Technische Universität Bergakademie Freiberg
Fakultät für Wirtschaftswissenschaften
Lehrstuhl für Allgemeine Betriebswirtschaftslehre mit dem Schwerpunkt
Investition und Finanzierung
Masterarbeit im Studiengang International Management of Resources and Environment (IMRE)
zur Erlangung des akademischen Grades
MBA
über das Thema
Project Finance in Russia
Eingereicht bei: Prof. Dr. Andreas Horsch von:
Anschrift:
Abgabedatum: **. August 2015
ABSTRACT
In order to increase the investment attractiveness, project finance development and implementation of the projects with the use of this mechanism is becoming more and more urgent. Being one of the riskiest financing methods, project finance is still very attractive for investors. There are many successful projects that have been implemented under project finance mechanism. This financing tool became originally widely used in developed countries. However, as other economies are emerging, project finance has been widely used in the countries with economies in transition as well as in developing countries. The main aim of this paper is to analyze current development of project finance mechanism in Russia. The research dwells upon the institutional framework for project finance in the country, and underlines the main problems that hinder development of this financing mechanism in Russia. A new governmental program for project finance that was introduced by the Ministry of Economic Development in the end of 2014 is looked more into detail. The research touches upon the projects that have already been implemented in Russia and also looks into unsuccessful ones. It analyzes which sectors are the most attractive for investment decisions in the country, and provides some corresponding statistics. Moreover, the paper tries to determine current economic situation in Russia in the light of the sanctions that the country had to face in the context of Ukrainian crisis, and influence of the latter on the projects to be implemented on the basis of project finance. As a result, the research provides prospects for development of project finance in Russia, and underlines necessity of this mechanism being further used for projects implementation.
Key words: Project Finance, Public-Private Partnership, Investment, Project Analysis, Project Risks.
1
TABLE OF CONTENTS
ABSTRACT ...... 1
ABBREVIATIONS ...... iii
LIST OF FIGURES ...... iv
LIST OF TABLES ...... iv
1. INTRODUCTION ...... 2
1.1. Relevance of the topic ...... 2
1.2. Literature Review ...... 3
1.3. Structure of the Study ...... 4
1.4. Aim of the Study ...... 5
2. THEORETICAL BACKGROUND OF PROJECT FINANCE ...... 7
2.1. Development of Project Finance ...... 10
2.1.1. Project Finance Structure ...... 12
2.1.2. Project Risk Management ...... 16
2.1.3. Benefits of Using Project Finance Structure ...... 18
2.2. Infrastructure in Russia ...... 20
3. INSTITUTIONAL FRAMEWORK OF PROJECT FINANCE IN RUSSIA 26
3.1. Regulatory Framework ...... 26
3.2. Main Participants of Project Finance Mechanism in Russia ...... 33
4. PROJECT FINANCE MARKET OVERVIEW IN RUSSIA ...... 35
4.1. History of Project Finance Development in Russia ...... 36
4.2. Projects in Russia ...... 39
i
4.3. Case Study: South Stream ...... 42
4.3.1. Background Information ...... 42
4.3.2. Project Companies ...... 43
4.3.3. Project Costs and Financing ...... 45
4.3.4. Reasons for South Stream Project’s Abandonment ...... 46
4.3.5. Influence of Sanctions on South Stream Project Development ...... 48
4.3.6. Losses over South Stream Abandonment ...... 49
4.3.7. Turkish Stream...... 50
5. CONCLUSION AND OUTLOOK...... 52
ANNEX ...... 59
LITERATURE REFERENCES ...... 63
AUTHOR’S DECLARATION OF ORIGINALITY...... 71
ii
ABBREVIATIONS
BRICS - Brazil, Russia, India, China, and South Africa
CBR - Central Bank of Russia
CS - compressor station
ECA – Export Credit Agency
EDB – the Eurasian Development Bank
EPC Contract - Engineering, Procurement and Construction Contract
EXIAR- Russian Agency for Export Credit and Investment Insurance
FCPF - Federal Center for Project Finance
FZ – Federalny Zakon (Federal Law)
O&M Agreement - Operation and Maintenance Agreement
PPP – Public Private Partnership
SCO - Shanghai Cooperation Organization
SPE – Special Purpose Entity
SPFE - Special Project Financing Entity
SPV – Special Purpose Vehicle
TEP – Third Energy Package
iii
LIST OF FIGURES
Figure 1: Evolution of syndicated and project finance loans worldwide In USD million (l.h.s.) and per cent shares (r.h.s.), 2007-2013 ...... 11 Figure 2: Typical Project Structure ...... 14 Figure 3: Project finance scheme in Russia ...... 21 Figure 4: Exchange rate dynamics: US dollars to rubles ...... 22 Figure 5: Mechanism Implementation Diagram ...... 31 Figure 6: End of day Commodity Futures Price Quotes for Crude Oil (2006-2015) ...... 37 Figure 7: Export Index Value in Russia in the period 2000-2013 (Current value of exports (U.S. dollars), expressed as a percentage of the average for the base period 2000) ...... 38 Figure 8: Global Project Finance by Sector (USD mln) in 2014 ...... 42 Figure 9: South Stream Offshore Pipeline – Route ...... 44 Figure 10: Turkey’s “South Stream” and Russian Gas ...... 51
LIST OF TABLES
Table 1: Corporate Finance-Project Finance Continuum ...... 9 Table 2: Main stages of project finance development ...... 12 Table 3: Risks and their sub-categories (Summary) ...... 17 Table 4: Comparative Analysis of Project Finance Practices in Russia and Worldwide ...... 28 Table 5: Projects in Russia Implemented on the Basis of Project Finance ...... 40 Table 6: Objectives for Development and Efficiency Increase of Project Financing in Russia ...... 57
iv
1. INTRODUCTION
1.1. Relevance of the topic
In order to be realized projects need to find funding which in many cases cannot be provided by one investor even when represented by a state itself.1 Raising money for big projects cannot be fulfilled by relying only on traditional financing techniques. Project financing that has been developing rapidly in recent decades can be one of the options for large long-term projects.
Developed countries have been using project finance for a long time already. There is no single definition that can be universally applied to project finance. However, project finance is often defined as “a method of raising long-term debt financing for large projects based on lending against the cash flow generated by the project itself”.2
This method of financing has proved to be effective as a result of a significant number of many successful projects all over the world. However, the first relevant resolution by the Government of Russia “On Approval of the Program of Supporting Investment Projects Carried Out in the Territory of Russia Based on the Project Financing” was issued only in October 2014.3 What is more, a selection process of the authorized banks started only in December 2014. Projects in Russia turn out to be rarely funded by the banks due to the lack of guarantees from investors in the project company. According to the Minister of Economic Development of the Russian Federation, Mr. Alexey Ulyukaev, the project finance approach can let evenly diversify the risks between the project company that funds 20% of the project cost, the bank that lends the money, the budget and Central Bank of Russia. As this method of financing is new and not well developed in Russia, research on the topic “Project Finance in Russia” turns out to be very relevant today.
1 See Khan/Parra (2003), p.3. 2 See Yescombe (2014), p.1. 3 See Ministry of Economic Development of the Russian Federation Official Website. 2
1.2. Literature Review
In order to carry out a proper research current empirical literature has been analyzed. Theoretical background is determined through the works and studies by various scholars both from Russia and other countries, as it is important to see how specialists with different backgrounds identify project finance. In many cases they share the same views and classifications but very often even the term “project finance” is defined differently in every source.4 Project finance is a relevantly new method of financing economic development, and there is a lot, but yet a limited number of academic theory and research. Yescombe (2014) and Fight (2006) summarize basic characteristics of project finance in their work. Esty (2006) demonstrates a lot of actual examples that let one learn more about the subject of the study, especially its practical side.
A number of studies, publications and articles, for example, by Hainz/ Kleimeier (2011) and Subramanian/ Tung (2015) are devoted to this topic. As far as situation in Russia is concerned, studies by Katasonov (2001) and Krutova (2009) suggest that that the scale of project finance continues to grow due to the fact that this financial instrument proves to be well-structured and safe in comparison with the other high-risk methods.
Related statistics and data to support the research has been retrieved from different publications such as Finam Holdings Database, OECD Journal: Financial Market Trends, Neftegazovaya Vertikal, Economics and Law, Financial University under Government of Russia, Young Scientist. It is also supported by current and the most recent publications by the World Bank, European Bank for Reconstruction and Development, International Bank for Reconstruction and Development, International Monetary Fund, BRICS New Development Bank, Eurasian Development Bank. Some analysis is based on the information retrieved from
4 See Fight (2006), pp. 1-9. 3
Global Project Finance Review by Thomson Reuters, from Project Finance International Yearbook and others sources.
However, as project finance has not been the most popular method of project funding in Russia recently, a lot of attention in the research is dedicated to the laws and government decrees of the Russian Federation and documents provided on the website of the Russian Ministry of Economic Development. Moreover, Islamova/ Rodionov (2013) characterize project finance in Russia, in particular problems and trends of development in their work.
Current project finance development has also been analyzed based on news articles from Russian media, as well as on publications from World Finance Review (Eastern Europe and Central Asia) 2014-2015, and online journal Finance and Credit. As far as the projects that have been and are implemented under the project finance mechanism in Russia, they have been looked into with the reference to the statistics and reports from the official websites of the companies that participate or participated in the project itself. Mazur/Shapiro/Olderogge (2004) give characteristics of project finance in terms of project management in Russia. Both Nikonova (2014) and Tulsky (2014) specify problems of project finance development in Russia as well as introduce regulatory framework of project finance in the country.
