Coming in from the cold

One of the least shocking revelations from the Wikileaks cables of the past few weeks was probably the news that US diplomats believe Russia to be a operating as a mafia state.

Investors and bankers have long been suspicious of the relationship between the Kremlin and foreign investors.

The international PPP community is also sceptical of Russia’s growth potential, and it has a right to be.

After years of procurement and months of protests over its proposed route, Russia’s US$2.1bn Moscow to St Petersburg M10 highway will finally get into the ground in January.

The deal was first put on the table in September 2007 and was one of only three PPPs that reached financial close in Russia this year – all launched pre-financial crisis.

So was 2010 a landmark year for Russian PPPs?

Advisors are not so sure. Political interference and currency risk are the two dragons looming over the market.

Sberbank, Russia’s largest bank, and development bank Vnesheconombank provided just over $1bn for the first 43km stretch of the M10.

International banks have been wary of taking on currency risk ever since the financial crisis. And the $1.45bn Pulkovo airport, the second deal that reached close this year, did so only through a combination of dollar, euro and rouble revenues, according to one high-profile PPP advisor in Moscow.

He is sceptical on the number of deals that may reach close next year.

"Unless there is a political decision [otherwise], I wouldn’t say more than two deals will close next year. This is on the PPP/project finance/commercial side."

Although there are many deals being talked about in Russia, the long road to financial close is clearly an issue the market must address.

Before the credit crunch it was estimated nearly $1 trillion is needed by 2020 to upgrade Russian infrastructure to modern standards – including $195bn for roads and $204bn for rail.

Approximately 80% of this should come from private investors, said the Russian administration, and it established it’s own Investment Fund in 2006 to facilitate this.

As the market stands currently, there is a gap between what’s happening in St Petersburg and the rest of Russia.

St Petersburg’s state administration is clearly keen on PPPs, with a strong local economy and some expertise with the model but the big money and government is in Moscow, says the advisor.

There are currently discussions around a high-speed rail route between Moscow and St Petersburg, but there are clearly deep problems procuring PPPs in Russia as whole.

Will the federal government continue to rely on state-owned banks and state-guaranteed bond issues or is this just a tool to plug the current funding gap?

The hard question now is would the three projects that closed this year have been successfully procured if they had launched in the current climate.

The second 626km section of the Moscow to St Petersburg highway, yet to be procured, may provide the answer.