Gazprombank - Russian Infrastructure - Research

JULY 3, 2015
RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE
Mikhail Ganelin
+7 (495) 983 18 00 (ext. 54583)
Mikhail.Ganelin@gazprombank.ru
Russian Infrastructure
Yakov Yakovlev
+7 (495) 988 24 92 (ext. 22492)
Yakov.Yakovlev@gazprombank.ru
To build or not to build

that is the question
Matvey Tayts
+7 (495) 980 43 89 (ext. 54389)
Matvey.Tayts@gazprombank.ru
Source: Federal Special-Purpose Program,

Gazprombank estimates
Infrastructure investment breakdown

3% 2%
8%
28%
9%
12%
24%
14%
REGIONAL ROADS
GENERATION
GRIDS
AIRPORTS
FEDERAL ROADS
RAILWAY INFRASTRUCTURE
PORTS
Source: Finance Ministry, CBR, Gazprombank estimates
Pension savings dynamic, RUB bln

5,000
10%
2017E
2016E
2014
2015E
2013
2012
2011
2010
2009
0%
2008
NON-STATE PENSION FUNDS

PRIVATE AM
VEB
% OF GDP
Top 15 country-recipients of Chinese direct

investment
61
ARGENTINA
ALGERIA
IRAN
PERU
VENEZUELA
SAUDI ARABIA
NIGERIA
RUSSIA
24 24 21 21 20
18 17 17 15 15
KAZAKHSTAN
31 31
UK
39
BRAZIL
72
INDONESIA
80
70
60
50
40
30
20
10
0
CANADA
Cooperation between Russia and China in the development of

infrastructure is strengthening. Over the past 10 years, the volume of
Chinese investment in foreign assets rose from $19 bln to $150 bln per year. In
2014, direct Chinese investment in Russia doubled according to CBR estimates
to $1.3 bln, with a goal of increasing this figure to $20 bln. This is being
facilitated by the project envisioned by China entitled the Silk Road Economic
Belt, which proposes active cooperation in growth and integration between
neighboring countries, including through Chinese financial resources under the
auspices of the Asian Infrastructure Investment Bank (AIIB), in which Russia is
participating as a founding member.
0 500 1,000 1,500 2,000 2,500 3,000 3,500

2016-2020
2011-2015
2007
while the proportion of off-budget investments will be on the rise.

Pension savings will become a large source of financing for infrastructure
projects. This is the main internal source of long money, i.e. over RUB 300 bln
per year amid restricted access to external markets. An additional source will be
NWF (up to RUB 1.7 trln on infrastructure), which will help to complete on
schedule a number of projects in progress. Amendments that have been
passed concerning laws on the securities market, on joint stock companies and
on concessions aim to expand the ability to draw investments into infrastructure
and lower risks for investors, who maintain a keen interest in high-yield projects,
especially road concessions and airports. The scope of infrastructure bonds is
set to increase dramatically, perhaps exceeding RUB 1.5 trln by 2020.
REGIONAL ROADS
FEDERAL ROADS
GENERATION
RAILWAYS
GRIDS
METRO
AIRPORTS
PORTS
US
Reduction of infrastructure investment... In 2015, investments will be cut

by 10-15% of the scheduled volume due to a decrease in budget spending,
while about RUB 11 trln will be spent on transport and energy infrastructure
(RUB 2.2 trln or $40 bln on average) until 2020, in line with investments made
over the past five years. However, investments will contract in real terms
depending on the inflation rate and their proportion in GDP will decrease from
3.5% to 2.5%. The energy sector will see the steepest decline (-37%),
followed by airport and port infrastructure (12% and 45%, respectively). Road
development will account for half of investments, but their growth will not
exceed the inflation rate. The priority will be on projects associated with the
World Football Championship in 2018, the Moscow-St. Petersburg Highway,
and the Central Ring Road. Investments in railway infrastructure are
stagnating and the greatest growth in investments will go toward expansion of
the subway system.
Investment in infrastructure, RUB bln
AUSTRALIA
Low oil prices and a fall in budget revenues have forced the government
to reduce spending on infrastructure, though this is partially
compensated by recovery of the accumulated pension system and money
from the National Wealth Fund. Meanwhile, changes to laws on
concessions and the securities market heighten the attractiveness of the
sector for private investors. In this report, we analyze how the volume and
structure of investment in infrastructure will change by 2020. We focus in
particular on Chinas policy relating to investment in assets of foreign
countries, including Russia.
Source: Heritage Foundation
Research Department
Copyright 2003-2015.
Gazprombank (Joint Stock Company)
JULY 3, 2015
CONTENTS
Investment in infrastructure ............................................................................................................................ 3
Investment in Russian infrastructure ................................................................................................................................................................... 4
Railroad infrastructure................................................................................................................................................................................................ 7
Core investment projects ........................................................................................................................................................................................... 8
Highways ......................................................................................................................................................................................................................... 11
Russias seaports .......................................................................................................................................................................................................... 17
Airports ............................................................................................................................................................................................................................ 23
Sources of financing .......................................................................................................................................... 29

State budget .................................................................................................................................................................................................................... 29
NWF.................................................................................................................................................................................................................................... 31
Pension savings ............................................................................................................................................................................................................. 31
Bank loans ....................................................................................................................................................................................................................... 34
Legislative amendments ................................................................................................................................. 35

Chinese investment in foreign assets ......................................................................................................... 37
Chinas investment in Russia .................................................................................................................................................................................. 40
New Silk Road .................................................................................................................................................. 42

Appendix 1: Russian-chinese joint projects ............................................................................................. 46
Appendix 2: List of infrastructure bonds .................................................................................................. 48
Appendix 3: Russias largest public infrastructure companies ......................................................... 50
JULY 3, 2015
INVESTMENT IN INFRASTRUCTURE: BEST TO

HEIGHTEN EFFICIENCY DURING A CRISIS
It is well-known fact that an increase in government spending to develop infrastructure is
a good instrument with which to fight recession, as it facilitates a multiplication effect
within the economy. Companies from various sectors become involved in construction,
which leads to the creation of new jobs, while growth in employment helps support
consumption. However, in Russias current economic conditions, the multiplication effect
from such investment will be minimal, as the country continues to enjoy a low level of
unemployment (5.8%), while the cost of capital is high. This means that there are no
resources for new jobs, and companies will use a significant part of their income to
service current debt rather than make new investments. On the other hand, given the
current economic downturn, a decision to reduce public investment would exert further
pressure on the economy and thus may be unacceptable.
An increase in government spending on

development of infrastructure is a good
instrument with which to fight recession, as it
facilitates a multiplication effect within the
economy. However, in current economic
conditions, the multiplication effect from such
investment will be minimal.
Consequently, we believe that the best solution is to maintain public investment on a

level seen over the several past years until interest rates decline to a comfortable level
and the economy resumes growth. However, during the current period of high interest
rates and marginal private activity, the government should focus on expansion of
funding mechanisms for infrastructure projects and improvement of legislation, including
for the purpose of reducing risks for investors. As soon as robust economic growth
resumes, these factors will drive an inflow of private investment. We note that such
solutions aimed at supporting investment in infrastructure projects that are under
government consideration generally coincide with our views.
During the current period of high interest

rates and marginal private activity, the
government should focus on expansion of
funding mechanisms for infrastructure
projects and improvement of legislation,
including for the purpose of reducing risks for
investors.
Need to support investment at a high level amid a shortage of funds is forcing the
government to seek effective solutions more quickly
Over the past year, the Russian government has made a range of important decisions
that significantly improve the attractiveness of investing in domestic infrastructure.
The government decided to preserve the cumulative part of pensions, which will
become the most important source of funding for infrastructure projects.
A range of substantial amendments that heighten the potential to attract investment

in infrastructure projects and reduce risks for investors have been introduced into
laws on the securities market, joint-stock companies and concessions.
The government is working on a mechanism for collecting tolls from heavy trucks
for access to federal highways. which will supply budgets with additional funds that
can be used for road construction projects.
The quality of presentations on large infrastructure projects implemented by such

corporations as Avtodor is improving noticeably. This helps to attract many
participants to the relevant tenders (3-4 large consortiums) while increasing the
competitiveness and efficiency of investments.
The government also continues to reorganize the countrys airports. Moscows

largest airports have been merged into holdings, the controlling stakes in which will
be owned by private investors. Regional airports have been transferred to the
ownership of local authorities, which should organize the privatization process and
attract private investors for further development of these airports.
Russia has intensified talks with China regarding joint development of

transportation corridors. The construction of a high-speed mainline from Moscow to
Kazan is consistent with Chinas large-scale project dubbed the Silk Road
Economic Belt.
JULY 3, 2015
Investment in Russian infrastructure projects stagnating, not

declining, but their share in GDP is decreasing
As in our previous infrastructure overview report entitled A Big Ship Sails Far
(published in 2014), we based our research on updated and revised programs as well
as documents aimed at stimulating investment in Russian infrastructure projects.
Federal Budget Spending for 2015-17;
Federal Target Program: Development of the Transport System of Russia until

2020, updated in April and June 2015;
Transport Strategy until 2030;
Federal Law on Concession Agreements on Securities Market;
Investment programs of Russian Railways, Avtodor, airport operators, and large

stevedoring and electricity companies;
Throughout 201620 a total of RUB 11 trln

will be invested in transport and energy
infrastructure (RUB 2.2 per annum on
average. or $40 bln), comparable to overall
investments made for the previous five years.
Zero growth will reduce the share of
investment in GDP from 3.5% to 2.5%.
Throughout 2016-20, a total of RUB 11 trln will be invested in transport and energy
infrastructure (RUB 2.2 per annum on average, or $40 bln), comparable to overall
investments made over the past five years. Zero growth will lead to a decline in the
share of investment in GDP from 3.5% to 2.5%. Utilities will face a major decline in
investment (-37%), while the figure for airport and seaport infrastructure will grow by
12% and 45%, respectively. Road development will account for almost half of all
investment. The top-priority projects include those that need to be completed before
the 2018 World Football Championship: the MoscowSt. Petersburg highway and the
Central Ring Road (TsKAD). Investment in railroad infrastructure, which accounts for
12% of all investment, is stagnating as well. Essentially, extension of the BAM and
Trans-Siberian Railway remain the only large-scale projects in the near term. Should
construction of the MoscowKazan HSR commence (our estimates do not yet
incorporate this project), infrastructure will see another spike of investment totaling
RUB 1 trln.
Transport infrastructure spending to rise in nominal terms but decline in real terms
We estimate that RUB 9 trln (around RUB 1.8 trln per annum, $32 bln) should be
invested directly in transport infrastructure (roads, railroads, airport and seaport
construction, reconstruction and extension) within the next five years (2016-20), equal
to around 2.0% of GDP vs. 2.3% over the past five years. Compared with our analysis
from last year, the nominal figure will remain nearly flat but in real terms will be lower
given the higher level of inflation. Our analysis reveals that transport infrastructure
spending in 2015-16 will be cut by around 10-15% of the initially planned volume,
although the figure will not be lower than the 2013-14 nominal spending of around
RUB 1.6 trln. A cut in federal budget expenditures will be offset by higher financing
from the NWF and the pension savings system. Thus, although the financing issue is
challenging, it is far from critical.
Not feasible to cut financing of many projects
Moreover, we believe it is impossible to cut the financing of many infrastructure projects.
Many projects, including the Moscow St. Petersburg HSR and Moscow Metro, are
under currently construction, and reduced funding will merely complicate the situation.
Moreover, Russia is committed to providing high-quality infrastructure for the 2018
World Football Championship (e.g. the TsKAD) and thus there is no leeway to slash
investment. Another example is the surprising boost in passenger traffic on domestic
flights, among other reasons caused by ruble devaluation and the growing popularity of
domestic travel. Thus, reducing investment in airport modernization also seems risky
(thus the extension of Sheremetyevo airport is underway, while construction of a new
airport in Rostov-on-Don has begun). Lastly, ruble devaluation has triggered an
increase of raw material exports, which has created a need for more intensive
investment to expand seaport export capacities.
It is impossible to cut the financing of many

infrastructure projects.
JULY 3, 2015
As for weaknesses, we note the challenging situation in regional roads funding. Many
regions are in much poorer financial condition than the federal center. The total budget
of regional road funds will decrease by 12% to RUB 713 bln in 2015, according to
Federal Treasury estimates. However, we expect actual spending to be even lower, i.e.
about RUB 540 bln (-23% YoY).
Overview of investment in infrastructure, RUB bln
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
20112015
20162020
Federal roads
349
442
505
527
505
500
567
528
537
610
2,329
2,743
Regional roads
425
646
731
709
545
586
616
642
672
710
3,056
3,226
Railroad infrastructure
234
288
275
222
266
196
264
280
273
342
1,284
1,355
Metro
50
96
100
144
178
171
176
181
181
181
569
891
Airports
31
41
64
79
85
76
76
65
60
61
301
337
Seaports
18
26
43
38
71
79
69
57
46
36
196
286
1,108
1,540
1,717
1,718
1,651
1,608
1,768
1,752
1,769
1,941
7,735
8,838
21.4%
39.0%
11.5%
0.1%
-3.9%
-2.6%
10.0%
-0.9%
0.9%
9.7%
2.0%
2.5%
2.6%
2.4%
2.2%
2.0%
2.0%
1.9%
1.8%
1.8%
2.3%
1.9%
Generation
603
523
637
546
392
367
333
330
309
306
2,701
1,646
Grids
355
329
325
284
177
174
179
213
216
216
1,470
998
Total electric utilities
958
851
962
830
569
541
512
543
525
522
4,170
2,644
CAGR
5%
-11%
13%
-14%
-31%
-5%
-5%
6%
-3%
-1%
% of GDP
1.7%
1.4%
1.5%
1.2%
0.8%
0.7%
0.6%
0.6%
0.5%
0.5%
Total infrastructure
investment
2,066
2,391
2,679
2,548
2,220
2,149
2,280
2,295
2,294
2,463
11,905
11,482
13.5%
15.7%
12.0%
-4.9%
-12.9%
-3.2%
6.1%
0.7%
-0.1%
7.4%
3.7%
3.8%
4.0%
3.6%
3.0%
2.6%
2.6%
2.5%
2.3%
2.3%
3.5%
2.5%
Total transport
infrastructure
CAGR
% of GDP
UTILITIES
CAGR
% of GDP
Source: Gazprombank estimates
JULY 3, 2015
Investment in infrastructure, RUB bln

