Alex Moroz is an Executive Director in VTB Capital's Infrastructure Capital team, based in London. He joined VTB Capital in 2007 and has worked there on projects such as the €1.1 billion (US$1.37bn) Pulkovo Airport concession, the first Russian project procured under a PPP framework to close without any state support. A large pipeline of projects has been promised in Russia by various authorities, but the market is young and relatively few projects have yet closed successfully. Moroz joined IJ on the fringes of VTB Capital's annual investment forum in London to discuss the state of the market and the legal and institutional framework for funding PPP projects in the country.
IJ: What are the prospects for attracting international banks to Russian projects?
Alex Moroz: A big problem for international banks is long-term rouble exposure. Hedging that exposure is a problem. If you look at our projects, the business of Pulkovo Airport is structured in such a way that its profits are largely linked to hard currency with a limited residual rouble exposure. Therefore it was not easy but possible to attract a large international lending group.
With other projects that do not have a natural rouble hedge, it would be more challenging to attract international banks, but not impossible. Some international banks are prepared to lend in roubles; some can still lend in euros or dollar with some degree of hedging.
IJ: Will the government offer a guarantee on foreign exchange risk, as has been reported it is prepared to do, for example for the high-speed rail programme?
AM: There have been discussions about that for some time. The Central Bank of Russia and the Ministry of Finance are considering the idea, but I don’t think anything concrete has come out. It would be extremely helpful. One of the issues with that project [high-speed rail] is the sheer size. If the government wants to raise that much money in the international markets it will have to be very creative.
IJ: What are the prospects for project bonds, and allowing state-managed pension funds to invest in them?
AM: Pension funds are allowed to invest in infrastructure bonds already as long as such bonds are essentially guaranteed by the Russian Government. To allow this without a guarantee, an amendment to the existing law would have to be put in place. If whoever wins the [high-speed rail] tender decides a viable route for this project would be issuing an infrastructure bond, definitely VTB Capital would be well positioned to be their agent. It would only be natural for VTB Capital as a leading bond arranger in Russia/Commonwealth of Independent States.
IJ: Russian project finance deals are mainly financed by the four largest banks – VTB Capital, Sberbank, Vnesheconombank and Gazprombank - apart from international banks. Do you see smaller Russian banks joining PF deals anytime soon?
AM: Lower tier banks do occasional project finance deals, but the problem with second and lower tier banks is for PF deals you need to raise long-term funding. Long-term funding in hard currency or in roubles is an issue. They would hardly ever be underwriters. They would be brought in later as members of a syndicate.
IJ: Is there enough liquidity among the top-tier banks to finance the PPP deals planned to hit the market in the next decade – not just high-speed rail but also a pipeline from Avtodor and various regional projects?
AM: If all that project pipeline comes to the market and materialises, then the answer is definitely not. The amount of projects that come to the market would definitely require a large amount of foreign investment. So inevitably Russia will have to find a way of structuring a project in a way they become attractive for international banks and investors alike.
IJ: What is being done to make the next wave of PPPs bankable?
AM: We are working with key agencies and with the Russian government to inspire them towards prioritising the issue of bankability of future projects. For example, we have been in discussions with Avtodor in relation to their forthcoming projects to be procured as concessions. There is a lot of
work going on in the background both at federal and regional levels. Before a project comes to the market, the chances are we’ll have spoken to the grantor and they’ll know what the market thinks.
IJ: The amendments to the federal law on concessions have now become law and an entirely new law on PPP is in planning. What do you think of the current legal framework?
AM: There are still strong discrepancies between normal international practice and what Russian law allows. Not all concepts in international PPP practice can be replicated in Russia. The natural way for Russia to attract foreign investment is to try to remove those discrepancies. The current law is not optimal but neither is any concession law in any country.
There are big issues that have been highlighted by the banking community, including over security provisions, the lack of a specific role for the lenders’ direct agreement, and overly strict currency regulations. Those are issues that keep being highlighted on every single project and are red-flagged as big risks by international banks. If Russia really wants to make progress, those red flags need to be eliminated and that’s what they are doing now.