Europe’s export credit agencies say they’re optimistic about their future pipeline of projects in Russia, a view buoyed by the country’s recent economic recovery. Shannon Manders reports from the annual VTB Capital Investment Forum ‘Russia Calling’ in Moscow.
The likes of Germany’s Euler Hermes, Italy’s Sace and Austria’s OeKB are reporting an overwhelmingly positive outlook for Russia in the coming years. Speaking in Moscow in October, senior executives from each of the export credit agencies (ECAs) were in agreement that their enthusiasm is being driven by Russia’s effective management of what they termed a “difficult economic environment”.
According to Euler Hermes’ forecast for 2018, released in October, Russian GDP is set to grow by 1.9%, the oil price will move to US$56 a barrel, the country’s exports will increase by US$26bn, and both insolvencies and the negative impact of international sanctions on investment will decline. The insurer says in its report that positive domestic factors, such as an increasing confidence in both the consumer and corporate sectors, will offset the negative impact of international economic sanctions, “which will become less and less relevant in discouraging inward foreign direct investments”.
It’s not a view shared by all: IHS Markit’s principal economist for Europe and CIS, Lilit Gevorgyan, tells GTR that the country’s recent exporting success in the agricultural sector (see fact box) is not enough to offset a much stronger negative long-term impact of the sanctions on overall investment in Russia. “Russian economic activity will be suffering from the cumulative effect of underinvestment in infrastructure, missed FDI opportunities, delays in the development of the off-shore hydrocarbon resources due to the ban on transfers of western expertise and latest technologies to Russia, as well as poor demographics,” she says.
There was no on-stage talk at the Russia Calling forum of the impact of sanctions, either ongoing or freshly imposed.
Instead, GTR heard on the sidelines of the event that banks have steadied themselves against recent adversities. Speaking to GTR, Leonid Sirota, global head of VTB Bank’s trade and export finance department, said: “We don’t mind the difficulties – they make us stronger. Our business is growing.”
It was a stoic stance that permeated wider discussions at the gathering. “It’s difficult to make predictions about the future, but I think we all agree that Russia is recovering right now,” Edna Schöne, Euler Hermes’ management board member told the audience. As a result, she said, “capital investments in Russia are definitely on the agenda – we can confirm that”.
Schöne noted that the ECA, which currently has an accumulated €9bn exposure in Russia, and has been able to meet 100% of the needs of Germany’s exporters’ activities in the country, sees “very nice applications for complex, interesting projects in Russia in the pipeline”. She made specific reference to the petrochemical and transport infrastructure industries.
“I also think there might be growing interest in [Hermes’] untied loan scheme for Russian mining companies that want to conclude long-term agreements with offtakers in Germany. They can benefit from very attractive financing with our cover,” she added.
Fellow panellist Allessandro Decio, CEO of Sace, told the audience that the Italian ECA has a pipeline of €3.5bn-worth of transactions in Russia over the next 12 to 18 months – a significant increase from the €600mn-worth of new transactions it signed in the country in 2016, and €1.5bn-worth the year before. “This tells a lot about our view of the Russian market – we are extremely positive on its development,” he said.
Decios also noted that the growth of Italian exports into the Russian market in the first half of 2017 had increased by 25% compared to the same period the previous year.
Helmut Bernkopf, CEO of OeKB, speaking on the same panel, echoed his peers’ sentiments and earmarked a €300mn Gazprom loan from VTB Bank Austria backed by the Austrian ECA, signed in mid-2017, as a standout “deal of the year”.
The corporate view
Despite prospects opening up in the Russian market, the large corporate companies that joined the ECAs on their panel in Moscow were quick to point out that more work is still required to get those projects that have been delayed for some time off the ground.
“We’re convinced there are plenty of opportunities, but I think it would be worthwhile to think about what could be done to get going some of the projects that have been around for a long time,” said Wolfgang Leitner, president and CEO of Andritz, an Austrian plant engineering company.
He noted that Andritz has at least two sizeable projects in the country in need of investment, both of which would “create jobs and exports, and replace imports”.
He called on ECAs and Russian authorities to create a pool of equity for investment, which he said was lacking in the country.
VTB Bank’s Sirota told GTR that project delays have been par for the course given the recent squeeze on the economy. Now that economic activity is picking up, however, those projects that were put on the shelf over the last few years are being dusted off and re-evaluated.
One such long-awaited deal was signed in the presence of Russian President Vladimir Putin in June 2017 and saw Germany’s Linde Group win a major contract from Russia’s PJSC Nizhnekamskneftekhim (NKNK). The deal – worth a reported nearly €900mn – will see the German company supply an olefin plant in the city of Nizhnekamsk, located in the republic of Tatarstan.