3,000
4.5%
4.0%
2,500
3.5%
2,000
3.0%
2.5%
1,500
2.0%
1,000
1.5%
1.0%
500
0.5%
0.0%
2011
2012
2013
2014
FEDERAL ROADS
METRO
GENERATION
2015
2016
2017
2018
REGIONAL ROADS
AIRPORTS
GRIDS
2019
2020
PORTS
% OF GDP
Investment in infrastructure, 2011-2015 vs. 201620, RUB bln
Breakdown of investment in infrastructure, 201620, RUB bln

8%
REGIONAL ROADS
3% 2%
28%
FEDERAL ROADS
9%
GENERATION
RAILWAYS
12%
GRIDS
METRO
AIRPORTS
24%
14%
PORTS
1,000
2016-2020
2,000
3,000
4,000
2011-2015
Source: Federal Target Program. Gazprombank estimates
REGIONAL ROADS
FEDERAL ROADS
GENERATION
GRIDS
AIRPORTS
PORTS
Source: Federal Target Program. Gazprombank estimates
JULY 3, 2015
Railroad infrastructure: Eastern Polygon is the only major project

slated for implementation. Will there be an HSR?
The volume of investment in the railroad sector under the Federal Special-Purpose
Program entitled Development of the Transport System of Russia will amount to
RUB 2.1 trln ($38 bln at a RUB/USD rate of 55) in 2016-20. This is 46% more than
was spent over the previous five years (2011-15), although at the projected annual
average inflation rate of 7-8% in real terms investment could remain virtually
unchanged. According to our estimates, about 60% of all spending under the
program RUB 1.3 trln or RUB 260 bln ($5 bln) per year is expected to be
earmarked directly for the expansion of railroad infrastructure. The rest will go
toward purchasing locomotives, railroad cars, R&D and social projects not directly
related to infrastructure.
Over the next few years, the largest projects in the sector will be as follows:
construction of the Eastern Polygon (expansion of BAM and the Trans-Siberian
Mainline), expansion of approaches to Russias northern and southern ports, and
construction of the Northern Latitudinal Railway the SalekhardNadym railway spur
and a bridge across the Ob River. A new project in the program calls for construction
of the 748 km Prokhorovka-Bataysk railway line, which should bypass Ukraine. So far,
this project is not included in Russian Railways investment program and it can be
implemented only with support from the federal budget. Furthermore, a project to build
the Moscow-Kazan High-Speed Railway (HSR) has still not been included in a
special-purpose investment project or in Russian Railways investment program,
although the design stage has already kicked off.
Elegest Kyzyl Kuragino state-private partnership in railroads
Construction will soon commence of the 410 km Elegest Kyzyl Kuragino railroad,
which will connect coal deposits in the Republic of Tuva with Krasnoyarsk region and
Russias main railroad lines.
Road building is part of a large-scale vertically integrated project that includes
development of the large Elegest coal field, construction of a mining and processing
plant, a railroad to deliver coal, and a coal terminal in the Far East at Vanino port.
The key aspect of the project is that it is being implemented with funds from a private
investor Tuva Energy Industrial Corporation (TEPK). A total of RUB 133 bln will be
directly invested to build the railroad, while RUB 86.9 bln will be contributed from the
National Wealth Fund. Following the completion of construction, its throughput
capacity will allow to transport around 15 mln tonnes of coal per year. A memorandum
of intention to build the railroad was signed with the Chinese contractor China Civil
Enginring Construction Corporation ().
The project has great potential for further expansion the railroad may be extended
to West Mongolia and further to China, which will give Russia a new transportation
corridor for trade with Asian countries.
At the projected annual average inflation rate

of 7-8% in real terms, investment in railroads
could remain virtually unchanged.
Over the next few years, the largest projects

in the sector will be as follows: expansion of
BAM and the Trans-Siberian Mainline,
expansion of approaches to Russias
northern and southern ports, and construction
of the Northern Latitudinal Railway the
Salekhard-Nadym railway spur and a bridge
across the Ob River.
JULY 3, 2015
Largest railway infrastructure projects

INVESTMENTS IN 2011-15,
RUB BLN
INVESTMENTS IN 2016-20,
RUB BLN
EXPECTED TIMELINE FOR

COMPLETION OF
CONSTRUCTION
145.0
415.0
2014-18
Construction of the ProkhorovkaBataisk railway

(bypassing Ukraine)
0.0
479.8
2017-20
Expansion of railway approaches to seaports of

Russias North Basin (Baltic)
74.4
43.0
2010-18
Expansion of railway approaches to southern seaports
6.5
30.9
2010-20
Expansion of the TobolskSurgut railway

(transportation of petrochemical feedstock)
38.3
14.4
2017
PROJECT
Expansion of Trans-Siberian Railway and Baikal-Amur
Mainline (BAM)
Construction of the SalekhardNadym railway (for gas

production in Yamal)
0.0
84.7
2017-2018
Construction of a railway bridge across the Ob River

near the city of Salekhard
2.0
67.1
2015-19
Moscow-Kazan High-Speed Rail Project
0.0
1,068.0
2016-18
Source: Federal Target Program Development of Transport System of Russia, Gazprombank estimates
Core investment projects

LIMITING ELEMENTS
2012
20152020
Sections
2012
20152020
Stations
2012
20152020
Electricity supply, electrification and dispatching control
EXIT TO PORTS OF
MURMANSK AND
ARKHANGELSK
DEVELOPMENT OF PASSENGER
SERVICE BETWEEN MOSCOW AND
ST. PETERSBURG
Murmansk
ENSURING GAS PRODUCTION
ON YAMAL
Saint Petersburg
Konosha
CARGO BYPASS OF
MOSCOW HUB
Vorkuta
EXPANSION OF TRANSSIBERIAN RAILWAY AND

BAIKAL-AMUR MAINLINE
Yaroslavl
Moscow
APPROACH TO FAR EAST

PORTS
Noyabrsk
Perm
Rostov-on-Don
Novorossiysk
Tuapse
Saratov
Ufa
SHIPMENT OF FEEDSTOCK
FOR PETROCHEMICALS
INDUSTRY
Yekaterinburg
Tobolsk
Samara
Volgograd
Sochi
Kazan
Surgut
Chelyabinsk
Omsk
PASSAGES TO
SOUTHERN PORTS
Vanino
Lena
Novosibirsk
Achinsk
Novokuznetsk
EXPANSION OF RAILROAD CARRYING
CAPACITY FROM URAL TO CENTRAL
REGION
Komsomolsk-on-Amur
Tynda
Barnaul
Taishet
Irkutsk
Khabarovsk
Severobaikalsk
Chita
Ussuriysk
EXPANSION OF EXPORTS
TO CHINA
Vladivostok
RECONSTRUCTION OF BOTTLENECKS ALONG TRANSSIBERIAN RAILWAY AND ENSURING COAL SHIPMENT

FROM KUZBASS
Source: Expert magazine, citing data provided by the Institute of Economy and Transport Development
Expansion of BAM and Trans-Siberian Mainline (Eastern Polygon): construction is

underway
Among the projects approved for the next three years, the bulk of investments will go
toward one expansion of the Baikal-Amur Mainline (BAM) and the Trans-Siberian
Mainline (the Eastern Polygon) at a total cost of RUB 560 bln. Sources of financing will be
as follows: the federal budget (RUB 110 bln), the National Wealth Fund (RUB 150 bln),
VEB and state banks (which buy infrastructure railway bonds), as well as the operating
cash flow of the railroad monopoly itself (around RUB 300 bln). (We provided details on
this project in our report of last year).
Among the projects approved for the next

three years, the bulk of investments will go
toward one expansion of the Baikal-Amur
Mainline (BAM) and the Trans-Siberian
Mainline.
JULY 3, 2015
Planned investment in railway infrastructure projects, RUB bln

400
350
300
250
22
200
125
125
125
342
150
288
100
234
198
275
273
125
200
141
50
139
155
2017E
2018E
56
0
2010
2011
2012
2013
2014
2015E
INCL. TRANS-SIBERIAN AND BAIKAL-AMUR RAILWAYS EXPANSION
2016E
2019E
2020E
INVESTMENTS INTO RAILWAY INFRASTRUCTURE
Source: Federal Target Program Development of Transport System of Russia, Gazprombank estimates
Sources of financing for Russian Railways capex, RUB bln

600
480
500
395
400
389
250
317
300
200
467
234
217
216
72
98
98
120
28
39
52
71
100
89
107
0
2010
2011
149
38
2012
INFRASTRUCTURE BONDS
FUNDS FROM SALE OF SUBSIDIARIES' SHARES
OWN CASH FLOW
98
2013
414
438
450
2016E
2017E
204
110
100
50
2014
2015E
BORROWINGS ON MARKET
CONTRIBUTIONS TO CHARTER CAPITAL
Source: Russian Railways, Gazprombank estimates
Who will build BAM?

The first tender for construction of the Eastern Polygon was held in August 2014. It was
won by a construction consortium consisting of Bamstroymekhanizatsiya,
Setstroyenergo, Stroytrest and Transstroy-DV. The contract is valued at RUB 133.5 bln,
including VAT (30% of the total cost). The contract provides for construction of 306 km
of new railroad track and reconstruction of more than 230 artificial facilities, bridges and
tunnels. The new tenders have yet to be announced. Russian Railways does not yet
intend to bring in foreign contractors, including those from China.
Moscow-Kazan HSR: China is ready to invest

Last year, it seemed that the Moscow-Kazan HSR was one of the infrastructure
projects that would be put on hold until better times. With total declared investments
reaching RUB 1.068 trln, only 40% was covered by specific sources of financing.
However, China showed interest in the project: the countrys authorities at the end of
last year unveiled a concept for creating the Silk Road Economic Belt (see below).
Among other things, it calls for developing transportation channels from Asia to
Europe, including through Russia.
China has shown interest in the project: the

countrys authorities at the end of last year
unveiled a concept for creating the Silk Road
Economic Belt
JULY 3, 2015
A memorandum on collaboration signed in early May 2015 between Russia and China
calls for the HSR to be built by a company with capital owned by the Chinese Silk Road
Fund (under the management of Asian Infrastructure Investment Bank (AIIB), which is
being formed by China), which will contribute up to RUB 100 bln. A similar amount is to
be invested by Russian authorities. In addition, Chinese banks are ready to allocate
another RUB 250 bln. On the part of Russia, RUB 150 bln could be contributed by the
NWF, about RUB 100 bln by the federal budget and Russian Railways, and about RUB
140 bln as an infrastructure bond issue that would be bought up by VEB. Thus, it
remains unclear where the other RUB 330 bln would come from. Part of these funds
could be contributed by Russian banks, while the cumulative part of pension savings
would make it possible to boost the size of the infrastructure bond issue.
Sources of financing, RUB bln
National Wealth Fund
150
Federal budget
21
Russian Railways budget
31
VEB pension savings via infrastructure bond issues
150
Silk Road Fund (HSR capital)
100
Chinese banks (borrowings)
250
Other unidentified sources
366
Total
1,068
Source: Interfax, Gazprombank estimates
The railroad is currently in the design stage. The tender was won by a RussianChinese consortium consisting of Mosgiprotrans, Nizhegorodmetroproekt and China
Railway Eryuan Engineering Group. The total cost of the work to be carried out in
2016 is RUB 21 bln. It should take two years to build the railroad, which would be
finished in 2018, although it seems to us that such a rapid construction period looks
too ambitious. In any case, while the railway is in the design phase, the interested
parties have time to discuss the details and figure out whether the Russian economy
can handle such a big project.
HSR construction in China and impact on the countrys economy
The construction of an HSR would definitely have a positive economic impact on the
expansion of any countrys economy. A considerable amount of economic research
points to the agglomeration effect. The areas through which an HSR runs show
heightened GRP growth averaging 0.5-0.7% per annum, while the household
incomes of peripheral areas approach the higher income levels seen in large cities, a
factor which promotes consumption. In addition, an HSR would develop tourism.
Small regional companies have an incentive to speed up growth, which heightens the
level of competition.
Despite the advantages that HSRs offer the economy, the ROI offered by these
railways remains questionable and requires detailed analysis. For example, there is
an opinion that many HSRs in China are loss-making. The most successful project is
the 1,318 km Beijing-Shanghai HSR, which was built in 2011 at a cost of $32 bln. In
2014, for the first time it generated net income ($192 mln), while total revenues
reached $4.6 bln. In addition, the HSR was used by more than 100 mln passengers
per year. The line is expected to have a payback period of 14 years.
10
JULY 3, 2015
Export of Chinese HSRs

