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Banking & Finance

Infrastructure New highway offers vision of future state and private investment

Driving new roads: PPP leads the way

Public private partnerships have taken off slowly in Russia, but the completion of a major road in St Petersburg offers a new option for infrastructure development.

TIM GOSLING

BUSINESS NEW EUROPE

The final documents to kick off Russia’s first major pri- vate-public partnership (PPP) project were officially signed on April 26, as North- West Concession Company agreed with the Federal Road Agency on construction of a 27-mile section of the planned Moscow-St Petersburg Ex- pressway. The agreement marks sever- al important steps in Rus- sia’s investment and devel- opment environments. On the one hand, it signals another move in the concert- ed strategy to improve the country’s investment climate, the government finally hav- ing negotiated the complex web of legislative reform needed to support PPP. At the same time, it introduces an important avenue to help at- tract private money and re- sources into the massive ef- fort to update the country’s ailing infrastructure. More specifically, it gives the green light to new road building in Russia, which has been al- most utterly neglected over the last decade or more. With construction set to start as early as this year, the first section of the new motorway will run 27 miles to the north from Moscow’s outer ring road, where it will link with

Despite administrative barriers, the Western High-Speed Diameter bypass in St Petersburg is an early example of a successful public private partnership in Russia

the existing 400-mile road between Russia’s two major cities. According to a press release, the project should be complete in three years. First put on the table by the government in September 2007, the concession for the project will see 23bn roubles (£567m) contributed from federal sources, with total project costs anticipated at 60bn roubles (£1.4bn). Pick- ing up the rest of the tab will be North West Concession Company, which sees the

French construction giant Vinci link up with Russian transport and infrastructure group N-Trans. In addition to the main con- tract, state-owned banks Vnesheconombank (VEB) and Sberbank signed off on a 29bn-rouble (£656m), 20- year loan to the private part- ner. Further financing will come from 10bn roubles (£227m) in 20-year infra- structure bonds, which will be fully guaranteed by the state. VEB has already said

that it expects to purchase around 70pc of the paper. The bank has an independ- ent PPP unit, and aims for over 30pc of its credit port- folio to be dedicated to such projects by 2012. Three years ago, a whopping 31 trillion roubles (£701bn) was ear- marked to redevelop it – with most of it set to update the transport sector. However, the crisis soon put an end to that, with state resources subse- quently pumped into sup- porting social welfare and

Telecommunications Russia expects to see an explosion in broadband internet

Innovation: from Moscow to the regions

The state’s policy of expanding high-speed internet access is likely to affect the most remote regions, and boost competition in the internet market.

BEN ARIS

RUSSIA NOW

In a country as big as Rus- sia, which spans nine time zones, long-distance commu- nication is part of millions of people’s work routines. The telecoms reform launched at the start of the last dec- ade is now largely complet- ed and is, arguably, Russia’s most modern industry. However, even in Moscow there are still more than 1.8 million analogue telephone exchanges. Still, the private sector has been stepping up to the mark with investments as it seeks to claim a sizeable stake in this fast-growing industry. Comstar is Russia’s largest broadband operator and has started digitising Moscow’s telephone system in an am- bitious £280m project using IMS – an internet protocol base multimedia technology that manages a high-speed fibre-optic telecoms network. By 2013 there will be no an- alogue exchanges left in Moscow. “Introducing innovative IMS technology will enable us to take a fresh look at service provision,” said Comstar’s CEO Sergei Pridantsev, “and it will be a prototype for the future, when the main serv- ice will be provision of broad- band access and a multitude of services based on that.” IMS was originally devel- oped for mobile phones (leading Russian mobile phone company Moscow Tel- eSystems recently took con- trol of Comstar), but the ad- vantage of using it to run a fixed-line network is that once a home is hooked up to a cable it is also automati- cally enabled to access the internet over the same net- work.

