Gazprombank - Russian Infrastructure - Research

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JULY 3, 2015 RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

Research Department Copyright 2003-2015.Gazprombank (Joint Stock Company)

1

Russian InfrastructureMikhail Ganelin

+7 (495) 983 18 00 (ext. 54583)[email protected]

Yakov Yakovlev

+7 (495) 988 24 92 (ext. 22492)[email protected]

Matvey Tayts+7 (495) 980 43 89 (ext. 54389)[email protected]

To build or not to build

that is the question

Low oil prices and a fall in budget revenues have forced the government

to reduce spending on infrastructure, though this is partially

compensated by recovery of the accumulated pension system and money

from the National Wealth Fund. Meanwhile, changes to laws on

concessions and the securities market heighten the attractiveness of the

sector for private investors. In this report, we analyze how the volume and

structure of investment in infrastructure will change by 2020. We focus in

particular on Chinas policy relating to investment in assets of foreigncountries, including Russia.

Reduction of infrastructure investment... In 2015, investments will be cut

by 10-15% of the scheduled volume due to a decrease in budget spending,

while about RUB 11 trln will be spent on transport and energy infrastructure

(RUB 2.2 trln or $40 bln on average) until 2020, in line with investments made

over the past five years. However, investments will contract in real terms

depending on the inflation rate and their proportion in GDP wi ll decrease from

3.5% to 2.5%. The energy sector will see the steepest decline (-37%),

followed by airport and port infrastructure (12% and 45%, respectively). Road

development will account for half of investments, but their growth will not

exceed the inflation rate. The priority will be on projects associated with the

World Football Championship in 2018, the Moscow-St. Petersburg Highway,and the Central Ring Road. Investments in railway infrastructure are

stagnating and the greatest growth in investments will go toward expansion of

the subway system.

while the proportion of off-budget investments will be on the rise.

Pension savings will become a large source of financing for infrastructure

projects. This is the main internal source of long money, i.e. over RUB 300 bln

per year amid restricted access to external markets. An additional source will be

NWF (up to RUB 1.7 trln on infrastructure), which will help to complete on

schedule a number of projects in progress. Amendments that have been

passed concerning laws on the securities market, on joint stock companies and

on concessions aim to expand the ability to draw investments into infrastructure

and lower risks for investors, who maintain a keen interest in high-yield projects,especially road concessions and airports. The scope of infrastructure bonds is

set to increase dramatically, perhaps exceeding RUB 1.5 trln by 2020.

Cooperation between Russia and China in the development of

infrastructure is strengthening. Over the past 10 years, the volume of

Chinese investment in foreign assets rose from $19 bln to $150 bln per year. In

2014, direct Chinese investment in Russia doubled according to CBR estimates

to $1.3 bln, with a goal of increasing this figure to $20 bln. This is being

facilitated by the project envisioned by China entitled the Silk Road Economic

Belt, which proposes active cooperation in growth and integration between

neighboring countries, including through Chinese financial resources under the

auspices of the Asian Infrastructure Investment Bank (AIIB), in which Russia is

participating as a founding member.

Investment in infrastructure, RUB bln

Source: Federal Special-Purpose Program,Gazprombank estimates

Infrastructure investment breakdown

Source: Finance Ministry, CBR, Gazprombank estimates

Pension savings dynamic, RUB bln

Source: Finance Ministry, CBR, Gazprombank estimates

Top 15 country-recipients of Chinese directinvestment

Source: Heritage Foundation

0 500 1,000 1,500 2,000 2,500 3,000 3,500

PORTS

AIRPORTS

METRO

GRIDS

RAILWAYS

GENERATION

FEDERAL ROADS

REGIONAL ROADS

2016-2020 2011-2015

28%

24%14%

12%

9%

8%3% 2%

REGIONAL ROADS FEDERAL ROADSGENERATION RAILWAY INFRASTRUCTUREGRIDS

AIRPORTS PORTS

0%

10%

0

5,000

2007

2008

2009

2010

2011

2012

2013

2014

2015E

2016E

2017E

NON-STATE PENSION FUNDSPRIVATE AM

VEB% OF GDP

7261

3931 31

24 24 21 21 20 18 17 17 15 15

01020304050607080

US

AUSTRALIA

CANADA

INDONESIA

BRAZIL

UK

KA

ZAKHSTAN

RUSSIA

NIGERIA

SAU

DIARABIA

V

ENEZUELA

IRAN

PERU

ALGERIA

A

RGENTINA


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CONTENTS

Investment in infrastructure ............................................................................................................................ 3

Investment in Russian infrastructure ................................................................................................................................................................... 4

Railroad infrastructure ................................................................................................................................................................................................ 7

Core investment projects ........................................................................................................................................................................................... 8

Highways ......................................................................................................................................................................................................................... 11

Russias seaports .......................................................................................................................................................................................................... 17

Airports ............................................................................................................................................................................................................................ 23

Sources of financing .......................................................................................................................................... 29

State budget ............. ............. .............. ............. ............ .............. ............. ............. ............. ............. ............. .............. ............. ............. ............. ............. .. 29

NWF.................................................................................................................................................................................................................................... 31

Pension savings ............. ............. ............. ............. ............. ............. ............. ............. .............. ............. ............. ............. ............. ............. ............. ......... 31

Bank loans ....................................................................................................................................................................................................................... 34

Legislative amendments ................................................................................................................................. 35

Chinese investment in foreign assets ......................................................................................................... 37

Chinas investment in Russia .................................................................................................................................................................................. 40

New Silk Road.................................................................................................................................................. 42

Appendix 1: Russian-chinese joint projects ............................................................................................. 46

Appendix 2: List of infrastructure bonds .................................................................................................. 48

Appendix 3: Russias largest public infrastructure companies ......................................................... 50


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3

INVESTMENT IN INFRASTRUCTURE: BEST TOHEIGHTEN EFFICIENCY DURING A CRISIS

It is well-known fact that an increase in government spending to develop infrastructure is

a good instrument with which to fight recession, as it facilitates a multiplication effect

within the economy. Companies from various sectors become involved in construction,

which leads to the creation of new jobs, while growth in employment helps support

consumption. However, in Russias current economic conditions, the multiplication effect

from such investment will be minimal, as the country continues to enjoy a low level of

unemployment (5.8%), while the cost of capital is high. This means that there are no

resources for new jobs, and companies will use a significant part of their income to

service current debt rather than make new investments. On the other hand, given the

current economic downturn, a decision to reduce public investment would exert further

pressure on the economy and thus may be unacceptable.

Consequently, we believe that the best solution is to maintain public investment on alevel seen over the several past years until interest rates decline to a comfortable level

and the economy resumes growth. However, during the current period of high interest

rates and marginal private activity, the government should focus on expansion of

funding mechanisms for infrastructure projects and improvement of legislation, including

for the purpose of reducing risks for investors. As soon as robust economic growth

resumes, these factors will drive an inflow of private investment. We note that such

solutions aimed at supporting investment in infrastructure projects that are under

government consideration generally coincide with our views.

Need to support investment at a high level amid a shortage of funds is forcing the

government to seek effective solutions more quickly

Over the past year, the Russian government has made a range of important decisions

that significantly improve the attractiveness of investing in domestic infrastructure.

The government decided to preserve the cumulative part of pensions, which will

become the most important source of funding for infrastructure projects.

A range of substantial amendments that heighten the potential to attract investment

in infrastructure projects and reduce risks for investors have been introduced into

laws on the securities market, joint-stock companies and concessions.

The government is working on a mechanism for collecting tolls from heavy trucks

for access to federal highways. which will supply budgets with additional funds that

can be used for road construction projects.

The quality of presentations on large infrastructure projects implemented by such

corporations as Avtodor is improving noticeably. This helps to attract manyparticipants to the relevant tenders (3-4 large consortiums) while increasing the

competitiveness and efficiency of investments.

The government also continues to reorganize the countrys airports. Moscows

largest airports have been merged into holdings, the controlling stakes in which will

be owned by private investors. Regional airports have been transferred to the

ownership of local authorities, which should organize the privatization process and

attract private investors for further development of these airports.

Russia has intensified talks with China regarding joint development of

transportation corridors. The construction of a high-speed mainline from Moscow to

Kazan is consistent with Chinas large-scale project dubbed the Silk Road

Economic Belt.

An increase in government spending on

development of infrastructure is a good

instrument with which to fight recession, as it

facilitates a multiplication effect within the

economy. However, in current economic

conditions, the multiplication effect from such

investment will be minimal.

During the current period of high interestrates and marginal private activity, the

government should focus on expansion of

funding mechanisms for infrastructure

projects and improvement of legislation,

including for the purpose of reducing risks for

investors.


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Investment in Russian infrastructure projects stagnating, notdeclining, but their share in GDP is decreasing

As in our previous infrastructure overview report entitled A Big Ship Sails Far

(published in 2014), we based our research on updated and revised programs as well

as documents aimed at stimulating investment in Russian infrastructure projects.

