS
PROJECTEDSEAPORT
CAPACITY, MLNTONNES
REALIZATIONTIMELINE
1Construction of Ust-Luga port
Multi-purposeseaport
61.5
Kuzbassrazrezugol, GlobalPorts, Gunvor, NOVATEK,SIBUR, Eurochem, OMK,Gazprom and others
180 2000-20
2
Construction ofSabetta port,including building ofentrance channel inthe Gulf of Ob
LNG terminal 73.2Yamal LNG (NOVATEK,Total, CNPC)
16.5 2012-20
3
Construction of
marine multi-purposehandling terminalBronka in StPetersburg seaport
Container andRoRo terminals
59.6 Holding Company Forum(St. Petersburg)
1.9 (TEUs) 2012-2017
4
Year-round oilterminalNovoportovoye(Yamal)
Oil terminal 10.9 Gazprom Neft 8.5 2013-18
Source: Federal Special-Purpose Program, Gazprombank estimates
1
UST-LUGA
2
SABETTABRONKA
4
NOVOPORTOVOYE
5
TAMAN
VANINO
ZARUBINO
VLADIVOSTOK
OTKRYTYI
SAKHATRANS
Projects currently in active
construction
Projects in initial stage
or prospective projects
Moscow
OLYA
7
8
9
11
10
3
Russias largest
seaports
MURMANSK
BIG PORT
ST. PETERSBURG
PRIMORSK
NOVOROSSIYSK
TUAPSE
NAKHODKAVOSTOCHNY
PRIGORODNOYE
St. Petersburg
Vladivostok
Astrakhan6
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LOCATIONS ON THEMAP
DESCRIPTION
1
Universal Ust-Luga port is one of the largest-scale transport infrastructure projects since the dissolution of the Soviet Union and asuccessful case of private-public partnership. Seaport construction kicked off in 1999. It is located 70 km from St. Petersburg in the Gulfof Finland. The location is convenient for servicing deepwater vessels and allowing year-round navigation. State and private investmentsover 10 years totaled around $7 bln. The port s cargo turnover in 2014 reached 75 mln tonnes (+34% YoY). By 2020, the seaportcapacity is expected to extend up to 180 mln tonnes. Proprietary cargo terminals were constructed inside the port by many Russiancompanies, including Kuzbassrazrezugol (coal), Global Ports (container terminal), NOVATEK (LPG terminal), Eurochem (fertilizers),Rusal (aluminum and alumina), OMK (steel) and Gunvor (oil products). Gazprom intends to construct an LPG terminal inside the port.
2Construction of the new Arctic Sabetta port in Yamal began in 2012. Sabetta is the cornerstone infrastructure facility of the Yamal-LNGproject, developed by NOVATEK, Total and CNPC, which includes LNG production, as well as storage and shipping capacities based onYuzhno-Tambeiskoye gas field resources. The project is expected to be completed in 2017.
3
Construction of a multi-purpose loading complex is currently underway at Big Port St. Petersburg. The initial stage (2015) impliescommissioning of a container terminal with annual capacity of 1.45 mln TEU, as well as the Ro-Ro terminal of 260,000 units of equipmentper annum. The second stage (2017) proposes extension of container terminal capacities up to 1.9 mln TEU per annum and constructionof a logistics hub, while the third (2022) includes construction of a container terminal with annual capacity of 3 mln TEU. Bronka sremoteness from other cargo terminals of St. Petersburg seaport provides it with a number of competitive advantages: readiness toservice large-displacement type container ships, convenient transportation logistics as well as pilotage. That said, commissioning of
rather large container capacities creates overcapacities in the Northwest Region.
4
In 2015, Gazprom Neft will launch a year-round oil terminal in the Yamal peninsula in the Gulf of Ob intended for oil exports fromNovoportovskoye field to Europe. The Gulf of Ob, where tanks are loaded with oil, is the first zone of the Northern Sea Route and iscovered with ice for nine months per year. Regular operation of tanks requires the use of nuclear-powered icebreakers for a distance ofaround 400 km.