In Moscow, one can access the Internet practically anywhere

The number of Russians online by the end of last year was 59 million out of 142 million people

Internet usage is already ex- ploding in Russia with the number of Russians online up by about a third every year for the last three years, to reach 59 million (out of a population of 142 million) by the end of last year. From next to nothing five years ago, Russian commu- nications and mass media minister Igor Shchyogolev said in May that the coun- try’s broadband internet penetration rate was at 26pc as of the end of 2009. As part of the Kremlin’s drive to modernise the coun- try, the government launched an initiative to bring cheap broadband to all homes and hopes to increase the pene- tration of broadband to 60pc in the next five years. “The development of the

Russian telecommunications industry requires the expan- sion of fast speed and afford- able broadband internet ac- cess services across the country using various tech- nologies,” Shchyogolev told Itar-Tass news agency. Russia’s broadband penetra- tion is rapidly reaching a critical mass that will trans- form the sector. “Russia is generally five years behind the West in its broadband development, due to the historical undersup- ply of broadband networks,” says Anastasia Obukhova, a telecoms analyst with VTB Capital. “Increased broad- band speeds dramatically af- fect user experience online, resulting in a substantial rise in the amount of time spent online and volumes of po- tential ad space to be sold to advertisers.” European companies in- creased their online spend tenfold over the last decade from 2pc to 20pc as broad- band penetration rose from single digits to between 60- 80pc over the same period.

The early movers now are racing to stake out their share of this fast-moving market now while it is still up for grabs. Comstar already covers Mos- cow and 81 other Russian cities. Pridantsev says the company aims to expand op- erations to cover a total of 200 cities with populations over 100,000 people and has already been moving fast into the regions. The company controls 29pc of the broadband market in Moscow but only 4pc in the regions, say analysts, but are buying up regional assets to extend its reach into the hin- terland. At the start of this year the company added yet another regional operator when it paid $8m to buy Tenzor Tel- ecom based in the Yaroslavl region. “The purchase of Tenzor Tel- ecom is in line with Com- star’s strategy to expand into the Russian regional broad- band market, where pene- tration currently is at ap- proximately 15pc,” says Ivan Kim, a telecoms analyst with Renaissance Capital. Comstar’s broadband reach is growing even faster in the regions than for the country as a whole. The company’s regional broadband base was up by 44pc year-on-year in 2009, says Konstantin Chernyshev, an analysts at Uralsib in Moscow. Chernyshev says that by the end of 2010 Comstar’s total broadband base will increase by a quarter again to 1.5m households, including 560,000 households in the regions, making it one of the fastest growing companies in the country. “The company provides the best exposure to the fast- growing broadband market in Russia – particularly as its focus is, not on the high- ly penetrated Moscow mar- ket, but on the regions where the company has a greater scope for development,” says Chernyshev.

keeping the economy afloat. The issue remains vital though, and it’s no coinci- dence that shipping compa- nies and ports are at the fore- front of the government’s new privatisation drive. At the same time, much has been made of Russia’s fail- ure to build new roads since the collapse of the Soviet Union. Work on road build- ing finally began in earnest last year, with the govern- ment spending 1.2 trillion roubles (£29.5bn), while both

the president and the prime minister have blasted the construction sector recently for the high levels of corrup- tion – and therefore costs – involved in the process. The state originally allocat- ed 3.8bn roubles (£85m) to supplement private finance when it launched a wide PPP programme in 2006, and ap- proved 20 projects intended to follow that particular route, including many high- way projects – the Western High-Speed Diameter bypass in St Petersburg, for instance. However, progress was first hampered by legislative is- sues, and then stopped dead in its tracks by the crisis. The new deal sees the pri- vate side of the project take on a familiar shape for the construction and develop- ment sectors in Russia – that is, a large Western partner providing expertise and cash linking up with a domestic company which knows how to negotiate the tricky local environment. On April 28, just two days after the sign- ing, a similar set-up closed the final financial agreement on a 37bn-rouble (£840m) project to upgrade and op- erate St Petersburg’s Pulko- vo Airport, and another is ex- pected to agree closing documents on the 23.3bn- rouble (£526m) Odintsovo Bypass in the Moscow region within weeks. The next con- cession on the Moscow-St Petersburg Expressway is ex- pected to be offered in early 2011. The only fly in the ointment for the government when signing the current deal is that the European Bank for Reconstruction and Devel- opment and the European Investment Bank, which have been heavily involved in ad- vising on Russia’s PPP leg- islative framework, decided not to take part, despite an earlier preliminary agree- ment with VEB. Media re- ports suggest this is due to public protests over the road’s route through a forest just outside Moscow.