Federal Budget Spending for 2015-17;

Federal Target Program: Development of the Transport System of Russia until

2020, updated in April and June 2015;

Transport Strategy until 2030;

Federal Law on Concession Agreements on Securities Market;

Investment programs of Russian Railways, Avtodor, airport operators, and large

stevedoring and electricity companies;

Throughout 2016-20, a total of RUB 11 trln will be invested in transport and energyinfrastructure (RUB 2.2 per annum on average, or $40 bln), comparable to overall

investments made over the past five years. Zero growth will lead to a decline in the

share of investment in GDP from 3.5% to 2.5%. Utilities will face a major decline in

investment (-37%), while the figure for airport and seaport infrastructure will grow by

12% and 45%, respectively. Road development will account for almost half of all

investment. The top-priority projects include those that need to be completed before

the 2018 World Football Championship: the MoscowSt. Petersburg highway and the

Central Ring Road (TsKAD). Investment in railroad infrastructure, which accounts for

12% of all investment, is stagnating as well. Essentially, extension of the BAM and

Trans-Siberian Railway remain the only large-scale projects in the near term. Should

construction of the MoscowKazan HSR commence (our estimates do not yet

incorporate this project), infrastructure will see another spike of investment totaling

RUB 1 trln.

Transport infrastructure spending to rise in nominal terms but decline in real terms

We estimate that RUB 9 trln (around RUB 1.8 trln per annum, $32 bln) should be

invested directly in transport infrastructure (roads, railroads, airport and seaport

construction, reconstruction and extension) within the next five years (2016-20), equal

to around 2.0% of GDP vs. 2.3% over the past five years. Compared with our analysis

from last year, the nominal figure will remain nearly flat but in real terms will be lower

given the higher level of inflation. Our analysis reveals that transport infrastructure

spending in 2015-16 will be cut by around 10-15% of the initially planned volume,

although the figure will not be lower than the 2013-14 nominal spending of around

RUB 1.6 trln. A cut in federal budget expenditures will be offset by higher financing

from the NWF and the pension savings system. Thus, although the financing issue ischallenging, it is far from critical.

Not feasible to cut financing of many projects

Moreover, we believe it is impossible to cut the financing of many infrastructure projects.

Many projects, including the Moscow St. Petersburg HSR and Moscow Metro, are

under currently construction, and reduced funding will merely complicate the situation.

Moreover, Russia is committed to providing high-quality infrastructure for the 2018

World Football Championship (e.g. the TsKAD) and thus there is no leeway to slash

investment. Another example is the surprising boost in passenger traffic on domestic

flights, among other reasons caused by ruble devaluation and the growing popularity of

domestic travel. Thus, reducing investment in airport modernization also seems risky

(thus the extension of Sheremetyevo airport is underway, while construction of a new

airport in Rostov-on-Don has begun). Lastly, ruble devaluation has triggered anincrease of raw material exports, which has created a need for more intensive

investment to expand seaport export capacities.

Throughout 201620 a total of RUB 11 trln

will be invested in transport and energyinfrastructure (RUB 2.2 per annum on

average. or $40 bln), comparable to overall

investments made for the previous five years.

Zero growth will reduce the share of

investment in GDP from 3.5% to 2.5%.

It is impossible to cut the financing of many

infrastructure projects.
http://www.gazprombank.ru/upload/iblock/007/gpb_russian%20infrastructure_eng_150714.pdfhttp://www.gazprombank.ru/upload/iblock/007/gpb_russian%20infrastructure_eng_150714.pdfhttp://www.gazprombank.ru/upload/iblock/007/gpb_russian%20infrastructure_eng_150714.pdf


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As for weaknesses, we note the challenging situation in regional roads funding. Many

regions are in much poorer financial condition than the federal center. The total budget

of regional road funds will decrease by 12% to RUB 713 bln in 2015, according to

Federal Treasury estimates. However, we expect actual spending to be even lower, i.e.about RUB 540 bln (-23% YoY).

Overview of investment in infrastructure, RUB bln

2011 2012 2013 2014 2015 2016 2017 2018 2019 20202011-2015

2016-2020

Federal roads 349 442 505 527 505 500 567 528 537 610 2,329 2,743

Regional roads 425 646 731 709 545 586 616 642 672 710 3,056 3,226

Railroad infrastructure 234 288 275 222 266 196 264 280 273 342 1,284 1,355

Metro 50 96 100 144 178 171 176 181 181 181 569 891

Airports 31 41 64 79 85 76 76 65 60 61 301 337

Seaports 18 26 43 38 71 79 69 57 46 36 196 286

Total transportinfrastructure

1,108 1,540 1,717 1,718 1,651 1,608 1,768 1,752 1,769 1,941 7,735 8,838

CAGR 21.4% 39.0% 11.5% 0.1% -3.9% -2.6% 10.0% -0.9% 0.9% 9.7%

% of GDP 2.0% 2.5% 2.6% 2.4% 2.2% 2.0% 2.0% 1.9% 1.8% 1.8% 2.3% 1.9%

UTILITIES

Generation 603 523 637 546 392 367 333 330 309 306 2,701 1,646

Grids 355 329 325 284 177 174 179 213 216 216 1,470 998

Total electric utilities 958 851 962 830 569 541 512 543 525 522 4,170 2,644

CAGR 5% -11% 13% -14% -31% -5% -5% 6% -3% -1%

% of GDP 1.7% 1.4% 1.5% 1.2% 0.8% 0.7% 0.6% 0.6% 0.5% 0.5%

Total infrastructureinvestment

2,066 2,391 2,679 2,548 2,220 2,149 2,280 2,295 2,294 2,463 11,905 11,482

CAGR 13.5% 15.7% 12.0% -4.9% -12.9% -3.2% 6.1% 0.7% -0.1% 7.4%

% of GDP 3.7% 3.8% 4.0% 3.6% 3.0% 2.6% 2.6% 2.5% 2.3% 2.3% 3.5% 2.5%

Source: Gazprombank estimates


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6

Investment in infrastructure, RUB bln


Investment in infrastructure, 2011-2015 vs. 201620, RUB bln Breakdown of investment in infrastructure, 201620, RUB bln

Source: Federal Target Program. Gazprombank estimates Source: Federal Target Program. Gazprombank estimates

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%4.0%

4.5%

0

500

1,000

1,500

2,000

2,500

3,000

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

FEDERAL ROADS REGIONAL ROADS RAILWAY INFRASTRUCTUREMETRO AIRPORTS PORTS

GENERATION GRIDS % OF GDP

0 1,000 2,000 3,000 4,000

PORTS

AIRPORTS

METRO

GRIDS

RAILWAYS

GENERATION

FEDERAL ROADS

REGIONAL ROADS

2016-2020 2011-2015

28%

24%14%

12%

9%

8%3% 2%

REGIONAL ROADS FEDERAL ROADS GENERATION

RAILWAY INFRASTRUCTURE GRIDS

AIRPORTS PORTS


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7

Railroad infrastructure: Eastern Polygon is the only major projectslated for implementation. Will there be an HSR?

The volume of investment in the railroad sector under the Federal Special-Purpose

Program entitled Development of the Transport System of Russiawill amount to

RUB 2.1 trln ($38 bln at a RUB/USD rate of 55) in 2016-20. This is 46% more than

was spent over the previous five years (2011-15), although at the projected annual

average inflation rate of 7-8% in real terms investment could remain virtually

unchanged. According to our estimates, about 60% of all spending under the

program RUB 1.3 trln or RUB 260 bln ($5 bln) per year is expected to be

earmarked directly for the expansion of railroad infrastructure. The rest will go

toward purchasing locomotives, railroad cars, R&D and social projects not directly

related to infrastructure.

Over the next few years, the largest projects in the sector will be as follows:

construction of the Eastern Polygon (expansion of BAM and the Trans-Siberian

Mainline), expansion of approaches to Russias northern and southern ports, and

construction of the Northern Latitudinal Railway the SalekhardNadym railway spur

and a bridge across the Ob River. A new project in the program calls for construction

of the 748 km Prokhorovka-Bataysk railway line, which should bypass Ukraine. So far,

this project is not included in Russian Railways investment program and it can be

implemented only with support from the federal budget. Furthermore, a project to build

the Moscow-Kazan High-Speed Railway (HSR) has still not been included in a

special-purpose investment project or in Russian Railways investment program,

although the design stage has already kicked off.

ElegestKyzylKuraginostate-private partnership in railroads

Construction will soon commence of the 410 km Elegest Kyzyl Kuragino railroad,

which will connect coal deposits in the Republic of Tuva with Krasnoyarsk region and

Russias main railroad lines.

Road building is part of a large-scale vertically integrated project that includes

development of the large Elegest coal field, construction of a mining and processing

plant, a railroad to deliver coal, and a coal terminal in the Far East at Vanino port.

The key aspect of the project is that it is being implemented with funds from a private

investorTuva Energy Industrial Corporation (TEPK). A total of RUB 133 bln will be

directly invested to build the railroad, while RUB 86.9 bln will be contributed from the

National Wealth Fund. Following the completion of construction, its throughput

capacity will allow to transport around 15 mln tonnes of coal per year. A memorandum

of intention to build the railroad was signed with the Chinese contractor China Civil

Enginring Construction Corporation ().