Source: Federal Special-Purpose Program, Gazprombank estimates
Projects in initial stage and prospective facilities
LOCATIONON MAP
DESCRIPTIONSEAPORTCATEGORY
TOTALAMOUNT OF
INVESTMENT,RUB BLN
INVESTORS
PROJECTEDSEAPORT
CAPACITY, MLNTONNES
REALIZATIONTIMELINE
5 Development ofTaman seaport Universal port 25.0
Gazprom, Eurochem, Uralkali,
SUEK, Metalloinvest, UnitedGrain Company (OZK), GlobalPorts
93.8 2011-20
6
Construction of oilhandling terminaland bulk cargohandling complex inthe Olya seaport(Astrakhan region)
Universal port 19.7Olinskiy petrochemicalterminal, Olya commercialseaport, Olya bulk terminal
3 2015-18
7Construction of acoal terminal atVanino port
Coal terminal 19 ZAO TEPK 15 2015-2018
8
Construction ofhandling terminals inZarubino seaport(Big SeaportZarubino)
Universal port 180.0Summa/China MerchantsHolding Int. (CMHI)
60 2015-22
9
Construction of portterminal for LNGplant nearVladivostok
LNG plant n/a Gazprom 15 2014-22
10
Construction of acoal terminal nearOtkrytyi Cape(Primorsk region).
Coal terminal 50.0 Rostec/Shenhua (China) 20 2015-19
11 Sakhatrans Coal terminal n/a Volga Group 12 n/a
Source: Federal Special-Purpose Program, Gazprombank estimates
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LOCATION ON THEMAP
DESCRIPTION
5
The government is currently developing the expansion of seaport capacities in order to raise cargo turnover (coal, fertilizers, ore) partiallytransported via Ukrainian ports. Negotiations are underway with private investors who are ready to build proprietary cargo terminals,
including Global Ports, UCL Ports, SUEK and Metalloinvest. Should the project enjoy decent demand from cargo shippers, its capacitieswould be lifted to 70 mln tonnes by 2020 and to 100 mln tonnes by 2030. Total intended capex exceeds RUB 200 bln, while the updatedversion of the Federal Special-Purpose Program specifies the total amount of planned investment at just RUB 25 bln.
6Mechel planned a major expansion of the capacities of Vanino port, which specializes in coal exports. However, given the companyspoor financial position, the capex program has yet to be implemented.
7
Summa plans to build Big Port of Zarubino in the Trinity Bay, located 18 km from the Chinese border, by 2018. Cargo turnover isexpected to total 60-100 mln tpa, with a major volume to come via transit from northern to southern Chinese provinces. The port willhandle grain (about 10 mln tpa), containers (up to 2 mln TEU pa), general and bulk cargo (up to 35 mln tpa), Ro-Ro-cargo, etc. The valueof the project inclusive of rail and road infrastructure as well as a dry port in near-border Hunchun is estimated at $3.0-3.5 bln. Projectworks are expected to start in February 2015. CMHI, established in Hong Kong in 1992, is the largest asset of the state-owned ChinaMerchants Group (controls 55% shares, while the remaining 45% belongs to Goldman Sachs). CMHI operates in 7 of the 10 largestChinese container ports.
8 Gazprom is considering a project to build an LNG terminal in the Russian Far East, but a final decision has yet to be made.
9
In 2014, Rostec and Chinese corporation Shenhua signed a memorandum to start works on joint exploration of the Ogodjinskoye coaldeposit, located in Amur region, and to build a coal sea transshipment terminal with 20 mln tonne capacity at Port Vera in Primorskregion. Engineering of the ports facilities is nearing completion. Total investment in port construction is estimated at $1 bln.Implementation of the project would allow to considerably expand access for Russian coal companies to ATP distribution markets.
10Volga Group, owned by Gennady Timchenko, controls 89% of Sahattrans LLC, with the latter owing around 200 ha of land in the vicinityof Vanino Port. The company plans to build a t ransshipment terminal for coal and iron ore concentrate with annual capacity up to 12 mlntonnes. The terminal is expected to transship coal from the company Colmar.
Source: Federal Special-Purpose Program, Gazprombank estimates
Chinese investors in port assets outside the country
Chinese ports top the list of the worlds largest ports in terms of cargo turnover, the
structure of which is dominated by containers, coal, ore and petrochemical products.
The shares of the largest port operators trade on the Shanghai and Hong Kong stock
exchanges, while the major shareholders of most Chinese stevedore companies are
central and local governments. In recent years, large Chinese port operators have been
actively buying assets in other countries, including purchases under concession
agreements. Primarily, Chinese investors are interested in container terminals, as suchacquisitions would allow them to expand their own business and improve the efficiency
of container logistics. Chinese companies own container terminals in several European
ports (the Netherlands, Belgium and Greece), Sri Lanka, Nigeria and Israel.