China created the longest and most efficient HSR system in the world and has taken
steps to export HSR construction services to other countries, particularly since the
construction cost of HSRs in China is about half as much as in Europe.
Aside from Russia, China is in talks on building HSRs with Mexico, Turkey, India,
Thailand and other countries. To date, however, negotiations have been successful only
with Turkey, where a Turkish and Chinese consortium is building a 533 km HSR
between Istanbul and Ankara. The consortium consists of Railway Construction
Corporation, China National Machinery Import and Export Corporation, as well as
Turkish construction companies. The total cost of building the railway is about $4 bln. As
part of this project, China has provided a $750 mln loan.
This year, the Mexican government was forced to terminate a similar contract with
China for the construction of a $3.7 bln HSR due to the decline in oil prices, which
reduced budget revenues. The contract itself was stipulated in 2014 with China Railway
Construction Corporation. All in all, 16 contenders placed bids at the tenders (including
Siemens, Bombardier and Mitsubishi), but none of these companies were able to
compete with China in terms of price. In addition, Export-Import Bank offered to provide
85% of project funding.
Length of HSRs with allowed speed limit of more than 200 km/h
CHINA
EUROPE
JAPAN
TURKEY
RUSSIA
US
0
5,000
EXISTING
10,000
15,000
20,000
25,000
30,000
35,000
40,000
UNDER CONSTRUCTION/INTENDED
Source: International Union of Railways
Highways: all resources for completion of current projects

According to the Federal Special-Purpose Program entitled Development of the
Transport System of Russia until 2020, the total amount of investment to be spent on
expanding highway infrastructure is planned at RUB 2.7 trln ($47 bln at a RUB/USD rate
of 55) or RUB 550 bln per year. This is 17.8% more than was spent over the past five
years (2011-15), and assumes average annual growth of about 3.3%. However, the
economic crisis has forced the government to decrease budget spending, including for
the construction and repair of federal roads. This year, spending will be reduced by at
least 10-15% of the earlier budgeted amount. So far, the government has not decided
by how much spending will be decreased in subsequent years. One radical option would
be to cut all expenditures by 5% in real terms. In 2015-16, the government had planned
to boost spending on road infrastructure by 15-20% and the reduction will essentially
return spending to the level seen in previous years RUB 500 bln.
The decrease in spending will likely prevent full-fledged reconstruction of such federal
roads as M5 Ural (MoscowChelyabinsk), M7 Volga (MoscowUfa) and M8 (Moscow
Arkhangelsk). All funds will be concentrated toward completing the construction of current
projects of which state concern Avtodor is in charge: the MoscowSt. Petersburg toll
11
China created the longest and most efficient

HSR system in the world and has taken steps
to export HSR construction services to other
countries, particularly since the construction
cost of HSRs in China is about half as much
as in Europe.
JULY 3, 2015
highway and the Central Ring Road around Moscow, which should be completed by 2018.
The reconstruction of M4 Don (MoscowNovorossiisk) will likely continue. A major road
project in future years will be the construction of a bridge across the Kerch Strait, at an
estimated cost of over RUB 200 bln. The structure and bulk of funds will come from the
federal budget and the NWF. This project should consume funding from other sources.
We estimate total spending on federal roads at 0.5% of GDP over the next five years
(RUB 500-600 bln) vs. 0.7% for the previous five years. In addition, consolidated
spending of regional budgets to support regional roads, including Moscow, account for
another 0.6% of GDP (RUB 600-700 bln) vs. 0.9% for the previous five years. Thus,
total budget spending on road infrastructure will decline to 1.1% in 2016-20 vs. 1.5% in
2011-15. This is a moderate level of expenditure, which will make it possible to
gradually improve road infrastructure and implement several large-scale projects.
However, it will not allow infrastructure to expand at a pace exceeding overall growth of
the economy.
Dynamic of costs for road infrastructure development, RUB bln
Structure of costs for road infrastructure development, 201620
800
12%
60%
4%
2%
600
FEDERAL BUDGET SPENDING

SUBSIDIES TO AVTODOR
400
OTHER SUBSIDIES
200
22%
NATIONAL WELFARE FUND
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FEDERAL BUDGET SPENDING
OTHER SUBSIDIES
NON-BUDGET SOURCES
NON-BUDGET SOURCES
SUBSIDIES TO AVTODOR
Source: Federal Target Program Development of Transport System of Russia,

Source: Federal Target Program Development of Transport System of Russia,

Program for building and reconstruction of major federal highways

INVESTMENTS IN
20112015, RUB MLN
INVESTMENTS IN
20162020, RUB MLN
SHARE OF TOTAL
INVESTMENTS
5 Ural Highway (Moscow Chelyabinsk)
66,287
227,575
14.14%
11 Moscow St. Petersburg (toll highway)
157,917
205,971
12.80%
7 Volga Highway (Moscow Ufa)
45,356
152,448
9.47%
051, 053, 055 Baikal Highway (from Chelyabinsk through Kurgan,

Omsk, Novosibirsk, Kemerovo, Krasnoyarsk, Irkutsk, Ulan-Ude to Chita)
18,159
144,065
8.95%
060 Ussuri Highway (Khabarovsk Vladivostok)
29,207
111,979
6.96%
4 Don Highway (from Moscow through Voronezh, Rostov-on-Don,

Krasnodar to Novorossiysk)
126,159
107,875
6.70%
56 Lena Highway (from town of Never to Yakutsk)
39,751
93,324
5.80%
8 Kholmogory Highway (from Moscow through Yaroslavl, Vologda to

Arkhangelsk)
43,305
88,547
5.50%
1 Belarus Highway (from Moscow to the border with Belarus)
45,015
87,424
5.43%
03 Ukraine Highway (from Moscow through Kaluga, Bryansk to the

border with Ukraine)
11,104
52,349
3.25%
Central Ring Road (Moscow region)
29,857
50,368
3.13%
29 Caucasus Highway (from Krasnodar though Grozny, Makhachkala to

the border with Azerbaijan)
31,677
46,171
2.87%
St. Petersburg Petrozavodsk
33,732
40,403
2.51%
Moscow-Nizhny Novgorod-Kazan high-speed railway
3,160
37,033
2.30%
6 Caspian Highway (from Moscow through Tambov and Volgograd to

Astrakhan)
7,138
35,929
2.23%
Amur Highway (Chita Khabarovsk)
3,380
29,211
1.82%
12
JULY 3, 2015
20 St. Petersburg Pskov Pustoshka Nevel (to the border with

Belarus)
5,671
26,230
1.63%
Kolyma Highway (from Yakutsk to Magadan)
17,973
25,831
1.61%
10 Russia (from Moscow to St. Petersburg)
11,346
25,141
1.56%
Total
726,194
1,587,872
99%
Source: Federal Target Program Development of Transport System of Russia
Creation of heavy truck toll system

Several years ago, the government decided to establish a truck toll system in Russia
for vehicles in excess of 12 tonnes that travel on federal roads. The point is that wear
and tear of roads increases because of heavy vehicles and requires repair. The
system would generate additional revenues that would be contributed to the road
fund. The creation and management of the system was granted on a concession
basis to RT-Invest Transportation Systems. The concessionaire must create a
system that will service 50 km of federal roads and record the movement of around
1.6 mln trucks. The overall cost of its creation is RUB 25.6 bln (excl. VAT). The IRR
of the project is estimated at 12%, with a payback period of eight years. The project
will mainly be financed through borrowed funds provided by Gazprombank.
Following the launch of the system, the owners of freight vehicles will pay a tariff of
RUB 3.7/km, indexed to inflation. Collections are estimated at RUB 50 bln per year,
equivalent to around 10% of Federal Road Fund revenues.
GK Avtodor: an efficient vehicle for investors in road concessions

Over the past several years, GK Avtodor has done a huge amount of work, practically
from scratch, to create large-scale concession projects in the roads segment and to
attract investors. Its main achievements over the past two years include the following:
The successful organization within tight time frames of four tenders to construct
segments of the MKAD (I, II, IV and V). For segments I and V, a contract was
signed with the winner and construction is underway. Tenders for segments III and
IV will be conducted in September 2015.
The holding of new tenders to construct segments of the Moscow St. Petersburg
highway. In 2014, a contract was signed with a consortium of VTB and Vinci to
construct segments 7 and 8 of the road (543-684 km) at a cost of RUB 77 bln.
Preparation is underway for tenders to construct segments 2 and 3 (58-149 km and
149-208 km). In December 2014, the first toll segment of the road (15-58 km) was
launched (exiting to Moscow through Sheremetyevo airport).
The holding of tenders and the signing of contracts to reconstruct segments of the
M4 Don and M3 Ukraine roads, each at a cost of RUB 17 bln. Documents are
being prepared to hold tenders to reconstruct the M7 (Balashikha bypass) and M1
(Belarus) roads.
The preparation of a presentation is underway for regional concession projects in

Tatarstan, Bashkortostan and Novosibirsk.
Despite the large volume of work and tight time frames for construction, a large
number of investors (usually 3-4 consortiums) are taking part in Avtodors tenders,
which underscores the high investment attractiveness of the projects.
The tenders have been organized on a quality basis. For each tender, the
corporation prepares detailed technical, financial and legal documentation, which
allows investors to quickly and efficiently value a projects attractiveness.
13
JULY 3, 2015
GK Avtodors budget: need for private investment totals around $500 mln annually
According to the Federal Target Program (FTP), GK Avtodors budget in 2016-20 should
amount to around RUB 1 trln (RUB 200 bln per annum), although the corporation itself
forecast its budget at nearly 30% less RUB 732 bln. Half of the budget is in the form
of direct subsidies from the federal budget. Additional funds from the National Wealth
Fund RUB 150 bln will go toward construction of the TsKAD by 2018. In addition,
GK Avtodor plans to issue bonds in a total amount of RUB 89 bln until 2020. Proprietary
and borrowed funds of the concessionaire and investors must total RUB 186 bln (22%
of the planned amount) or around RUB 30 bln per annum. Of this amount, around 70%
(RUB 25 bln) may be attracted by the concessionaire in the form of borrowed funds
(bonds and bank loans), while 30% (RUB 5 bln) should be comprised of the
concessionaires own funds.
The peak of investment in GK Avtodors projects will occur in 2016-18 for construction of
the Moscow St. Petersburg toll road and the TsKAD, which should be completed by
2018 in time for the World Football Championship to be held in Russia. Therefore,
despite the economic crisis, these projects will be financed in full.
Dynamics and sources of financing for GK Avtodors projects,
RUB bln
Financing structure of GK Avtodors projects (201520)
250
22%
200
35
20
40
100
50.9
27
50
0
39
2015
35.7
75
2016
SUBSIDIES FROM THE

BUDGET
57
150
17
38.4
49%
56
2017
NATIONAL WELFARE
FUND
34
25.0
27
8
11
79
78
75
2018
2019
2020
11%
FUNDS FROM CONCESSIONAIRES AND INVESTORS

AVTODOR'S FUNDS (MARKET BOND)
SUBSIDIES FROM THE BUDGET
AVTODOR'S FUNDS
(MARKET BOND)
18%
Source: GK Avtodor
FUNDS FROM
CONCESSIONAIRES AND
INVESTORS
Source: GK Avtodor
Road concessions in Russia offer solid ROI

In GK Avtodors projects, the share of budget financing totals 60-90%, while that of
investors comprises 10-40% of required investment. The structure of financing depends
on the operational investment attractiveness of a given project. The higher the expected
automobile traffic, the lower the operational risks, the more attractive the project is for
private investors and the larger their share in the project. The majority of GK Avtodors
projects are concluded based on the terms of a long-term investment agreement which
assumes that GK Avtodor will take operational risks (risk of traffic density), while private
investors are offered a guaranteed return on own and borrowed investment in the
amount of inflation +4-8%. The period of the concession is 23-30 years. There are also
concession projects with direct collection of tolls, by which a concessionaire receives all
of the revenues of a project from automobile traffic, while assuming risks of traffic
variability. Such projects offer higher returns amid greater operational risk.
In our view, the proposed return on GK Avtodors concession projects is extremely
attractive for investors. By comparison, the current premium for investment in Russian
equities stands at 8-10%, while the risk level for equities is higher than for road
concessions. Moreover, the risk premium for investing in equities will decline as
geopolitical risks subside. The historical risk premium for investing in equities is 4-5%
compared to 4-8% for road concessions. Admittedly, when tenders are held, a decline in
ROI requirements for own and borrowed funds is one of the criteria for winning tenders.
14
JULY 3, 2015
Despite the fact that interest rates and inflation in Russia are very high at present, they
are gradually declining. There is a high likelihood that within a few years, inflation
indicators and the level of interest rates will decline to historically low levels. For
example, the CBR has set its inflation target at a level of 4% by 2017.
Tenders planned for 2015
MOSCOWST. PETERSBURG TOLL HIGHWAY
Road section
1558 km
58149 km
149208 km
208258 km
258334 km
334543 km
543684 km
43
90
59
47.9
72.7
217.1
137.5
77,000
30,000
n/a
26,800
12,00015,000
15,50017,000
16,000255,00
55.8
71.9
n/a
30.88
49.6
144.6
76.8
Direct payments
concession
Long-term
investment
agreement
n/a
Long-term
investment
agreement
Long-term
investment
agreement
Long-term
investment
agreement
Availability
payment
concession
Current status
Launched
Preparing for the

tender (in 2016)
n/a
Under
construction
Launched
Under
construction
Under
construction
Investor/tender
participant
North-West
Concession
Company (50%
Mostotrest, 50%
Vinci)
n/a
Mostotrest
Mostotrest
Mostotrest
Two Capitals
Highway
2016-2018
20152017
20122014
20152017
20152017
23
23
28
27
75%/25%
Length, km
Expected traffic, cars
per year
Price, RUB bln
(including VAT)
Agreement
Construction period
Timeline for
concession
Sources of financing
(public/private)
Private investors
ROE
20112014
20162018
26
24
40%/60%
80%/20%
85%/15%
90%/10
90%/10%
89%/11%
CPI+8.5%
CPI+8.5%
CPI+8.5%
CPI+8.5%
CPI+8.4%
(4.55%+3.85%)
n/a
Source: GK Avtodor, Gazprombank estimates
CENTRAL RING ROAD