The project has great potential for further expansion the railroad may be extendedto West Mongolia and further to China, which will give Russia a new transportation

corridor for trade with Asian countries.

At the projected annual average inflation rate

of 7-8% in real terms, investment in railroads

could remain virtually unchanged.

Over the next few years, the largest projects

in the sector will be as follows: expansion of

BAM and the Trans-Siberian Mainline,

expansion of approaches to Russiasnorthern and southern ports, and construction

of the Northern Latitudinal Railwaythe

Salekhard-Nadym railway spur and a bridge

across the Ob River.


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Largest railway infrastructure projects

PROJECTINVESTMENTS IN 2011-15,

RUB BLNINVESTMENTS IN 2016-20,

RUB BLN

EXPECTED TIMELINE FORCOMPLETION OFCONSTRUCTION

Expansion of Trans-Siberian Railway and Baikal-AmurMainline (BAM)

145.0 415.0 2014-18

Construction of the ProkhorovkaBataisk railway(bypassing Ukraine)

0.0 479.8 2017-20

Expansion of railway approaches to seaports ofRussias North Basin (Baltic)

74.4 43.0 2010-18

Expansion of railway approaches to southern seaports 6.5 30.9 2010-20

Expansion of the TobolskSurgut railway(transportation of petrochemical feedstock)

38.3 14.4 2017

Construction of the SalekhardNadym railway (for gasproduction in Yamal)

0.0 84.7 2017-2018

Construction of a railway bridge across the Ob Rivernear the city of Salekhard

2.0 67.1 2015-19

Moscow-Kazan High-Speed Rail Project 0.0 1,068.0 2016-18

Source: Federal Target Program Development of Transport System of Russia, Gazprombank estimates

Core investment projects

Source: Expert magazine, citing data provided by the Institute of Economy and Transport Development

Expansion of BAM and Trans-Siberian Mainline (Eastern Polygon): construction is

underway

Among the projects approved for the next three years, the bulk of investments will go

toward one expansion of the Baikal-Amur Mainline (BAM) and the Trans-Siberian

Mainline (the Eastern Polygon) at a total cost of RUB 560 bln. Sources of financing will be

as follows: the federal budget (RUB 110 bln), the National Wealth Fund (RUB 150 bln),VEB and state banks (which buy infrastructure railway bonds), as well as the operating

cash flow of the railroad monopoly itself (around RUB 300 bln). (We provided details on

this project in our report of last year).

Moscow

Saint Petersburg

Vladivostok

Khabarovsk

Ussuriysk

VaninoTynda

Chita

Severobaikalsk

Irkutsk

Murmansk

Taishet

Lena

Achinsk

Novokuznetsk

Barnaul

NovosibirskOmsk

Tobolsk

Surgut

Noyabrsk

Vorkuta

Chelyabinsk

Perm

Samara

KazanSaratov

Volgograd

Yaroslavl

Rostov-on-Don

Novorossiysk

TuapseSochi

KonoshaAPPROACH TO FAR EAST

PORTS

Komsomolsk-on-Amur

EXPANSION OF TRANS-

SIBERIAN RAILWAY AND

BAIKAL-AMURMAINLINE

EXPANSION OF EXPORTS

TO CHINA

SHIPMENT OF FEEDSTOCK

FOR PETROCHEMICALS

INDUSTRY

RECONSTRUCTION OF BOTTLENECKS ALONG TRANS-

SIBERIAN RAILWAY AND ENSURING COAL SHIPMENT

FROM KUZBASS

Yekaterinburg

EXPANSION OF RAILROAD CARRYING

CAPACITY FROM URAL TO CENTRALREGION

Ufa

PASSAGES TO

SOUTHERN PORTS

ENSURING GAS PRODUCTION

ON YAMAL

CARGO BYPASS OF

MOSCOW HUB

DEVELOPMENT OF PASSENGER

SERVICE BETWEEN MOSCOW AND

ST. PETERSBURG

EXIT TO PORTS OF

MURMANSK AND

ARKHANGELSK

2012 20152020 Sections

2012 20152020 Stations

2012 20152020 Electricity supply, electrification and dispatching control

LIMITING ELEMENTS

Among the projects approved for the next

three years, the bulk of investments will go

toward oneexpansion of the Baikal-Amur

Mainline (BAM) and the Trans-Siberian

Mainline.


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Planned investment in railway infrastructure projects, RUB bln

Source: Federal Target Program Development of Transport System of Russia, Gazprombank estimates

Sources of financing for Russian Railways capex, RUB bln

Source: Russian Railways, Gazprombank estimates

Who will build BAM?

The first tender for construction of the Eastern Polygon was held in August 2014. It was

won by a construction consortium consisting of Bamstroymekhanizatsiya,Setstroyenergo, Stroytrest and Transstroy-DV. The contract is valued at RUB 133.5 bln,

including VAT (30% of the total cost). The contract provides for construction of 306 km

of new railroad track and reconstruction of more than 230 artificial facilities, bridges and

tunnels. The new tenders have yet to be announced. Russian Railways does not yet

intend to bring in foreign contractors, including those from China.

Moscow-Kazan HSR: China is ready to invest

Last year, it seemed that the Moscow-Kazan HSR was one of the infrastructure

projects that would be put on hold until better times. With total declared investments

reaching RUB 1.068 trln, only 40% was covered by specific sources of financing.

However, China showed interest in the project: the countrys authorities at the end of

last year unveiled a concept for creating the Silk Road Economic Belt (see below).Among other things, it calls for developing transportation channels from Asia to

Europe, including through Russia.

198234

288 275

200

141

56

139 155

273

342

4

22 125

125

125125

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

INCL. TRANS-SIBERIAN AND BAIKAL-AMUR RAILWAYS EXPANSION INVESTMENTS INTO RAILWAY INFRASTRUCTURE

9850

10038

2852

107

12039

89

7172 98 98

110216

217

250 234149 204

317

395

480 467

389414

438 450

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015E 2016E 2017E

INFRASTRUCTURE BONDS BORROWINGS ON MARKETFUNDS FROM SALE OF SUBSIDIARIES' SHARES CONTRIBUTIONS TO CHARTER CAPITALOWN CASH FLOW

China has shown interest in the project: the

countrys authorities at the end of last year

unveiled a concept for creating the Silk Road

Economic Belt


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10

A memorandum on collaboration signed in early May 2015 between Russia and China

calls for the HSR to be built by a company with capital owned by the Chinese Silk Road

Fund (under the management of Asian Infrastructure Investment Bank (AIIB), which is

being formed by China), which will contribute up to RUB 100 bln. A similar amount is tobe invested by Russian authorities. In addition, Chinese banks are ready to allocate

another RUB 250 bln. On the part of Russia, RUB 150 bln could be contributed by the

NWF, about RUB 100 bln by the federal budget and Russian Railways, and about RUB

140 bln as an infrastructure bond issue that would be bought up by VEB. Thus, it

remains unclear where the other RUB 330 bln would come from. Part of these funds

could be contributed by Russian banks, while the cumulative part of pension savings

would make it possible to boost the size of the infrastructure bond issue.

Sources of financing, RUB bln

National Wealth Fund 150

Federal budget 21

Russian Railways budget 31

VEB pension savings via infrastructure bond issues 150

Silk Road Fund (HSR capital) 100

Chinese banks (borrowings) 250

Other unidentified sources 366

Total 1,068

Source: Interfax, Gazprombank estimates

The railroad is currently in the design stage. The tender was won by a Russian-

Chinese consortium consisting of Mosgiprotrans, Nizhegorodmetroproekt and China

Railway Eryuan Engineering Group. The total cost of the work to be carried out in2016 is RUB 21 bln. It should take two years to build the railroad, which would be

finished in 2018, although it seems to us that such a rapid construction period looks

too ambitious. In any case, while the railway is in the design phase, the interested

parties have time to discuss the details and figure out whether the Russian economy

can handle such a big project.

HSR construction in China and impact on the countrys economy

The construction of an HSR would definitely have a positive economic impact on the

expansion of any countrys economy.A considerable amount of economic research

points to the agglomeration effect. The areas through which an HSR runs show

heightened GRP growth averaging 0.5-0.7% per annum, while the householdincomes of peripheral areas approach the higher income levels seen in large cities, a

factor which promotes consumption. In addition, an HSR would develop tourism.

Small regional companies have an incentive to speed up growth, which heightens the

level of competition.

Despite the advantages that HSRs offer the economy, the ROI offered by these

railways remains questionable and requires detailed analysis. For example, there is

an opinion that many HSRs in China are loss-making. The most successful project is

the 1,318 km Beijing-Shanghai HSR, which was built in 2011 at a cost of $32 bln. In

2014, for the first time it generated net income ($192 mln), while total revenues

reached $4.6 bln. In addition, the HSR was used by more than 100 mln passengers

per year. The line is expected to have a payback period of 14 years.


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11

Export of Chinese HSRs

China created the longest and most efficient HSR system in the world and has taken

steps to export HSR construction services to other countries, particularly since the

construction cost of HSRs in China is about half as much as in Europe.