1.3. Structure of the Study x Chapter 1 (Introduction) covers relevance of the chosen topic at the present time as well as provides relevant literature review, structure of the study and introduces the aim of the study. x Chapter 2 (Theoretical Background of Project Finance) describes basic characteristics and development of project finance including its fundamentals and risks, and gives an introductory infrastructure overview of project finance in Russia. It underlines the main achievements and issues in the country connected with the chosen subject. 4 x Chapter 3 (Institutional Framework of Project Finance in Russia) focuses on laws, Central Bank documents, main requirements regarding project finance in Russia, as well as introduces main participants of project finance mechanism in the country. x Chapter 4 (Project Finance Market Overview in Russia) analyzes the projects that have already been or are about to be implemented, if they have been successful, how much money has been invested, which industries are the most widely financed in the country. It describes history of project finance development in the country. Russian market is introduced with the reference to the other countries due to the experience and relevant success of the latter in the field of project finance. In order to analyze the common situation in the country it is important to look more into legal background and therefore, a chosen case of the failure of project finance implementation in Russia, namely South Stream Project, is introduced. The Case Study provides reasons for the project’s failure and consequences and losses born by the companies that were shareholders of the established project company. x Finally, Chapter 6 (Conclusion and Outlook) concludes and describes possible prospects of project finance development in the country based on the data collection and analysis in the previous chapters.
1.4. Aim of the Study
The primary objective of the study is to collect and analyze data regarding Project finance development in Russia. It can be further divided into the following three sub objectives:
1. To identify basic characteristics and development of project finance based on the literature mentioned above; 2. To analyze project finance market in Russia, to assess legal framework in the country; 3. To determine prospects of project finance development in Russia. 5
The study focuses on analyzing current situation connected with project finance in Russia and identifying possible reasons for this state of affairs in the country.
As traditional forms of lending and investing are not able to fully provide the necessary financial base, project financing is becoming a priority form of funding large long-term projects. Russia, in comparison with the other countries, has been getting involved in this field only in recent years due to the prior lack of legal framework, financial instability of economy, lack of project finance specialists and qualified market participants and other factors.5 Project finance is still developing in Russia, but nevertheless it is becoming a well established method of financing large long-term projects. Of course, there are some inconsistencies with traditional pattern of project finance applied in developed countries, but basic principles are being followed.6
This study represents particularly relevant in Russia topic due to the fact that it is important to explore all possibilities for adapting to classical approach of project financing in Russia. Therefore, it seems essential to analyze conditions in the country regarding project financing.
5 See Katasonov (2001), p.34. 6 See Barinov (2008), pp.38-52. 6
2. THEORETICAL BACKGROUND OF PROJECT FINANCE
One of the fundamental tasks of project management is organization of financing, meaning securing the project with investment resources. They include fixed and current assets, property rights and intangible assets, loans, land use rights, etc.
Project financing is a type of investment activities that is always risky, especially taking into consideration current socio-economic conditions of Russia. Investment climate, legal framework that has not met the requirements of international project management are the reasons that impede effective implementation of the projects. For example, until recently, there has not been any certain definition of the term “project finance” in the Russian legislation, while the term “project” is also not well defined.7
Public-private partnership projects are usually the ones that are financed by project finance mechanism. This mechanism implies the fact that lenders and investors get return from cash flow generated by the project. While corporate finance means balance-sheet based financing structure.8
Funding for the project should be carried out under the following conditions: x Dynamics of investments should ensure the implementation of the project in accordance with the time and financial constraints; x Reduced funding and project risks should be provided by appropriate structure and funding sources, and certain organizational measures, including tax incentives, guarantees and various forms of participation.
Funding project implies the following steps: x Preliminary study of the viability of the project (on the feasibility of the project costs and planned profit);
7 See Mazur/Shapiro/Olderog (2004), p.105. 8 See The EPEC PPP Guide, Project Finance. 7 x Development of a project implementation plan (risk assessment, resource provision, etc.); x Organization of financing, including: o assessment of the possible forms of financing and choice of a particular form; o identifying funding organizations; o determination of the structure of funding sources; x Control of the plan and conditions of financing.
Funding of projects can be fulfilled by self-financing and by using external funds.
There are three main organizational forms of funding investment projects: x deficit financing which means government borrowing under the guarantee of the state with the formation of the national debt and the subsequent distribution of investment into the projects. State guarantees and fulfills debt repayment; x equity or corporate funding, which implies investment in a specific industry or business activities; x project financing, meaning direct project investment and being most commonly classified into:9 o limited recourse financing; o non-recourse financing.
Corporate financing implies funding investment projects by a company through cash flows generated from its current activities. And managers of the company have a right to use the cash flow generated for any other projects. Project finance, on the other hand, means that each project is considered separately, and that funding is to be found from the outside creditors who have access only to the
9 See Delmon/Delmon (2012), p.6. 8 assets and cash flows of the project they have invested into.10 Thus, investors get returns from the project’s cash flow and manage the money by their own will.11
Table 1: Corporate Finance-Project Finance Continuum Source: See Comer (1996), p.6.
10 See Comer (1996), p.5. 11 See Kensinger/Martin, p.324. 9
Corporate financing is usually used for short-term and smaller projects while project finance is applicable for long-term and larger projects. Project finance mechanism is more time-consuming due to a significant number of agreements and contracts that need to be concluded with operators, advisors, and other participants.
Table 1 introduces a summary of the main differences between corporate finance and project finance.
2.1. Development of Project Finance
Project finance is a relevantly new form of loan in international arena. However, the main idea which is fundamental for this kind of financing is not new at all.
Project finance appeared in 1930s when oil fields were developing in the US. It was when the loan was paid with the produced oil. Necessary for the development of oil deposits funds were provided by the bank as a loan. From the beginning of oil extraction the loan was settled by oil revenues. In that case, the bank undertook the risk of the lack of oil reserves for loan repayment. Project finance in Europe came into existence in 1970s due to oil and gas fields development in the North Sea. It has been used since then in various industries and infrastructure projects. This mechanism has been developing very rapidly until it faced financial crisis in 2007-2008.
Before 1980s development of oil fields played a significant role in the market of project loans. Nowadays, the most popular industries among creditors are infrastructure, telecommunications, high technologies, entertainment.12
Project finance is widely used by development banks in order to support countries with economies in transition and developing markets that are abundant in natural resources but lack capital.13
12 See Kuznetsov (2012), p.2. 13 See Wärnelid (2008). 10
Figure 1: Evolution of syndicated and project finance loans worldwide In USD million (l.h.s.) and per cent shares (r.h.s.), 2007-2013
Source: See Thomson OneBanker.
According to Thomson OneBanker data (See Figure 1), it was in 2008 that project finance loans amounted to USD 247 (9.55% of the global syndicated loans), and that was the highest level they reached in the previous years.14 However, in 2009 both the indicators fell considerably. Since that year project finance loans were increasing gradually, amounting to USD 204 in 2013 (4.82% of syndicated loans).
Through the history, project finance has been used in the countries of the world for infrastructure projects. It has been widely used in Western Europe, North America, Africa, Middle East and South Asia. The main stages of project finance development are summarized in Table 2.
Period Industry Regions 1 13th century – 1971 Random Project finance application in different countries and different industries 2 1971 – 1986 Oil and Gas Western Europe (North Sea)
14 See Croce/Gatti (2014), p.128. 11
3 1978 – Electric Power Industry USA beginning 1990s 4 End 1980s – Transport and Energy Projects; Great Britain, Western mid 1990s Ore Mining Industry Europe, Latin America
5 Mid 1990s – 2001 Telecommunications, Energy, Ore USA, Western Europe, Mining Industry Latin America 6 2002 – 2008 Transport, Construction and Real Western Europe, Middle Estate, Oil and Gas East 7 2006 – up-to-date Transport, Energy, Water India, Indonesia, Australia, Purification, Waste Disposal, Western Europe, USA Social Projects Table 2: Main stages of project finance development
Source: See Chugnin (2010), p. 14.
2.1.1. Project Finance Structure
The subjects of the project financing are the parties that are directly related to the object of lending. The following parties are engaged in project financing process: x Special purpose entity (SPE) typically plays the main role in project finance. It is established in order to fulfill implementation of a project or for a specific purpose and consists of operators and contractors who have a particular interest in a project. A project company is an independent legal entity which concludes contracts with the other parties of the project. It is controlled by the shareholders and is subject to the laws of the host country; x Sponsor – managing company of the project that usually is an equity holder of the SPE and gets profit through this ownership. The project sponsor is sometimes under the obligation to undertake legal responsibility or risks in order to guarantee his interest in the project’s success;
12 x Borrower does not have to be a part of the special purpose entity. There can be more than one borrowing entities, for instance, construction and operating companies, suppliers and off-takers; x Financial adviser can be represented by a commercial or merchant bank that provides consulting services to the sponsor. The financial adviser advises on legal framework in the host country so that all the transactions and financial structure are up to the requirements, it provides help in accounting matters and can consult in how to arrange the financing of the project itself; x The lenders that provide funding for a project can create a syndicate as large and long-term projects usually need significant financing. This syndication occurs in order to diversify lending portfolio and distribute the risks. The syndicate can include banks from both host and other countries in order to avoid host government interference in the project; x Technical experts provide advisory services to the sponsors and lenders as far as technical issues are concerned. Technical advisers are to prepare feasibility studies and sometimes to monitor and evaluate the development of the project; x Lawyers assist in all areas of the project. International law firms provide professional guidance in legal aspects of project finance. They are to be engaged in the project from the very beginning to avoid legal mistakes. Local law firms should also be involved as they are more aware of the project finance requirements in the host country; x Equity investors can be represented by project sponsors or lenders who do not have any managing rights in the project; x Construction companies are contractors that are core parties in project financing. They deliver project facilities either according to EPC (engineering, procurement and construction) as per given norms or ‘turnkey’ agreements under which the company is liable for timely execution;
13 x Regulatory agencies are essential as projects have to conform to the laws and regulations of the host country. Before financing part it has to be confirmed that the project obtained all the necessary licenses and permits; x Export credit agencies (ECAs), first of all, defend interests of the host country. ECAs encourage international trade and, therefore, are one of the key promoters of projects in emerging countries.15
As a rule, first of all, the project company has to hold a discussion with the government in order to receive essential authorization such as licenses and permits.
