A short piece by Liam Denning in the Wall Street Journal points out the problematic strategy behind Russia’s ambitious plan to spend $1.1 trillion on infrastructure by 2015, theoretically providing a cushion for crisis. The problem: most of that money is meant to come from private sources, and given the way Moscow likes to treat foreign investors, the level of risk is completely out of whack. (For more on the state of Russia’s road and highway system, see Grigory Pasko’s writings – for example 3.84 billion rubles have been spent on roads in Samarra with zero results).
Tapping into it isn’t easy. Sector stocks that Renaissance identifies as “liquid” have an average free float of just 19%. That not only means a small pool of opportunity, but raises the usual risk to minority shareholders in Russian companies.
Some 71% of the planned investment is expected to come from private sources. Yet while the infrastructure sector’s balance sheet looks healthy, Russia’s corporations have, in general, been on a borrowing spree. Public coffers are full, but are being bled defending the ruble.
Foreign capital hoping to fill the gap should remember that Russia’s economy remains a leveraged bet on oil prices.
Moreover, treatment of foreign investors has been dismal,particularly in “strategic” sectors — and what could be more strategicthan highways and power grids?
Investors should, at the least, demand a high risk premium.