Top investors in port assets outside China
CHINESE PORT OPERATORS PORT ASSETS OUTSIDE CHINA
Shanghai International Port 25% in Zeebrugge port (Belgium), New Haifa Port (Israel)
China Merchants HoldingsNigeria-based container terminal, 85% in ColomboInternational Container Terminal (Sri Lanka)
Cosco PacificContainer terminals located in Belgium (49%) and Greece(100%)
Source: Gazprombank estimates
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Airports: the fastest growing segment in Russian transportinfrastructure
Over the past five years (2010-14), passenger traffic in Russian airports has risen by 56 mln
to 150 mln (+60%, average annual growth rate of 10%). Even during the recessionary 2015,
we do not expect a decline in passenger traffic, as the population will shift its focus from
traveling abroad to domestic tourism. Fast-growing demand for quality airport services
makes investment in airport infrastructure highly lucrative. This segment of transport
infrastructure is undergoing the most active process of reformation and modernization,
privatization and formation of concessions.
Key sector-wide trends:
Consolidation of federal airport assets. The consolidation is aimed at uniting
into holdings multiple public and private companies, as well as providers of
services for operation of the largest federal airportsSheremetyevo and Vnukovo
(Domodedovo airport, being 100% privately held, does not participate in the
consolidation). The consolidation will result in controling stakes being transferred toprivate investors, while the state will become a minority stakeholder. As for
Sheremetyevo, the controlling stake is planned to be handed to Sheremetyevo
Holding, the beneficiaries of which are Arkady Rotenberg, Alexander Ponomarenko
and Alexandr Skorobogatko. Control over Vnukovo is expected to be transfered to
Vnukovo-Invest, the beneficiaries of which are several Russian businessmen.
Transfer to private ownership of airfield infrastructure at Moscow Aviation
hub airports based on concession.According to federal law, runways, taxiways
and appron areas can only be publicly held. Therefore, there is only a single
source of investment in their modernization the state budget. Their transfer to a
concession will help facilitiate private investment while easing the burden on the
state budget.
Regional airports are transferred into regional property and become subjects
for privatization. In recent years, Perm, Irkutsk, Krasnoyarsk and Sakhalin
airports were transferred from state to regional ownership. Regional authorities are
more activily seeking to attract private investors in the airports development,
helping to ease the burden on the federal budget as well.
During 2016-20, around RUB 300 bln is expected to be invested in airport
infrastructure in line with the previous five years spending. Private investment
accounts for 40% (RUB 130 bln)
The planned amount of investment in airport infrastructure remains almost flat
compared with the previous versions of the Federal Special-Purpose Program, as
airport congestion coupled with the task of hosting the 2018 World FootballChampionship in 11 cities requires timely funding. Extension of Sheremetyevo airport
remains the largest investment pipeline: construction of a third runway financed with the
help of the state budget as well as the B terminal with an underground crosswalk
between the northern and the southern parts of the airport (construction is privately
funded), while the Federal Special-Purpose Program currently lacks investment for
construction of a third runway at Domodedovo. The runner-up in terms of the scope of
investment is the Yuzhny airport based in Rostov-on-Don. Yuzhny is valued at around
RUB 37 bln, half of which is financed through the federal budget, with the other half to
be financed through private investment provided by Airports of Regions holding, owned
by holding company Renova. Ample investment will be directed toward modernization of
regional airports in Tyumen, Novosibirsk, Yakutsk, Khabarovsk, Kaliningrad, Nalchik,
Surgut, Murmansk, Chelyabinsk and Saratov.