Aside from Russia, China is in talks on building HSRs with Mexico, Turkey, India,

Thailand and other countries. To date, however, negotiations have been successful only

with Turkey, where a Turkish and Chinese consortium is building a 533 km HSR

between Istanbul and Ankara. The consortium consists of Railway Construction

Corporation, China National Machinery Import and Export Corporation, as well as

Turkish construction companies. The total cost of building the railway is about $4 bln. As

part of this project, China has provided a $750 mln loan.

This year, the Mexican government was forced to terminate a similar contract with

China for the construction of a $3.7 bln HSR due to the decline in oil prices, which

reduced budget revenues. The contract itself was stipulated in 2014 with China Railway

Construction Corporation. All in all, 16 contenders placed bids at the tenders (includingSiemens, Bombardier and Mitsubishi), but none of these companies were able to

compete with China in terms of price. In addition, Export-Import Bank offered to provide

85% of project funding.

Length of HSRs with allowed speed limit of more than 200 km/h

Source: International Union of Railways

Highways: all resources for completion of current projects

According to the Federal Special-Purpose Program entitled Development of the

Transport System of Russia until 2020, the total amount of investment to be spent on

expanding highway infrastructure is planned at RUB 2.7 trln ($47 bln at a RUB/USD rate

of 55) or RUB 550 bln per year. This is 17.8% more than was spent over the past five

years (2011-15), and assumes average annual growth of about 3.3%. However, the

economic crisis has forced the government to decrease budget spending, including for

the construction and repair of federal roads. This year, spending will be reduced by at

least 10-15% of the earlier budgeted amount. So far, the government has not decided

by how much spending will be decreased in subsequent years. One radical option would

be to cut all expenditures by 5% in real terms. In 2015-16, the government had planned

to boost spending on road infrastructure by 15-20% and the reduction will essentially

return spending to the level seen in previous years RUB 500 bln.

The decrease in spending will likely prevent full-fledged reconstruction of such federalroads as M5 Ural (MoscowChelyabinsk), M7 Volga (MoscowUfa) and M8 (Moscow

Arkhangelsk). All funds will be concentrated toward completing the construction of current

projects of which state concern Avtodor is in charge: the MoscowSt. Petersburg toll

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

US

RUSSIA

TURKEY

JAPAN

EUROPE

CHINA

EXISTING UNDER CONSTRUCTION/INTENDED

China created the longest and most efficient

HSR system in the world and has taken steps

to export HSR construction services to othercountries, particularly since the construction

cost of HSRs in China is about half as much

as in Europe.


12/51


12

highway and the Central Ring Road around Moscow, which should be completed by 2018.

The reconstruction of M4 Don (MoscowNovorossiisk) will likely continue. A major road

project in future years will be the construction of a bridge across the Kerch Strait, at an

estimated cost of over RUB 200 bln. The structure and bulk of funds will come from thefederal budget and the NWF. This project should consume funding from other sources.

We estimate total spending on federal roads at 0.5% of GDP over the next five years

(RUB 500-600 bln) vs. 0.7% for the previous five years. In addition, consolidated

spending of regional budgets to support regional roads, including Moscow, account for

another 0.6% of GDP (RUB 600-700 bln) vs. 0.9% for the previous five years. Thus,

total budget spending on road infrastructure will decline to 1.1% in 2016-20 vs. 1.5% in

2011-15. This is a moderate level of expenditure, which will make it possible to

gradually improve road infrastructure and implement several large-scale projects.

However, it will not allow infrastructure to expand at a pace exceeding overall growth of

the economy.

Dynamic of costs for road infrastructure development, RUB bln Structure of costs for road infrastructure development, 201620

Source: Federal Target Program Development of Transport System of Russia,Gazprombank estimates

Source: Federal Target Program Development of Transport System of Russia,Gazprombank estimates

Program for building and reconstruction of major federal highways

INVESTMENTS IN20112015, RUB MLN

INVESTMENTS IN20162020, RUB MLN

SHARE OF TOTALINVESTMENTS

5 Ural Highway (MoscowChelyabinsk) 66,287 227,575 14.14%

11 MoscowSt. Petersburg (toll highway) 157,917 205,971 12.80%

7 Volga Highway (MoscowUfa) 45,356 152,448 9.47%

051, 053, 055 Baikal Highway (from Chelyabinsk through Kurgan,Omsk, Novosibirsk, Kemerovo, Krasnoyarsk, Irkutsk, Ulan-Ude to Chita)

18,159 144,065 8.95%

060 Ussuri Highway (KhabarovskVladivostok) 29,207 111,979 6.96%

4 Don Highway (from Moscow through Voronezh, Rostov-on-Don,Krasnodar to Novorossiysk) 126,159 107,875 6.70%

56 Lena Highway (from town of Never to Yakutsk) 39,751 93,324 5.80%

8 Kholmogory Highway (from Moscow through Yaroslavl, Vologda toArkhangelsk)

43,305 88,547 5.50%

1 Belarus Highway (from Moscow to the border with Belarus) 45,015 87,424 5.43%

03 Ukraine Highway (from Moscow through Kaluga, Bryansk to theborder with Ukraine)

11,104 52,349 3.25%

Central Ring Road (Moscow region) 29,857 50,368 3.13%

29 Caucasus Highway (from Krasnodar though Grozny, Makhachkala tothe border with Azerbaijan)

31,677 46,171 2.87%

St. PetersburgPetrozavodsk 33,732 40,403 2.51%

Moscow-Nizhny Novgorod-Kazan high-speed railway 3,160 37,033 2.30%

6 Caspian Highway (from Moscow through Tambov and Volgograd toAstrakhan)

7,138 35,929 2.23%

Amur Highway (ChitaKhabarovsk) 3,380 29,211 1.82%

0

200

400

600

800

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

FEDERAL BUDGET SPENDING SUBSIDIES TO AVTODOROTHER SUBSIDIES NATIONAL WELFARE FUNDNON-BUDGET SOURCES

60%

22%

2%

4%

12%

FEDERAL BUDGET SPENDING

SUBSIDIES TO AVTODOR

OTHER SUBSIDIES

NATIONAL WELFARE FUND

NON-BUDGET SOURCES


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13

20 St. PetersburgPskovPustoshkaNevel (to the border withBelarus)

5,671 26,230 1.63%

Kolyma Highway (from Yakutsk to Magadan) 17,973 25,831 1.61%

10 Russia (from Moscow to St. Petersburg) 11,346 25,141 1.56%

Total 726,194 1,587,872 99%

Source: Federal Target Program Development of Transport System of Russia

Creation of heavy truck toll system

Several years ago, the government decided to establish a truck toll system in Russia

for vehicles in excess of 12 tonnes that travel on federal roads. The point is that wear

and tear of roads increases because of heavy vehicles and requires repair. The

system would generate additional revenues that would be contributed to the road

fund. The creation and management of the system was granted on a concession

basis to RT-Invest Transportation Systems. The concessionaire must create a

system that will service 50 km of federal roads and record the movement of around

1.6 mln trucks. The overall cost of its creation is RUB 25.6 bln (excl. VAT). The IRRof the project is estimated at 12%, with a payback period of eight years. The project

will mainly be financed through borrowed funds provided by Gazprombank.

Following the launch of the system, the owners of freight vehicles will pay a tariff of

RUB 3.7/km, indexed to inflation. Collections are estimated at RUB 50 bln per year,

equivalent to around 10% of Federal Road Fund revenues.

GK Avtodor: an efficient vehicle for investors in road concessions

Over the past several years, GK Avtodor has done a huge amount of work, practically

from scratch, to create large-scale concession projects in the roads segment and to

attract investors. Its main achievements over the past two years include the following:

The successful organization within tight time frames of four tenders to construct

segments of the MKAD (I, II, IV and V). For segments I and V, a contract was

signed with the winner and construction is underway. Tenders for segments III and

IV will be conducted in September 2015.

The holding of new tenders to construct segments of the MoscowSt. Petersburg

highway. In 2014, a contract was signed with a consortium of VTB and Vinci to

construct segments 7 and 8 of the road (543-684 km) at a cost of RUB 77 bln.

Preparation is underway for tenders to construct segments 2 and 3 (58-149 km and

149-208 km). In December 2014, the first toll segment of the road (15-58 km) was

launched (exiting to Moscow through Sheremetyevo airport).

The holding of tenders and the signing of contracts to reconstruct segments of the

M4 Don and M3 Ukraine roads, each at a cost of RUB 17 bln. Documents are

being prepared to hold tenders to reconstruct the M7 (Balashikha bypass) and M1

(Belarus) roads.

The preparation of a presentation is underway for regional concession projects in

Tatarstan, Bashkortostan and Novosibirsk.

Despite the large volume of work and tight time frames for construction, a large

number of investors (usually 3-4 consortiums) are taking part in Avtodors tenders,

which underscores the high investment attractiveness of the projects.

The tenders have been organized on a quality basis. For each tender, the

corporation prepares detailed technical, financial and legal documentation, which

allows investors to quickly and efficiently value a projects attractiveness.