Markets Global uncertainty impacts on the latest Russian stock launches

Flotations tank as fear returns

A combination of factors, such as European financial downshifting and market volatility, have caused some Russian companies to cancel or rethink planned IPOs.

OLEG NIKISHENKOV

THE MOSCOW NEWS

“The external environment heavily affected the dynam- ics of the Russian stock mar- ket, as the volatility is huge,” said Yaroslav Lissovolik, chief economist for Deutsche Bank in Moscow. Russian agribusiness Rusa- gro which, in April, had ini- tially declared its domestic IPO on MICEX and RTS, re- cently announced the can- cellation of the placement due to volatility. This setback came a few days after Oleg Deripaska’s Strikeforce Min- ing and Resources, a world leader in molybdenum alloys, cancelled its IPO for the same reason. “As global market instabil- ity increased, it was very dif- ficult for Russian managers to assess what the market will be when they were mov- ing towards pricing of an offer,” said Roger Monson, chief strategist at Unicredit in London. With doubts emerging from sellers and buyers alike, investors now require higher risk premiums, he added. One relatively successful IPO was held by Russian seafood firm Russkoye Morye, just

before the May stock market nosedive. Although the place- ment was conducted at the low end of the spread – about $6 per share – it attracted $90m. Russian domestic factors, such as lack of corporate transparency, must be taken into consideration in assess- ing the Russkoye Morye of- fering, said Mr Monson. “Some Russian companies find global markets attrac- tive, but the level of disclo- sure required is higher than they are comfortable with. “Regulations for listing and transparency requirements in London are higher than they were – and higher than they are now in Shanghai and Hong Kong.” This dilemma, of whether to switch their listings to less demanding Chinese stock markets, is now taxing Rus- sian companies. “A listing [in China] for any company is more likely to have more vis- ibility,” added Mr Monson. But a listing in China could be a double-edged sword. “Failure in China will lead to lower world prices for commodities, and Russia will be affected,” said Alexei Mi- nayev, head of research at Rue, Man and Gore. “We have to admit that con- ditions for raising funds ex- ternally aren’t the best now; the main source of invest- ment for industrial compa- nies is their own profit.”

MOSCOW BLOG

Don’t panic, this is no Greek tragedy

Ben Aris

RUSSIA NOW

T

he crisis sparked by Greece’s inability to meet its obligations looks all too familiar

to Russia. At the start of 1998, Russia had just put in its first-ever positive growth and the spreads on the gov- ernment’s T-bills had fallen into the low teens, making the 8pc deficit easier to fi- nance. Russia looked like it would turn the corner after a decade of chaos.

Then the aftershocks of the Asian crisis a year earlier hit. Like now, the problems of one country spread to the next. Confidence in the Asian Tiger evaporated as one currency after another collapsed. It took a year for the Asian debacle to feed through into commodities, but once oil prices fell to $10 a barrel the Russian economy promptly col- lapsed. As Russia currency reserves dropped to $9bn, by August 17, 1998 the Kremlin gave up pretend- ing it could turn the boat round. The rouble was slashed to a quarter of its value against the dollar and a five-year moratorium was put on foreign debt repay- ments. This time Russia is stand- ing on the other side of the fence with the strong coun- tries. The EU’s inability to act decisively to bail out Greece has led to the spread of fear. As Greece’s neigh- bours are infected turmoil is spreading, making a res- cue even more difficult and expensive. From Russia’s standpoint things could be a lot worse. The first thing to note is that the problems are re- gional not global. The Sep- tember 2008 crisis hit the whole world, this crisis re- mains essentially a trans- atlantic problem: America

LONDON BLOG

Beware a plague of frogs…

Stephen Dalziel

RUSSO-BRITISH CHAM- BER OF COMMERCE

Russia’s benchmark RST index: 2010

right now. You’re just seeing your business – along with the wider economy – pull out of the worst financial crisis in living memory, you’re buoyed by the chance of getting those order books filling up again, when… wallop!