Typical project finance structure, consisting of a number of different parties and agreements that they sign, is usually represented in the following way (Figure 2):
Figure 2: Typical Project Structure Source: Adapted from Esty (2003), p. 36.
15 See Fight (2006), p.28. 14
The project company enters into a number of contracts in the process of project construction and operation. Project Agreement is the most important contract that represents the scheme under which the project company gets revenues.16 Three types of project agreement are usually distinguished: x Offtake agreement is an agreement between the project company and the parties interested in buying the prospective products or services that the project company provides; x Availability-based contract usually touches upon the public infrastructure (schools, roads, etc) projects and stipulates that a facility with the specified characteristics must be completed by a certain time; x Concession agreement is the one concluded between a project company and a contracting authority, under which the former is obliged develop or improve the infrastructure with revenue derived from payments by a contracting authority. The project remains fully owned by the public sector while the project company can use it under the provided license or a lease agreement.
The other project contracts are so-called sub-contracts that are also signed by a project company, as one party, and other than a contracting authority, as the other one17: x EPC (engineering, procurement and construction) contract – a construction contract under which a project facility has to be delivered by the contractor; x O&M (operation and maintenance) agreement is a contract according to which the project company or the operator that can be a member of the project company are engaged in operating and managing the facility; x Supply contract is concluded by suppliers of required materials (fuel or raw materials) and the project company; x Insurance is very important in project finance structure as the risks are very high, and, as a result, insurance costs turn out to be high as well. An insurance
16 See Yescombe (2014), pp.104-128. 17 See Yescombe (2014), p.163. 15
broker, experienced in the area of project finance, is often hired as an advisor in this issue.18
There is a number of additional contracts related to the Project Agreement, such as site lease contracts, project permits (construction and operating) and other rights, and others.
2.1.2. Project Risk Management
One of the most important aspects of implementation of project financing structure is rational management of its risks. Along with the estimated financial performance, degree of risks is also a criterion for acceptance or rejection of a particular investment project.19
Risk allocation is believed to be one of the most attractive features of project finance structure. However, due to the fact that risks are shared between the agents it is essential to analyze and properly approach all the possible risks.20
Different scholars that study project finance classify its risks in various ways. Fight (2006) differentiates risks as per the parties of the project, Nevitt/Fabozzi (2000) look into the risk phases, Yescombe (2014), on the other hand, provides the following division (Table 3):
Risks Sub-categories of risks
Commercial risks (or project risks) Commercial viability; Construction risks; Revenue risks; Operating risks; Input supply risks; Uninsured (Force Majeure) risks; Environmental Risks; Residual-value risk; Contract mismatch; Sponsor support; Risks for the Contracting Authority Macro-economic risks (financial risks) Changes in interest rates; Changes in inflation; Changes in currency exchange
18 See Yescombe (2014), p 182. 19 See Radchenko (2013), pp.285 – 287. 20 See Nevitt/Fabozzi (2000), p.9. 16
rates Regulatory and political risks Change in law risks; Investment risks, Quasi-political risks Table 3: Risks and their sub-categories (Summary) Source: Yescombe (2014), pp.197-313.
Commercial risks are the one that are directly relevant to the project and include those risks that relate to construction and operating phases of the project. Macro- economic risks, on the other hand, are the ones that should be evaluated during the whole project duration as they consist of external causes, such as inflation or interest rates. As far as regulatory and political risks are concerned, they occur because of governmental interferences as well as due to unexpected changes in law.
For the project finance structure to work, it is important to evaluate and manage these risks. Every risk requires different mitigation techniques. Risks and mitigation tools are stipulated in the contract but sometimes the latter may not be applicable due to limitations in scope, amount in duration.21
The mitigation of these risks requires three steps:
1. Identification and analysis of all the possible project risks.
A feasibility study is prepared and carefully analyzed by financiers or external financial consultants. The main focus is calculation of the project costs and cash- flow streams. Different possible situations will be examined considering changes in macroeconomic variables.
2. Allocation of these risks among the parties.
In project finance, risks are allocated among the parties so that each of them is able to manage them in the best way possible. As a rule, political risks are undertaken
21 See Ruster (1996), p.1. 17 by the state sector, while commercial risks – by the private sector. Financiers tend to allocate risks in such a way that each party is interested in managing such risks.
3. Creation of mechanisms to manage the risks.
Risk response planning implies different strategies such as its avoidance, transfer, and minimization. Risk minimization is important in order to avoid the risk or if there is no way to do so, to reduce its negative consequences. Risks must be monitored and controlled constantly during the project.
Project finance is a very advantageous financing tool. However, due to some preconditions, it is not that well-used in some countries. These preconditions are usually as follows22:
1. Sustainable economics, meaning that there is a sustainable economic system where all the basic needs of the people are fulfilled and the project’s goods and services are demanded. 2. Identifiable risks, so that one can predict development of the project without being exposed to any serious risks. 3. Accessible financing is the main factor when planning to launch infrastructure projects. 4. Political stability is another important issue concerning successful launch of a project in the country, since political and regulatory risks are complicated to manage due to their ‘force majeure’ nature.
2.1.3. Benefits of Using Project Finance Structure
Opposite to the Miller-Modigliani theorem that shows that the choice of financing method does not influence the company’s value, scholars proved that project finance can be called one of the most viable financing methods due to several reasons.23
22 See Rhodes (2012), p.193. 23 See Esty (2003), p.1. 18
First of all, due to the fact that infrastructure projects do not lead to high returns, investors can be attracted by the compensation that they get because of the high leverage. As the risk of investing when using project finance method is very high, since the debt is quite high, too, return on equity turns out to be high as well in comparison to low leverage financing models.24
Besides, non-recourse and limited nature of project financing attract investors due to the opportunity of avoiding guarantees since the lenders are undertaking all/some of the risks.
What is more, project finance method is beneficial in a sense that even if a project does not turn out to be successful and profitable, it will not affect the owner’s financial status. The risk is excluded from the balance-sheet, and from the economic point of view, companies find this attractive since they can maintain their financial indicators and credit rating.25
The choice of project finance method is also driven by tax benefits. Projects that in the future serve to the state usually use different tax allowances that are provided in order to stimulate the development of similar projects. What is more, in some countries interest is deductable.26
Risk spreading in a project finance structure is also an appealing factor because risks are undertaken by all the parties, including the lender. Every participant takes a specific risk which increases the chances of a project to be successful. If a project is half-done only, participants will still be more interested to find a solution for continuation rather than to shut down the whole project. This also happens due to non-recourse and limited financing, meaning that loan security represented by, for example, a half-completed facility, will be of very limited worth in liquidation case.27
24 See Yescombe (2014), p.21. 25 See Fight (2006), p.5. 26 See Yescombe (2014), p.22. 27 See Fight (2006), p.6. 19
2.2. Infrastructure in Russia
Project financing is a relatively new instrument in the global financial market. Despite the fact that it has proved to be successful in many countries, project finance in Russia can be defined as rather weak.
The main problem in the Russian financial market, and particularly in the market of investment projects, is high level of uncertainty and unpredictability. These factors have been affecting the volume of capital investment and the respective rates of development of the Russian economy. Therefore, it is necessary not only to choose projects for financing more carefully, to carry out a more detailed analysis of them, to assess the appropriateness and effectiveness, but also to reasonably choose the organizational and economic mechanism of funding for each project individually.28
Project financing is considered to be one of the riskiest and most complicated financial mechanisms for investment projects.29 Nevertheless, starting from the beginning of 2000s project finance has been developing in Russian commercial banks and companies. The methodology, contractual framework and project finance experience have a place to be in the Bank for Development and Foreign Economic Affairs (Vnesheconombank), "Sberbank of Russia", "Gazprombank", the Eurasian Development Bank, the bank “Financial Corporation Otkritie”, and others.
There are a number of reasons for project finance not having been particularly widely used in Russia: Soviet Union command economy that excluded the use of market mechanisms for financing investment projects, monopolization of foreign trade activities, limited long-term financial resources, underdevelopment of tools and methods, high costs. The only exception was the Bank for Foreign Economic
28 See Nikonova (2014), p.1. 29 See Smirnov (2013), p.7. 20
Affairs of USSR that used a project finance mechanism for implementation of projects with foreign partners.30
Russian project finance has a number of distinctive features, the first of which can be considered a financing scheme itself which is represented in Figure 3.
Figure 3: Project finance scheme in Russia Source: See Voitovich (2014), p.2.
The following specific features can be highlighted as far as project finance scheme in Russia is concerned:31 x Liability to establish a project company, all shares of which are pledged to the investor; x Obligatory investment of 20-40% or more of own funds of the total project costs by a project initiator; x A lot of accounting and tax considerations both for the project initiator and the project company;
30 See Kuznetsov (2010), p.4. 31 See Voitovich (2014), p.2 21 x Liability of the project initiators to service a bank loan during the investment stage; x Demand by the banks of guarantees by the project initiators as far as the project company is concerned.
Researchers of project financing in Russia believe that there are a few factors that have a negative impact on its development n the country. First of all, there is not a single definition of the term “project finance”.32 They also highlight that Russian stock market is not that well developed and project loan securities are not widely used, too. Moreover, Russian banks are not able to provide long-term loans. There is a lack of knowledge and experience in order to properly assess the project and take its risks. Discrepancies between income and loan, as well as debt service in foreign currency inside the country itself also have a place to be. The risk of inconsistency between the currency that one gets the revenue in, and the currency, that the debt has to be serviced in, also hinders development of project finance in Russia. Cash flow in rubles may create problems when paying back the loan that was received in US dollars. This problem has especially worsened in 2014-2015, when sanctions on Russia and world oil prices plunge affected its currency, which can be seen in Figure 4.
Figure 4: Exchange rate dynamics: US dollars to rubles Source: See Exchange Rate Section, in www.yandex.ru.
