End of the line: transport networks built in the Soviet era are in need of modernisation. Source: Getty Images / Fotobank
Between $60 billion and $65 billion is being invested each year on major renovation
projects across the country – not that you’d notice if you visit Russia’s
regional capitals, which still look drab and run-down, bar a few brightly
coloured billboards. That’s because most of the money is going into transport
and power systems – the lifeblood of this vast but largely empty country.
Infrastructure investment in Russia
in 2010 reached $111 billion, according to a report by Morgan Stanley, a
10-fold increase from the $7 billion spent in 1999.
Commentators regularly attack the Kremlin’s “spending frenzy”, claiming it has
driven up the oil price needed to balance the budget to over $125 a barrel –
from $21 in 2007, based on Citigroup figures. But they don’t seem to
acknowledge that, rather than propping up struggling factories or paying public
servants, the money is going on much-needed infrastructure projects. And, when
set against the rapidly expanding economy, the spending splurge is not that
much: as a share of GDP it has doubled from 3.5 percent of GDP in 1999 to 7 percent in 2010
– slightly ahead of India’s
6 percent, but well behind China’s
What’s more, it isn’t just the federal government making the investment, but
state-owned companies, many of which are now on the privatisation list. Over
half of all infrastructure investment (3.7 percent of GDP) was made by just eight
large state-owned companies, while federal budget spending accounted for only
1.8 percent, according to Morgan Stanley.
The real boom in infrastructure spending, though, has not even begun. A host of
mega-projects are being prepared that will push the spending even higher over
the next couple of years.
Among the biggest projects planned are the development of the Vankor oil and
gas field, the biggest find in Russia in the past 25 years; the Ust-Luga port
in the Gulf of Finland that will be the biggest warm-water port in Russia; the
reconstruction of the Black Sea resort of Sochi ahead of the 2014 Winter
Olympics; and the construction of the East Siberia-Pacific Ocean (Espo) oil
Morgan Stanley estimates that a total of $500 billion worth of infrastructure
projects are underway or about to start. “Based on our major projects database,
we see a steady $60 billion - $65 billion [per year] flow of infrastructure capital
expenditure on major projects, and a new generation of mega-projects under
development, including high- speed rail, new federal highways, the Moscow
transport hub and further development of the Yamal oil and gas province,” says
Jacob Nell, chief economist of Morgan Stanley and author of the report.
To sustain this high level of development, Mr Nell estimates state-owned
companies will have to raise another $28 billion a year to finance the work – about as
much as Russia
attracts in foreign
What is odd is that much of this work has gone unnoticed. This is partly
because the spending has not had much impact on the country’s growth or overall
investment – both are now lower than before the financial crisis began. And
because the more opaque state-owned companies are in the front line, their
spending is harder to see than federal budget spending or privately funded
But perhaps the biggest factor is that, unlike China
and India, which were both
largely agrarian economies, Russia
inherited a lot of serviceable infrastructure from the Soviet era. In the boom
years of the Seventies, when the workers’ paradise looked like it might
actually happen, Kremlin spending on infrastructure averaged 40 percent of GDP a
year. It was only in the Nineties that it fell away to next to nothing.
“Russia inherited significant elements of a modern industrial infrastructure from the Soviet Union, including an oil and gas industry, a mining industry, a railway network, a power network, and urban transport and municipal services. However, the infrastructure was often inefficient, and there were notable gaps, particularly in telecommunications and transport,” says Mr Nell.
A fleet of nuclear-powered ice-breakers is boosting trade by cutting the journey time for ships travelling between Europe and Asia.
Business New Europe
Russia has opened up a new trade route that halves the distance between Europe and Asia. The Northern Sea Route goes round the top of Eurasia, rather than the traditional route via the Suez Canal, passing India and China. The sea along Russia’s Arctic coast freezes solid in the winter, which has made the passage impractical for commercial traffic until recently. But as Russia expands its fleet of nuclear-powered ice-breakers, traffic is increasing.
The first complete crossing of the route was made in 1878-9 by the Finnish-Swedish explorer Adolf Erik Nordenskiöld. It was a dangerous expedition then but the journey is becoming increasingly routine as Russia seeks to increase trade between the developed and developing worlds.
Vladimir Mikhailichenko, executive director of the public partnership on co-ordination and operation of the route, said the number of ships making the journey had tripled this year to 33 from 10 in 2010. Cargo shipments via the Russian part of the Northern Sea Route were expected to rise to 800,000 tons in 2011 from 145,000 tons in 2010. The increase is partly due to the Kremlin’s decision to cut transport duties, which were between four and six times higher than that of the Suez Canal last year.
One of the most important cargoes is fish, shipped from Russia’s Far East to St Petersburg. “Transporting fish by sea is more efficient than by railway,” Mr Mikhailichenko quipped.
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