Paving a 'Road to Russia's Future'

Putin is finally working on infrastructure, inviting international companies to bid on highway projects

Here's a number to ponder: 25,500. That's how many miles of expressways China has built since 1988. The same statistic for Russia? A few hundred. As the Chinese have carried out a building campaign unparalleled in history, Russia—with its billions of dollars in oil wealth—has done little to improve its infrastructure. Now, the Kremlin is embarking on an ambitious program to bring its highways, railroads, and airports into the 21st century. "A modern transport infrastructure is the real road to Russia's future," President Vladimir V. Putin said on Nov. 13 while visiting a highway construction site in the Siberian city of Krasnoyarsk.

Moscow isn't planning to skimp on public funding, but it's also looking to bring in plenty of private money to pay for the upgrades. The state railways and several ports and airports are planning public offerings to boost their capital, and foreign and domestic companies are being invited to build and operate highways in exchange for toll revenues. The plan is to construct 39,000 miles of new roads and 5,300 miles of railways by 2015. All told, Russia is hoping to raise $1 trillion for infrastructure investment over the next 10 years, with as much as 80% of the financing coming from private sources.


The first of the privately financed road projects is likely to be something called the Western High-Speed Diameter near St. Petersburg. Early next year, the local government is slated to choose one of four international groups vying for the right to build the 28-mile, eight-lane expressway that will link the city with existing highways to Helsinki and Moscow by 2015. Bidders on the $3 billion project include French highway operator Bouygues, San Francisco-based engineering giant Bechtel, and Deutsche Bank (DB). The winning consortium will operate the highway for 30 years, charging tolls starting at about $1.60 per car.

That's just the beginning. Toll roads on the drawing board include stretches of expressway from Moscow west to the Belarusian capital of Minsk, another north to St. Petersburg, and a third to the south toward Krasnodar, en route to the Black Sea resort of Sochi, the venue for the 2014 Winter Olympics. On Nov. 20, Brisa, Portugal's leading toll-road operator, announced a joint venture with Russia's Gazprom to bid for the Minsk and St. Petersburg roads. Such projects are potentially attractive for investors, offering higher returns than equity markets without the volatility, says Evgeny Trusov, head of the project finance group at Ernst & Young in Moscow. "The investment community is looking at this as an opportunity," he says. "It's a big market."

Russian highways, though, are hardly a one-way bet. Russia passed a law on concessions in 2005, paving the way for public-private toll highways, but lawyers say conflicts over the law's interpretation are inevitable. Tolls are also a novel concept for Russia, raising questions about how much Russians would be willing to pay. The anticipated investment boom could send construction costs spiraling, which would cut into returns. Russia's cement prices, already the highest in Europe, have more than doubled this year because of a real estate boom. And with so much money at stake, opportunities for graft will abound.

Those risks aren't deterring Russian tycoons. Basic Element, a conglomerate owned by metals magnate Oleg Deripaska, spent almost $2 billion this year on stakes in Austrian and German construction companies to get a leg up in the race to build infrastructure. So far, the company is evaluating projects worth $35 billion, says L.J. Mahon, Basic Element's infrastructure chief. "Over the next 5 to 10 years, there'll be as much opportunity here as anywhere in the world," Mahon says. And SMP-Neftegaz, an oil company in Tatarstan, decided to invest $77 million in an 89-mile expressway in the region after four of its employees were killed in a crash on that dangerous stretch of road two years ago. "Everyone says that China is a poor country, but there are tens of thousands of kilometers of toll roads," says SMP President Foat Komarov. "Why can't Russia do the same?"

Before it's here, it's on the Bloomberg Terminal.