There is also a limited range of financial instruments that can be applied for financing investment projects, as well as not a sufficient number of qualified participants of project finance. There are high political risks along with the
32 See Nikonova (2014), p.1. 22 regulatory ones. Regulatory framework has only started to actively develop in 2014. Existing legal and regulatory framework concerning project finance does not fully address issues that are essential for its development in the country. Also, issues of protection of interests and insurance against risks of the project participants are not taken into consideration, procedures for receipt of guarantee, granting tax exemptions, and use of this method for infrastructure objects financing are not defined.
One of the factors hindering development of project finance in Russia is the fact that the probability of 5-10% from the estimated main indicators is set in developed countries, whilst in Russia this value equals to 20-30%.33 These are the costs connected with the extra assets reserves to meet various unforeseen costs.
What is more, there has not been any project that could be used as an example of a high quality and well-designed project. It is also a common practice that project initiators approach the banks without having a deliberate plan. This kind of approach is not suitable for project finance structure. This mechanism requires specific requirements as far as a project and sponsors themselves are concerned. It is very often that banks have to reject the initiators due to a low level of project planning, financially weak and unstable position of a sponsor, unprofessional project team and other factors. Most of the projects seem risky to foreign investors due to the lack of their well-defined structure and transparency. Therefore, it is important for the companies to carry out a meticulous analysis of a project.
As by the time that the bank have made a final decision, the client may still not have any sources of repayment, but there are already technological and market project risks, new difficulties may appear. In order to overcome them, a special mechanism of state support of the objects that are important on the state level is to be created. If there is one, then investors will invest in the projects, and financial assistance from the state will not be needed. This approach consists of the
33 See Gusev (2014), p.2. 23 following components: reliable guarantees to the banks that participate in financing programs of national priorities and projects, development of cooperation between the banks in the field of consolidated loans for different investment projects, as well as tax incentives.34
International project finance in cooperation with many participants from different countries requires financial reporting for cash flow management and assessment, international accounting standards, risk management. One the most crucial conditions for development of project finance in Russia, for improvement of investment system is enhancement of application of international accounting standards that can be used as a tool for exchange of financial information on international level. In order to attract foreign investment, it is essential to carry out a detailed research for advancing international accounting standards application in the country, taking into consideration recommendations and proposals from foreign investors and experts.
Despite all the negative aspects, there are still a number of positive features and results, as far as project finance in the country is concerned. Many Russian commercial banks use project finance structure today. Russian Government established Federal Center for Project Finance (FCPF) that prepares and implements projects envisioned by agreements between Russia and international financial organizations. The Russian Foreign Investment Promotion Center, the Russian Financial and Banking Union, the Foreign Investment Advisory Council were also set up.35 The government is trying to resort to the use of project finance mechanisms when implementing Federal Special Purpose Programs, Energy Strategies of Russia etc.
The following activities have been introduced in the country in order to improve a situation for project finance structure use:
34 See Islamova/Rodionov (2013), pp.7-15. 35 See Kuznetsov (2010), p.4. 24
• Promoting sustainable interaction between all potential investors - companies, banks, funds, leasing companies and other institutions;
• Enhancing the role of banks as project finance initiators;
• Paying special attention to reduction of the various types of risks by advancing the level of project analysis;
• Improving project control systems and enhancing efficiency of supervising functions;
• Identifying benefits of various schemes of project finance in different sectors of the economy.
25
3. INSTITUTIONAL FRAMEWORK OF PROJECT FINANCE IN RUSSIA
3.1. Regulatory Framework
In the last 20 years project finance has become widespread in developed countries of the world. As for Russia, this financing tool has been actively used only for the last 10 years.
In contrast to the worldwide practice, project finance in Russia did not have any required legal framework until 2014 and all the regulations in this field before that can be characterized as insufficient. The main laws that were regulating project finance mechanism in the country up until 2014 were the Civil Code of the Russian Federation, Federal Laws “On Collateral”, “On Mortgage”, “On Joint Stock Companies”, “On Limited Liability Companies”, “On Bankruptcy”, “On Concession Agreements”, “On Placing Orders for Goods, Work and Services for State and Municipal Needs ”36 and regional laws on public-private partnership.
However, they did not regulate a lot of important aspects of project financing, including:
x Ringfencing of project property with the help of specialized legal entity - the project company; x Creation of a security interest over project assets in favor of the lenders; x Use of the future revenue, cash flow and assets to meet obligations to lenders during the construction phase; x Collective exercise of the rights of the lenders; x Protection and control of the project’s cash flow.
Therefore, Russian sponsors and lenders using project finance transactions were forced to turn to foreign law instruments. Russian law was used for project finance
36 See Nikonova (2014), p.2. 26 transactions to a limited extent, or not used at all due to their lack of its competitiveness in comparison with the foreign law.37
In December 2013 the State Duma adopted two Federal Laws that were important for the development of project finance in Russia: No. 379-FZ "On Amendments to Certain Legislative Acts of the Russian Federation" and No. 367-FZ "On Amendments to Part One of the Civil Code of the Russian Federation and Repeal of Certain Legislative Acts (Provisions of Legislative Acts) of the Russian Federation". They include a number of innovative provisions for development of project finance and the bond market. The laws provide for introduction of a number of new Russian law concepts and tools in the field of project finance, including:
x Creation of specialized companies (project companies); x Inter-creditor agreements; x A new mechanism for the assignment and delegation of rights and obligations under the contract, particularly assignment of rights to future revenues, cash flow, generated assets; x New types of collateral (rights under the agreement, future property, future rights); x Creation of the institute managing the collateral; x New types of accounts, ensuring control over the cash flows of the project and the rights of creditors and shareholders.
Due to history of project finance development in Russia, the term “project finance” has a slightly different meaning in the country, i.e. it is perceived as a loan to the project company for investment project implementation.38 That means that in practice, the term “project finance” is simplified. Comparative analysis of project finance practices in Russia and the other countries is represented in Table 4.
37 See Project Finance in Russia (2013). 38 See Voitovich (2014), p.3. 27
International Practice Russia
Borrower Project company Operating company Operating company (project initiator) - guarantor
Credit Recovery On the basis of economic Based on existing cash flow stability of the proposed of the borrower and its Calculation investment project financial results in the previous years Debt Repayment Cash flows and assets Normal conventional lien generated by the project Guarantee itself Contract Nature More strict Less strict
Book-keeping Credit is on the balance of Credit is on the balance of the project company, the the operating company balance sheet of the operating company stays the same Financial Tools Loans, bonds, shareholding Loans, shareholding in the in the project company, the project company, options volume of transactions for the right to structured as per the shareholding, acquisition of principles of PPP property rights for development projects Table 4: Comparative Analysis of Project Finance Practices in Russia and Worldwide Source: See Voitovich (2014), p.3.
As a rule, project finance implies existence of a project company (special-purpose entity). These companies are fully in charge of project implementation. Until recently, these entities were not regulated in Russia. Limited liability companies were established for participation in tenders for concession and public-private partnerships agreements.
As noted in the Budget Message of the President to the Federal Assembly of the Russian Federation as of 13.06.2013 "On Budgetary Policy in the Period 2014- 2016", the State programs of the Russian Federation should become a key
28 mechanism through which strategic and budget planning can be connected.39 This can be called one of the reasons why year 2014 has become crucial for project finance development in Russia.
In July 2014 new amendments to the Federal Law “On the Securities Market” were adopted, introducing a new mechanism for attracting long-term financing in Russia. Legal entities acquired a new status of special project financing entities (SPFE).40 An SPFE is not in charge of the whole process of project implementation. Its main obligation is to finance a particular investment project. What is more, mentioned above amendments provide for the protection of interests of the lenders as well. An SPFE can be set up either in the form of a joint stock company or of a limited liability company.
In order to improve the overall situation connected with project financing, in October 2014 Ministry of Economic Development of Russia introduced a new federal program “Program of Support for Investment Projects Implemented the Russian Federation on the Basis of Project Financing”.41 The objective of this Program is creation of a mechanism that will support investment projects implemented in Russia on the basis of project financing and that will contribute to an increase in volumes of crediting the real sector of the economy on the long-term and concessional terms. The Ministry has already identified the banks that are authorized to concessional funding of the Central Banks. Some projects to be implemented have also been selected. Investors have already expressed a high interest in the program.42 Moreover, the Ministry of Economic Development is developing an improved procedure for granting state guarantees as far as investment projects are concerned.
39 See Budget Message of the President to the Federal Assembly of the Russian Federation "On Budgetary Policy in the Period 2014-2016". 40 See Karpunin (2014), p.9. 41 See Government Decree of Russia of 11.10.2014, No.1044. 42 See Yarmalchuk (2015), p.32. 29
The program by the Ministry of Economic Development introduced an Interdepartmental Commission for the selection of investment projects, with the involvement of the Ministry of Finance, the Ministry of Industry and Trade, the Ministry of Agriculture, and the Ministry of Energy. It established basic terms for granting loans for projects implementation which determine that they are to be provided only by authorized Russian credit organizations and international financial organizations. The currency of the loans is Russian ruble. Initially, the interest rate for the entity to be supported within the program was not to exceed the key rate level of Russian Central Bank plus 1% per annum.43 The key rate is the rate at which the Central Bank of Russia (CBR) grants loans to the banks for one week and the rate at which the latter can deposit the money at the Central Bank. However, since February 2015, the rate is to consist of the refinancing rate plus 2.5% per annum. The refinancing rate is the main interest rate of the CBR. It directly affects the calculation of penalties and fines in Russia. Under this rate the banks pay back the loans to the Central Bank. Currently, the refinancing rate is 8.25% since 2012, and the key interest rate is 11% since July 31, 2015.44 By 2016 these rates are to be equalized by the Central Bank. The Central Bank of Russia considers inflation outlook and risks when setting up the limits of the rates.45
What is more, according to the program, the loan agreement includes the right of the authorized bank to change the interest rate only when the key rate by the Central Bank changes. The loan is provided for a particular project and to be used only within the program. The investment projects for this program are chosen by the Inter-departmental Commission.
The mechanism of the Program by the Ministry of Economic Development for the projects implementation in the basis of project finance is represented in Figure 5.