His colleague, Igor Ostreyko, trade and export finance managing director, explained the reasoning behind these delays: “After 2015 and the depreciation of the Russian rouble, capex programmes were stopped. During 2016, companies started to think: should they renew or not? And in 2017 we have seen more companies coming back to these discussions about long-term investments with the involvement of ECAs.”
As such, for capex projects, 2018 will be a much more active year in terms of business volume, with financing coming both from ECAs and banks’ own funds, he predicted.
Ostreyko added that VTB Bank has more than €1bn-worth of ECA-backed projects in the pipeline globally. Recent restrictions have meant that the bank has swapped bank-to-bank schemes in favour of lending directly to their corporate customers, which has opened up new opportunities for customers.
In terms of where the money will go, in an audience poll during the forum’s ECA panel, 41% of respondents voted the oil and gas sector as the most promising for investment, followed by infrastructure, which received 25% of votes.
Linde Group executive board member Christian Bruch told forum delegates that Russia’s oil and gas and chemicals industries had been keeping the company – which claims to have €4bn-worth of projects in this sector on the ground – “extremely busy”.
“What we see going forward is that these projects get bigger, more integrated and more complex. It will be the task of all of us to accommodate these types of projects – whether from the execution or the financing side,” he said, adding that ECA support would be essential in bringing these projects to reality.
Nevertheless, unlike in recent years, when the majority of oil and gas projects were upstream-oriented, panellists were in agreement that a significant shift had been made, and that future opportunities would be concentrated downstream.
“This is the year of the downstream,” said Pierroberto Folgiero, CEO of Maire Tecnimont, the Italian engineering and contracting conglomerate, who also declared that Russia will be a “cornerstone in the petrochemical downstream business for the next decades”.
German steel and capital goods producer ThyssenKrup Industrial Solutions’ CEO Peter Faldhaus said that he “admired” Russia’s ongoing shift from commodities into value-added products, which, for his company, has resulted in more plans that focus on the downstream chemical industry and the production of ammonia and urea.
An emerging agri superpower
Speaking at the Russia Calling forum in October, Russian President Vladimir Putin told the audience and GTR that the country’s volume of non-energy exports grew by 18.6% to US$77bn in the first eight months of 2017, constituting 35% of its total exports.
Russia’s agricultural industry, he said, is driving this trend. “From the period January to August, [exports] of food and raw materials grew by 19.6% and stood at US$11.9bn. And we have only just collected the harvest,” Putin noted.
He went on to inform the audience that Russia’s exports of agricultural goods now exceeds its exports of arms. “In 2016, the export of food and agricultural production grew by 4.9%, and that translates into US$17.1bn. And, in 2016, we sold weapons for US$15.3bn,” he said.
Russia’s agricultural sector has been booming: in 2016/17 the country became the world’s biggest exporter of wheat, according to the US department of agriculture. As little as 15 years ago the country was a net importer.
It’s Russia’s retaliatory ban on many western foodstuffs that has helped boost domestic production to the point where it can substitute imports. That, and a weaker rouble, which in parallel has been increasing exports and making imports more costly.
Analysts that GTR spoke to are in agreement with the overall trend as outlined by Putin, although they adopt a more cautionary stance.
Lilit Gevorgyan, principal economist for Europe and CIS at IHS Markit, acknowledges that owing to the strong harvest last year, Russia’s agricultural exports volumes will surpass defence-related exports. But, she notes that there is volatility in the sector’s performance due to its dependence on weather conditions, and highlights the devastating impact of the 2010 wildfire and drought on the Russian agricultural sector as a recent example of this vulnerability.
Rebecca Harding, founder and CEO of Equant Analytics, tells GTR that Russia has “always” exported more cereals, fertilisers, and even fish products than it has the fairly narrow sector which is arms and ammunition. “Certainly 2017 has been a success story for Russian exports,” she says.
Nevertheless, Harding admits that there could be an element of “smoke and mirrors” in Russian data. After oil and gas, the second-largest export sector is ‘commodities not elsewhere specified’. “This is an unknown ‘catch-all’ sector and may include arms or oil and gas, given how strongly it is generally correlated with trade in those sectors. That sector grew by just over 24% in 2016 and there is little transparency on what this might be,” she says.
In his speech, Putin added that more needs to be done to galvanise Russia’s non-energy exports. “I understand that the investments we are making are not enough, and we are going to increase our investment and all the support tools,” he said, noting that “infrastructural and administrative obstacles” in the path to making support more efficient would need to be lifted, though he did not specify the exact nature of these obstacles.