Road section
Length, km
Expected automobile
traffic, per year
Agreement
Price, RUB bln
(including VAT)
Current status
Investor/tender
participant
Timeline for
construction
Timeline for
concession
Sources of financing
Private investors ROE
Start-up facility 3
Start-up facility 4
105.3
Start-up facility 5
96.5
Start-up facility 1
76.44
49.5
34,100
21,300
26,600
33,100-39,500
Availability payment
concession
Availability payment
concession
Long-term investment
agreement
Long-term investment
agreement
80.5
79.8
42.2
52.39
Tender results to be
announced soon
Tender results to be
announced soon
Under construction
Agreement signed
North-East Mainline, Sok 24

Russia, Invest Finance, Road
Building Corporation
South-East Mainline, Capitala

Big Ring, Invest Finance Plus,
Road Building Corporation
Koltsevaya magistral (100%

subsidiary of ARKS)
Stroygazconsulting
20162018
20162018
20142018
20142018
30
30
24
23
National welfare fund (32%),

subsidies from federal budget
(25%), private investors
(~40%).
National welfare fund (55%),

subsidies from federal budget
(7%), private investors
(~38%).
Public finance (89%), private

finance (11%)
Public finance (87%), private

finance (13%)
12-13% IRR
n/a
CPI+4.65%
CPI+8.30%
Source: GK Avtodor, Gazprombank estimates
Long-term strategy: 12,000 km of highways

Acording to the long-term strategy for the development of GK Avtodors highway
network, 12,000 km of highways will be under the companys management by 2030. Out
of the total, 6,000 km of roads will be built and 2,000 km will be renovated. The share of
toll roads will account for 75% of the entire network.
15
JULY 3, 2015
GK Avtodors long-term targets, mln RUB

201020
BY 2030
Total investments *
1,569,130
4,650,000
Including subsidies from the federal budget
1,012,487
2,092,500
556,643
2,557,500
20
80
3,994
12,000
894
2,000
1,333
6,000
47%
75%
133
289380
46
125165
Non-budget financing
Range of investment projects
Expected total length of highways
under trust management by 2020, km
Automobile roads to be restored, km
Automobile roads to be built, km
Share of toll roads of the entire network
Capacity of market of GK Avtodors construction and assembly works,
RUB bln per year
Including the capacity of private finance market
Source: GK Avtodor
* 2010 prices
Highway network under GK Avtodors management by 2030

11
M-1 Belarus
M7A MoscowNizhny NovgorodKazan
St. Petersburg
M-3 Ukraine
KazanYekaterinburg
Veliky Novgorod
M-4 Don
YekaterinburgOmskKazakhstan border
M-11 MoscowSt. Petersburg
10
Southwest Chord
Central Ring Road
11
Scandinavia automobile road
Novorossiysk Transport Hub
12
KrasnodarAbinskKabardinka
Road transport bridge

Through Kerch Strait
13
KazanShaliBavlyKazakhstan border
14
OzinkiSaratovVoronezhKursk
Belarus border
15
ChelyabinskYekaterinburg
16
Sochiseaport Kavkaz
4
1
Smolensk
Tver
Moscow
Vladimir
Bryansk
7
Nizhny Novgorod
Yelets
14
Voronezh
Kazan
14
10
Saratov
6
Kerch
Novorossiysk
Yekaterinburg
15
Rostov-on-Don
13
6 12
Krasnodar
16
Chelyabinsk
Volgograd
Tyumen
Orenburg
Omsk
Sochi
Automobile roads and high-speed highways transferred under the trust management of the State
Company Russian Highways (GK Avtodor); roads under construction to be launched by 2020.
Projected automobile roads and high-speed highways

by 2030
Source: GK Avtodor
16
JULY 3, 2015
Russias seaports: state support, growth of cargo turnover and high

profitability
Russia has 63 cargo seaports with total capacity of 860 mln tpa. Regardless of the
economic situation in the country, the cargo turnover of Russian seaports has been
growing steadily each year. Over the past 10 years, turnover has increased by 67% to
623 mln tonnes in 2014. That said, devaluation supported exports of raw materials,
which has resulted in higher cargo turnover. In 2014, such turnover rose 5.8% and in
1Q15 the growth rate accelerated to 8.9%.
Export goods (mainly crude oil, oil products, and coal) account for 80% of the total cargo
turnover of Russian seaports, which reflects Russias commodities export-led economy
100% of grain, around 80% of oil, and 75% of coal exported from Russia is shipped
via seaports. Imports account for just 9% of total turnover (cars, containers with
equipment, consumer goods, and car parts). The remaining amount of cargo accounts
for transit cargoes and cabotage.
64%
62%
60%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CAPACITY, MLN T
CAPACITY UTILIZATION, %
CARGO TURNOVER, MLN T
30%
20%
-1.2% 10%
0%
-10%
-20%
-30%
-40%
PRIGORODNOYE
66%
-30.3%
TUAPSE
68%
5.3%
-15.8%
NAKHODKA
70%
7.9%
VANINO
72%
10.1%
12.5%
19.7%
MURMANSK COMMERCIAL
SEAPORT
74%
24.9%
20.7%
VOSTOCHNY PORT
160
140
120
100
80
60
40
20
0
BIG PORT ST. PETERSBURG
76%
PRIMORSK
845 860
791 829
761
699 731
630
591
589 623
549
535 566
496 526
451 455
407 421
NOVOROSSIYSK
1,000
900
800
700
600
500
400
300
200
100
0
Russias 10 largest seaports by turnover
UST-LUGA*
Dymamic of cargo turnover in Russian seaports, mln tonnes
CAPACITY, MLN T
CARGO TURNOVER, MLN T (2014)
CARGO TURNOVER DYNAMIC YOY
* by 2020, the seaports capacity will increase to 150 mln tonnes
Source: Association of Sea Commercial Ports, Gazprombank estimates
Source: Transportation Ministry, Gazprombank estimates
Structure of Russian seaport cargo turnover, 2014
Russias seaport cargo turnover, 2014

19%
7%
79%
4%
7%
5%
20%
623 MLN T
623 MLN
TONNES
8%
2%
1%
1%
11%
6%
30%
EXPORTS
IMPORTS
TRANSIT CARGOES
OIL
CONTAINERS
FERTILIZERS
OTHER
CABOTAGE
Source: Association of Commercial Sea Ports
OIL PRODUCTS
FERROUS METALS
ORE
COAL
GRAIN
TIMBER
Source: Association of Trade Sea Ports
17
JULY 3, 2015
Russian seaport cargo turnover breakdown

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010
OTHER
FERROUS METALS
2011
TIMBER
CONTAINERS
2012
ORE
COAL
2013
2014
FERTILIZERS
OIL PRODUCTS
2015
GRAIN
OIL
Source: Association of Trade Sea Ports
Under the Federal Target Program for 2016-20, investment in seaport infrastructure is
planned at around RUB 280 bln. The government will contribute 30% of the total sum,
while the remaining 70% will come from private investors. However, in our opinion,
the actual investment amount could be half of that expected about RUB 140 bln
(RUB 28 bln or $0.5 bln per year). Some core projects have already been launched,
such as the expansion of capacities of Ust-Luga and Big Port St. Petersburg, and the
construction of Sabetta and Novoportovoye ports in the Yamal peninsula. At the same
time, projects such as the expansion of capacity of Taman seaport on the Black Sea,
construction of a universal deepwater port in the city of Baltiysk (Kaliningrad region),
and expansion of capacities of coal terminals at Vanino seaport in the countrys Far
East are planned under the target program, but their implementation is in question.
Planned investment in extension of Russias seaport
infrastructure, RUB bln
Sources of funding for seaport infrastructure, RUB bln
100
90
80
80
70
60
60
50
40
40
30
20
20
10
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ACCORDING TO FEDERAL SPECIAL-PURPOSE PROGRAM
STATE BUDGET
GAZPROMBANK ESTIMATES
Source: Federal Special-Purpose Program, Gazprombank estimates
PRIVATE INVESTMENTS
Source: Federal Special-Purpose Program
The mechanism of public-private partnership is most commonly used for the

construction of seaport infrastructure
The government is investing in preparation works in the water area of the port
bottom-dredging works, building of approach channels and moorage walls, and
construction of access routes to the port. Private investors (stevedores) invest in the
construction of cargo terminals (funds are used for storage facilities, sheers, loading
machines). For example, the government fully financed the water part of Sabetta and
18
JULY 3, 2015
Novoportovoye seaports, which are currently under construction in the Yamal peninsula,
while private investors Yamal-LNG and Gazprom Neft are now building the cargo
terminals (in other words, the landside part of these projects). In some instances, private
investors take part in the construction of the water part of seaport infrastructure.
but a concession agreement mechanism that is widespread in other countries is
not yet used in Russia
The reason for this is that stevedores usually own the land plots on which cargo
terminals are located (or rent them for long periods at a relatively low price). However, in
other countries (i.e. Greece, the Netherlands, UAE) land plots for the construction of
seaport infrastructure are assigned to the operator under concession agreements. Due
to low payments for land, Russian stevedores show higher margins than their foreign
peers with similar types of cargo turnover. For example, the EBITDA margin of sea grain
terminals can reach 80%, and the margin of container terminals can approach 60%. Oil
and petrochemical terminals show a margin of around 40-50%. Coal terminals stand
apart, as most of them are controlled by coal producers (Mechel, Kuzbassrazrezugol,
SDS-Ugol). These terminals show lower margins, which is not surprising given the fact
that high transportation costs are factored into the sales price. Hence, full control over
the coal transportation chain is an important part of coal producers business.
EBITDA margin of Russian and overseas stevedores, 2014
61%
61%
55%
60%
54%
52%
50%
47%
25%
30%
23%
22%
PERAEUS PORT AUTHORITY

(GREECE)
36%
40%
DALIAN PORT (CHINA)
70%
20%
10%
HHLA (GERMANY)
ST PETERSBURG SEAPORT
(UNIVERSAL)
DP WORLD (UAE)
TUAPSE COMMERCIAL
SEAPORT (UNIVERSAL)
COSCO PACIFIC (CHINA)
VOSTOCHNY PORT (COAL)
GLOBAL PORTS
(CONTAINER)
NCSP GROUP (UNIVERSAL)
0%
Source: companies, Bloomberg, Gazprombank estimates
Despite high margins, the construction of seaport infrastructure is a capital-intensive

business. Globally, the average return on capital invested in this segment reaches 12-15%.
In Russia, it is more difficult to calculate the ROI in seaport assets, as most new projects are
implemented by raw materials companies in order to improve the efficiency of their logistics
operations and gain control over transportation costs.
19
JULY 3, 2015
Largest projects to construct port capacities

Projects currently in active
construction
Projects in initial stage
or prospective projects
Russias largest
seaports
PRIMORSK
MURMANSK
UST-LUGA
BRONKA
SABETTA
2
St. Petersburg
4
BIG PORT
ST. PETERSBURG
SAKHATRANS
NOVOPORTOVOYE
Moscow
11
VANINO
7
TAMAN
PRIGORODNOY
E
VLADIVOSTOK
OLYA
NOVOROSSIYSK
Astrakhan
10
Vladivostok
TUAPSE
OTKRYTYI
ZARUBINO
8
NAKHODKA
VOSTOCHNY
Largest port infrastructure projects

Projects currently in active construction phase
LOCATION
DESCRIPTION
ON MAP
SEAPORT
CATEGORY
TOTAL
AMOUNT OF
INVESTMENT,
RUB BLN
INVESTORS
PROJECTED
SEAPORT
CAPACITY, MLN
TONNES
REALIZATION
TIMELINE
Construction of UstLuga port
Multi-purpose
seaport
61.5
Kuzbassrazrezugol, Global
Ports, Gunvor, NOVATEK,
SIBUR, Eurochem, OMK,
Gazprom and others
180
2000-20
Construction of
Sabetta port,
including building of
entrance channel in
the Gulf of Ob
LNG terminal
73.2
Yamal LNG (NOVATEK,

Total, CNPC)
16.5
2012-20
Construction of
marine multi-purpose
Container and
handling terminal
RoRo terminals
Bronka in St
Petersburg seaport
59.6
Holding Company Forum

(St. Petersburg)
1.9 (TEUs)
2012-2017
Year-round oil
terminal
Novoportovoye
(Yamal)
10.9
Gazprom Neft
8.5
2013-18
Oil terminal
20
JULY 3, 2015
LOCATIONS ON THE
MAP
DESCRIPTION
Universal Ust-Luga port is one of the largest-scale transport infrastructure projects since the dissolution of the Soviet Union and a
successful case of private-public partnership. Seaport construction kicked off in 1999. It is located 70 km from St. Petersburg in the Gulf
of Finland. The location is convenient for servicing deepwater vessels and allowing year-round navigation. State and private investments
over 10 years totaled around $7 bln. The ports cargo turnover in 2014 reached 75 mln tonnes (+34% YoY). By 2020, the seaport
capacity is expected to extend up to 180 mln tonnes. Proprietary cargo terminals were constructed inside the port by many Russian
companies, including Kuzbassrazrezugol (coal), Global Ports (container terminal), NOVATEK (LPG terminal), Eurochem (fertilizers),
Rusal (aluminum and alumina), OMK (steel) and Gunvor (oil products). Gazprom intends to construct an LPG terminal inside the port.
Construction of the new Arctic Sabetta port in Yamal began in 2012. Sabetta is the cornerstone infrastructure facility of the Yamal-LNG
project, developed by NOVATEK, Total and CNPC, which includes LNG production, as well as storage and shipping capacities based on
Yuzhno-Tambeiskoye gas field resources. The project is expected to be completed in 2017.
Construction of a multi-purpose loading complex is currently underway at Big Port St. Petersburg. The initial stage (2015) implies
commissioning of a container terminal with annual capacity of 1.45 mln TEU, as well as the Ro-Ro terminal of 260,000 units of equipment
per annum. The second stage (2017) proposes extension of container terminal capacities up to 1.9 mln TEU per annum and construction
of a logistics hub, while the third (2022) includes construction of a container terminal with annual capacity of 3 mln TEU. Bronkas
remoteness from other cargo terminals of St. Petersburg seaport provides it with a number of competitive advantages: readiness to
service large-displacement type container ships, convenient transportation logistics as well as pilotage. That said, commissioning of
rather large container capacities creates overcapacities in the Northwest Region.
In 2015, Gazprom Neft will launch a year-round oil terminal in the Yamal peninsula in the Gulf of Ob intended for oil exports from
Novoportovskoye field to Europe. The Gulf of Ob, where tanks are loaded with oil, is the first zone of the Northern Sea Route and is
covered with ice for nine months per year. Regular operation of tanks requires the use of nuclear-powered icebreakers for a distance of
around 400 km.
Projects in initial stage and prospective facilities

