Leaflet B Construction Sector In Russia 2009 2012 Promotion

3
rd
!
edition

Construction sector
in Russia 2009
Development forecasts 2009-2012
Publication date: October 2009
Languages: English

www.constructionrussia.com

Word from the author:

The construction industry in Russia has been hit hard by the global economic downturn. The

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slowdown on the domestic construction market began in 2008 and deepened in 2009, with 80%
of construction projects suspended and virtually no new residential and commercial property
projects started. For the first time in the current decade the value of construction works will
shrink this year, by over 15% in comparison to 2008. However, the worst for Russia’s construction
is over now as the market will stabilise next year and return to a growth path in 2011.
In 2010, construction of buildings will remain subdued due to the still ongoing problems with
financing, but the industry will be stimulated by picking up capital expenditure for infrastructure
development projects. Investment in roads, railways and airport expansion will be driven by the federal programme
to modernise the country’s transport system, which envisages total outlays of $420bn, including $147bn from the
federal coffers. Assuming a down-to-earth scenario that only 10% of the programme will be implemented, this
will translate into a $7bn annual boost in construction activity each year through 2015. With federal budget deficit
expected at 3-7% of GDP in the three upcoming years, much of the funding for Russia’s infrastructure projects will
have to be attracted from private investors through schemes such as public-private partnerships and other non-
budgetary sources, which will thus gain growing importance.

Robert Obetkon, Senior Construction Market Analyst

See the table of contents See the list of graphs and tables

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About the report:

This third edition of PMR’s popular report, Construction sector in Russia 2009, Development forecasts 2009-2011
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provides readers with a timely assessment of the construction industry in Russia as a whole, describes conditions
in each major segment – engineering, non-residential and residential construction – and explores the major
opportunities for the coming years. It supplies vital new information on planned energy and transportation
infrastructure projects.
As lagging economic conditions slow development and construction around the world, this report examines the
reasons why Russia remains a country of continuing opportunity for construction related businesses and
investors. Government funded projects, an abundance of in-demand natural resources and an increasing need
for housing continue to provide solid options for innovative construction related businesses in each federal district
of Russia’s vast and varied economy. Profiles of the largest companies engaged in locating and seizing those
opportunities enhance the informational value of this document.
The professionals at PMR have gathered all of the latest market intelligence and assembled it into this single clear,
concise document – ready for delivery to you in convenient electronic format.


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Decreased availability of credit around the world has resulted in lower levels of foreign direct investment in Russian
construction projects. Opportunities do exist, however, particularly in energy, infrastructure and transportation
projects financed by government funding, and the steady demand for imported construction materials. Are you
searching for the data, analysis and direction needed to locate these opportunities?

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If you are looking for:

„ Russian economic conditions, including domestic and foreign investment levels, inflation and exchange rates
and current and projected GDP
„ Complete coverage of the Russian construction industry – output, top companies and profits, employment,
wages, taxes, building materials and development forecasts
„ Russian infrastructure development – including planned projects for roads, railways, airports, gas and oil
pipelines, power generation and environmental development
„ Non-residential development status – factories and warehouses, office facilities, hotels and trade and service
facilities
„ Russian residential construction market conditions, including levels of housing stock and new construction,
housing prices and federally funded housing construction plans…
…then this is the document you have been looking for!

In addition, Construction sector in Russia 2009, Development forecasts 2009-2011, third edition reveals all the details
and plans of the market’s most successful players in a special section dedicated to insightful company profiles.




Who will find the report Construction Sector in Russia 2009 most useful?

PMR has specifically targeted this report to meet the informational needs of top managers at regional construction
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companies, strategic planners and executive decision makers at companies considering market entry, regional
producers and distributors of building materials and supplies, architectural and consultancy firms, developers,
construction equipment producers, commercial and investment bank personnel and decision makers for real
estate investment trusts will benefit from this concise yet comprehensive PMR publication. With a focus that is
broad enough to present the complete market picture, yet specific enough to provide a solid basis for strategic
planning, this report is a must-have resource for those interested in locating and maximising opportunity in the
marketplace.




