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10 March 2011

Infrastructure Investor, 10.03.2011, Russia: ignore the stereotypes

Many investors still cling to the stereotype that in Russia the range of quality investments is limited to the resource sectors. The tide, however, has recently turned and investors are exploring a variety of new options. Infrastructure is an alternative asset class that attracts longterm investors around the world. Given the country’s scale and lack of investment in transport and utilities assets since the early 1990s, the infrastructure investment business in Russia has the potential to develop into a rich investment field.

Russia’s infrastructure sector has already benefited from the realisation of several large-scale projects, including: the 2012 APEC Summit; the 2013 Universiade in Kazan; and the 2014 Winter Olympics in Sochi. However, it is perhaps through Russia’s successful bid to host the 2018 FIFA World Cup that there will be the strongest impetus to accelerate infrastructure modernisation plans. The investment in preparations for the 2018 World Cup has been assessed at $50 billion, including up to $4 billion in building and renovating stadiums and $11 billion in infrastructure projects.

The Russian government has confirmed that private companies, both domestic and foreign, will be offered to play a key role in infrastructure development projects. The government acknowledges that external investment will be essential in supporting its goal of investing $1 trillion over the next 10 years in creating new infrastructure facilities and modernising the existing ones. Investors are expected to be attracted to revitalised growth in Russia and less constrained financial markets.

Established legal framework

The government’s plans to attract private investors are supported by an established legal framework that includes federal concession and local public-private partnership (PPP) laws that have already been successfully tested on several large-scale infrastructure projects. This includes the first two toll road concessions awarded to private investors that financially closed in 2010: the Moscow-St. Petersburg and Moscow-Minsk highways.

At VTB Capital, we are proud to have been part of the acclaimed Pulkovo airport PPP project. VTB Capital, acting as both financial advisor and equity co-investor, has attracted ?1.2 billion of investment into the project. The project to redevelop Pulkovo airport in St. Petersburg is the first major PPP project in Russia to be financed without government support.

Meanwhile, the City of St. Petersburg continues to be a leader among Russian regions in terms of its pipeline of PPP projects. The most recent deals offered to investors in St. Petersburg include the Neva Water project, which envisages a reconstruction of a water supply station. Additionally, the central section of the Western High Speed Diameter road will be procured on a PPP basis in 2011. We expect several other regions, including Moscow, to follow the City of St. Petersburg’s lead and announce tenders for projects in transport and utilities in the near future. Federal government is also developing new road PPPs through GK Avtodor, and high-speed rail projects through Russian Railways.

Investors are also being attracted by plans to privatise infrastructure assets. Federal government has adopted a mid-term programme aimed at raising around $50 billion from asset sales. The programme envisages the privatisation of stakes in 12 sea and river ports and a number of regional airports. Regional authorities are also engaged in privatisations, and we have already seen some key infrastructure assets being put on sale by the City of Moscow, and a drive to reorganise its local utility and transport enterprises with an aim to make them attractive to investors.

Through our experience and expertise, we believe VTB Capital is well positioned to both invest and advise in the upcoming infrastructure investment opportunities in Russia, and we are focused on sharing our knowledge and resources with international partners and co-investors.

We are extremely proud of the recognition that our projects generate in the market. The Pulkovo Airport reconstruction project has been recently awarded Infrastructure Investor awards for Global PPP Transaction of the Year and European PPP Transaction of the Year. These awards are the most renowned in the industry and we are proud to receive them.

In our view, the Pulkovo financing has become the yardstick against which infrastructure transactions in Russia and CIS will be measured in the years to come. It has a number of unique features that cannot be easily replicated in other deals, but the majority of key aspects can be used as a template for future PPP projects.

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