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Total investment in airport infrastructure, RUB bln
Source: Federal Special-Purpose Program, Gazprombank estimates
Largest investment pipelines, RUB bln, 2016-20
Source: Federal Special-Purpose Program, Gazprombank estimates
0
10
20
30
40
50
60
7080
90
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
STATE BUDGET PRIVATE INVESTMENTS
0.00 10.00 20.00 30.00 40.00
RECONSTRUCTION OF CHELYABINSK AIRPORT
CONSTRUCTION OF AN AIRPORT IN SARATOV
RECONSTRUCTION OF MURMANSK AIRPORT
RECONSTRUCTION OF NOVY URENGOI AIRPORT
RECONSTRUCTION OF SURGUT AIRPORT
AIRPORT CONSTRUCTION (NALCHIK)
RECONSTRUCTION OF DOMODEDOVO AIRPORT
RECONSTRUCTION OF KHRABROVO AIRPORT (KALININGRAD)
RECONSTRUCTION OF NOVY AIRPORT (KHABAROVSK)
RECONSTRUCTION OF 2ND RUNWAY AT YAKUTSK AIRPORT
RECONSTRUCTION OF TOLMACHEVO AIRPORT (NOVOSIBIRSK)
RECONSTRUCTION OF ROSHCHINO AIRPORT (TYUMEN)
AIRPORT CONSTRUCTION IN IRKUTSK
UZHNY AIRPORT CONSTRUCTION (ROSTOV-ON-DON)
CONSTRUCTION OF 3RD RUNWAY AT SHEREMETYEVO
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Construction of Yuzhny airport in Rostov-on-Don
Rostov-on-Dons existing airport is Russias ninth-largest in terms of passenger traffic
(2.4 mln). However, it is located in the city center with serious restrictions for furtherdevelopment. This was the reason behind the construction of a new airport called
Yuzhny, the completion of which should occur in 2017 before the 2018 World
Football Championship. The new complex is expected to fully replace the old one
while providing grounds for the creation of a modern centralized airport hub in
southern Russia with annual throughput capacity of up to 8 mln passengers. The total
space of the new passenger terminal should exceed 50,000 m2, with throughput
capacity of 2,000 passengers per hour. The runway will have a length of 3,600 m,
enabling all types of aircraft to land.
This airport construction project is being developed by Rostovaeroinvest, in which
Airports of Regions Holding has a controlling stake. The project was among the first
included in the state program of support for Russian investment projects, allowing the
raising of privileged funding at a rate of 11.5% p.a. This is much lower than currentmarket rates. The project is valued at RUB 37.2 bln, of which RUB 17.9 bln will come
from the state budget. Gazprombank has originated a RUB 15.7 bln loan to fund
implementation of this project. Mostotrest subsidiary Transstroymekhanizatsiya will
undertake to construct airfield infrastructure. A subcontractor for the terminal has yet to
be announced.
Design of new terminal at Yuzhny airport
Source: Airports of Regions
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A group of Russian strategic investors in airport infrastructure is being formed
Apart from the state, which remains the largest owner of Russias airports, the list of
private strategic investors includes Basel-Aero, Airports of Regions (state corporation
Renova), Novaport and Aero-Invest. Airport privatization is within the scope of Rostec sinterests as well.
Passenger traffic in airports, mln
Source: Federal Special-Purpose Program, Gazprombank estimates
Market shares of airport operators, 2014 (total passenger traffic, mln and %)
Source: company data, Gazprombank estimates
10%
20%
30%
40%
50%
60%
0
30
60
90
120
150
1991
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
REGIONAL AIRPORTS SHARE OF MOSCOW AVIATION HUB, %
32, 20%
33, 21%
13, 8%14, 9%
9, 6%
8, 5%
11, 7%
3, 2%
35.22%
SHEREMETYEVO (STATE)
DOMODEDOVO (EAST LINE)
VNUKOVO
PULKOVO (NORTHERN CAPITAL GATEWAYS)
NOVAPORT
AIRPORTS OF THE SOUTH
AIRPORTS OF REGIONS
AEROINVEST
OTHER (STATE-OWNED AIRPORTS)
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Major investors in Russian airports
INVESTORS/SHAREHOLDERS AIRPORTSPASSENGER TRAFFIC,
MLN, 2014
State authoritiesFederal and regionalauthorities
Sheremetyevo (states stake83.4%) 31.57Kazan, Ufa, Mineralnye Vody, Perm, Irkutsk,Krasnoyarsk and Vladivostok airports
East Line Group Domodedovo 33.04
Vnukovo-invest Vnukovo 12.73
Northern Capital Gateways VTB Capital, Fraport Pulkovo (St Petersburg) 14.30
NovaportRoman Trotsenko (50%),
Meridian Capital (50%)
Tolmachevo (Novosibirsk) 3.96
Chelyabinsk 1.40
Volgograd 0.70
Astrakhan 0.40
Tomsk 0.54
Barnaul 0.39
Chita 0.33
Perm 1.32
Airports of South
Basel-Aero (50%) Sochi 3.10
Changi (30%) Pashkovsky (Krasnodar) 3.40
Sberbank (20%) Gelendzhik 0.24
Anapa 1.00
Airports of Regions Renova (100%)
Koltsovo (Yekaterinburg) 4.53
Kurumoch (Samara) 2.38
Rostov-on-Don 2.34
Strigino (Nizhny Novgorod) 1.13
Saratov Airport 0.41
AeroinvestMineralnye Vody 1.92
Khrabrovo (Kaliningrad) 1.20
RostecRamenskoye Airport (under reconstruction)
Irkutsk Airport (possible in the longer term)
Source: company data
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Largest projects to construct airports
Source: Gazprombank estimates
Asian investors in airport infrastructure
Strategic investors from Asia have expressed interest in Russian airports. For example,Changi Airports International, which manages Singapore airport, has become a partner
of Basel-Aero (part of Basic Element owned by Oleg Deripaska). Changi controls 20%
of Airports of South Holding.Another example is South Koreas Incheon (the manager
of its namesake airport in Seoul), which owns a minority stake in Khabarovsk airport.