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14

GKAvtodors budget: need for private investment totals around $500 mln annually

According to the Federal Target Program (FTP), GK Avtodors budget in 2016-20 should

amount to around RUB 1 trln (RUB 200 bln per annum), although the corporation itself

forecast its budget at nearly 30% less RUB 732 bln. Half of the budget is in the formof direct subsidies from the federal budget. Additional funds from the National Wealth

Fund RUB 150 bln will go toward construction of the TsKAD by 2018. In addition,

GK Avtodor plans to issue bonds in a total amount of RUB 89 bln until 2020. Proprietary

and borrowed funds of the concessionaire and investors must total RUB 186 bln (22%

of the planned amount) or around RUB 30 bln per annum. Of this amount, around 70%

(RUB 25 bln) may be attracted by the concessionaire in the form of borrowed funds

(bonds and bank loans), while 30% (RUB 5 bln) should be comprised of the

concessionairesown funds.

The peak of investment in GKAvtodors projects will occur in 2016-18 for construction of

the Moscow St. Petersburg toll road and the TsKAD, which should be completed by

2018 in time for the World Football Championship to be held in Russia. Therefore,

despite the economic crisis, these projects will be financed in full.

Dynamics and sources of financing for GK Avtodors projects,RUB bln

Financing structure of GK Avtodors projects (201520)

Source: GK Avtodor Source: GK Avtodor

Road concessions in Russia offer solid ROI

In GK Avtodors projects, the share of budget financing totals 60-90%, while that of

investors comprises 10-40% of required investment. The structure of financing depends

on the operational investment attractiveness of a given project. The higher the expected

automobile traffic, the lower the operational risks, the more attractive the project is forprivate investors and the larger their share in the project. The majority of GK Avtodors

projects are concluded based on the terms of a long-term investment agreement which

assumes that GK Avtodor will take operational risks (risk of traffic density), while private

investors are offered a guaranteed return on own and borrowed investment in the

amount of inflation +4-8%. The period of the concession is 23-30 years. There are also

concession projects with direct collection of tolls, by which a concessionaire receives all

of the revenues of a project from automobile traffic, while assuming risks of traffic

variability. Such projects offer higher returns amid greater operational risk.

In our view, the proposed return on GK Avtodors concession projects is extremely

attractive for investors. By comparison, the current premium for investment in Russian

equities stands at 8-10%, while the risk level for equities is higher than for road

concessions. Moreover, the risk premium for investing in equities will decline asgeopolitical risks subside. The historical risk premium for investing in equities is 4-5%

compared to 4-8% for road concessions. Admittedly, when tenders are held, a decline in

ROI requirements for own and borrowed funds is one of the criteria for winning tenders.

39

75

56

79 78 7538.4

50.9

35.725.0

20

2734

817

35

40

57

2711

0

50

100

150

200

250

2015 2016 2017 2018 2019 2020

FUNDS FROM CONCESSIONAIRES AND INVESTORS

AVTODOR'S FUNDS (MARKET BOND)

NATIONAL WELFARE FUND

SUBSIDIES FROM THE BUDGET

49%

18%

11%

22% SUBSIDIES FROM THEBUDGET

NATIONAL WELFAREFUND

AVTODOR'S FUNDS

(MARKET BOND)

FUNDS FROMCONCESSIONAIRES ANDINVESTORS


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15

Despite the fact that interest rates and inflation in Russia are very high at present, they

are gradually declining. There is a high likelihood that within a few years, inflation

indicators and the level of interest rates will decline to historically low levels. For

example, the CBR has set its inflation target at a level of 4% by 2017.

Tenders planned for 2015

MOSCOWST. PETERSBURG TOLL HIGHWAY

Road section 1558 km 58149 km 149208 km 208258 km 258334 km 334543 km 543684 km

Length, km 43 90 59 47.9 72.7 217.1 137.5

Expected traffic, carsper year

77,000 30,000 n/a 26,800 12,00015,000 15,50017,000 16,000255,00

Price, RUB bln(including VAT)

55.8 71.9 n/a 30.88 49.6 144.6 76.8

AgreementDirect payments

concession

Long-terminvestmentagreement

n/aLong-terminvestmentagreement



Availabilitypayment

concession

Current status Launched Preparing for thetender (in 2016)

n/a Underconstruction

Launched Underconstruction

Underconstruction

Investor/tenderparticipant

North-WestConcession

Company (50%Mostotrest, 50%

Vinci)

n/a Mostotrest Mostotrest MostotrestTwo Capitals

Highway

Construction period 20112014 20162018 2016-2018 20152017 20122014 20152017 20152017

Timeline forconcession

26 24 23 23 28 27

Sources of financing(public/private)

40%/60% 80%/20% 85%/15% 90%/10 90%/10% 89%/11% 75%/25%

Private investorsROE

n/a CPI+8.5% CPI+8.5% CPI+8.5% CPI+8.5%CPI+8.4%

(4.55%+3.85%)

Source: GK Avtodor, Gazprombank estimates

CENTRAL RING ROAD

Road section Start-up facility 3 Start-up facility 4 Start-up facility 5 Start-up facility 1

Length, km 105.3 96.5 76.44 49.5

Expected automobiletraffic, per year

34,100 21,300 26,600 33,100-39,500

AgreementAvailability payment

concessionAvailability payment

concessionLong-term investment

agreementLong-term investment

agreement

Price, RUB bln(including VAT)

80.5 79.8 42.2 52.39

Current statusTender results to be

announced soonTender results to be

announced soonUnder construction Agreement signed

Investor/tenderparticipant

North-East Mainline, Sok 24

Russia, Invest Finance, RoadBuilding Corporation

South-East Mainline, Capitala

Big Ring, Invest Finance Plus,Road Building Corporation

Koltsevaya magistral (100%subsidiary of ARKS) Stroygazconsulting

Timeline forconstruction

20162018 20162018 20142018 20142018

Timeline forconcession

30 30 24 23

Sources of financing

National welfare fund (32%),subsidies from federal budget

(25%), private investors(~40%).

National welfare fund (55%),subsidies from federal budget

(7%), private investors(~38%).

Public finance (89%), privatefinance (11%)

Public finance (87%), privatefinance (13%)

Private investors ROE 12-13% IRR n/a CPI+4.65% CPI+8.30%

Source: GK Avtodor, Gazprombank estimates

Long-term strategy: 12,000 km of highways

Acording to the long-term strategy for the development of GK Avtodors highway

network, 12,000 km of highways will be under the companys management by 2030. Outof the total, 6,000 km of roads will be built and 2,000 km will be renovated. The share of

toll roads will account for 75% of the entire network.


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16

GKAvtodors long-term targets, mln RUB

201020 BY 2030

Total investments * 1,569,130 4,650,000

Including subsidies from the federal budget 1,012,487 2,092,500

Non-budget financing 556,643 2,557,500

Range of investment projects 20 80

Expected total length of highwaysunder trust management by 2020, km

3,994 12,000

Automobile roads to be restored, km 894 2,000

Automobile roads to be built, km 1,333 6,000

Share of toll roads of the entire network 47% 75%

Capacity of market of GK Avtodors construction and assembly works,RUB bln per year

133 289380

Including the capacity of private finance market 46 125165

Source: GK Avtodor

* 2010 prices

Highway network under GK Avtodors management by 2030

Source: GK Avtodor

Moscow

St. Petersburg

Tver

Veliky Novgorod

Smolensk

11

4

1

Bryansk2

Yelets

Vladimir

Nizhny Novgorod

Kazan

Saratov

Volgograd

Rostov-on-Don

Voronezh

KrasnodarNovorossiysk

Sochi

Kerch

5

3

14

14 10

6

6 12

16 Orenburg

Yekaterinburg

Chelyabinsk

Tyumen

Omsk

9

15

8

7

13

Automobile roads and high-speed highways transferred under the trust management of the State

Company Russian Highways (GK Avtodor); roads under construction to be launched by 2020.

Projected automobile roads and high-speed highways

by 2030

1 M-1 Belarus

2 M-3 Ukraine

3 M-4 Don

4 M-11 MoscowSt. Petersburg

5 Central Ring Road

6 Novorossiysk Transport Hub

6 Road transport bridge

Through Kerch Strait

7 M7AMoscowNizhny NovgorodKazan

8 KazanYekaterinburg

9 YekaterinburgOmskKazakhstan border

10 Southwest Chord

11 Scandinavia automobile road

15 ChelyabinskYekaterinburg

13 KazanShaliBavlyKazakhstan border

14 OzinkiSaratovVoronezhKursk

Belarus border

12 KrasnodarAbinskKabardinka

16 Sochiseaport Kavkaz


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17

Russias seaports: state support, growth of cargo turnover and highprofitability

Russia has 63 cargo seaports with total capacity of 860 mln tpa. Regardless of the

economic situation in the country, the cargo turnover of Russian seaports has been

growing steadily each year. Over the past 10 years, turnover has increased by 67% to

623 mln tonnes in 2014. That said, devaluation supported exports of raw materials,

which has resulted in higher cargo turnover. In 2014, such turnover rose 5.8% and in

1Q15 the growth rate accelerated to 8.9%.