43 See Government Decree of Russia of 11.10.2014, No.1044. 44 See Central Bank of Russia Official Website. 45 See TeleTrade. Expert in the Financial Market (2015). 30
The documentation procedure is rather simplified due to the possibility of its submission in electronic format. According to the amendments of February 2015, the procedure of interaction between the Interdepartmental Commission, Russian credit organizations and international financial organizations has also been facilitated.46
Importance of project finance due to its influence on the overall macroeconomic situation in the country has been repeatedly highlighted by Russian President, Mr. Vladimir Putin. What is more, Mr. President proposed establishment of an international project finance center based on the interbank association in the framework of Shanghai Cooperation Organization (SCO).47 The SCO member states (China, Russia. Kazakhstan, Tajikistan, Kyrgyzstan, Uzbekistan, India and Pakistan) should also consider possible financial cooperation on the basis of the Eurasian Development Bank, the Asian Infrastructure Investment Bank and the New BRICS Development Bank.
There are still some drawbacks in project finance development in Russia. Even though regulatory framework started actively developing in 2013-2014, there is still a low level of project management systems used among most of the Russian companies. Companies do not sufficiently evaluate and monitor the cost parameters of the project and its effects. There are still some restrictions in the regulatory framework of the Central Bank of the Russian Federation for the risk assessment of the project company as a borrower. The term “project finance” is still very simplified and sometimes distorted.48 There is still no professional platform, i.e. no national journal that could involve and discuss best practices and challenges of project financing in Russia.
46 See Finam Holdings Official Website. 47 See SCO Business Forum (2015). 48 See Reanda, RusAudit: Project Finance. 32
3.2. Main Participants of Project Finance Mechanism in Russia
Supply and demand for project financing continues to grow. This mechanism has been becoming attractive due to the fact that the company does not face any risks considering its credit history. By the year 2008, most of the major Russian banks were engaged in the project financing. Banks have been interested in this structure as it lets expand loan portfolios.49 In terms of long-term lending by banks project finance is a very profitable operation, but not every bank can afford it due to the lack of internal funds and high risks of the project. Ministry of Economic Development of Russia introduced a list of financial institutions that are entitled to provide project finance services to support project implementation in the country: Sberbank of Russia, Rosselhozbank (Russian Agricultural Bank), Alfa-Bank, Bank VTB, Promsvyazbank, Gazprombank, Bank of Moscow, Otkritie Financial Corporation Bank, International Investment Bank and Eurasian Development Bank. Banks can lend the funds as well as act as initiate the projects or act as financial advisers.
There are many financial advisers in the country that can help in a project finance mechanism: KPMG, EY, PwC, Credit Suisse, HSBC, BNP Paribas. Legal advisers in Russia are usually represented by White & Case, Clifford Chance, Allen & Overy, Linlaters.
The largest strategic investors in infrastructure projects in Russia are Russian companies "Bazovy element", "Renova", ZAO "Leader". Industry strategic investors in the Russian market are Bombardier, Siemens, Alstom, Ansaldo, Skoda Transportation, Transdev, Changi Airports, Vienna Airoport, TAV Airoports, Fraport, Mitsui & Co. As for the leading contractors, they are Bouygues, Vinci, Hochtief, Strabag, Egis, Soares da Costa, FCC, Mosstroyotryad 19.
The major financial investors in the Russian market of project finance are Vnesheconombank, VTB Bank, Sberbank, Gazprombank, infrastructure fund
49 See Zobnev (2010), p.43. 33
Macquarie Renaissance Infrastructure Fund and investment bank Macquarie Capital Group.
Project finance development in the world was particularly influenced by ECAs – export credit agencies. There is no such investment guarantee mechanism in Russia. The state supports export only with guarantees only through Eximbank of Russia. However, Russian government has been trying to take steps in the direction of development state guarantee system. A certain role in these steps is played by Russian Agency for Export Credit and Investment Insurance (EXIAR) creation of which was proposed Russian Ministry of Finance and that was established in 2011 in order to insure export credits and investments against commercial and political risks.
Project finance development in Russia is becoming possible due to some changes in the legislative framework as well:
1. National plan to fight corruption was adopted 4 times so far: in 2008, 2010, 2012, 2014. It introduces not only new penalties under criminal law for corrupt practices but also involves actions for improvement of public services organization. 2. Law on Concession Agreements was adopted in 2005. As a result, private companies can take full responsibility for design and construction of the facility, its transfer to the state, and for its operation. Meanwhile, they reserve the right to get profits within a specified period of time. The law clarifies the role of the state in public-private partnerships, how these PPPs should be organized and how transparent they should be. It also stipulates property rights and economic benefits gaining.
34
4. PROJECT FINANCE MARKET OVERVIEW IN RUSSIA
Russia can be called one of the most attractive countries in terms of foreign investment. The main industries of investment in Russia are fuel and energy, metallurgical and food processing that generate significant amount of production and labor assets. Moreover, the fact that Russia is located between Asia and Europe can also explain the need for infrastructure projects.
Thus, one of the advantages in Russia is its abundance of resources that are necessary not only for economic development inside the country but also for development of the countries that have a comparatively limited resource base. Sustained growth of the world economy has led to the steadily rising demand for global resources, limited nature of which has resulted in the growth in their prices and increased economic attractiveness of the projects in the field of gas, oil, minerals, power generation and infrastructure. Demand for resources extracted in Russia caused economic growth of the country, increased the need for the development of internal transport, social infrastructure, industry and telecommunications, as well as the growing demand of alternative sources of energy. Slow development of these areas may hinder economic growth in Russia. What is more, the need for implementation of new projects in Russia is caused by weak competition in social and transport sectors due to protectionist measures enacted for development of the national companies, and for protection of strategic industries.50 In order to effectively manage economic potential of social and transport infrastructure, extractive industries, it is important that private companies are involved. Everything mentioned above determines specific economic attractiveness of project implementation in Russia.51And for large-scale and long- term projects, project finance is one of the best financing tools that can be used.
50 See Russia is Among the Leaders by the Number of Protectionist Measures (2009). 51 See Ahmetov (2008), pp.57-62. 35
4.1. History of Project Finance Development in Russia
Development of project financing in Russia began with the adoption of the Law No. 226-FZ "On Production Sharing Agreements" dated 30 December 1995 which is applicable to mineral resources and related industries). According to this law, the products manufactured are to be divided between the state and investors based on the special agreement and establishment of the Federal Center for Project Finance (FCPF).
OAO "FCPF" was established in accordance with the Government decree No. 545 of June 2, 1995. The shares of the Center are fully owned by the State Corporation "Bank for Development and Foreign Economic Affairs". FCPF was created as an organization carrying out work on projects preparation and implementation. These projects have a place to be due to which agreements between the Russian Federation and international financial organizations as well to financing from external sources.52 The purpose of the Center is to assist in raising funds for domestic and foreign financing and to provide for implementation of projects that are of highest priority for Russian economy.
Peak growth of the Russian market of project financing was in 2007 - the first half of 2008. However, since September 2008 there was a decrease in long-term and cheap foreign funds, deterioration of financial sector liquidity, shortage of resources.53 State started providing additional funds which were available to a limited number of banks and were given for a short term, meaning that they could not be used for project financing. During the crisis, even the most promising projects were frozen.
Project finance mechanism is not as well developed in Russia today. Banks prefer traditional bank lending. Until recently, the bank would approve a loan, if it understood the business, and the company had a positive credit history and has
52 See Government Decree of Russia of 02.06.95, No 545. 53 See Zobnev (2010), p.44. 36 been on the market for several years. Moreover, the bank would demand as a collateral not only equipment which will be acquired for the project but also collateralized liquid assets. The money would be given for the period of up to three years, rarely up to five. Long-term money has not existed until the new program by the Ministry of Economic Development in 2014.
However, the influence of the crisis in Ukraine and consequent sanctions in Russia in 2014 can impede economic growth in the country. Many transactions in financing to some energy companies have been already prohibited. Without a doubt, sanctions have a negative effect on investment in the country.54 2014 was supposed to be fruitful for Russia as far as project finance is concerned. However, sanctions impeded the predicted development. Some projects, like Yamal LNG and South Stream were influenced.55 What is more, the European Bank for Reconstruction and Development made a statement in September 2014 that it would not be provide any financial support for projects in Russia in response to the sanctions of the European Union sanctions.56
Figure 6: End of day Commodity Futures Price Quotes for Crude Oil (2006- 2015)
54 See Thomson Reuters (2015). 55 See Thomson Reuters: Project Finance International PFI Yearbook 2015 Annotation. 56 See Swiss Business Today (2014). 37
4.2. Projects in Russia
Project finance in Russia has been mostly used in the following industries: oil and gas, metallurgy, automobile, electric power, construction and industrial, while infrastructure projects are the first priority in the rest of the world as far as this financing tool is concerned.
During financial crisis, foreign investments became of a high interest to the country, while its potential of raw materials, energy and transport sectors remained as substantial. Therefore, project finance structure seems to be one of the most effective ones and should be used more widely in Russia.
Until recently there have been two main trends in project finance development in the country: projects that focus on resource potential in Russia and infrastructure projects. Table 5 represents some of the projects that have been implemented or are being implemented under this mechanism.