Moreover, the company may also participate in the management of Irkutsk airport.
In China, most large airports are state-owned and their management companies do not
yet invest in foreign assets. On the contrary, construction and concession companies as
well as investment houses have expressed interest in foreign airports. For example, in
2014, Beijing Urban Construction Group signed a $1 bln contract with the Kyrgyz
government to reconstruct Manas airport. The peculiarity of the deal is that another
candidate was Rosneft, but it later pulled out of negotiations. Another Chinese
company, China Machinery Engineering Corporation, has invested $300 mln inKyrgyzstans second-largest airport in the city of Osh. Other examples include China
Investment Corporation (CIC), which controls a 10% stake in Londons Heathrow
airport; Beijing Construction Engineering Group, which has allocated GBP 800 mln for
the construction of a new terminal at Manchester airport; and Chandgoung Hi-Speed
Group, which is investing funds in Toulouse Blagnac Airport (France).
Moscow
Saint Petersburg (Pulkovo)
Vladivostok(Knevichi)
SHEREMETYEVO
DOMODEDOVO
VNUKOVO
Kaliningrad (Khrabrovo)
Anapa (Vytyazevo)
Tomsk (Bogashevo)
Chita (Kadala)
Gelendzhik
Sochi (Adler)
Rostov-on-Don
Krasnodar(Pashkovsky)
Novosibirsk(Tolmachevo)
Perm
Yekaterinburg (Koltsovo)
Chelyabinsk(Balandino)
Barnaul
Astrakhan
Volgograd
Saratov
Irkutsk
UfaSamara(Kurumoch)
RAMENSKOYE*
*under renovation
Krasnoyarsk(Yemelyanovo)
Kazan
Nizhny Novgorod (Strigino)
Mineralnye Vody
State authorities
East Line Group
Vnukovo-Invest
Northern Capital Gateway
Novaport
Airports of South Holding
Airports of Regions Holding
Aeroinvest
Rostec
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SOURCES OF FINANCING:DECREASE, NO WAY TO INCREASE
The main sources of financing for Russian infrastructure are as follows:
the federal budget;
the National Wealth Fund (NWF);
regional budgets;
own and borrowed funds from natural monopolies (Russian Railways) and state
corporations (VEB, GK Avtodor);
private pension savings that are invested through investment funds;
loans raised from commercial banks;
private investors, including foreign investors;
cash flows from infrastructure projects.
Over the next few years, the proportion of state spending in infrastructure will decrease
due to a decline in revenues. However, this decline will be offset by higher investments
from the NWF and pension funds that regain access to private pension savings.
State budget: difficult choice between higher social spending andspending on economic development
Federal and regional budgets account for over half of all investments in transport
infrastructure. Federal budget spending goes toward the construction and maintenance
of federal roads, subsidies to state corporation Avtodor and the regions, construction
and renovation of airport and port infrastructure facilities (take-off and landing strips,
mooring berths and to conduct dredging operations, i.e. areas where private
investments are not yet permitted). Regional budgets spend funds on construction andreconstruction of regional and municipal roads as well as