Export goods (mainly crude oil, oil products, and coal) account for 80% of the total cargo

turnover of Russian seaports, which reflects Russias commodities export-led economy

100% of grain, around 80% of oil, and 75% of coal exported from Russia is shipped

via seaports. Imports account for just 9% of total turnover (cars, containers with

equipment, consumer goods, and car parts). The remaining amount of cargo accounts

for transit cargoes and cabotage.

Dymamic of cargo turnover in Russian seaports, mln tonnes Russias 10 largest seaports by turnover

Source: Association of Sea Commercial Ports, Gazprombank estimates * by 2020, the seaports capacity will increase to 150 mln tonnes

Source: Transportation Ministry, Gazprombank estimates

Structure of Russian seaport cargo turnover, 2014 Russias seaport cargo turnover, 2014

Source: Association of Commercial Sea Ports Source: Association of Trade Sea Ports

549591 630

699 731761 791

829 845 860

407 421451 455

496 526535 566

589 623

60%

62%

64%

66%

68%

70%

72%

74%

76%

0

100

200

300

400

500

600

700

800

900

1,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

CAPACITY, MLN T CARGO TURNOVER, MLN T

CAPACITY UTILIZATION, %

7.9%20.7%

-15.8%5.3%

19.7%

-30.3%

10.1%

12.5%

24.9%

-1.2%

-40%-30%-20%-10%0%10%20%30%

020406080

100120140160

NOVOROSSIYSK

UST-LUGA*

PRIMORSK

BIGP

ORTST.

PETERSBURG

VOSTOCHNYPORT

MURMANSKCOMMERCIAL

SEAPORT

VANINO

NAKHODKA

TUAPSE

PRIGORODNOYE

CAPACITY, MLN TCARGO TURNOVER, MLN T (2014)CARGO TURNOVER DYNAMIC YOY

79%7%

8%

6%

EXPORTS IMPORTS TRANSIT CARGOES CABOTAGE

623 MLN T

30%

20%

19%

7%

4%

5%2%

1%1%

11%

OIL OIL PRODUCTS COALCONTAINERS FERROUS METALS GRAINFERTILIZERS ORE TIMBEROTHER

623 MLN

TONNES


18/51


18

Russian seaport cargo turnover breakdown

Source: Association of Trade Sea Ports

Under the Federal Target Program for 2016-20, investment in seaport infrastructure is

planned at around RUB 280 bln. The government will contribute 30% of the total sum,

while the remaining 70% will come from private investors. However, in our opinion,

the actual investment amount could be half of that expected about RUB 140 bln

(RUB 28 bln or $0.5 bln per year). Some core projects have already been launched,

such as the expansion of capacities of Ust-Luga and Big Port St. Petersburg, and the

construction of Sabetta and Novoportovoye ports in the Yamal peninsula. At the same

time, projects such as the expansion of capacity of Taman seaport on the Black Sea,

construction of a universal deepwater port in the city of Baltiysk (Kaliningrad region),and expansion of capacities of coal terminals at Vanino seaport in the countrys Far

East are planned under the target program, but their implementation is in question.

Planned investment in extension of Russias seaportinfrastructure, RUB bln

Sources of funding for seaport infrastructure, RUB bln

Source: Federal Special-Purpose Program, Gazprombank estimates Source: Federal Special-Purpose Program

The mechanism of public-private partnership is most commonly used for the

construction of seaport infrastructure

The government is investing in preparation works in the water area of the port

bottom-dredging works, building of approach channels and moorage walls, andconstruction of access routes to the port. Private investors (stevedores) invest in the

construction of cargo terminals (funds are used for storage facilities, sheers, loading

machines). For example, the government fully financed the water part of Sabetta and

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

2010 2011 2012 2013 2014 2015

OTHER TIMBER ORE FERTILIZERS GRAINFERROUS METALS CONTAINERS COAL OIL PRODUCTS OIL

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

ACCORDING TO FEDERAL SPECIAL-PURPOSE PROGRAM

GAZPROMBANK ESTIMATES

0

10

20

30

40

50

60

70

80

90

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

STATE BUDGET PRIVATE INVESTMENTS


19/51


19

Novoportovoye seaports, which are currently under construction in the Yamal peninsula,

while private investors Yamal-LNG and Gazprom Neft are now building the cargo

terminals (in other words, the landside part of these projects). In some instances, private

investors take part in the construction of the water part of seaport infrastructure.

but a concession agreement mechanism that is widespread in other countries is

not yet used in Russia

The reason for this is that stevedores usually own the land plots on which cargo

terminals are located (or rent them for long periods at a relatively low price). However, in

other countries (i.e. Greece, the Netherlands, UAE) land plots for the construction of

seaport infrastructure are assigned to the operator under concession agreements. Due

to low payments for land, Russian stevedores show higher margins than their foreign

peers with similar types of cargo turnover. For example, the EBITDA margin of sea grain

terminals can reach 80%, and the margin of container terminals can approach 60%. Oil

and petrochemical terminals show a margin of around 40-50%. Coal terminals stand

apart, as most of them are controlled by coal producers (Mechel, Kuzbassrazrezugol,SDS-Ugol). These terminals show lower margins, which is not surprising given the fact

that high transportation costs are factored into the sales price. Hence, full control over

the coal transportation chain is an important part of coal producers business .

EBITDA margin of Russian and overseas stevedores, 2014

Source: companies, Bloomberg, Gazprombank estimates

Despite high margins, the construction of seaport infrastructure is a capital-intensive

business. Globally, the average return on capital invested in this segment reaches 12-15%.

In Russia, it is more difficult to calculate the ROI in seaport assets, as most new projects are

implemented by raw materials companies in order to improve the efficiency of their logistics

operations and gain control over transportation costs.

61% 61%

55% 54% 52%47%

36%

25%23% 22%

0%

10%

20%30%

40%

50%

60%

70%

NCSPGROUP(UNIVERSAL)

GLOBALPORTS

(CONTAINER)

VOSTOCHNYPORT(COAL)

COSCOPACIFIC(CHINA)

TUAPSECOMMERCIAL

SEAPORT(UNIVERSAL)

DPWORLD(UAE)

STPETERSBURGSEAPORT

(UNIVERSAL)

HHLA(GERMANY)

DALIANPORT(CHINA)

PERAEUSPORTAUTHORITY

(GREECE)


20/51


20

Largest projects to construct port capacities


Largest port infrastructure projectsProjects currently in active construction phase

LOCATIONON MAP

DESCRIPTIONSEAPORTCATEGORY

TOTALAMOUNT OF

INVESTMENT,RUB BLN

INVESTORS

PROJECTEDSEAPORT

CAPACITY, MLNTONNES

REALIZATIONTIMELINE

1Construction of Ust-Luga port

Multi-purposeseaport

61.5

Kuzbassrazrezugol, GlobalPorts, Gunvor, NOVATEK,SIBUR, Eurochem, OMK,Gazprom and others

180 2000-20

2

Construction ofSabetta port,including building ofentrance channel inthe Gulf of Ob

LNG terminal 73.2Yamal LNG (NOVATEK,Total, CNPC)

16.5 2012-20

3

Construction of

marine multi-purposehandling terminalBronka in StPetersburg seaport

Container andRoRo terminals

59.6 Holding Company Forum(St. Petersburg)

1.9 (TEUs) 2012-2017

4

Year-round oilterminalNovoportovoye(Yamal)

Oil terminal 10.9 Gazprom Neft 8.5 2013-18

Source: Federal Special-Purpose Program, Gazprombank estimates

1

UST-LUGA

2

SABETTABRONKA

4

NOVOPORTOVOYE

5

TAMAN

VANINO

ZARUBINO

VLADIVOSTOK

OTKRYTYI

SAKHATRANS

Projects currently in active

construction

Projects in initial stage

or prospective projects

Moscow

OLYA

7

8

9

11

10

3

Russias largest

seaports

MURMANSK

BIG PORT

ST. PETERSBURG

PRIMORSK

NOVOROSSIYSK

TUAPSE

NAKHODKAVOSTOCHNY

PRIGORODNOYE

St. Petersburg

Vladivostok

Astrakhan6


21/51


21

LOCATIONS ON THEMAP

DESCRIPTION

1

Universal Ust-Luga port is one of the largest-scale transport infrastructure projects since the dissolution of the Soviet Union and asuccessful case of private-public partnership. Seaport construction kicked off in 1999. It is located 70 km from St. Petersburg in the Gulfof Finland. The location is convenient for servicing deepwater vessels and allowing year-round navigation. State and private investmentsover 10 years totaled around $7 bln. The port s cargo turnover in 2014 reached 75 mln tonnes (+34% YoY). By 2020, the seaportcapacity is expected to extend up to 180 mln tonnes. Proprietary cargo terminals were constructed inside the port by many Russiancompanies, including Kuzbassrazrezugol (coal), Global Ports (container terminal), NOVATEK (LPG terminal), Eurochem (fertilizers),Rusal (aluminum and alumina), OMK (steel) and Gunvor (oil products). Gazprom intends to construct an LPG terminal inside the port.