Name of the Cost, Description Stage of Project billion implementation euros Blue Stream Gas 2,6 Construction of a gas Supply of gas Pipeline pipeline between Russia and through the pipeline Turkey under the Black Sea began in February 2003 The Yuzhno- 1,0 An oil and gas field Production was Russkoye field launched in 2007
The Sakhalin-2 16 An oil and gas field, Production was construction of the first launched in 2009 liquefied natural gas plant in Russia Boguchanskoye 2,9 A massive energy and metals The hydropower Energy and Metals complex on the Angara plant's four 333 MW Complex (BEMO) River in the Krasnoyarsk hydropower units region were put into operation in the end of 2012 Nord Stream 8,8 Gas pipeline under the Baltic Both gas pipeline Sea for gas transportation strings were from Russia to Europe launched by the end of 2012 39
The Shtokman field 12,1 A gas and condensate field Production is to be development started in 2015 The toll road detour 0,7 Construction of a new road The road was Odintsovo between the M1 Moscow - launched into Minsk and Moscow MKAD operation in 2013 Ring Road The Moscow–Saint 1,6 A toll road Some parts of the Petersburg road have already motorway or М11 opened, the whole motorway is to open by 2018 Pulkovo Airport 1,2 An international airport New terminal was located in St. Petersburg: the opened in 2013, the construction of new and old one was closed renovation of existing for reconstruction in terminals at the airport 2014 Western High- 6,8 An eight-lane 45 km Parts of the highway Speed Diameter motorway connecting Saint were opened in Petersburg with Helsinki and 2012 and 2013, the Moscow routes rest are still under construction Central Ring Road 13,6 A large scale infrastructure The project is under project in Moscow region construction and is (520 km) to be finished by 2018 Table 5: Projects in Russia Implemented on the Basis of Project Finance
Examples of the projects implemented under this mechanism and with the support of the Eurasian Development Bank are:57
x Wood Processing Industrial Plant “Partner - Tomsk”, for which the Eurasian Development Bank provided 99.7 million euros for the construction of the factory – the first and the only one in Siberia. The goods are used in furniture production and house-building industry. x Tikhvin Carriage Works, for which the Eurasian Development Bank provided 330 million US dollars. x 90 million US dollars that was provided by the EDB for the construction, reconstruction and operation of Pulkovo Airport in St. Petersburg. The
57 See The EDB Official Website. 40
project has been financed with a number of other international financial institutions.
A new project finance program was approved by the Government of Russian in the fall 2014. According to this program, the state can finance 80% of the projects through the loans of the authorized banks. The projects should have a strategic meaning to the growth of Russian economy. The total amount of the project should not exceed 20 billion rubles (about 320 million euros). In order to finance the projects, the banks get loans from the Central Banks of Russia with the interest rate of 9% per annum, and the rate for end-use borrowers must not exceed 11.5%.58
Program for support of investment projects carried out in Russia on the basis of project financing provided for new projects in the country. In the period from January to July 2015 these projects were registered, and the total loan value of them amounts to 145,968 million rubles (about 2,341 million euros) so far (See Annex 1).
The only approved by the Commission for Project Financing project is the one in the field of communications – 3G/4G network construction in Moscow by a joint venture of“Tele2 Russia” and “Rostelecom”, “T2 RTC Holding”. The Commission approved this project’s loan value of 20 billion rubles in January 2015, the operator will get project financing to the extent of 16 billion rubles.59 The second project concerning network construction in the other regions of Russia was rejected by the Commission.
There are many other projects in the territory of Russia. Almost all the projects share one distinguishing feature which is the fact that most of the lenders engaged in project financing are foreign.60 This problem resides in the peculiarities of the
58 See Ministry of Economic Development of the Russian Federation Official Website. 59 See Vedomosti (2015): State Rejected Project Finance to MTS And “Rostelecom”. 60 See Tulsky (2014), pp.442-446. 41
Russian law, which is not that competitive compared with foreign institutions of law as far as project finance is concerned.
Though there are many projects in various sectors in Russia, the structure is still different from global trends, in particular, there is a lack of infrastructure focus. According to Figure 8, the leading sectors in project financing in 2014 worldwide was power, oil & gas and transportation.
Figure 8: Global Project Finance by Sector (USD mln) in 2014 Source: See Global Project Finance Review, First Nine Months 2014, in: Thomson Reuters.
Russia’s potential in raw materials, energy and transport sector is quite high, therefore, project finance is widely used in these industries. The most promising sector is the energy one, due to which project finance started developing in the world and especially in Russia.
4.3. Case Study: South Stream
4.3.1. Background Information
"South Stream" is an unsuccessful global infrastructure project of one of the biggest Russian companies "Gazprom". It is a gas pipeline project with the
42 capacity of 63 billion cubic meters. The pipeline was to transport gas across the Black Sea to the countries of Southern and Central Europe (Bulgaria, Serbia, Hungary, Croatia, Slovenia and Italy) in order to diversify export routes for gas and to avoid transit risks.61
The sea section of the gas pipeline "South Stream" was supposed to run under the Black Sea from the compressor station (CS) "Russian" on the Russian coast to the Bulgarian coast through the economic zone of Turkey. The length of the area was to be more than 900 kilometers, the maximum depth amounted to over two kilometers. The length of the land section in Europe was to be 1455 km.
Land section of the pipeline was supposed to pass Bulgaria, Serbia, Hungary and Slovenia. The endpoint of the pipeline was to be a gas measuring station Tarvisio in Italy. There were supposed to be gas branch lines to Croatia and Republika Srpska (state formation in the territory of Bosnia and Herzegovina).
4.3.2. Project Companies
The project was created by the Russian gas company "Gazprom" and Italian Eni Corporation in 2007. The management company South Stream AG was registered in Switzerland in 2008 with a registered capital of 10,000 Swiss francs (about 9 million US dollars).62 ENI and "Gazprom" became the owners of the company on a parity basis. By 2011 French company Electricite de France and German company Wintershall Holding GmbH (BASF Group) joined the project. Gazprom owned 50% of the shares of the joint venture, Eni owned 20%, and Électricité de France and Wintershall 15% each.63 Joint ventures were established in each of the countries where South Stream was supposed to be located (Bulgaria, Serbia, Hungary, Slovenia and Italy).
In November 2012 the project "South Stream" moved over to the investment stage.
61 See Gazprom News (2013). 62 See Grib (2008). 63 See Gronholt-Pedersen (2011). 43
In December 2012 construction of the gas pipeline "South Stream" in the area of Anapa, Krasnodar Territory started. In October 31, 2013 the ceremony of welding of the first joint of the Bulgarian section of the gas pipeline near the site of the compressor station “Rasovo”.
Commercial operations of the first line were to start by the end of 2015.64
Figure 9: South Stream Offshore Pipeline – Route Source: See South Stream Transport Official Website.
Just as the project "North Stream", "South Stream" was one of the projects of the Russian government and "Gazprom" to build a pipeline that would directly supply major customers in Southern and Central Europe with 63 billion cubic meters of Russian gas annually, bypassing transit countries: in this case, Ukraine.
When Russia and Turkey agreed to increase gas supplies in 1997, "Gazprom" refused to increase the capacity of the existing gas pipeline that was supposed to transport gas to Turkey through Ukraine and Bulgaria. One of the reasons was a very high price requested by the Bulgarians for the transit.65 However, a solution
64 See South Stream Transport Official Website. 65 See Emelyanov (2003), pp.1-2. 44 to the problem was found. With the support of Italian company Eni, a new pipeline “Blue Stream” was built.66 It is located under the Black Sea and links Russia and Turkey directly.67 Two gas pipelines were opened in 2003, but in the first years they were practically inactive due to the fact that Turkey had decided to diversify its natural gas suppliers. It was in 2005 only when Turkey agreed to increase supplies from Russia that had offered reduced gas prices.68
4.3.3. Project Costs and Financing
Implementation of South Stream gas pipeline project required huge investments. Initially, onshore and offshore (European) parts of the South Stream were estimated at 16.6 billion euros, while Russian one, meaning necessity to build additional 2,500 km of linear pipelines to Anapa and 10 compressor stations - project "Southern Corridor", was estimated at about 2.6 billion US dollars. In the last two years before its closure in December 2014 this amount increased by 80% to 4.66 billion US dollars.69 This was to be covered by shareholder equity and to be financed by lenders.
This amount included all the stages: technical design stage, pipe suppliers, logistics, since these imply the main expenses, usually to the extent of two thirds of the total budget.70 The rest of the budget was to cover environmental assessment studies, technical planning, obtaining of all the necessary permits, and costs for implementation of other activities.
Gazprom compensated all costs in the territory of Russia by the funds from the net cash flow and internal (undesignated) credit. A scheme of financing the construction of the offshore and the European onshore parts of the pipeline proposed contribution to shareholders' equity in the amount of only 30%. The remaining 70% planned to attract long-term loans in the form of export credit
66 See Gazprom Official Website. 67 See Gazprom News (2007). 68 See Neftegazovaya Vertikal (2005). 69 See Gas Outlet: Why South Stream exhausted (2015). 70 See South Stream Transport Official Website: Project Costs and Financing. 45 agencies, international commercial banks and other international financial institutions.
As far as financial advisors are concerned, Crédit Agricole Corporate and Investment Bank (France), London Branch of ING Bank N.V., and RPFB Project Finance Ltd (Russia) were assigned to consult financial matters of the project.71
The project was attractive to the potential investors due to the fact that the shareholders of the project were leading companies of the gas market and due to the project’s steady commercial basis. The South Stream project represented a joint venture. As large European energy companies with stable growth statistics and favorable credit history were a part of the project, the project itself seemed to be very promising.
“South Stream” project engaged strong partners and involved big consumers. It was designed as a long-term investment project that relied on the future regular gas supply and on the estimated long-term demand. Even in uncertain economic conditions, projects like this one tend to be a reliable investment. However, this was not the case with the project in question.
The main creditors of the offshore section were foreign export credit agencies, which were supposed to cover the political risks and to support exports from their countries.72
4.3.4. Reasons for South Stream Project’s Abandonment
In 2011 the EU introduced Third Energy Package (TEP).73 The TEP impaired the situation for Gazprom in terms of export of gas to European countries and the capacity of the pipelines.
