JANUARY 1999
AUTHORS: M.KAMAYEVA; A.KANSKY; N.MIKHAILOV; L.SAVCHENKO
Summary
1. Russia's major cities have witnessed a commercial construction boom in recent years.
Despite the downturn in current economic activity during the crisis, significant long-term
demand is forecast for infrastructure projects where architectural, construction, and engineering
services are required: Construction projects for facilities such as warehouses, Western-standard
hotels and new roads are priorities for local and regional governments. Air and sea ports are now
recognizing the need to install world-class facilities in order to compete in the international
market. International lending organizations are funding municipal pollution-abatement and
prevention projects. Russia's immense energy reserves are providing opportunities for servicing
both upstream and downstream energy industries.
Allowing for the long-term horizons typically required for projects in these infrastructure sectors,
the current Russian market downturn should not discourage companies from acting now to
ensure that they are adequately positioned to capitalize on these opportunities as they take
shape.
Projects
Housing and Office Construction: In several Russian cities local governments are issuing
housing bonds to attract private investors to stimulate construction and revive a moribund
housing market. Reconstruction, real estate development, and modern housing technologies are
best prospects for U.S. companies in this market. The construction of new office buildings and
reconstruction of existing residential buildings in the historical centers of Moscow and St.
Petersburg was a flourishing sector before the August 1998 financial crisis, and projects in this
sector still hold excellent prospects in Russia after the crisis is overcome.
Warehouses: The supply and quality of warehousing in Russia is improving, but of the estimated
one million square meters of space in Moscow, only 30,000 square meters meet Western
standards. Several new warehousing projects are expected to be completed over the next 18
months, many of them associated with Moscow's airport infrastructure.
Airports: The current level of aviation services in Moscow and St. Petersburg does not
meet international standards. Burgeoning cargo traffic is pressuring airports to use their own
funds for the initial stages of reconstruction and take steps to attract more airlines. With
predictions of sharp increases in passenger volumes, Sheremetyevo, Domodedovo, Vnukovo and
Bykovo airports in Moscow, and Pulkovo Airport in St. Petersburg, are each seeking to upgrade
their facilities to be able to offer a more comprehensive range of services and to compete as
regional hubs. International financing is available for some projects, such as the European Bank
for Reconstruction and Development's (EBRD's) assistance for St. Petersburg's Pulkovo
Airport.
Seaports: Faced by an increasing share of its cargo transiting through competing ports in the
Baltic states, the Russian Government has developed a sea port development program which
includes a number of priority investment projects for modernizing existing Russian ports and for
constructing new sea ports. Port development opportunities exist at the St. Petersburg, Vyborg,
Vysotsk, Kaliningrad, Primorsk, Ust'-Luga, and Batarejnaya Bay sea ports in Northwestern
Russia.
Roads, Railroads, and Bridges: The St. Petersburg Government considers construction of a ring
road as a priority for city development in easing local road congestion, and work has already
started on the first 23 km portion of the ring. Local government officials have also placed a
priority on the construction of a new bridge over the Neva River and an investment tender for its
construction is scheduled for later this year. Although currently on hold, a project for the
construction of a new railroad terminal in St. Petersburg has received international funding, and
sub-contracting opportunities exist.
Special Projects: In anticipation of St. Petersburg's 300th anniversary in 2003, it is expected that
considerable renovation work will be contracted by the city authorities and federal government
over the next four years. In 2000, St. Petersburg will also host the Ice Hockey World Cup
Tournament. Currently, sub-contracting opportunities exist in the reconstruction of existing
hockey arenas as well as the construction of a new arena estimated at USD 80 million.
Infrastructure for Energy Transportation and Development: Russia's total oil and gas resources
(developed as well as undeveloped) are the world's largest. The plunge in global energy prices
during the past two years has squeezed the levels of working capital available to Russian oil and
gas companies. However, over the longer term, as energy prices are predicted to rise, the
development of new energy resources will become a higher priority. The need for greater
cost-efficiency and environmental performance will also spur opportunities for repair or
upgrading of existing facilities in oil refining, oil and gas pipelines, power generation, and other
energy-related infrastructure; and export revenues generated by the energy industry from sales of
both upstream (gas and crude oil) and downstream (refined) products can help to secure project
financing more readily than in many other sectors.
Financing
3. The major factor influencing today's Russian construction services market is a lack of
investment finance. Although U.S. companies should not expect Russian Government financing
for most construction projects, there are several projects which have received federal or local
financing as evidenced in this report. However, the best opportunities still exist in those projects
backed by international funding. Some organizations (such as ports which serve international
cargo or passenger carriers, or energy companies with export earnings) are able to finance certain
projects at least partially with their own funds).
In 1995, the World Bank allocated USD 760 million for housing projects in the Russian
Federation and developers are optimistic regarding sales of new apartments and houses built with
the World Bank's assistance. Additionally, the World Bank, the EBRD, and other lending
institutions are involved with several other projects in Russia's major cities.
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4. We consider the market for construction services to be a
5. For more details on these and other projects, please contact the Foreign Commercial Service
offices in Moscow (phone: 7-095-737-5030, fax 7-095-737-5033) or St. Petersburg (phone:
7-812-326-2560, fax: 7-812-326-2561); or refer to these recent IMI reports:
12/98 Major Project: Pulkovo-3 International Passenger Terminal Project (St.
Petersburg)
12/98 Brief Overview of the St. Petersburg Market for Architectural, Construction and
Engineering Services (St. Petersburg)
12/98 Port Development in Northwest Russia - Update (St. Petersburg)
1/99 Warehousing in Moscow (forthcoming -Moscow)
1/99 Four Moscow Airports Plan Upgrades (forthcoming -Moscow)
1/99 Commercial Opportunities in Oil-Related Environmental Technologies in Russia
(forthcoming -Moscow)
1/99 Commercial Opportunities in Russia's Water Resources Management
Sector (forthcoming -Moscow)
For more information on a Matchmaker Trade Mission to Moscow and St. Petersburg for
Architectural, Construction and Engineering Services companies, please contact
Sam Dhir, Director of U.S. Exhibitions at telephone (202) 482-4756 or fax (202)
482-0178.
INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S.
DEPARTMENT OF STATE, 1999. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED
STATES.
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2. Although Russia's financial crisis has resulted in a short-term downturn in construction
(particularly for commercial office and retail space), Russia's need to modernize still remains. In
Moscow and St. Petersburg, federal and local government agencies, private companies, and
international financing organizations, are pursuing projects in a variety of areas, such as the
following.
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On the environmental infrastructure side, the International Bank for Reconstruction and
Development has proposed and Environmental Management project envisioning USD 28 million
in water resource and water quality management, USD 18 million for an air pollution abatement
program, and nearly USD 17 million for hazardous waste management.
promising area for U.S. firms. This market has considerable potential for growth in the
medium-term, stimulated by a high demand for modern buildings, transport services, the
development of financial institutions and legislation pertaining to the real estate market, and
Russia's need to maximize the productivity of its energy sector with less adverse environmental
impact than in the past. Those companies which can bring in modern, low-cost construction
technologies and services, innovative energy-saving building products and techniques, and
flexible financing arrangements will secure for themselves a future in this market.