Excerpts from the report:

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Construction sector in Russia 2009 – Development forecasts for 2009-2012 Construction sector in Russia 2009 – Development forecasts for 2009-2012 Construction sector in Russia 2009 – Development forecasts for 2009-2012

Despite the doom and gloom brought about by the economic crisis, in the medium and Capacity utilisation rate of construction companies in Russia (%),
Investment Fund & PPP
long term, there is little doubt that the opportunities on the construction market in Russia by company size, 2006-2009
are both lucrative and numerous. A mere fraction of domestic demand for housing and CSR027 Russia’s Investment Fund (IF) was created at the end of 2005 with the aim of bolstering
infrastructure development has been satisfied during the recent construction boom and so All construction including companies employing: the realisation of investment projects, particularly in the area of infrastructure. In 2006, RUB
prospects for future development remain strong.
companies
Fewer than 51 51-100 101-250* Over 250** 69.7bn was earmarked for the IF, a figure that rose to RUB 72.9bn in 2007 and RUB 73.2bn in
2006 2008. In 2009, as has been mentioned already, budget allocations for the IF are to be cut to
RUB 64bn ($2bn). The IF is intended to become the primary source of funding for PPP projects
Q1 61 50 60 64 70
Q2 60 49 61 64 68
and to act as a catalyst in attracting private investment. To date, the fund appears to have
Employment and wages
Q3 65 54 65 66 73
Q4 66 56 65 67 72
2007 performed its task successfully – for every one rouble provided by the federal budget, just
In 2008 the number of people employed in the construction industry increased by over two (2.2) roubles worth of private investment are attracted.
Q1 65 55 62 65 71
Q2 66 57 65 67 72
6.5% to approximately 5.6 million. The economic downturn, however, resulted in H1 2009
Q3 68 58 68 70 74 Investments from the IF may take the form of:
direct financing of up to 75% of total capital project costs as equity investment or
Q4 69 59 67 70 75
employment levels falling by 4.8% in comparison with the same period of the previous year. 2008 
The number of foreign workers employed on Russian construction sites decreased by almost through the financing of certain assets in exchange for the ownership title to the assets
Q1 66 57 64 66 71
Q2 68 58 65 68 74
9% in H1 2009, to 730,700. As a comparison, in the first half of 2008, the number of foreign In 00 the number Q3 69 60 67 70 75
 guarantee for 60% of the borrowings for the purposes of the project.
Q4 67 59 66 68 72
workers employed in the Russian construction industry rose by 80% in year-on-year terms. of people employed 2009
The project approval procedure involves three stages: investment commission,
Employment levels are expected to decrease further before the end of 2009 as companies
Q1 58 50 56 58 63
in the construction
Q2 57 49 54 57 62 governmental commission, and finally approval, which takes place during a meeting of the
still plan to lay off more workers than they intend to hire. The numbers of construction workers * Before 2008: 101-200 workers Russian government.
forced to drop from full to part time, or even accept unpaid leave, is also on the rise. industry increased ** Before 2008: over 200 workers
Source: Rosstat, 2009 www.pmrpublications.com Financing can only be provided for projects worth over RUB 5bn ($156m) over five-
In the second quarter of 2010, the situation is expected to improve. Russian authorities to . million. year period. Two types of evaluation are used for project examination: qualitative (first of all,
recently announced that 75,000 construction jobs will be created in 2010 and 2011 as the generation of social benefits) and quantitative, which include:
country ramps up its preparations for the winter Olympics in 2014. At present, 11,000 workers Traditional obstacles, such as high costs of building materials and structures, have  macroeconomic productivity – the implementation of the project should contribute to
are employed on Olympics-related construction projects in Sochi, of which 300 are foreigners. ceased to pose such serious problems for constructors8. Instead, insolvency of clients has been an increase in GDP on a national or regional level
Construction projects related to the APEC-2012 Summit will also create new demand for the major problem for Russian constructors this year.
 budgetary effectiveness – the project should generate tax revenues for local and federal
labour. There are currently over 5,000 construction workers employed in these projects,
budgets
almost 3,500 of which are working on the construction of two bridges: the 70-metre-high
 financial effectiveness – i.e. the project should have a negative stand-alone net present
suspension bridge that traverses the Bosfor Vostochny Strait, which divides Vladivostok and
Main barriers to doing business in the Russian construction sector
value (NPV) justifying state support for implementation. It should generate economic
(% of all construction enterprises), Q4/2008-Q3/2009
Russky Island; and the bridge across the Golden Horn Bay. In 2010 and 2011, the expected
profit if support is provided (creating a positive NPV). Project profitability should be at
CSR028