First of all, it affected the Nord Stream project and its pipelines. The pipelines (OPAL and NEL) have not been yet allowed to be fully utilized by Gazprom only
71 See South Stream Transport Official Website. Project Costs and Financing. 72 See Gas Outlet: Why South Stream exhausted (2015). 73 See European Commission Official Website, Energy. 46 after long negotiations between the European Commission and Gazprom. The European Commission refers to technical incompliance and deteriorated EU- Russia relationship over Ukrainian crisis. There is no guarantee that Gazprom will be able to get an exemption for utilizing 100% of the pipeline.74
Due to inability to obtain an exemption in the Nord Stream project, Gazprom relied only on the intergovernmental agreements with the countries where South Stream was supposed to be laid. The European Commission hindered this procedure referring to the Third Energy Package.75 The TEP prohibited supply and transport of gas by one company only. Thus, the host countries have become liable in any case: if they cancelled intergovernmental agreements, they would have had to face penal sanctions from Russia, otherwise they would have had to face penalties from the European Commission.76 Under the TEP regulations, pipeline construction in Bulgaria was stopped in August 2014.77
Due to the regulatory issues, Gazprom and the Russian government came to an agreement that the South Stream project could not be fulfilled as it had been scheduled. Both European and Russian sides were hoping to reach a compromise. However, a turning point of the project became the Ukrainian crisis when Russia faced disapproval from Western countries on the Crimean annexation.78 At first, the project was officially suspended for an indefinite period of time, and afterwards cancelled in December 2014.
Official reasons for closure of the project named by CEO of Gazprom, Mr. Alexey Miller, were the following:79
x Bulgarian government did not give any guarantees that the pipelines could be constructed in their territory;
74 See Natural Gas Europe (2014). 75 See Natural Gas Europe (2013). 76 See Stern/Pirani/Yafimava (2015), p.4. 77 See Russia & CIS Interfax Oil and Gas Weekly (2014), pp.16-17. 78 See Stern/Pirani/Yafimava (2015), p.4. 79 See European Commission Press Release Database (2014). 47
x The European Commission impeded the gas flowing through these pipelines.
4.3.5. Influence of Sanctions on South Stream Project Development
Influence of new sanctions against Russia was not critical. In order to get borrowing, it was needed to obtain a special permit from the European officials. After introduction of sanctions all projects connected to Russia had to be coordinated. For example, Gazprom had to obtain a confirmation from the Dutch government, stipulating that neither sector, nor financial sanctions impeded construction of South Stream and fulfillment of their obligations to financial suppliers. It took about two months to get all the necessary documents.
As far as bank financing is concerned, it should be noted that one of the most important conditions for granting long-term project financing is a successful procurement of all the permits. Thus, without permission from the authorities, and in the case, of Bulgaria, in the presence of a direct prohibition ban to build a gas pipeline (upon the recommendation of the European Commission), the operators of the "South Stream" were not able to use project financing.
In November 2014, "Gazprom" made a statement that the offshore and European onshore parts of the "South Stream" have become more expensive - from 10 billion euros to 14 billion euros and from 6.6 billion euros to 9.5 billion euros respectively. However, it was claimed at the time that even with the increase in the cost, "South Stream" still fits in the parameters of the internal rate of return set by the company. 80
In December 1, 2014 Russia officially closed South Stream project, as the European Union did not support the project anymore, and the countries could not find a compromise on the antitrust laws of the EU.
80 See Gas Outlet: Why South Stream exhausted (2015). 48
This decision was unexpected and many specialists blame worsening economic situation in the country due to sanctions and falling oil price. Gazprom had invested 4.7 billion US dollars in both offshore and onshore parts of the pipeline by the time the project was cancelled.81
German Wintershell, French EDF and Italian Eni withdrew from the project. Within a month Gazprom bought their shares in addition to 50% that it had already owned. The company paid about 1 billion US dollars for the shares.82 Thus, Gazprom became a 100% shareholder of the construction company South Stream Transport BV which proved that the project could not be continued anymore.83 European companies sold their shares due to the fact that the project was postponed for an indefinite period of time.
However, instead of constructing a gas pipeline with the capacity of 63 cubic meters to the countries of Central and Southern Europe, Russia decided to change the direction and deliver gas through Turkey to Greece.84
South Stream cancellation showed that even though all the risks were taken into consideration and possible ways of mitigation were considered, the project cannot be called successful until it has been put into operation. All the agreements were signed, construction started, and initial investments were made. Nevertheless, the project was abandoned.85
4.3.6. Losses over South Stream Abandonment
Estimates showed that foreign companies lost 2.82 billion euros from the South Stream project cancellation:86
x Italian company Eni experienced the biggest loss, 2 billion euros. Its subsidiary, Saipem, was to be a contractor for laying the pipeline.
81 See Stern/Pirani/Yafimava (2015), p.5. 82 See Gazeta.ru (2015). 83 See Russia Today (2014). 84 See Gotev (2015). 85 See Wiśniewski (2015). 86 See South Stream Transport Official Website. 49
x German company Europipe also lost 500 million euros. It was to be a supplier of half of the pipes for the first line of the South Stream. x 40% of the second line of the project was to be supplied with the pipes by Japanese companies Marubeni-Itochu and Sumitomo. They lost a contract of 320 million euros. x The Australian OMV company also invested the construction of the South Stream project, meaning that it will also bear losses.
Cancellation of the project also meant losses on the state level for such countries as Serbia, Hungary and Bulgaria. For example, Bulgaria lost 3 billion euros of investment along with 2500 jobs that could have been created.87
4.3.7. Turkish Stream
Instead of the South Stream project, Russia decided to redirect its offshore gas pipeline to Turkey. The Turkish Stream Project is aimed at ensuring supply of gas to Turkey and EU countries. This pipeline will be the biggest offshore pipeline, in terms of capacity, ever built.
The sea section of the pipeline will be located under the Black Sea. The maximum depth of the planned pipeline route reaches 2200 m. The underwater part of the pipeline is 910 km.
It is planned that the land part of Turkish Stream will be in the European part of Turkey, near Kıyıköy, the point of delivery of gas to the Turkish customers will be Lüleburgaz, and for European ones – the border of Turkey and Greece in the area İpsala. Length of Turkish onshore section will be 180 km. The capacity of the pipeline branches will be the same as it was planned to be for the South Stream - 63 billion cubic meters of gas per year, 47 billion cubic meters of which will be delivered to the border of Turkey and Greece (See Figure 10).88
87 See Russia Today (2014). 88 See Gazprom Export Official Website: The TurkStream Project. 50
Figure 10: Turkey’s “South Stream” and Russian Gas Source: Russia Today. Gazprom, Reuters, EIA, Gas Infrastructure Europe.
A Memorandum of Understanding on the construction of a gas pipeline to Turkey between Gazprom and the Turkish Company Botaş Petroleum Pipeline Corporation was signed in December 2014, right before South Stream project was officially abandoned. In the end of January 2015 a feasibility study was reviewed and decision on the new route was already made. In February 2015 both sides identified key route points and technical solutions for the pipeline in Turkish territory. On June 18, 2015 a Memorandum on Cooperation on the Construction and Operation of TurkStream in Greece was signed by Russian Minister of Energy, Mr. Alexander Novak and the Minister of Productive Reconstruction, Environment and Energy of Greece, Mr. Panagiotis Lafazanis.
51
5. CONCLUSION AND OUTLOOK
The issue of financing a project and mitigating its risks has become one of the central problems in the project management system today.
Project finance is often called one of the most promising forms of financing, the main features of which are accounting system, risk management, risk allocation between the parties of the project, and consequent assessment of costs and benefits.
Project finance requires a sound legal and regulatory framework, developed market infrastructure, as well as targeted measures by the government to encourage and support investment.
Project financing is one of the riskiest financing methods, since it is, first of all, connected with high risks for lenders. The risk that has not been mitigated in due time can cause a collapse of the whole project, as well as all or many participants of the project may have to face losses, too.
As far as project financing in Russia is concerned, it has just started to actively develop. Traditional bank lending has been dominating for years in the country. It was not until the end of 2014, that proper regulatory framework for project finance started to be worked out. Even in 2013, the participants of the conference "Project Financing and Financing of Projects in Russia and CIS 2013" came to a conclusion that project financing did not exist at that very moment in the country as there was no regulatory framework and no practical experience in financing large infrastructure projects.89 Meanwhile, according to the experts of the analytical company "Business Monitor International", 120 billion US dollars was needed to finance infrastructure projects in Russia.
89 See Rossijskaya gazeta (2013). 52
As there is no single definition of the term "project finance", an inaccurate assessment of project finance development in Russia sometimes has a place to be as well.90
In developed countries project finance mechanism has been widely used for decades now. Initially, American and Canadian banks were involved in financing investment projects by implementing this method. Currently, banks in different developed countries practice this method, in particular banks of Great Britain, Germany, the Netherlands, France and Japan.
However, project finance method is not yet well developed in Russia. There are a number of reasons for that:
x Internal sources of debt financing are not as well developed in Russia as, for example, in European countries. Domestic credit markets do not have sufficient financial resources and liquid funds that are necessary to finance large-scale capital-intensive projects, especially large-scale projects with long-term maturity loans. There is very less experience and knowledge to confidently assess and to take all or a part of the project risks; x There are discrepancies between income and loans in the country and loan servicing in foreign currency. The risk of a mismatch between the currency of the revenue and the currency of the loan complicates project finance; x Regulatory framework and legislative stability are insufficient as far as risk allocation, guarantee provision and other financing obligations are concerned. Commercial and loan documentation is a complicated process and requires a stable legal framework. All legal obligations and guarantees, peculiarities of risk allocation and profit distribution as well as political and insurance risks must be legally formalized;
90 See Modern Research of Social Problems (E- Scientific Journal) (2014). 53
x There are a limited number of project finance specialists in Russia, although many banks claim to provide corresponding services. Project finance system for any large investment projects is not well developed, too;
x What is more, there are an insufficient number of qualified project finance participants - organizations that could take control over major projects in accordance with the mechanism. This issue could be solved by engaging both national and foreign specialists in the field.
Russian financial market is dominated by so called short-term money and investing in long-term projects is an exception rather than a rule. The most common practice for these projects is financing in the form of traditional bank loans.
Russian economy is not stable at the very moment for active usage of this financing form. In spite of governmental support, some banks are still not able to fully support project finance method due to the following reasons:
x Instability of the domestic economy; x Lack of sufficient bank reserves ; x High inflation rate; x High debts of Russian enterprises; x Heavy tax burden and instability of tax legislation; x Low quality of management at the borrowing companies; x Lack of experience and highly qualified professionals in the banks in the field of project analysis and project finance; and x Influence of sanctions imposed by the other countries due to the Ukrainian crisis.