LOCATION
DESCRIPTION
ON MAP
SEAPORT
CATEGORY
TOTAL
AMOUNT OF
INVESTMENT,
RUB BLN
INVESTORS
PROJECTED
SEAPORT
CAPACITY, MLN
TONNES
REALIZATION
TIMELINE
93.8
2011-20
Development of
Taman seaport
Universal port
25.0
Gazprom, Eurochem, Uralkali,

SUEK, Metalloinvest, United
Grain Company (OZK), Global
Ports
Construction of oil
handling terminal
and bulk cargo
handling complex in
the Olya seaport
(Astrakhan region)
Universal port
19.7
Olinskiy petrochemical
terminal, Olya commercial
seaport, Olya bulk terminal
2015-18
Construction of a
coal terminal at
Vanino port
Coal terminal
19
ZAO TEPK
15
2015-2018
Construction of
handling terminals in
Zarubino seaport
(Big Seaport
Zarubino)
Universal port
180.0
Summa/China Merchants
Holding Int. (CMHI)
60
2015-22
Construction of port
terminal for LNG
plant near
Vladivostok
LNG plant
n/a
Gazprom
15
2014-22
10
Construction of a
coal terminal near
Otkrytyi Cape
(Primorsk region).
Coal terminal
50.0
Rostec/Shenhua (China)
20
2015-19
11
Sakhatrans
Coal terminal
n/a
Volga Group
12
n/a
21
JULY 3, 2015
LOCATION ON THE
MAP
DESCRIPTION
The government is currently developing the expansion of seaport capacities in order to raise cargo turnover (coal, fertilizers, ore) partially
transported via Ukrainian ports. Negotiations are underway with private investors who are ready to build proprietary cargo terminals,
including Global Ports, UCL Ports, SUEK and Metalloinvest. Should the project enjoy decent demand from cargo shippers, its capacities
would be lifted to 70 mln tonnes by 2020 and to 100 mln tonnes by 2030. Total intended capex exceeds RUB 200 bln, while the updated
version of the Federal Special-Purpose Program specifies the total amount of planned investment at just RUB 25 bln.
Mechel planned a major expansion of the capacities of Vanino port, which specializes in coal exports. However, given the companys
poor financial position, the capex program has yet to be implemented.
Summa plans to build Big Port of Zarubino in the Trinity Bay, located 18 km from the Chinese border, by 2018. Cargo turnover is
expected to total 60-100 mln tpa, with a major volume to come via transit from northern to southern Chinese provinces. The port will
handle grain (about 10 mln tpa), containers (up to 2 mln TEU pa), general and bulk cargo (up to 35 mln tpa), Ro-Ro-cargo, etc. The value
of the project inclusive of rail and road infrastructure as well as a dry port in near-border Hunchun is estimated at $3.0-3.5 bln. Project
works are expected to start in February 2015. CMHI, established in Hong Kong in 1992, is the largest asset of the state-owned China
Merchants Group (controls 55% shares, while the remaining 45% belongs to Goldman Sachs). CMHI operates in 7 of the 10 largest
Chinese container ports.
Gazprom is considering a project to build an LNG terminal in the Russian Far East, but a final decision has yet to be made.
In 2014, Rostec and Chinese corporation Shenhua signed a memorandum to start works on joint exploration of the Ogodjinskoye coal
deposit, located in Amur region, and to build a coal sea transshipment terminal with 20 mln tonne capacity at Port Vera in Primorsk
region. Engineering of the ports facilities is nearing completion. Total investment in port construction is estimated at $1 bln.
Implementation of the project would allow to considerably expand access for Russian coal companies to ATP distribution markets.
10
Volga Group, owned by Gennady Timchenko, controls 89% of Sahattrans LLC, with the latter owing around 200 ha of land in the vicinity
of Vanino Port. The company plans to build a transshipment terminal for coal and iron ore concentrate with annual capacity up to 12 mln
tonnes. The terminal is expected to transship coal from the company Colmar.
Chinese investors in port assets outside the country

Chinese ports top the list of the worlds largest ports in terms of cargo turnover, the
structure of which is dominated by containers, coal, ore and petrochemical products.
The shares of the largest port operators trade on the Shanghai and Hong Kong stock
exchanges, while the major shareholders of most Chinese stevedore companies are
central and local governments. In recent years, large Chinese port operators have been
actively buying assets in other countries, including purchases under concession
agreements. Primarily, Chinese investors are interested in container terminals, as such
acquisitions would allow them to expand their own business and improve the efficiency
of container logistics. Chinese companies own container terminals in several European
ports (the Netherlands, Belgium and Greece), Sri Lanka, Nigeria and Israel.
Top investors in port assets outside China
CHINESE PORT OPERATORS
PORT ASSETS OUTSIDE CHINA
Shanghai International Port
25% in Zeebrugge port (Belgium), New Haifa Port (Israel)
China Merchants Holdings
Nigeria-based container terminal, 85% in Colombo

International Container Terminal (Sri Lanka)
Cosco Pacific
Container terminals located in Belgium (49%) and Greece

(100%)
22
JULY 3, 2015
Airports: the fastest growing segment in Russian transport

infrastructure
Over the past five years (2010-14), passenger traffic in Russian airports has risen by 56 mln
to 150 mln (+60%, average annual growth rate of 10%). Even during the recessionary 2015,
we do not expect a decline in passenger traffic, as the population will shift its focus from
traveling abroad to domestic tourism. Fast-growing demand for quality airport services
makes investment in airport infrastructure highly lucrative. This segment of transport
infrastructure is undergoing the most active process of reformation and modernization,
privatization and formation of concessions.
Key sector-wide trends:
Consolidation of federal airport assets. The consolidation is aimed at uniting

into holdings multiple public and private companies, as well as providers of
services for operation of the largest federal airports Sheremetyevo and Vnukovo
(Domodedovo airport, being 100% privately held, does not participate in the
consolidation). The consolidation will result in controling stakes being transferred to
private investors, while the state will become a minority stakeholder. As for
Sheremetyevo, the controlling stake is planned to be handed to Sheremetyevo
Holding, the beneficiaries of which are Arkady Rotenberg, Alexander Ponomarenko
and Alexandr Skorobogatko. Control over Vnukovo is expected to be transfered to
Vnukovo-Invest, the beneficiaries of which are several Russian businessmen.
Transfer to private ownership of airfield infrastructure at Moscow Aviation

hub airports based on concession. According to federal law, runways, taxiways
and appron areas can only be publicly held. Therefore, there is only a single
source of investment in their modernization the state budget. Their transfer to a
concession will help facilitiate private investment while easing the burden on the
state budget.
Regional airports are transferred into regional property and become subjects
for privatization. In recent years, Perm, Irkutsk, Krasnoyarsk and Sakhalin
airports were transferred from state to regional ownership. Regional authorities are
more activily seeking to attract private investors in the airports development,
helping to ease the burden on the federal budget as well.
During 2016-20, around RUB 300 bln is expected to be invested in airport

infrastructure in line with the previous five years spending. Private investment
accounts for 40% (RUB 130 bln)
The planned amount of investment in airport infrastructure remains almost flat
compared with the previous versions of the Federal Special-Purpose Program, as
airport congestion coupled with the task of hosting the 2018 World Football
Championship in 11 cities requires timely funding. Extension of Sheremetyevo airport
remains the largest investment pipeline: construction of a third runway financed with the
help of the state budget as well as the B terminal with an underground crosswalk
between the northern and the southern parts of the airport (construction is privately
funded), while the Federal Special-Purpose Program currently lacks investment for
construction of a third runway at Domodedovo. The runner-up in terms of the scope of
investment is the Yuzhny airport based in Rostov-on-Don. Yuzhny is valued at around
RUB 37 bln, half of which is financed through the federal budget, with the other half to
be financed through private investment provided by Airports of Regions holding, owned
by holding company Renova. Ample investment will be directed toward modernization of
regional airports in Tyumen, Novosibirsk, Yakutsk, Khabarovsk, Kaliningrad, Nalchik,
Surgut, Murmansk, Chelyabinsk and Saratov.
23
JULY 3, 2015
Total investment in airport infrastructure, RUB bln

90
80
70
60
50
40
30
20
10
0
2010
2011
2012
2013
2014
2015
STATE BUDGET
2016
2017
2018
2019
2020
PRIVATE INVESTMENTS
Largest investment pipelines, RUB bln, 2016-20

CONSTRUCTION OF 3RD RUNWAY AT SHEREMETYEVO
UZHNY AIRPORT CONSTRUCTION (ROSTOV-ON-DON)
AIRPORT CONSTRUCTION IN IRKUTSK
RECONSTRUCTION OF ROSHCHINO AIRPORT (TYUMEN)
RECONSTRUCTION OF TOLMACHEVO AIRPORT (NOVOSIBIRSK)
RECONSTRUCTION OF 2ND RUNWAY AT YAKUTSK AIRPORT
RECONSTRUCTION OF NOVY AIRPORT (KHABAROVSK)
RECONSTRUCTION OF KHRABROVO AIRPORT (KALININGRAD)
RECONSTRUCTION OF DOMODEDOVO AIRPORT
AIRPORT CONSTRUCTION (NALCHIK)
RECONSTRUCTION OF SURGUT AIRPORT
RECONSTRUCTION OF NOVY URENGOI AIRPORT
RECONSTRUCTION OF MURMANSK AIRPORT
CONSTRUCTION OF AN AIRPORT IN SARATOV
RECONSTRUCTION OF CHELYABINSK AIRPORT
0.00
10.00
20.00
30.00
40.00
24
JULY 3, 2015
Construction of Yuzhny airport in Rostov-on-Don

Rostov-on-Dons existing airport is Russias ninth-largest in terms of passenger traffic
(2.4 mln). However, it is located in the city center with serious restrictions for further
development. This was the reason behind the construction of a new airport called
Yuzhny, the completion of which should occur in 2017 before the 2018 World
Football Championship. The new complex is expected to fully replace the old one
while providing grounds for the creation of a modern centralized airport hub in
southern Russia with annual throughput capacity of up to 8 mln passengers. The total
2
space of the new passenger terminal should exceed 50,000 m , with throughput
capacity of 2,000 passengers per hour. The runway will have a length of 3,600 m,
enabling all types of aircraft to land.
This airport construction project is being developed by Rostovaeroinvest, in which
Airports of Regions Holding has a controlling stake. The project was among the first
included in the state program of support for Russian investment projects, allowing the
raising of privileged funding at a rate of 11.5% p.a. This is much lower than current
market rates. The project is valued at RUB 37.2 bln, of which RUB 17.9 bln will come
from the state budget. Gazprombank has originated a RUB 15.7 bln loan to fund
implementation of this project. Mostotrest subsidiary Transstroymekhanizatsiya will
undertake to construct airfield infrastructure. A subcontractor for the terminal has yet to
be announced.
Design of new terminal at Yuzhny airport
Source: Airports of Regions
25
JULY 3, 2015
A group of Russian strategic investors in airport infrastructure is being formed

Apart from the state, which remains the largest owner of Russias airports, the list of
private strategic investors includes Basel-Aero, Airports of Regions (state corporation
Renova), Novaport and Aero-Invest. Airport privatization is within the scope of Rostecs
interests as well.
Passenger traffic in airports, mln
60%
150
50%
120
40%
90
REGIONAL AIRPORTS
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
10%
1999
0
1998
20%
1997
30
1996
30%
1991
60
SHARE OF MOSCOW AVIATION HUB, %
Market shares of airport operators, 2014 (total passenger traffic, mln and %)
SHEREMETYEVO (STATE)
32, 20%
35.22%
DOMODEDOVO (EAST LINE)

VNUKOVO
PULKOVO (NORTHERN CAPITAL GATEWAYS)
3, 2%
NOVAPORT
11, 7%
AIRPORTS OF THE SOUTH
8, 5%
33, 21%
9, 6%
AIRPORTS OF REGIONS
AEROINVEST
14, 9%
13, 8%
OTHER (STATE-OWNED AIRPORTS)
Source: company data, Gazprombank estimates
26
JULY 3, 2015
Major investors in Russian airports

INVESTORS/SHAREHOLDERS
State authorities
AIRPORTS
Federal and regional
authorities
Sheremetyevo (states stake 83.4%)
PASSENGER TRAFFIC,
MLN, 2014
31.57
Kazan, Ufa, Mineralnye Vody, Perm, Irkutsk,

