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The sanctions are designed to block loans from multilateral organisations such as the EBRD and the EIB for new public sector infrastructure projects in Russia; in 2013, Russia borrowed USD2.4bn from the EBRD and USD1.3bn from the EIB. We do note that the implementation of these sanctions will be challenging given that Russia is one of 64 shareholders in the EBRD and is the largest recipient of funds historically. In addition to the blocks on lending, EU regional cooperation agreements are also being considered for suspension. According to the European Commission (EC), without the sanctions, Russia would benefit from an estimated USD609mn from the EU between 2014 and 2020. Furthermore, we believe that the tragic crash of flight MH17 on July 17 has only increased the pressure on EU leaders to escalate sanctions against Russia.
Apart from limiting Russia's access to multilateral funding, these sanctions will also discourage much-needed private investment in the country. As such, we will be looking to revise down our construction industry forecasts for the country once the specific details of the sanctions are published. For instance, we believe that one of the projects to be targeted by the sanctions is the USD285mn EBRD loan to modernise the Russian grid infrastructure.
Downside Risk To Growth
Russia Construction Industry Value (RUBbn) And Real Growth %
One potential alternative source for investment in Russian infrastructure comes from Russia's participation in the initiative to set up the BRICS bank, which will initially invest in infrastructure projects among member nations and subsequently expand its investment portfolio to other developing countries. The development bank is scheduled to start lending in 2016, but its structure still requires legislative approval from the countries involved . However, we believe that Russia's infrastructure development will only moderately benefit from the new BRICS bank as the majority of the authorised capital will be in the form of guarantees. As such, the bank's impact on infrastructure development will be dependent on private sector participation and given Russia's high risk business environment, the outlook is bleak.
In addition, we question Russia's capacity to live up to its financial commitments to fund infrastructure projects at home and abroad. With an already struggling economy, several projects in Russia have been cancelled or postponed. In addition, Russia's promise to developed infrastructure in the newly annexed Crimean territory is detracting funds from projects at home. Alexei Ulyukayev, Russia's Minister of Economic Development, declared in May 2014 that the federal government is planning to spend USD4.5bn per year in Crimea's transport, energy, and water infrastructure. Projects include a road and railway bridge to connect Crimea with Russia, three new power stations, a new gas pipeline, and a new university. Crimea is considered one of the most underdeveloped regions in Europe in terms of infrastructure. Only 46% of homes have access to gas in comparison with 65% in Russia.
In order to fund this investment promises in Crimea, the government has cancelled two major projects in Russia, namely the port on the Taman peninsula and the long-awaited Lena bridge in eastern Siberia . Minister Ulyukayev estimates that the cancellation of these two projects will free USD3.2bn in resources.
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