Banks are becoming involved in project finance mechanism due to the fact that there are an increasing number of applications for investment that are not corresponding to the assets of the applying companies. In this case collateral coverage is impossible. Therefore, a number of commercial banks have already 54 introduced project finance mechanism in their activities. However, when granting long-term loans, banks are paying a lot of attention to highly liquid coverage as well as financial condition of the borrower. But having started to take into consideration international practice of project finance, the banks have begun to expose the projects to a deeper expertise, namely to a project analysis that is widely used in the practice of foreign credit institutions.91
Nikonova (2014) analyzes the basic measures, the implementation of which could ensure a certain push to project finance. Current and future objectives for development and efficiency increase of project financing in Russia are presented in Table 6.
Field of the Objectives of the State Objectives of the Private Objective Business and Self- regulating Organizations (SROs) Investment x Improvement of the investment Active stand on the support Climate and climate of the state policy for Macroeconomic x Elimination of sanctions investment climate and Environment of x Stabilization of the inflation macroeconomic stability the Project rate, exchange rate, interest rate x Reduction of the priorities of the investment policy x Easing of the monetary policy x Development of the project finance flow chart
Institutional x Establishment of the center for x Introduction of social Development guarantee and insurance and ecological support expertise, project x Capital increase of the assessment and financial development management of related institutions risks x Enhancement of the role of the x Introduction of project Federal Center of Project effects monitoring Finance
91 See Mazur/ Shapiro/ Olderog (2004), p.111. 55
x Development of the institutes of engineering, procurement x Raising awareness among public and private businesses of the best project finance practices Regulatory x Adoption of the law on public- x Dissemination of best Framework private partnership practices of project, x Provision of incentives for structured and trade project companies’ finance establishment and their x Issue of the Russian financing by the banks magazine covering issues of project financing x Creation of a database of information on transactions with the use of project financing x Development of the market of infrastructure and other project bonds Project x Issue of a new edition of x Use of project analysis Analysis guidelines for multi-criteria at all stages of the assessment of investment project life cycle projects x Implementation of x Development of mechanisms responsible finance for analysis of the projects x Evaluation of project implemented on PPP principles finance viability for the x Introduction of standards of project responsible financing Cost Development of the system of Development of the SRO Accounting federal valuation standards, standards system for including assessment of assessment of project investment projects, collateral, companies business, effects of the project pledge of rights for future revenue and assets of the project, insurance Project x State support of the projects Implementation of Management with effective management corporate project x Introduction of requirements management systems, for a qualitative monitoring of technical and cost 56
projects and their effects engineering Table 6: Objectives for Development and Efficiency Increase of Project Financing in Russia Source: See Nikonova (2014), p.96-97.
Reference to the international experience in project financing contributes to the preparation and implementation of the projects that need financial support and that are of high economic significance for the country's economy. Federal Center for Project Finance, Russian Financial and Banking Union were established in order to support investment projects that are to be financed with this mechanism. Moreover, in order to ensure effective information and consulting cooperation between potential foreign investors and Russian organizations and to ensure creation of an attractive image of Russia in the global capital markets, the Russian Center for Foreign Investment Promotion was also created. It is aimed at helping foreign investors and Russian organizations in all stages of the project, including marketing functions and search for specific partners. The Government of Russia also initiated establishment of the Consultative Council on Foreign Investment in Russia, which is composed of the representatives of foreign companies that are carrying out direct investments in the Russian economy on a large scale. Its main task is to ensure a permanent dialogue between the Government of the Russian Federation and the major foreign investors in order to develop specific recommendations for improving the investment climate in Russia.
The Governmental Program of Support of Investment Projects on the Basis of Project Finance has been already productive, some of the projects under the program have been approved and are about to be implemented. The legal framework has been adjusted in various sectors of the market, including the process of granting concessions, guarantees, insurance issues, leasing operations and others.
In order to improve the situation, it is important to further strengthen the role of state guarantees for securing project risks, including provision of guarantees to the
57 banks that participate in the project finance mechanism, tax incentives for investment mechanisms, development of cooperation between the banks in the field of joint investment projects crediting.92
Moreover, successful development of project finance in Russia requires learning of best techniques and practices from the international experience and adapting it to the economic situation and market conditions in the country. That includes development of methodological approaches for enhancing efficiency of investment. Solution of this issue is connected to the analysis of the capability of the investor to raise his own and borrowed sources, of investment attractiveness, of the choice of investment objects in order to determine an acceptable level of risk for the required yield.
All in all, project finance method is new in Russia, and there is need for further development, new successful projects implemented in the basis of this mechanism, more specialists to support its development in the country. With further governmental support and encouragement from private businesses to use this mechanism, it can prove itself successful even in the country with the economy in transition.
92 Islamova/ Rodionov (2013), pp.7-15. 58
ANNEX
Annex 1. Record of Projects. Source: Ministry of Economic Development of the Russian Federation Official Website.
Name of the Project Implementati Aim of the Project Loan Loan on period Value period (mln rub) Starting 4th mobile 2015-2019 The project will contribute to 15,976.00 10 years operator in Moscow - the coverage of building networks 3G communication services in / 4G. Providing Moscow and the Moscow affordable mobile region retaining the format of communications to low prices for the general public. telecommunications services. Complex for the 2014-2022 The project will promote 6,942.10 8 years production and production of high-quality, processing of poultry competitive products meat (broiler) in the corresponding to the world Tambov region standards and provide the domestic market with high- quality food. Construction of the 2014-2016 The project will promote the 6,274.46 8 years ninth stage of the production of high quality poultry complex meat, improving the "Poultry ecological situation in the Akashevskaya" in the region, improving soil fertility. Republic of Mari El Construction of 2012-2016 The project will contribute to 1,006.00 15 years cattle-breeding further development of complex in the modern and efficient Voronezh region, agricultural enterprises in the Bobrovskoye area direction of the production of with. Upper Ikorets milk, beef and breeding of and purchase young pedigree cattle. cattle breeding Construction and 2013-2016 The project will contribute to 5,038.00 13 years 6 months operation of bridges the development of the road on a paying basis over network from Nizhny the River Kama and Novgorod to Yekaterinburg Bui River near the and thus entering into the 59 town of Kambarka on international 2nd trans- the road Izhevsk, European corridor Berlin - Sarapul-Kambarka- Warsaw - Minsk - Nizhny border of the Novgorod - Ekaterinburg Republic of (East-West). Bashkortostan in the Udmurt Republic Expanding Until 2016 The project will help to 820.00 8 years productivity platform increase the productivity of "Znamenka" of the sugar plant, reduce the "Znamensky sugar specific consumption of factory" equivalent fuel, obtaining additional revenue from the sale of granulated pulp Investment project on 2015-2018 The project will promote the 12,650.00 7 years 10 construction of pig development of pig breeding months farms with capacity in the Far Eastern Federal the complex for the District and import production of substitution in the meat combined feed in processing industry in the Primorsky Territory region. Creation, 2014-2027 Construction of toll collection 15,700.00 12 years 4 months modernization and system will create an operation of the toll additional source of funding collection system of for the Federal Road Fund of compensation for the Russian Federation, whose harm caused to funds are directed to the federal-aid highways construction, repair and by vehicles with maintenance of federal maximum weight of highways over 12 tons Construction of two 2015-2024 The Project is aimed at 11,100.00 9 years power units of Kazan meeting acute energy Heat and Power shortages in the city of Kazan Station-1, in the city and the growing needs of of Kazan electricity in the Republic of Tatarstan Creation of a new 2015-2017 The project will promote the 15,700.00 13 years 8 months airport complex development of passenger air "Yuzhny" (Rostov- travel market in the Rostov 60 on-Don) region. Organization of 2013-2025 The project will cover the 3,037.84 7 years production of tank deficit of of specialized types wagons of rolling stock, including innovative tank wagons Construction of 2011-2023 The project aims to replace the 6,612.88 12 years facilities for offsite retiring capacity serving infrastructure to Yakutsk State District Power Yakutsk State District Plant Power Plant Construction of a 2015-2027 The project is aimed at the 2,715.00 12 years dairy unit development of agriculture in the production of milk. Construction of a 2014-2026 The main objective of the 1,019.00 8 years greenhouse center project is to increase production and sales of the production of the covered ground Construction of the 2015-2028 The project will offer 3,211.00 12,5 years plant for the affordable quality construction production of cement material
Manufacture of high- 2015-2020 Manufactured goods are 1,400.00 5 years strength longitudinal expected to be used as a electric-welded pipes casing, subsea, onshore pipelines. Reconstruction of the Increased production of broad 3,300.00 6 years
South Balyk Gas fraction of light hydrocarbons Processing Plant by 100 thousand tons annually. Creation and Registered in The project will increase the 1,201.98 11 years modernization of the June, 2015 volume of production and production of wheels expand its product range and for cars and trucks improve the quality of products. Construction of Registered in The project will increase the 8,000.00 8 years multifunctional sea June, 2015 cargo handling in the Russian handling terminal ports, improving the quality of “Bronk” port services and lower costs 61
for end users Construction of the 1st Registered in Enhancement of food security, 2,949.00 8 years and 2nd stages of the June, 2015 provision of import of greenhouse complex agricultural products; area for the Improving the socio-economic production of fruits conditions for employees in and vegetables rural areas. Construction of the Registered in Advancement of food security, 4,915.00 8 years 3rd stage of the June, 2015 provision of import of greenhouse complex agricultural products. for the production of fruits and vegetables Construction of the Registered in The project is aimed at 800.00 7 years plant for deep June, 2015 agriculture development in processing of soybean soybeans production. (Phase 1) Digital frame of Registered in Enhancement of capacity of 15,600.00 7 years June, 2015 Russia. Step 1: the regional transport network Extension of IP data transmission - IP MPLS. MPLS network 145,968
62
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