Krasnoyarsk and Vladivostok airports
East Line Group
Domodedovo
33.04
Vnukovo-invest
Vnukovo
12.73
Pulkovo (St Petersburg)
14.30
Tolmachevo (Novosibirsk)
3.96
Chelyabinsk
1.40
Volgograd
0.70
Astrakhan
0.40
Tomsk
0.54
Barnaul
0.39
Chita
0.33
Perm
1.32
Basel-Aero (50%)
Sochi
3.10
Changi (30%)
Pashkovsky (Krasnodar)
3.40
Sberbank (20%)
Gelendzhik
0.24
Anapa
1.00
Koltsovo (Yekaterinburg)
4.53
Kurumoch (Samara)
2.38
Rostov-on-Don
2.34
Strigino (Nizhny Novgorod)
1.13
Saratov Airport
0.41
Mineralnye Vody
1.92
Khrabrovo (Kaliningrad)
1.20
Northern Capital Gateways
Novaport
VTB Capital, Fraport
Roman Trotsenko (50%),

Meridian Capital (50%)
Airports of South
Airports of Regions
Renova (100%)
Aeroinvest
Ramenskoye Airport (under reconstruction)

Rostec
Irkutsk Airport (possible in the longer term)
Source: company data
27
JULY 3, 2015
Largest projects to construct airports

State authorities
Airports of South Holding
East Line Group
Airports of Regions Holding
Vnukovo-Invest
Aeroinvest
Northern Capital Gateway
Rostec
Novaport
Kaliningrad (Khrabrovo)
Saint Petersburg (Pulkovo)
SHEREMETYEVO
DOMODEDOVO
Moscow
VNUKOVO
Nizhny Novgorod (Strigino)
RAMENSKOYE*
Kazan
Perm
Rostov-on-Don
Saratov
Anapa (Vytyazevo)
Gelendzhik
Krasnodar
(Pashkovsky)
Sochi (Adler)
Volgograd
Samara
Ufa
(Kurumoch)
Astrakhan
Mineralnye Vody
Yekaterinburg (Koltsovo)
Chelyabinsk
(Balandino)
Tomsk (Bogashevo)
Krasnoyarsk (Yemelyanovo)
Novosibirsk
(Tolmachevo)
Barnaul
Chita (Kadala)
Irkutsk
*under renovation
Vladivostok
(Knevichi)
Asian investors in airport infrastructure

Strategic investors from Asia have expressed interest in Russian airports. For example,
Changi Airports International, which manages Singapore airport, has become a partner
of Basel-Aero (part of Basic Element owned by Oleg Deripaska). Changi controls 20%
of Airports of South Holding. Another example is South Koreas Incheon (the manager
of its namesake airport in Seoul), which owns a minority stake in Khabarovsk airport.
Moreover, the company may also participate in the management of Irkutsk airport.
In China, most large airports are state-owned and their management companies do not
yet invest in foreign assets. On the contrary, construction and concession companies as
well as investment houses have expressed interest in foreign airports. For example, in
2014, Beijing Urban Construction Group signed a $1 bln contract with the Kyrgyz
government to reconstruct Manas airport. The peculiarity of the deal is that another
candidate was Rosneft, but it later pulled out of negotiations. Another Chinese
company, China Machinery Engineering Corporation, has invested $300 mln in
Kyrgyzstans second-largest airport in the city of Osh. Other examples include China
Investment Corporation (CIC), which controls a 10% stake in Londons Heathrow
airport; Beijing Construction Engineering Group, which has allocated GBP 800 mln for
the construction of a new terminal at Manchester airport; and Chandgoung Hi-Speed
Group, which is investing funds in Toulouse Blagnac Airport (France).
28
JULY 3, 2015
SOURCES OF FINANCING:
DECREASE, NO WAY TO INCREASE
The main sources of financing for Russian infrastructure are as follows:
the federal budget;
the National Wealth Fund (NWF);
regional budgets;
own and borrowed funds from natural monopolies (Russian Railways) and state
corporations (VEB, GK Avtodor);
private pension savings that are invested through investment funds;
loans raised from commercial banks;
private investors, including foreign investors;
cash flows from infrastructure projects.
Over the next few years, the proportion of

state spending in infrastructure will decrease
due to a decline in revenues. However, this
decline will be offset by higher investment
from the NWF and pension funds.
Over the next few years, the proportion of state spending in infrastructure will decrease
due to a decline in revenues. However, this decline will be offset by higher investments
from the NWF and pension funds that regain access to private pension savings.
State budget: difficult choice between higher social spending and

spending on economic development
Federal and regional budgets account for over half of all investments in transport
infrastructure. Federal budget spending goes toward the construction and maintenance
of federal roads, subsidies to state corporation Avtodor and the regions, construction
and renovation of airport and port infrastructure facilities (take-off and landing strips,
mooring berths and to conduct dredging operations, i.e. areas where private
investments are not yet permitted). Regional budgets spend funds on construction and
reconstruction of regional and municipal roads as well as the expansion of public
transport and subways.
In 2015, federal budget revenues are expected to fall by 13.5% YoY to RUB 12.5 trln due
to the decline in oil prices and decrease in GDP (-1.9% YoY in 1Q15). However, spending
will increase by 2.5% YoY to RUB 15.2 trln (compared to the initial target, expenditures
were expected to decrease by 2%). The budget deficit will amount to RUB 3.1 trln (3.7% of
GDP) and will be financed using the Reserve Fund and loans. When forecasting the
budget, the Finance Ministry assumes an average oil price of $50/bbl and an average
RUB/USD exchange rate of 61.5, figures that we currently regard as quite conservative.
In 2015, federal budget revenues will fall by

13.5%. However, spending will increase by
2.5%. Federal and regional budgets account
for more than half of all investment in
transport infrastructure.
The Russian government is currently discussing the draft budget for 2016-17. One
option under consideration is to reduce spending across the board by 5% in real terms.
Such a radical decision would lead to a 15-20% annual decrease in infrastructure
spending. An alternative would be to limit growth in social spending (mainly by indexing
pensions in line with the inflation rate) in an effort to maintain spending that stimulates
economic growth, including transport infrastructure construction.
Increase in social spending in 2016-17 will

lead to a cut in spending throughout the
economy, including on infrastructure.
29
JULY 3, 2015
Federal budget revenues and expenditures, RUB bln
Federal budget revenues
2011
2012
2013
2014
2015
2016*
2016**
2017*
2017**
11,366
12,854
13,020
14,497
12,736
13,854
16,272
15,006
17,089
13.1%
1.3%
11.3%
-12.1%
8.8%
27.8%
8.3%
5.0%
CAGR, %
% of GDP
20.3%
20.6%
19.7%
18.6%
17.4%
16.8%
Federal budget expenditures
10,935
12,891
13,343
14,831
15,215
15,466
16,272
15,648
17,089
17.9%
3.5%
11.1%
2.6%
1.7%
6.9%
1.2%
5.0%
CAGR, %
16.5%
incl. transport spending
291
340
258
301
378
n/a
n/a
n/a
n/a
incl. federal road funds
349
442
505
527
626
n/a
619
n/a
702
431
-37
-323
-334
-2,479
-1,612
-642
Reserve Fund
2,877
1,100
242
YE Reserve Fund amount
1,920
1,018
749
Shortage/surplus
GDP
Expenditures, % of GDP
56,078
62,273
66,054
78,056
73,149
82,706
83,019
90,976
89,940
20%
21%
20%
19%
21%
19%
20%
17%
19%
* new version of budget blueprint (5% spending cut in real terms)

** previous forecast
Source: Finance Ministry, Gazprombank estimates
Breakdown of federal budget spending, 2015

14.3%
42.6%
4.7%
NATIONAL SECURITY
SOCIAL WELFARE
NATIONAL ECONOMY
8.5%
NATIONAL SECURITY AND LAW ENFORCEMENT
9.1%
INTERBUDGETARY TRANSFERS
OTHER SPENDING
20.8%
Source: Finance Ministry
Breakdown of consolidated budget (including regions) spending, 2015

14.3%
42.6%
4.7%
NATIONAL SECURITY
SOCIAL WELFARE
NATIONAL ECONOMY
8.5%
NATIONAL SECURITY AND LAW ENFORCEMENT
9.1%
INTERBUDGETARY TRANSFERS
OTHER SPENDING
20.8%
30
JULY 3, 2015
NWF should partially offset the decrease in budget spending

The NWF has risen by 26% to RUB 4 trln this year (as of May 1, 2015), mainly due to
ruble devaluation. Earlier, the government approved the upper limit for NWF spending on
infrastructure projects at 60% of the funds assets as of January 1, 2014 (RUB 2.9 trln),
implying total investment of RUB 1.7 trln. According to management rules, all projects in
which the fund invests should be self-financing.
Around 42% of NWF funds (RUB 1.7 trln) will

be spent on infrastructure. A total of 11
infrastructure projects have been approved
thus far: they will tap NWF funds equal to
RUB 800 bln.
In 2014, the government approved 11 infrastructure projects that will tap NWF funds
equal to RUB 800 bln, of which RUB 200 bln has already been allocated. The largest
amount was earmarked for Russian Railways projects RUB 250 bln, while another
RUB 300 bln will be invested in construction of the Central Ring Road and Yamal-LNG
(RUB 150 bln each). Another RUB 900 bln remains unallocated and the proportion of
these funds to be invested in pure infrastructure projects remains unclear. The
government is currently reviewing new projects from Rosneft, Russian Railways, VEB
and other contenders. We think that NWF resources will be tapped in later years to build
the Kerch Strait Bridge and the Moscow-Kazan HSR. Nor should it be ruled out that the
government may raise the spending cap due to an increase in the size of the fund itself,
thus releasing an additional RUB 600 bln.
Infrastructure projects financed from NWF, RUB bln*
150.0
CENTRAL RING ROAD TSKAD (AVTODOR)

BAM AND TRANS-SIBERIAN RAILWAY MODERNIZATION (RUSSIAN
RAILWAYS)
HANHIKIVI-1 NUCLEAR POWER PLANT IN FINNLAND
(ATOMENERGOPROM)
ELEGEST - KYZYL - KURAGINO RAILROAD (TUVA ENERGY
INDUSTRIAL CORP)
100.0
75.1
30.2
TRACTION ROLLING STOCK ACQUISITION (RUSSIAN RAILWAYS)

DIGITAL DIVIDE ELIMINATION (II-4)
74.9
30.0
23.0 4.1
22.0
APPROACHES TO AZOV - BLACK SEA BASIN PORTS (RUSSIAN

RAILWAYS)
10.3
EASTERN SECTION OF BAM (RUSSIAN RAILROADS)
7.5
SMART GRID (II-3)
0.0 1.1
0.0
UNDRAWN FINANCING FACILITY, RUB BLN
57.5
86.9
GAS PRODUCTION UNIT (YAMAL LNG)
APPROACHES TO NW PORTS (RUSSIAN RAILWAYS)
50.0
92.5
50.0
100.0
150.0
200.0
FUNDED FROM NWF, RUB BLN

Source: GK Avtodor
* as of April 1, 2015
Pension savings a major investment resource is again at play

The Russian government has definitively adopted a key economic decision to
maintain the savings part of the pension system to which workers born after 1967 will
continue to have 6% of their salaries deducted. At a time when funding from foreign
markets is limited, the government is focusing on a domestic source of long money that
totals more than RUB 300 bln per year. Indeed, pension savings are most suited for
long-term capital-intensive infrastructure projects with a lengthy payback period. In
addition, pension savings contribute to the expansion and raise the stability of the
countrys financial system, in particular, the equity market.
As of end 2014, the total value of assets invested in pension savings exceeded RUB 3 trln
(4% of GDP). Of this amount, 62% (RUB 1.9 trln) of the assets were managed by a state
management company on behalf of VEB, while 38% came from private pension funds and
asset management companies.
31
As of end 2014, the total value of assets

invested in pension accruals totaled more
than RUB 3 trln (4% of GDP). To compare,
the share of pension savings in Brazil equals
15% of GDP, in Chile 60%, and in the US,
Canada and the UK 70-100%.
JULY 3, 2015
Pension savings growth dynamic, RUB bln
Pension savings management, 2014, $ bln and %
5,000
4,500
4,000
1,130, 37%
3,500
3,000
2,500
2,000
1,500
1,900, 62%
1,000
500
38.2, 1%
VEB
PRIVATE AM
2007 2008 2009 2010 2011 2012 2013 2014 2015E2016E2017E

VEB
PRIVATE AM
Dynamic of VEBs investment portfolio structure, 200513

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2005
2006
2007
2008
2009
2010
2011
RUSSIAN GOVERNMENT SECURITIES
RUSSIAN BONDS
CASH
BANK DEPOSITS
MORTGAGE-SECURED BONDS
OTHER
2012
2013
Dynamic of structure of private pension fund portfolios, 2005-14

100%
80%
60%
40%
20%
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
EQUITIES
RUSSIAN GOVERNMENT SECURITIES
GOVERNMENT SECURITIES OF RUSSIAN REGIONS
RUSSIAN BONDS
CASH
BANK DEPOSITS
MORTGAGE-SECURED BONDS
OTHER
2014
32
JULY 3, 2015
Average breakdown of private pension fund investments via

pension savings, 201014
Average breakdown of VEB State Trust Management Companys

investment via pension savings, 201014
CASH
CASH
7%
3%
9%
4%
DEPOSITS
29%
MUNICIPAL BONDS
2%
52%
61%
6%
18%
1%
CORPORATE BONDS
4%
DEPOSITS
4%
SOVEREIGN BONDS
42%
11%
SOVEREIGN BONDS
(EXCL. GOVERNMENT
SAVING BONDS)
GOVERNMENT SAVING
BONDS
MUNICIPAL BONDS
82%
CORPORATE BONDS
OTHER
OTHER
Source: CBR, Gazprombank estimates
Source: CBR, Gazprombank estimates
Will investment in infrastructure securities be attractive for pension funds?