peak construction period for these projects, at least 12,000 people will work on Russky Island
least 4%, but no higher than 11%.
46 44 44
alone.
43 41 40

31 32 In 2008, five road construction and five railway construction projects received support
27 from the IF. This support amounted to RUB 18.5bn ($578m) in total.
Number of employed in construction industry in Russia (’000), 2005-2008
So far, 21 investment projects of national importance have been approved by the
government for state support from the IF. Support for these 21 projects amounts to RUB 400bn
CSR019

($12.5bn).
5,610
5,073 5,268
4,916
In addition, between September 2008 and mid-2009 the ministry of regional
Q4/2008 Q1/2009 Q3/2009 development received 53 project proposals from over 30 regions requesting funding from
the IF. The value of claims associated with these projects amounted to a combined total
of RUB 51bn (of which private investors would contribute RUB 247bn while an additional
Insolvency of clients High taxes Expensive building materials

RUB 20bn would come from regional budgets). Nineteen of these projects have already
been approved by the government commission for project review. The total combined value
Source: Rosstat, 2009 www.pmrpublications.com

of these projects is RUB 103.6bn ($3.2bn), of which RUB 13bn is to be provided by the
2005 2006 2007 2008

Source: Rosstat, 2009 www.pmrpublications.com investment fund.

8
The same percentage of
respondents now cite expensive
materials as the main obstacle as
was the case back in Q1 2006.
Interestingly, at the beginning
of 2006 just over half( 52%) of
respondents cited high taxes as one
of the main obstacles, which is 12
p.p. more than in Q3 2009.

www.pmrpublications.com

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Construction sector in Russia 2009 – Development forecasts for 2009-2012

Despite the doom and gloom brought about by the economic crisis, in the medium and
long term, there is little doubt that the opportunities on the construction market in Russia
are both lucrative and numerous. A mere fraction of domestic demand for housing and
infrastructure development has been satisfied during the recent construction boom and so
prospects for future development remain strong.

Employment and wages
In 2008 the number of people employed in the construction industry increased by
6.5% to approximately 5.6 million. The economic downturn, however, resulted in H1 2009
employment levels falling by 4.8% in comparison with the same period of the previous year.
The number of foreign workers employed on Russian construction sites decreased by almost
9% in H1 2009, to 730,700. As a comparison, in the first half of 2008, the number of foreign In 00 the number
workers employed in the Russian construction industry rose by 80% in year-on-year terms. of people employed
Employment levels are expected to decrease further before the end of 2009 as companies
in the construction
still plan to lay off more workers than they intend to hire. The numbers of construction workers
forced to drop from full to part time, or even accept unpaid leave, is also on the rise. industry increased
In the second quarter of 2010, the situation is expected to improve. Russian authorities to . million.
recently announced that 75,000 construction jobs will be created in 2010 and 2011 as the
country ramps up its preparations for the winter Olympics in 2014. At present, 11,000 workers
are employed on Olympics-related construction projects in Sochi, of which 300 are foreigners.
Construction projects related to the APEC-2012 Summit will also create new demand for
labour. There are currently over 5,000 construction workers employed in these projects,
almost 3,500 of which are working on the construction of two bridges: the 70-metre-high
suspension bridge that traverses the Bosfor Vostochny Strait, which divides Vladivostok and
Russky Island; and the bridge across the Golden Horn Bay. In 2010 and 2011, the expected
peak construction period for these projects, at least 12,000 people will work on Russky Island
alone.

