Foreign investors eye expansion into Russian road-building industry

07.11.2016

The Russian road sector looks set for international investment – Eugene Gerden writes. Amid the ongoing recovery of the Russian economy from the effect of Western sanctions, foreign investors are considering accelerating their activities in the Russian road building industry.

In recent months the establishment of joint ventures with local road building companies has become no longer as profitable for foreign investors as it was in the past. As a result the majority of foreign investors are considering independent expansion in the Russian road building industry.

Two key examples are the Turkish company Cengiz Holding and Italian firm Salini Impregilo. The firms were recently among the main bidders for the building of the new Solntsevo – Butovo road in the south-west of Moscow, which should link the Kaluga and Borovsk Highways.

However both companies lost a tender to Russian firm Mostotrest, which recently signed a contract for the building of the road with a total cost of US$500 million (RUB 26 billion).

The Solntsevo – Butovo road is not the only road project providing interest in Russia for these companies. Both Cengiz and Salini are interested in the reconstruction of the A101 Moscow – Maloyaroslavets – Roslavl road, which is a Russian federal highway running  from Moscow to the border with Belarus, (where it turns into the P43 to Bobruysk). The tender for this route will be announced by the Russian Government by the end of the current year. The value of the contract will vary in the range of $$374-481 million (19.45-RUB 25 billion).

It is likely that the major competitor for the contract for these companies will come from the local ARKS Group, the Russian financial holding, controlled by the Russian Lavlentsevyh family, one of Russia’s richest families.

In the meantime, according to analysts of Rosavtodor, Russia’s state corporation responsible for road building in the country, the trend for international bids for road projects in the country is fully justified.

According to Rosavtodor, expansion into the Russian road building industry in recent years has become more attractive for foreign investors in terms of profits, instead of joint implementation of projects with local players.

This is mainly due to the reduction of profitability of the majority of projects in the field of transport infrastructure, and in particular road building in Russia. Sharing profits with Russian partners has become less interesting for foreign investors than in the past.

At present the existing access to cheap lending and hedging of currency risks currently remain the main advantages of foreign companies, involved in road building in Russia. By comparison local firms do not have an opportunity to receive loans with low interest rates from Western banks due to sanctions.

Analysts for the Russian Ministry of Industry and Trade have also noted a significant increase of interest from foreign investors in participation in public and state contracts.

According to their calculations, the average yield of road building projects in Russia is currently varied in the range of 10-15%, which is relatively high for the country, and its road building industry.

Doing business in Russia has become less risky for foreign investors. Due to ongoing stabilisation of the Russian economy, the national government has opted to provide additional protection for foreign companies implementing their business in Russia, and in particular in regard to currency risks and currency fluctuations. This took place through the introduction of amendments in the Russian legislation, which allowed contractors and investors in road building in Russia to unilaterally demand compensation in the case of an increase in the cost of the project, due to currency fluctuations.

In the meantime, according to Oleg Belozerov, a former head of the Federal Road Agency, who was recently appointed a general director of Russian railway monopoly RZD, this is just the beginning. In the next few years other foreign companies are expected to expand in the Russian road building industry.

According to Belozerov, in recent years the Russian government has created favourable conditions for attracting foreign investors into the domestic road building industry. He said, “Both federal and regional budgets do not have enough funds to successfully implement the programs and projects in the field of road construction in Russia. Therefore the attraction of private investors, and in particular foreign, which have long-term money should become an important reserve for the national road building industry.”

The government also plans to ease bureaucratic hurdles for foreign investors, involved in road building activities in Russia. According to recently announced state plans, the winners of the tenders for road building in Russia will be no longer required to address many legal issues, relating to the search and preparation of the construction sites.

Currently, the Russian government plans to classify the issues related to the search of construction sites as a separate phase of construction. According to the new state decree, foreign investors will not be obliged to resolve disputes with the owners of the land before they can begin construction, as in the past. According to Konstantin Timofeev, chairman of Moskomstrojinvest, an investment committee of the Moscow city government, the number of foreign companies, which are interested in the building of roads in Moscow has significantly increased.

According to Timofeev, many companies, so far, have not even had branches in Russia, so their Russian business will be built from scratch.

Among the foreign investors interested in the building of roads in Moscow are Odak Group-Moscow, Esta Construction, Sunrise Hyatt Capital Holding, the Turkish ALARKO Contracting Group, Japanese construction company Nichiro Capital Group, and the Chinese real estate development company Grinlend Group.

World Highways