We believe they will be. The fact is that one of the main goals of pension funds is to
offer yields above the inflation rate. Historically (2005-14), pension funds have yielded
1.5-2.0% less than the inflation rate. With inflation averaging about 9% over the past 10
years, the average yield on the investment portfolio of VEB and private pension funds is
about 7-8% (even though some private pension funds have of course managed to
achieve yields considerably higher than inflation). Infrastructure bonds offer yields
based on the principle of inflation +X%, where X% is the risk premium of an issuer or a
project. State-owned Russian Railways and GK Avtodor place bonds with coupon set at
an inflation rate +1%. Furthermore, pension funds have the ability to invest in the equity
capital of infrastructure projects where yields are higher compared to bonds. For
instance, one of Russias largest pension funds, Blagosostoyanie, recently gained
control over the construction company Mostotrest, which has number of equity holdings,
including those in several build-operate-transfer (BOT) projects. The Economy Ministry
forecasts that the average yield of pension accruals will be 7.03% with an average
annual inflation rate of 5.18%.
Average annual yield of pension savings
50%
40%
30%
20%
10%
0%
-10%
-20%
2007
2008
2009
2010
2011
2012
2013
2014
VEB (EXTENDED INVESTMENT PORTFOLIO)
PRIVATE MANAGEMENT COMPANIES
INFLATION
PRIVATE PENSION FUNDS

33
One of the main tasks of pension funds is to

offer yields higher than the inflation rate. That
said, historically (2005-14), pension funds
have yielded 1.5-2% less than inflation.
JULY 3, 2015
Earlier, pension savings also played an important role as a source of financing for
investment projects. For example, VEB invested over RUB 200 bln in Russian Railways
bonds, RUB 126 bln in FGC bonds, and RUB 30 bln in Gazprom bonds. In 2013-14,
RUB 280 bln was invested in infrastructure bonds with a floating rate of inflation + 1%.
Overall, as of end 2014, infrastructure bonds worth over RUB 380 bln were placed in
investment portfolios.
Pension savings recovery in 2015 will bring

up to RUB 250 bln (private pension funds will
receive a total of RUB 526 bln, including from
VEB). Full re-establishment of pension
savings starting in 2016 will bring to the
market over RUB 300 bln per annum.
In 2015, private pension funds will receive RUB 526 bln, including RUB 327 bln from socalled passive pension contributors, i.e. those who stated their preference in 2013 to
switch over from VEB to private managers, and another RUB 180 bln as contributions to
private pension funds in 2H13, i.e. funds that were frozen during the time when the
system of guaranteed pension savings was being formed. Thus, the recovery of pension
savings will yield about RUB 200 bln of new money in 2015.
Bank loans: interest rate must be below 11% in order to finance

infrastructure
In Russia, the main creditors of infrastructure projects are major banks, including
Gazprombank, Sberbank and VTB. Foreign banks on the Russian market essentially
take no part in this process not only for political reasons, but also because of difficulties
related to currency risks, an issue that is especially important when attempting to fund
long-term projects.
The economic crisis and hike in the CBRs key rate have made the cost of bank loans
prohibitive for the implementation of infrastructure projects. For example, when road
concessions are implemented, ROI financial models for these projects call for lending
costs no higher than 11%, whereas the current cost reaches 14-15%. For this reason,
many investors are being forced to halt project implementation and wait for the CBR to
lower its key lending rate. However, we expect lending to resume by year end as the
rate is lowered. Overall, banks maintain great interest in lending for large infrastructure
projects, since most of them are in high demand in the Russian economy and capable
of generating steady cash flow, part of which will service loans issued earlier. In
addition, substantial amendments to Russian legislation governing the securities market
in 2014-15 (see below) will act as an incentive for further expansion of lending
infrastructure, including ventures carried out on terms of project financing.
34
The economic crisis and hike in the CBRs

key rate have made the cost of bank loans
prohibitive for the implementation of
infrastructure projects. For example, when
road concessions are implemented, ROI
financial models for these projects call for
lending costs no higher than 11%.
JULY 3, 2015
LEGISLATIVE AMENDMENTS WILL LEAD

TO AN INCREASE IN INFRASTRUCTURE BOND ISSUES
In 2014-15, the Russian government adopted important amendments to the Law on the
Securities Market, the Law on Concessions, the Civil Code, and the Law on Joint-Stock
Companies, which expand opportunities for funding infrastructure projects, incentivize
the attraction of private investments, lower investor risks, and promote the development
of project financing and the issuance of full-fledged infrastructure bonds.
Mortgage relations. Amendments to the Civil Code expand the definition of a

mortgage, as this concept now includes property to be used in the future, as well
as rights of claim which arise from existing or future obligations. Pursuant to the
approved amendments, a bank account can be subject to lien. Earlier, funds held
in a settlement account could not be attached by way of lien. The mortgagers
revenue derived from the use of property subject to pledge, lien or mortgage can
be used to satisfy lien requirements (for example, rental payments, fee for the use
of an infrastructure facility, etc).
Another newly introduced concept is that of a mortgage management agreement

whereby a creditor or third party can enter into such an agreement on behalf of all
creditors, while exercising all the rights and obligations of the mortgager.
Accordingly, in the Law on the Securities Market, the concept of cash-securitized
bonds was introduced.
Prioritized execution of bond obligations. A new clause (27.5-6) was added

to the Law on Securities that introduces the concept of securitized bonds with
differentiated prioritization for the execution of obligations. The issuer is
entitled to set in the issue prospectus the terms of priority for execution of
obligations secured by one and the same collateral, which will be applicable
when the object of security is subject to enforcement, when cash is received
using the available collateral, and in the case of premature repayment. This
novelty makes it possible to issue subordinated paper under Russian law,
specifically for Russian borrowers.
Specialized companies. The Law on Joint-Stock Companies introduces the

concept of SPVs a specialized company that is subdivided into a specialized
financial company and a specialized project financing company (Section 3.1.2 of
the Law on Joint-Stock Companies). The purpose and object of specialized
financial companies are as follows: 1) to acquire monetary claims under credit
agreements, loan agreements, or other obligations, including rights of claim, which
arise in the future, and 2) to issue bonds collateralized by rights of claim. For
specialized project financing companies the purpose and object of activity is to
fund long-term (at least three years) investment projects by acquiring rights of
claim that arise as a result of the implementation thereof, and to issue bonds
collateralized by rights of claim. SPVs are an instrument required for the
securitization of assets (which in special cases may involve project bonds), and an
off-balance sheet entity that acquires rights of claim related to the proceeds from
bond placements. In addition, a term in a bond issue may envisage limiting
creditors claims to the funds which SPVs may earn in case of the enforcement of
security (limited recourse). This measure protects the assets of a project
company or bank that arranges securitization directly against the claims of
creditors.
The charter of a specialized company may contain additional limitations on the
object and types of activity, thus creating additional opportunities for control over
the distribution of funds on the part of creditors.
Notably, specialized companies are exempted from a number of requirements
that apply to open joint-stock companies and limited companies (in particular, in
35
JULY 3, 2015
relation to large deals/interested party deals, and net assets). In addition, there is
a simplified bankruptcy procedure for specialized companies (no supervision,
external management or financial rehabilitation are required). This should allow
bondholders to honor obligations as quickly as possible through the enforcement
of security.
Nominal accounts and escrow accounts. The Civl Code defines two new types
of accounts. A nominal account which the holder opens (for example, a project
company) in order to perform cash transactions in cases when the relevant rights
are held by another party the beneficiary (creditors/bondholders). The account
agreement may limit the range of transactions that can be performed at the
owners instructions (the project company), thus making it possible to eliminate the
risks of unauthorized use of funds and the rights of claims used to secure the
bonds. Furthermore, creditors may assign the bank in which a nominal account is
held to monitor spending of cash (for example, by setting debt repayment priority).
An escrow account involves depositing funds in an account that is managed by
an escrow agent (bank) for the purpose of assigning these funds to another
party the beneficiary when specific grounds for such action arise. An escrow
account is a widespread mechanism that project companies use as additional
bond security, or as backup funds to repay liabilities on securities that can be
deposited by the shareholders of a project company and tapped in case of
default.
Risk-taking methods for cash-securitized bonds by initial creditors. A

separate Central Bank instruction (No. 3309-U dated July 7, 2014) establishes
ways and means for risk-taking by initial creditors for liabilities, monetary claims
subject to lien under SPV bonds). In Western and Russian practise (concession
agreements)
initial
creditors
are
the
sponsors
of
a
project
company/concessionaires, who are the companys shareholders or major creditors.
Under the terms of a bond issue of the specialized company, which is secured by
monetary claims, the initial creditors can assume part of the risks by providing a
securityship, a special-purpose loan to repay liabilities to bondholders, redeem a
junior tranche under a bond placement, etc.
The Law on Concessions guarantees the concessionaire a revision of the

terms of the concession agreement in case legislative amendments result in
deterioration of the standing of the concessionaire, as a result of which the
latter is deprived to a significant extent of what the concessionaire was
entitled to receive when entering into a concession agreement. The legislative
amendments establish two grounds for the application of this provision: a change
in the concessionaires total tax burden and deterioration of the standing of the
concessionaire, as a result of which the latter is deprived to a significant extent of
what the concessionaire was entitled to receive when entering into a concession
agreement, including cases when the concessionaire is subject to a system of
prohibitions and limitations that worsen the latters standing compared to the
system that was previously in effect.
The above-mentioned innovations lay the framework for launching infrastructure bonds
with a complex structure and considerably expand leeway for the securitization of
assets by Russian banks. Earlier, securitization under Russian law was limited to
mortgage-backed bonds. They were used to securitize other classes of assets under
deals executed by companies incorporated abroad (for example, to issue bonds of HC
Finance-1 that were securitized using a pool of consumer loans). The legislative
amendments should make it possible to securitize transactions executed in Russian
jurisdiction.
36
JULY 3, 2015
CHINESE INVESTMENT IN FOREIGN ASSETS:

LEVERAGING DOMESTIC GROWTH
In order to better assess the scale of interests and the ability of China to invest in
Russian assets, we have analyzed the dynamics and structure of investments by
Chinese companies worldwide over the past 10 years. In our analysis, we used the
database of the US analytical center Heritage Foundation, which contains information
on deals executed by Chinese companies in foreign assets, data from the Chinese
Statistics Committee, Bloomberg, and a number of media outlets.
Slowdown in growth prompts search for new development models
Thirty-six years after the beginning of economic reforms, China in 2014 became the
worlds biggest economy in terms of purchasing power parity, overtaking the US, which
had held leadership for the past 100 years. During the reform period, per capita GDP
climbed 30-fold, reaching the level of such countries as Peru, South Africa and Bulgaria.
Chinas international currency reserves stand at $3.8 trln (Japan ranks second, with
reserves three times lower at $1.3 trln). Over the past 15 years, excellent transport
infrastructure has been established in China: the worlds longest system of high-speed
railroads and highways, including the creation of state-of-the-art airports and ports.
These factors, among others, have provided the country with an average annual pace of
industrial production in excess of 10% compared with the 3-4% global average.
Chinas industrial production index
Thirty-six years after the beginning of

economic reforms, China in 2014 became the
worlds biggest economy in terms of
purchasing power parity, overtaking the US,
which had held leadership for the past 100
years.
Chinas gold and FX reserves, $ bln
16%
4,500
90%
14%
4,000
80%
3,500
70%
12%
3,000
60%
10%
2,500
50%
8%
2,000
40%
6%
1,500
30%
1,000
20%
500
10%
4%
2%
FX RESERVES
Source: National Bureau of Statistics of China
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2005
2006
2007
2008
2009
2010
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2001
0%
2000
0%
RELATIVE TO GDP
Source: IMF
However, growth has slowed down recently, raising discussion of whether China will be
capable of maintaining growth of at least 6-7% over the following decade. Given that the
country possesses enormous human resources and technological capabilities, it will be
necessary for China to continuously secure a high utilization rate of these resources.
This is especially the case in the construction industry, where there have recently been
signs of an increasingly large-scale crisis. Despite the fact that China is still carrying out
dozens of major infrastructure projects, the scope of construction work is in decline
compared to volumes over the past decade. For this reason, the Chinese authorities are
searching for new ways and means to achieve long-term growth, which can be
summarized as follows:
More active economic assistance to neighboring states using the financial

resources of China to leverage its own exports and overall growth (the Silk Road
Economic Belt project).
Export of capital. Large-scale increase of investment in the assets of other

countries. In particular, this includes resources used to reduce its reliance on
37
The Chinese economy is slowing. Given that

the country possesses enormous human
resources and technological capabilities, it
will be necessary for China to continuously
secure a high utilization rate of these
resources. The Chinese authorities are
searching for new ways and means to
achieve long-term growth.
JULY 3, 2015
commodity imports and in transport infrastructure to facilitate access to these

resources.
Export of technology, especially in the area of transport construction. Specifically,

China is attempting to secure global leadership in the construction of high-speed
railways.
Chinas foreign investment exceeds $1 trln