Number of employed in construction industry in Russia (’000), 2005-2008
CSR019

5,610
5,073 5,268
4,916

2005 2006 2007 2008




Capacity utilisation rate of construction companies in Russia (%),
by company size, 2006-2009
CSR027

All construction including companies employing:
companies
Fewer than 51 51-100 101-250* Over 250**
2006
Q1 61 50 60 64 70
Q2 60 49 61 64 68
Q3 65 54 65 66 73
Q4 66 56 65 67 72
2007
Q1 65 55 62 65 71
Q2 66 57 65 67 72
Q3 68 58 68 70 74
Q4 69 59 67 70 75
2008
Q1 66 57 64 66 71
Q2 68 58 65 68 74
Q3 69 60 67 70 75
Q4 67 59 66 68 72
2009
Q1 58 50 56 58 63
Q2 57 49 54 57 62
* Before 2008: 101-200 workers
** Before 2008: over 200 workers

Traditional obstacles, such as high costs of building materials and structures, have
ceased to pose such serious problems for constructors8. Instead, insolvency of clients has been
the major problem for Russian constructors this year.

Main barriers to doing business in the Russian construction sector
(% of all construction enterprises), Q4/2008-Q3/2009
CSR028

46 44 44
43 41 40

31 32
27

Q4/2008 Q1/2009 Q3/2009

Insolvency of clients High taxes Expensive building materials


8
The same percentage of
respondents now cite expensive
materials as the main obstacle as
was the case back in Q1 2006.
Interestingly, at the beginning
of 2006 just over half( 52%) of
respondents cited high taxes as one
of the main obstacles, which is 12
p.p. more than in Q3 2009.



Investment Fund PPP
Russia’s Investment Fund (IF) was created at the end of 2005 with the aim of bolstering
the realisation of investment projects, particularly in the area of infrastructure. In 2006, RUB
69.7bn was earmarked for the IF, a figure that rose to RUB 72.9bn in 2007 and RUB 73.2bn in
2008. In 2009, as has been mentioned already, budget allocations for the IF are to be cut to
RUB 64bn ($2bn). The IF is intended to become the primary source of funding for PPP projects
and to act as a catalyst in attracting private investment. To date, the fund appears to have
performed its task successfully – for every one rouble provided by the federal budget, just
over two (2.2) roubles worth of private investment are attracted.
Investments from the IF may take the form of:
 direct financing of up to 75% of total capital project costs as equity investment or
through the financing of certain assets in exchange for the ownership title to the assets
 guarantee for 60% of the borrowings for the purposes of the project.
The project approval procedure involves three stages: investment commission,
governmental commission, and finally approval, which takes place during a meeting of the
Russian government.
Financing can only be provided for projects worth over RUB 5bn ($156m) over five-
year period. Two types of evaluation are used for project examination: qualitative (first of all,
generation of social benefits) and quantitative, which include:
 macroeconomic productivity – the implementation of the project should contribute to
an increase in GDP on a national or regional level
 budgetary effectiveness – the project should generate tax revenues for local and federal
budgets
 financial effectiveness – i.e. the project should have a negative stand-alone net present
value (NPV) justifying state support for implementation. It should generate economic
profit if support is provided (creating a positive NPV). Project profitability should be at
least 4%, but no higher than 11%.
In 2008, five road construction and five railway construction projects received support
from the IF. This support amounted to RUB 18.5bn ($578m) in total.
So far, 21 investment projects of national importance have been approved by the
government for state support from the IF. Support for these 21 projects amounts to RUB 400bn
($12.5bn).
In addition, between September 2008 and mid-2009 the ministry of regional
development received 53 project proposals from over 30 regions requesting funding from
the IF. The value of claims associated with these projects amounted to a combined total
of RUB 51bn (of which private investors would contribute RUB 247bn while an additional
RUB 20bn would come from regional budgets). Nineteen of these projects have already
been approved by the government commission for project review. The total combined value
of these projects is RUB 103.6bn ($3.2bn), of which RUB 13bn is to be provided by the
investment fund.

1

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Development forecasts for 2009-2012
Publication date: October 2009
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