Like one of the plagues that beset the Egyptians as de- scribed in the Book of Ex- odus, along comes a cloud of volcanic ash which grounds aircraft for six days and then threatens to dis- rupt air travel for the next 20 years, according to some specialists. As well as those whose trav- el plans from the UK were disrupted, I have friends and associates who were stuck in Dubai, Turkey and Moscow, the last one neces- sitating a 36-hour return journey by air to Vienna, then on to Paris and final- ly the Eurostar to London. To add to the trauma, it seems that the worst side of human nature emerged, as black-marketeers moved in quickly to buy up tick- ets for trains and any other form of transport to ensure that they, at least, made a fat profit out of this tide of misery which swept Europe. I hope they’re proud of themselves. So you come back from all this to a general election in the UK which produces a hung parliament for the first time since 1974. While being too young to vote then I remember the year well, with its strikes and power cuts. We didn’t even have the consolation which we have this year of seeing England play in the World Cup, following a fail- ure to beat Poland in the last qualifying game at Wembley. Thank goodness we didn’t

I

f you’re superstitious and in international business, you must be having a pretty hard time of it

have an Icelandic volcano to deal with then, or else the prophets of doom would re- ally have been in their ele- ment. The comparison with 1974 is a fair one, though, and seems to give pointers to the future in 2010. Life was grim and uncertain; but, guess what? We pulled through, thanks to or despite the pol- iticians, and life not only went on but improved again, and in the UK there has been general stability ever since, but for the odd blip. It was in 1974 that I first vis- ited the Soviet Union. And since then that union has dis- appeared, and the upheavals in the largest constituent part which succeeded it, Russia, have made the political tur- moil in Britain in 1974 and 2010 seem very minor in- deed. Russian people coped with the collapse of the USSR and the subsequent rampant in- flation which followed (com- parable with that of Germa- ny after the First World War); a second loss of savings when it was decided to knock three zeros off the rouble, because the figures were becoming unmanageable (rather like the Italian lira in pre-euro days); and then the crash of the currency in 1998. But, surprise, surprise, Rus- sia has not imploded, no more than the United Kingdom has sailed out into the At- lantic and sunk. What the re- cent experiences of each country show is that when the going gets tough, the tough roll up their sleeves and get on with things. Business is business and there are sufficient people who believe that while a glo- bal recession and an Icelan- dic volcano may cause prob- lems of varying degrees, the problems are not insur- mountable. And such people will cope in the same way even if the next misfortune is a plague of frogs…

Stephen Dalziel is executive director of the Russo-British Chamber of Commerce.

and most of Europe are in deep debt they can’t pay off. However, for most of Asia and to a lesser extent emerg- ing Europe, their economies received a nasty shock but most have returned to growth. The second thing is that the 1997 Asian collapse spread to Russia via the fall in oil prices, but for the rest of the world it was business as usual. Indeed, the developed world was enjoying the ex- cesses of the dotcom bubble, which didn’t pop until 2000. Russia’s VTB Capital points out it only took Western mar- kets only four months ti re- turn to boom. Certainly the current turbu- lence is going to cause a lot more damage – and the pos- sibility of “double dip” is back on the cards – but growth in the region is strong and now the Bric countries are a new factor providing a badly needed patch of pros- perity to hold up things such as commodities. Even if Greece does default and the eurozone breaks apart, Russia is still in a fair- ly comfortable position. It has no external debt to speak of, plus more than $440bn in hard currency reserves. It ex- ports little to the West but has a huge auxiliary market in the East that is still grow- ing fast. Russia’s Achilles’ heel is its dependence on oil, which is the one thing that could bring it down. The world has been dived into the “old” and “new” and the gap between the two is likely to grow bigger. The old world, unused to crises, is struggling (and failing) to cope. The new world has been hardened in the fires of al- most two decades of contin- ual crisis and while this one is particularly nasty, for once it is not their crisis. Russia will be wounded along with everyone else if the eurozone blows up. But unlike 1998 it wont be a victim.

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DMITRY ROGULIN_ITAR-TASS

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