2Construction of the new Arctic Sabetta port in Yamal began in 2012. Sabetta is the cornerstone infrastructure facility of the Yamal-LNGproject, developed by NOVATEK, Total and CNPC, which includes LNG production, as well as storage and shipping capacities based onYuzhno-Tambeiskoye gas field resources. The project is expected to be completed in 2017.

3

Construction of a multi-purpose loading complex is currently underway at Big Port St. Petersburg. The initial stage (2015) impliescommissioning of a container terminal with annual capacity of 1.45 mln TEU, as well as the Ro-Ro terminal of 260,000 units of equipmentper annum. The second stage (2017) proposes extension of container terminal capacities up to 1.9 mln TEU per annum and constructionof a logistics hub, while the third (2022) includes construction of a container terminal with annual capacity of 3 mln TEU. Bronka sremoteness from other cargo terminals of St. Petersburg seaport provides it with a number of competitive advantages: readiness toservice large-displacement type container ships, convenient transportation logistics as well as pilotage. That said, commissioning of

rather large container capacities creates overcapacities in the Northwest Region.

4

In 2015, Gazprom Neft will launch a year-round oil terminal in the Yamal peninsula in the Gulf of Ob intended for oil exports fromNovoportovskoye field to Europe. The Gulf of Ob, where tanks are loaded with oil, is the first zone of the Northern Sea Route and iscovered with ice for nine months per year. Regular operation of tanks requires the use of nuclear-powered icebreakers for a distance ofaround 400 km.


Projects in initial stage and prospective facilities

LOCATIONON MAP

DESCRIPTIONSEAPORTCATEGORY

TOTALAMOUNT OF

INVESTMENT,RUB BLN

INVESTORS

PROJECTEDSEAPORT

CAPACITY, MLNTONNES

REALIZATIONTIMELINE

5 Development ofTaman seaport Universal port 25.0

Gazprom, Eurochem, Uralkali,

SUEK, Metalloinvest, UnitedGrain Company (OZK), GlobalPorts

93.8 2011-20

6

Construction of oilhandling terminaland bulk cargohandling complex inthe Olya seaport(Astrakhan region)

Universal port 19.7Olinskiy petrochemicalterminal, Olya commercialseaport, Olya bulk terminal

3 2015-18

7Construction of acoal terminal atVanino port

Coal terminal 19 ZAO TEPK 15 2015-2018

8

Construction ofhandling terminals inZarubino seaport(Big SeaportZarubino)

Universal port 180.0Summa/China MerchantsHolding Int. (CMHI)

60 2015-22

9

Construction of portterminal for LNGplant nearVladivostok

LNG plant n/a Gazprom 15 2014-22

10

Construction of acoal terminal nearOtkrytyi Cape(Primorsk region).

Coal terminal 50.0 Rostec/Shenhua (China) 20 2015-19

11 Sakhatrans Coal terminal n/a Volga Group 12 n/a



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LOCATION ON THEMAP

DESCRIPTION

5

The government is currently developing the expansion of seaport capacities in order to raise cargo turnover (coal, fertilizers, ore) partiallytransported via Ukrainian ports. Negotiations are underway with private investors who are ready to build proprietary cargo terminals,

including Global Ports, UCL Ports, SUEK and Metalloinvest. Should the project enjoy decent demand from cargo shippers, its capacitieswould be lifted to 70 mln tonnes by 2020 and to 100 mln tonnes by 2030. Total intended capex exceeds RUB 200 bln, while the updatedversion of the Federal Special-Purpose Program specifies the total amount of planned investment at just RUB 25 bln.

6Mechel planned a major expansion of the capacities of Vanino port, which specializes in coal exports. However, given the companyspoor financial position, the capex program has yet to be implemented.

7

Summa plans to build Big Port of Zarubino in the Trinity Bay, located 18 km from the Chinese border, by 2018. Cargo turnover isexpected to total 60-100 mln tpa, with a major volume to come via transit from northern to southern Chinese provinces. The port willhandle grain (about 10 mln tpa), containers (up to 2 mln TEU pa), general and bulk cargo (up to 35 mln tpa), Ro-Ro-cargo, etc. The valueof the project inclusive of rail and road infrastructure as well as a dry port in near-border Hunchun is estimated at $3.0-3.5 bln. Projectworks are expected to start in February 2015. CMHI, established in Hong Kong in 1992, is the largest asset of the state-owned ChinaMerchants Group (controls 55% shares, while the remaining 45% belongs to Goldman Sachs). CMHI operates in 7 of the 10 largestChinese container ports.

8 Gazprom is considering a project to build an LNG terminal in the Russian Far East, but a final decision has yet to be made.

9

In 2014, Rostec and Chinese corporation Shenhua signed a memorandum to start works on joint exploration of the Ogodjinskoye coaldeposit, located in Amur region, and to build a coal sea transshipment terminal with 20 mln tonne capacity at Port Vera in Primorskregion. Engineering of the ports facilities is nearing completion. Total investment in port construction is estimated at $1 bln.Implementation of the project would allow to considerably expand access for Russian coal companies to ATP distribution markets.

10Volga Group, owned by Gennady Timchenko, controls 89% of Sahattrans LLC, with the latter owing around 200 ha of land in the vicinityof Vanino Port. The company plans to build a t ransshipment terminal for coal and iron ore concentrate with annual capacity up to 12 mlntonnes. The terminal is expected to transship coal from the company Colmar.


Chinese investors in port assets outside the country

Chinese ports top the list of the worlds largest ports in terms of cargo turnover, the

structure of which is dominated by containers, coal, ore and petrochemical products.

The shares of the largest port operators trade on the Shanghai and Hong Kong stock

exchanges, while the major shareholders of most Chinese stevedore companies are

central and local governments. In recent years, large Chinese port operators have been

actively buying assets in other countries, including purchases under concession

agreements. Primarily, Chinese investors are interested in container terminals, as suchacquisitions would allow them to expand their own business and improve the efficiency

of container logistics. Chinese companies own container terminals in several European

ports (the Netherlands, Belgium and Greece), Sri Lanka, Nigeria and Israel.

Top investors in port assets outside China

CHINESE PORT OPERATORS PORT ASSETS OUTSIDE CHINA

Shanghai International Port 25% in Zeebrugge port (Belgium), New Haifa Port (Israel)

China Merchants HoldingsNigeria-based container terminal, 85% in ColomboInternational Container Terminal (Sri Lanka)

Cosco PacificContainer terminals located in Belgium (49%) and Greece(100%)



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Airports: the fastest growing segment in Russian transportinfrastructure

Over the past five years (2010-14), passenger traffic in Russian airports has risen by 56 mln

to 150 mln (+60%, average annual growth rate of 10%). Even during the recessionary 2015,

we do not expect a decline in passenger traffic, as the population will shift its focus from

traveling abroad to domestic tourism. Fast-growing demand for quality airport services

makes investment in airport infrastructure highly lucrative. This segment of transport

infrastructure is undergoing the most active process of reformation and modernization,

privatization and formation of concessions.

Key sector-wide trends:

Consolidation of federal airport assets. The consolidation is aimed at uniting

into holdings multiple public and private companies, as well as providers of

services for operation of the largest federal airportsSheremetyevo and Vnukovo

(Domodedovo airport, being 100% privately held, does not participate in the

consolidation). The consolidation will result in controling stakes being transferred toprivate investors, while the state will become a minority stakeholder. As for

Sheremetyevo, the controlling stake is planned to be handed to Sheremetyevo

Holding, the beneficiaries of which are Arkady Rotenberg, Alexander Ponomarenko

and Alexandr Skorobogatko. Control over Vnukovo is expected to be transfered to

Vnukovo-Invest, the beneficiaries of which are several Russian businessmen.

Transfer to private ownership of airfield infrastructure at Moscow Aviation

hub airports based on concession.According to federal law, runways, taxiways

and appron areas can only be publicly held. Therefore, there is only a single

source of investment in their modernization the state budget. Their transfer to a

concession will help facilitiate private investment while easing the burden on the

state budget.

Regional airports are transferred into regional property and become subjects

for privatization. In recent years, Perm, Irkutsk, Krasnoyarsk and Sakhalin

airports were transferred from state to regional ownership. Regional authorities are

more activily seeking to attract private investors in the airports development,

helping to ease the burden on the federal budget as well.

During 2016-20, around RUB 300 bln is expected to be invested in airport

infrastructure in line with the previous five years spending. Private investment

accounts for 40% (RUB 130 bln)

The planned amount of investment in airport infrastructure remains almost flat

compared with the previous versions of the Federal Special-Purpose Program, as

airport congestion coupled with the task of hosting the 2018 World FootballChampionship in 11 cities requires timely funding. Extension of Sheremetyevo airport

remains the largest investment pipeline: construction of a third runway financed with the

help of the state budget as well as the B terminal with an underground crosswalk

between the northern and the southern parts of the airport (construction is privately

funded), while the Federal Special-Purpose Program currently lacks investment for

construction of a third runway at Domodedovo. The runner-up in terms of the scope of

investment is the Yuzhny airport based in Rostov-on-Don. Yuzhny is valued at around

RUB 37 bln, half of which is financed through the federal budget, with the other half to

be financed through private investment provided by Airports of Regions holding, owned

by holding company Renova. Ample investment will be directed toward modernization of

regional airports in Tyumen, Novosibirsk, Yakutsk, Khabarovsk, Kaliningrad, Nalchik,

Surgut, Murmansk, Chelyabinsk and Saratov.


