Foreign investors eye Russian infra market

Foreign investors eye Russian infra market

With Russia’s economic climate improving in 2017, the country has seen an injection of investment commitments into infrastructure from Asia and the Middle East. Some argue Russia’s burgeoning M&A deal pipeline will spur further projects across the energy and transport sector in 2018.

Max Thompson

5 December 2017

With inflation below the government’s targeted 4%, low interest rates, steady GDP growth in 2017, and a stabilising rouble, Russia’s economy is on the mend. These positive market conditions have seen investment commitments pouring in from the Middle East and Asia this year, especially in the energy and transport sector. And, while most of this foreign capital is currently focused on merger and acquisition (M&A), it’s only a matter of time before the number of mega infrastructure tenders begin to pick up.

source Daily Mirror

edited by kcontents

Earlier this month a delegation from Saudi Arabia pledged billions of dollars of investment into Russia’s oil and infrastructure and technology sectors. Meanwhile, mid-October marked the ninth annual “Russia Calling!” investment forum in Moscow, hosted by VTB Capital, which also heralded a fresh slew of economic announcements. Even OECD-based investors are now eyeing the burgeoning M&A pipeline in the country. 

A Russia focused banker tells TXF: “The amount of M&A in Russia is going to spur the start of some big projects in the coming years, which will result in some mega bank mandates. And the government is also planning to launch a series of infrastructure projects after the 2018 election.”

Forging new partnerships

Russian Direct investment Fund (RDIF) has been building various new partnerships with Chinese entities during the second half of this year, while JBIC and Italian utility Enel have also signed new collaboration agreements with the sovereign wealth fund.

Saudi Arabia has made a play for increased reciprocal investment in the energy and oil and gas sectors, launching a $1 billion energy fund in October with capital from Saudi's Public Investment Fund (PIF). PIF and Saudi state-owned investor Mubadala also agreed to invest $100 million in transport projects in Russia by becoming shareholders in the United Transport Concession Company.

The three partners are also eyeing participation in three projects in Moscow and St Petersburg, and are expected to invest a total of RUB13 billion ($226 million).

RDIF’s CEO Kirill Dmitriev says that the fund will also be joined by state-owned company Saudi Aramco in relation to an agreement signed with Russia’s petchem firm, Sibur, which includes a $1.1 billion agreement to build a gas chemical plant in Saudi Arabia.

In reciprocation, Saudi Arabia will pump $150 million into the Eurasia Drilling Company, an undisclosed amount into the Novatek Arctic LNG 2 project, as well as investing in toll-free roads in Russia.

Dmitriev explains those deals represent important “signature transactions” that are key “to showcase cooperation among top companies so that mid-level companies can follow”.

He also announced the launch of a joint technology fund between the two governments, with $1 billion of funding committed. He said the fund was relevant to areas where the countries have synergies and unique technologies. Dmitriev also referred to “infrastructure areas” and said that - for example - RDIF is invested in the Hyperloop transport technology.

The increase in foreign investment comes as the Russian economy improves, as the banker says: “Inflation is below the government’s 4% target, and headline inflation is down at 3% which has rarely been seen in Russia. Local interest rates are coming down, there was just a key rate cut from 9% to 8.5% and people are forecasting its decline to 7% or below by the end of the next year. The rouble is now stable around 60 roubles to the dollar, where it has been for 12 months-plus now. We’ve had three quarters of GDP growth, but for Q2 [this year] it was 2.5% which is showing real recovery.”

source Bloomberg

edited by kcontents

Transport

Shareholder diversification for the operator of Pulkovo Airport, the main airport in St Petersburg, has also demonstrated the appetite of investors for Russian infrastructure from the Middle East and China.

VTB Capital completed the sale of a 25% equity stake in the operator of Pulkovo Airport on 1 September. RDIF brought local private equity firm Baring Vostok, Mubadala, and sovereign wealth funds from Qatar, Saudi, the United Arab Emirates (UAE), Kuwait and China into the deal. A year earlier Qatar Investment Authority acquired another 25% of the operator for around €240 million ($286 million).

The banker says: “The [Pulkovo Airport] deals are spurring on quite a few other airports to look at a similar structure. In addition, Russian aviation traffic is actually up 21% in the first nine months of 2017. There are three large Moscow airports and three large regional airport portfolios and there’s a lot of interest from their shareholders. There could even be an expansion project on the cards.”

Most sale rumours are connected to Domedovo International Airport in Moscow, while of the regional airport operators, Novaport is the main one to watch.

The roads sector is also throwing up M&A. Earlier in the year Turkish firm Limak acquired a 49% stake in Bashkir Concession Company, which was previously awarded the concession contract to finance, construct and operate the Ufa tunnel toll road in the Republic of Bashkortostan. Limak’s co-shareholder in the project is VTB.

The Western High Speed Diameter, a RUB120 billion ($2 billion) toll road PPP financed in 2012, opened to traffic on 4 December 2016. The operational history is ticking up and with two banks as shareholders – VTB Capital and Gazprombank – a sale is on the horizon, as well as a refinancing.

Meanwhile, an M&A deal is nearing completion in the ports sector. UAE government controlled port operator, DP World teamed up with RDIF to buy 35-40% of Fesco Transportation Group, the largest port operator in the Russian Far East, as well as being a rail rolling stock operator. Their investment awaits approval from the Federal Antimonopoly Service. Summa Group, GHP Group and TPG are the existing shareholders.

Russia Far Eastern container port traffic rose 35% in the first nine months of 2017. “Given the recovery in volumes, there is general interest in the port sector,” the banker adds. “And there are plans to expand a number of the Russian ports in the run up to 2020 .”

The government part-owns ports operator Novorossiysk Commercial Sea Port, which has long been a potential candidate for privatisation.

Inbound investment has certainly been coming from private and public foreign entities this year. The banker concludes: “There is a backdrop of increasing interest in emerging markets, so the outlook is looking pretty bright for infrastructure and interest from overseas. That’s mainly coming from China, but also international investors – sovereign wealth funds and strategic operators, and increasingly more OECD-based investors.”

He adds, “Russia is seen as a good opportunity by emerging markets investors, given the recovering economy and perceived value based on where assets are priced.”

https://www.txfnews.com/News/Article/6324/Foreign-investors-eye-Russian-infra-market

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