[Note: this the first in a series of posts covering what are, in my opinion, the most significant examples of 'what is wrong with Russia].
I’m not starting with the subject of infrastructure because it is necessarily the most significant problem for Russia. Instead, I would argue that it is theoretically the easiest weakness Russia can address, in that it only requires an adequate expenditure of federal and regional funds. Nevertheless, Russia’s deficient infrastructure is rarely noted as a top concern by investors.
In this way, I think it is a ‘stealth’ problem with which most observers are not familiar, mainly for two reasons: (1) Russia’s infrastructure overall is arguably better than the other BRICs, except for China; and (2) Russia’s infrastructure deficiencies have just started to appear over the past few years. People often forget about that Russia’s exceptional economic growth over 2004-08 came on the heels of a massive economic contraction caused by the end of the Soviet Union and the 1998 crisis. Thus, Russia’s ‘growth’ in real terms has mostly consisted of playing catch up for the lost 1990s, and output is only now beginning to reach full capacity (or at least it was before the current crisis). This explains why the strains on Russia’s economic capacity are a recent phenomenon.
The anecdotal evidence of Russia’s aging ‘Soviet-era’ infrastructure is persuasive. Recently, the failure of two substations near St. Petersburg caused a blackout in the city for over an hour, bringing buses and subway and commuter trains to a standstill during rush hour. A similar blackout happened this year after the Leninskaya substation in Tatarstan – generally considered a more developed region by Russian standards – collapsed and cut off power to 80,000 people. Perhaps the most dramatic recent infrastructure failure happened in 2009, when a turbine at the Sayano-Shushenskaya dam, which accounts for 15 percent of Russia’s hydroelectric power and 2 percent of its overall power, exploded, causing 75 deaths and leading to a total loss of output.
In addition to not ensuring the safety of – much less upgrading – existing infrastructure, Russia has also repeatedly delayed the construction of new infrastructure, including air and seaports and road and railways. For example, in 1995-2008, Russia only constructed 5,000 km of new roads (to 755k total – a .07% increase) and the total railways actually dropped by 1,000 km (to 86k total). Over a similar period (1989-2005), Brazil increased its total road network by 65%. From 2005-09, China constructed 480,000 km of new roads and 19,000 km of new railways. What is worse, the average cost of 1km worth of road in Russia is $12.9 million, versus $3.6 million in Brazil and $2.9 million. There are several particularly disgusting examples, such as the $7.34 billion, 48 km Olympic road from Adler to Krasnaya Polyana (that’s $153 million per km), the Western High-Speed Diameter in St. Petersburg ($142 million per km), and the Fourth Ring Road in Moscow, which rang up to $400 million per km. Quality is also an issue – for example, 65 percent of roads in Germany and 38 percent of roads in China are reinforced with steel beams, while none are in Russia. And forget about seaports – the sleepiest Chinese seaport handles more freight than all Russian ports combined. To cite another example from the Olympic preparations, the lack of a logistics port in or near Sochi appears to be a growing problem that may require the use of Turkish ports instead.
This is another one of those problems that Russia’s leaders are aware of, yet seem incapable of solving. Just yesterday PM Putin promised 14,000 km of new roads in the next five years (i.e., nearly 3x the amount constructed from 1995-2008). This is to make up for a 70 percent drop in road construction last year due to budget shortfalls. The unprecedented construction pace will be supported by the use of a new financing mechanism – so-called “road funds” (дорожные фонды). Still, it is hard to see how this is not simply ‘old wine in new bottles’ – i.e., Russia’s leaders are reverting to their textbook approach of throwing money at the problem.
Many of the problems in the infrastructure sector of course stem from other failings – most notably corruption – that I will address in later posts. Assuming, however, the corruption in Russia will not be eradicated by next year, how can Russia begin to solve its infrastructure problems without expending obscene amounts of money for poor or non-existent results? A recent white paper commissioned by the U.S.-Russia Business Council (USRBC), and written by CG/LA Infrastructure LLC, made a series of recommendations for how Russia can reach its potential to be a “leading market for infrastructure.” The main points include:
- Infrastructure Vision – a broad strategy similar to the Eisenhower Interstate Highway System that comes from the federal level.
- Discard Reliance on Public-Private Partnership (PPP) Model – a lot of Russian infrastructure projects – including some of the most expensive roads cited above – are done in the form of PPPs. The white paper recommends that Russia move away from this model for at least 90 percent of its projects because “financial institutions’ lending practices are cyclical while infrastructure development cannot be if it is to be sustained and successful.”
- Leading Role for Vneshekonombank – the white paper recommends that Vneshekonombank become the leading financier of Russian infrastructure projects, modeled after the Brazilian development bank.
- Build Up Local Industry – the white paper suggests that Russia identify and support Russian engineering, procurement, and construction (EPC) firms capable of implementing large infrastructure projects, citing Spain as a model to follow.
Clearly, Russia has the money and high-level political will to tackle its infrastructure problems. The challenge is to discard the existing models of infrastructure development and root out and eliminate inefficient and devious practices that turn legitimate projects into black holes for budget funds.