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Total investment in airport infrastructure, RUB bln


Largest investment pipelines, RUB bln, 2016-20


0

10

20

30

40

50

60

7080

90

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

STATE BUDGET PRIVATE INVESTMENTS

0.00 10.00 20.00 30.00 40.00

RECONSTRUCTION OF CHELYABINSK AIRPORT

CONSTRUCTION OF AN AIRPORT IN SARATOV

RECONSTRUCTION OF MURMANSK AIRPORT

RECONSTRUCTION OF NOVY URENGOI AIRPORT

RECONSTRUCTION OF SURGUT AIRPORT

AIRPORT CONSTRUCTION (NALCHIK)

RECONSTRUCTION OF DOMODEDOVO AIRPORT

RECONSTRUCTION OF KHRABROVO AIRPORT (KALININGRAD)

RECONSTRUCTION OF NOVY AIRPORT (KHABAROVSK)

RECONSTRUCTION OF 2ND RUNWAY AT YAKUTSK AIRPORT

RECONSTRUCTION OF TOLMACHEVO AIRPORT (NOVOSIBIRSK)

RECONSTRUCTION OF ROSHCHINO AIRPORT (TYUMEN)

AIRPORT CONSTRUCTION IN IRKUTSK

UZHNY AIRPORT CONSTRUCTION (ROSTOV-ON-DON)

CONSTRUCTION OF 3RD RUNWAY AT SHEREMETYEVO


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Construction of Yuzhny airport in Rostov-on-Don

Rostov-on-Dons existing airport is Russias ninth-largest in terms of passenger traffic

(2.4 mln). However, it is located in the city center with serious restrictions for furtherdevelopment. This was the reason behind the construction of a new airport called

Yuzhny, the completion of which should occur in 2017 before the 2018 World

Football Championship. The new complex is expected to fully replace the old one

while providing grounds for the creation of a modern centralized airport hub in

southern Russia with annual throughput capacity of up to 8 mln passengers. The total

space of the new passenger terminal should exceed 50,000 m2, with throughput

capacity of 2,000 passengers per hour. The runway will have a length of 3,600 m,

enabling all types of aircraft to land.

This airport construction project is being developed by Rostovaeroinvest, in which

Airports of Regions Holding has a controlling stake. The project was among the first

included in the state program of support for Russian investment projects, allowing the

raising of privileged funding at a rate of 11.5% p.a. This is much lower than currentmarket rates. The project is valued at RUB 37.2 bln, of which RUB 17.9 bln will come

from the state budget. Gazprombank has originated a RUB 15.7 bln loan to fund

implementation of this project. Mostotrest subsidiary Transstroymekhanizatsiya will

undertake to construct airfield infrastructure. A subcontractor for the terminal has yet to

be announced.

Design of new terminal at Yuzhny airport

Source: Airports of Regions


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A group of Russian strategic investors in airport infrastructure is being formed

Apart from the state, which remains the largest owner of Russias airports, the list of

private strategic investors includes Basel-Aero, Airports of Regions (state corporation

Renova), Novaport and Aero-Invest. Airport privatization is within the scope of Rostec sinterests as well.

Passenger traffic in airports, mln


Market shares of airport operators, 2014 (total passenger traffic, mln and %)

Source: company data, Gazprombank estimates

10%

20%

30%

40%

50%

60%

0

30

60

90

120

150

1991

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

REGIONAL AIRPORTS SHARE OF MOSCOW AVIATION HUB, %

32, 20%

33, 21%

13, 8%14, 9%

9, 6%

8, 5%

11, 7%

3, 2%

35.22%

SHEREMETYEVO (STATE)

DOMODEDOVO (EAST LINE)

VNUKOVO

PULKOVO (NORTHERN CAPITAL GATEWAYS)

NOVAPORT

AIRPORTS OF THE SOUTH

AIRPORTS OF REGIONS

AEROINVEST

OTHER (STATE-OWNED AIRPORTS)


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Major investors in Russian airports

INVESTORS/SHAREHOLDERS AIRPORTSPASSENGER TRAFFIC,

MLN, 2014

State authoritiesFederal and regionalauthorities

Sheremetyevo (states stake83.4%) 31.57Kazan, Ufa, Mineralnye Vody, Perm, Irkutsk,Krasnoyarsk and Vladivostok airports

East Line Group Domodedovo 33.04

Vnukovo-invest Vnukovo 12.73

Northern Capital Gateways VTB Capital, Fraport Pulkovo (St Petersburg) 14.30

NovaportRoman Trotsenko (50%),

Meridian Capital (50%)

Tolmachevo (Novosibirsk) 3.96

Chelyabinsk 1.40

Volgograd 0.70

Astrakhan 0.40

Tomsk 0.54

Barnaul 0.39

Chita 0.33

Perm 1.32

Airports of South

Basel-Aero (50%) Sochi 3.10

Changi (30%) Pashkovsky (Krasnodar) 3.40

Sberbank (20%) Gelendzhik 0.24

Anapa 1.00

Airports of Regions Renova (100%)

Koltsovo (Yekaterinburg) 4.53

Kurumoch (Samara) 2.38

Rostov-on-Don 2.34

Strigino (Nizhny Novgorod) 1.13

Saratov Airport 0.41

AeroinvestMineralnye Vody 1.92

Khrabrovo (Kaliningrad) 1.20

RostecRamenskoye Airport (under reconstruction)

Irkutsk Airport (possible in the longer term)

Source: company data


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Largest projects to construct airports


Asian investors in airport infrastructure

Strategic investors from Asia have expressed interest in Russian airports. For example,Changi Airports International, which manages Singapore airport, has become a partner

of Basel-Aero (part of Basic Element owned by Oleg Deripaska). Changi controls 20%

of Airports of South Holding.Another example is South Koreas Incheon (the manager

of its namesake airport in Seoul), which owns a minority stake in Khabarovsk airport.

Moreover, the company may also participate in the management of Irkutsk airport.

In China, most large airports are state-owned and their management companies do not

yet invest in foreign assets. On the contrary, construction and concession companies as

well as investment houses have expressed interest in foreign airports. For example, in

2014, Beijing Urban Construction Group signed a $1 bln contract with the Kyrgyz

government to reconstruct Manas airport. The peculiarity of the deal is that another

candidate was Rosneft, but it later pulled out of negotiations. Another Chinese

company, China Machinery Engineering Corporation, has invested $300 mln inKyrgyzstans second-largest airport in the city of Osh. Other examples include China

Investment Corporation (CIC), which controls a 10% stake in Londons Heathrow

airport; Beijing Construction Engineering Group, which has allocated GBP 800 mln for

the construction of a new terminal at Manchester airport; and Chandgoung Hi-Speed

Group, which is investing funds in Toulouse Blagnac Airport (France).

Moscow

Saint Petersburg (Pulkovo)

Vladivostok(Knevichi)

SHEREMETYEVO

DOMODEDOVO

VNUKOVO

Kaliningrad (Khrabrovo)

Anapa (Vytyazevo)

Tomsk (Bogashevo)

Chita (Kadala)

Gelendzhik

Sochi (Adler)

Rostov-on-Don

Krasnodar(Pashkovsky)

Novosibirsk(Tolmachevo)

Perm

Yekaterinburg (Koltsovo)

Chelyabinsk(Balandino)

Barnaul

Astrakhan

Volgograd

Saratov

Irkutsk

UfaSamara(Kurumoch)

RAMENSKOYE*

*under renovation

Krasnoyarsk(Yemelyanovo)

Kazan

Nizhny Novgorod (Strigino)

Mineralnye Vody

State authorities

East Line Group

Vnukovo-Invest

Northern Capital Gateway

Novaport

Airports of South Holding

Airports of Regions Holding

Aeroinvest

Rostec


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SOURCES OF FINANCING:DECREASE, NO WAY TO INCREASE

The main sources of financing for Russian infrastructure are as follows:

the federal budget;

the National Wealth Fund (NWF);

regional budgets;

own and borrowed funds from natural monopolies (Russian Railways) and state

corporations (VEB, GK Avtodor);

private pension savings that are invested through investment funds;

loans raised from commercial banks;

private investors, including foreign investors;

cash flows from infrastructure projects.

Over the next few years, the proportion of state spending in infrastructure will decrease

due to a decline in revenues. However, this decline will be offset by higher investments

from the NWF and pension funds that regain access to private pension savings.

State budget: difficult choice between higher social spending andspending on economic development

Federal and regional budgets account for over half of all investments in transport

infrastructure. Federal budget spending goes toward the construction and maintenance

of federal roads, subsidies to state corporation Avtodor and the regions, construction

and renovation of airport and port infrastructure facilities (take-off and landing strips,

mooring berths and to conduct dredging operations, i.e. areas where private

investments are not yet permitted). Regional budgets spend funds on construction andreconstruction of regional and municipal roads as well as

Gazprombank - Russian Infrastructure - Research

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