Over the past 10 years, Chinas investment in foreign assets rose from $19 bln to $150170 bln per year, exceeding $1 trln in total. By comparison, the US, which remains the
worlds largest investor in the assets of other countries, invests about $300 bln per year,
with cumulative foreign direct investment exceeding $5 trln.
Over the last 10 years, Chinas investments

in foreign assets rose from $19 bln to $150170 bln per year, exceeding $1 trln in total.
Nearly half of Chinas investment structure is related to the energy industry, including
the purchase of stakes in oil and gas and utilities companies as well as the
development of mineral deposits. According to Heritage Foundation data, the largest
recipients of investment are the US and Australia, in which Chinese companies have
invested $72 bln and $61 bln, respectively, over the past 10 years. However, the
largest region in terms of investment received from China is Africa, in which $150 bln
has been invested over the past 10 years, with the largest single recipients being
Algeria ($21 bln) and Nigeria ($15 bln). In exchange for access to Africas natural
resources, Chinese companies are actively investing in that continents transport
infrastructure. Chinese companies are building railways in a number of African
countries. For example, one of the biggest projects is being carried out by China Civil
Engineering Construction Corp. in a venture that involves building a 1,300 km railway
at a cost of more than $7 bln in the Republic of Chad with financial support from
Export-Import Bank of China.
The largest region in terms of Chinese

investment is Africa, in which $150 bln has
been invested over the past 10 years.
Chinas investment in foreign assets, $ bln
Structure of Chinas investment, 20052014, $ bln and %
180
250
160
135, 16%
200
140
20, 2% 32, 4%
10, 1%
AGRICULTURE SECTOR
CHEMICAL INDUSTRY
ENERGY SECTOR
120
100
80
60
150
27, 3%
100
86, 10%
FINANCE SECTOR
METALS
REAL ESTATE
40
50
20
0
124, 14%
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
INVESTMENTS, $ BLN
41, 5%
NUMBER OF DEALS
396, 45%
TECHNOLOGIES AND
COMMUNICATIONS
TRANSPORTATION
OTHER
38
JULY 3, 2015
Structure of Chinas investment by region, 200514, $ mln and %
NORTH AMERICA
US
50
SOUTH AMERICA
40
SOUTH-EAST ASIA
10
ARGENTINA
ALGERIA
IRAN
PERU
VENEZUELA
NIGERIA
SAUDI ARABIA
AFRICA
RUSSIA
EUROPE
UK
US
0
KAZAKHSTAN
127, 15%
24 24 21
21 20
18 17 17 15 15
20
AUSTRALIA
119, 14%
31 31
BRAZIL
97, 11%
39
30
WESTERN ASIA
61, 7%
61
60
CANADA
72, 8%
72
70
INDONESIA
52, 6%
104, 12%
80
AUSTRALIA
150, 17%
Top 15 countries in which China makes direct investment,

2005-14, $ bln
MIDDLE EAST
87, 10%
Largest deals concluded by Chinese companies over 20051H14

FOREIGN PARTNER
/OBJECT OF
INVESTMENT
SECTOR
COUNTRY
Nexen
Electricity
Canada
Rio Tinto
Aluminum
Australia
Railways
Venezuela
Addax Petroleum
Electricity
Switzerland
40%
Repsol
Oil and gas
Brazil
100%
Smithfield Foods
Agriculture
US
$6,500
Electricity
Pakistan
CITIC and China Railway Construction
$6,200
Car manufacturing
Algeria
2013
China Power Investment
$5,950
Aluminum
Guinea
2014
Minmetals
$5,850
Copper
Peru
2011
China Railway Construction
$5,630
Railways
Chad
2007
ICBC
$5,600
20%
Standard Bank
Banking
South Africa
2009
CNPC
$5,590
37%
BP and Iraq South Oil
Oil and gas
Iraq
2013
CNPC
$5,300
8%
KazMunaiGas National
Oil and gas
Kazakhstan
2007
CIC
$5,000
10%
Morgan Stanley
Banking
US
2008
CNPC
$4,990
Oil and gas
Nigeria
2010
China Railway Engineering
$4,800
Bhakta Hill Pan Pacific

Railway
Railways
Indonesia
2011
Sinopec
$4,800
30%
Galp Energia
Electricity
Brazil
2010
Sinopec
$4,650
9%
ConocoPhillips
Oil and gas
Canada
2008
China Ocean Shipping
$4,560
Maritime transport
Greece
VALUE OF
DEAL, $ MLN
INTEREST
IN
PROJECT
YEAR
INVESTOR
2012
CNOOC
$15,100
2008
Chinalco
$12,800
2009
China Railway Engineering
$7,500
2009
Sinopec
$7,200
100%
2010
Sinopec
$7,100
2013
Shuanghui
$7,100
2013
China National Nuclear
2006
11%
Glencore
Incidentally, not all companies greet China with open arms. According to Heritage
Foundation data, Chinese companies have disrupted 130 major deals worth $470 bln
for various reasons over the past 10 years (2005-14). The largest of these included: Rio
Tintos refusal to sell a stake to Chinalco for $19.5 bln and the prohibition by US
authorities to allow CNOOC to purchase US oil company Unocal for $18 bln, while
39
JULY 3, 2015
China Development Bank failed in 2008 to take over Germanys Dresdner Bank for
$13.9 bln, which went to Commerzbank.
Chinas focus shifts from Africa to Latin America
China has officially announced plans to invest $500 bln until 2020 in the economies of
other countries, of which one half is to be channeled into Latin America (Brazil, Peru,
Colombia, Chile and Venezuela). Thus, at issue is an amount larger than investments
in Africa. In Brazil alone, China is ready to invest $50 bln. One of the main projects
should be the construction of a railway between the Atlantic coast of Brazil and the
Pacific coast of Peru, thus making it possible to lower the cost of exporting goods
from these countries to China. Needless to say, the infrastructure itself will be built by
Chinese companies.
China has officially announced plans to invest

$500 bln until 2020 in the economies of other
countries, of which one half is to be
channeled into Latin America.
The following example should suffice to compare the scale of Chinas interests in
various countries: China is prepared to invest just $20 bln in Indias economy over the
next five years, most of which will go toward upgrading the countrys railroad system,
including the construction of an HSR line. By contrast, in neighboring Pakistan, China is
discussing a project involving an economic channel worth $46 bln. These funds will be
invested in a network of highways, trunk railways and pipelines, which will connect the
two countries. This project is to be carried out under the Silk Road Economic Belt, which
China recently unveiled to the global community (see below).
Chinas investment in Russia: up 70% in 2014, but will it continue?

Over the past 10 years, the scope of Chinas investment in the Russian economy has
been quite modest. According to data from Heritage Foundation, investments over the
past decade totaled about $21 bln (ranking eighth among the list of countries). However,
according to our estimates, many of the reported Russian-Chinese deals were never
implemented, so the actual amount of investment in Russian assets is lower.
Specifically, CBR data show that direct investment from China in Russia totaled about
$15 bln over the past 10 years.
CBR data show that direct investments from

China in Russia totaled about $15 bln over
the past 10 years.
In 2014, according to the CBR, the total volume of FDI in Russia fell 70% to $21 bln.
Such a sharp drop was due not only to the conflict in Ukraine, the fall in oil prices and
ruble devaluation, but also the high-base effect of 2013, when the volume of FDI totaled
$69 bln as a result of the Rosneft-BP deal.
Russian and Chinese leaders have set a goal

of increasing the volume of direct investment
from China at up to $20 bln per annum,
placing Russia among the top five countries
in terms of Chinese foreign investment.
Furthermore, the volume of Chinas foreign direct investments in Russia is rapidly on the
rise. According to data from the Chinese Trade Ministry, this figure was over five-fold
higher in 2013 vs. 2012 at $4 bln, and up another 73% in the first eight months of 2014.
Thus, Chinas overall direct investments in 2014 stood at about $7 bln. Notably, a large
part of these investments were loans made to Russian energy companies (Rosneft and
Transneft).
Given such impressive growth, Russian and Chinese leaders have set a goal of
increasing the volume of direct investment from China at up to $20 bln per annum,
placing Russia among the top five countries in terms of Chinese foreign investment.
40
JULY 3, 2015
Foreign direct investment in Russia, $ bln
Foreign direct investment in Russia, $ bln
80
69
30
37
50
30
13
13
23
27
14
51
43
38
40
37
30
29
33
24
32
20
24
10
-3
-10
21
16
0.5
0.4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EQUITY
55
50
22
40
56
60
50
69
70
60
10
75
80
6
70
20
0.2
0.4
0.6
0.3
0.7
4.1
7.1
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
IN DEBT INSTRUMENTS
TOTAL
Source: CBR
INCL. FROM CHINA

Source: CBR, Chinese Ministry of Commerce
Russian-Chinese investment fund

At the end of 2011, the Russian-Chinese Investment Fund was created. Its charter
members were the Russian Direct Investments Fund (RDIF) and China Investment
Corporation (CIC), each of which was required to invest a total of $2 bln. Since then,
the Fund has invested in shares of the Magnit retail chain and acquired a 42% equity
stake in Russian Forest Products Group located in the Far East. The volume of
investment was not disclosed, but it is believed that the funds will be directed to
construction of the Center for Deep Processing of Wood the largest such facility in
the region.
Moreover, Russia-China Investment Fund (RCIF) together with the government of
Heilongjiang Province plan to establish a specialized investment fund to invest in
agricultural projects in Russia and China.
In May, RCIF, Sukhoi Aviation Holding Company, Xixian New Area Management
Committee (China), and New Century International Leasing signed an agreement to
establish a leasing company, which over a three-year period will purchase up to 100
SSJ-100 aircraft from Sukhoi Aviation Holding Company for a total of about $3 bln.
41
JULY 3, 2015
NEW SILK ROAD: DEEP INTEGRATION WITH

COUNTRIES OF CENTRAL ASIA
One of the key elements of Chinas new economic policy will be active cooperation in
economic growth and the integration of neighboring countries through Chinas financial
resources, which will support its exports and own growth.
During his visit to Kazakhstan in September 2013, Chinese President Xi Jinping for the
first time mentioned the need for closer cooperation between China and countries of
Central Asia, which he invited to participate in the creation of an economic zone entitled
the Silk Road Economic Belt. This large-scale project spans the three continents of
Asia, Africa and Europe. He associated this project with the Great Silk Road the main
trading route between Asia and Europe that existed during the reign of the Han dynasty
between 200 BC and 200 AD. Its main goal is deeper economic integration between
countries of the region, an increase in volumes of investment, radical improvement in
quality of transportation infrastructure, and a reduction of trade barriers. The zone of
interests of the economic belt encompasses countries with a total population of around
3 bln. The economies of most of these countries are significantly weaker compared to
that of China, while having lower living standards. Thus, more active financial and
economic help on the part of China will support growth in their domestic economies.
The Silk Road Economic Belt envisions deep

economic integration between Asia and
Europe, an increase in volumes of
investment, radical improvement in quality of
transportation infrastructure, and a reduction
of trade barriers. The zone of interests of the
economic belt encompasses countries with a
total population of around 3 bln.
Silk Road Economic Belt: project details

At end March, the National Development and Reform Commission published the
general parameters of the new Silk Road. Aside from its land-based economic belt,
China proposed to establish a maritime route (Maritime Economic Belt). The land-based
route begins in the central part of China in the city of Han and proceeds through
Kazakhstan, Kyrgyzstan, Turkmenistan, Iran, Turkey, Russia and further to European
ports. The sea route stretches through the Sea of China to the Indian Ocean passing
Indonesia and Malaysia. The route then passes India and Kenya moving though the
Suez Canal to Greek and Italian ports in the Mediterranean Sea.
The Overland route is based on three transportation corridors:
Upper: China Mongolia Russia North Europe;
Central: China Central Asia Western Asia (Turkey) Europe;
Lower: China Southeast Asia Indian Ocean.
New Overland and Maritime Silk Road
Development of existing corridors

Helsinki
Moscow
Saint-Petersburg
Rotterdam
Rotterdam
Calais
Paris
Duisburg
Venice
Istanbul
Athens
Almaty Khorgos
Urumqi
Bishkek
Samarkand
Tehran
Berlin
Moscow
Lanzhou
Xian
Dushanbe
Tashkent
Tedzhen
Shanghai
Kolkata
Colombo
Chelyabinsk
Fuzhou
Zhanjiang Quangzhou
Beihai
Guangzhou
Hanoi
Haikou
Teheran
Khomeini Port
Gwadar Port
Kuala Lumpur
Mashhad
Islamabad
Kashgar
Hotan
Karachi
Urumqi
Golmud
Beijing
Hohhot
Lanzhou Tianjin
Lianyungang
Xian Xuzhou
Chengdu
Chongqing
Guiyang
Nairobi
Fangcheng
Jakarta
Maritime Silk Road
Northern Corridor
Overland Silk Road

Source: Xinhua News Agency
Central Corridor
Shanghai
Changsha
Guangzhou
Southern Corridor
Source: China Daily
42
JULY 3, 2015
Transportation corridors from Western China to Europe

There are currently three overland transportation corridors linking Western China with
Europe.
1) A railway route that stretches across Russia (a cross-border point is located in
the town of Zabaikalsk in Russias Far East) to seaports on the Baltic Sea.
Container trains pass this 12,800 km route over a period of 32 days.
2) A railway route across Kazakhstan (a cross-border point is located in the town of
Dostyk) and Russia to Baltic and European sea ports. It takes from 16 to 21
days to cover this 10,700 km distance.
3) An alternative automobile route via Kazakhstan and Russia that takes 8-10 days
to cover and is 2,000 km shorter than the previous route. However, this road
does not facilitate large cargo flows.
The sea route is the main trade channel linking China with Europe. This route
requires far lower costs than overland channels, but takes 45-60 days to transport
container cargoes. Transportation of cargoes by sea could require just half of the
costs needed for transportation via the overland routes. However, overland routes
(which take less time) could be more attractive for those companies located in
Western China; those that are interested in minimizing their working capital; and
those with a low share of transportation costs.
The overland trade volume between China and Europe is still marginal only
around 200-300 thousand containers per year. By comparison, the cargo turnover
between China and Europe accounts for 6 mln containers.
Key transportation routes between China and Europe
RUSSIA
St. Petersburg
Moscow
Astana
KAZAKHSTAN
Beijing
Traditional China-Europe
sea route
CHINA
China-KazakhstanRussia-Europe railway
Trans-Siberian Railway
Northern Sea Route
Source: GK Avtodor
43
JULY 3, 2015
Container cargo turnover, TEU mln

180
160
160
140
120
100
80
60
40
20
0.2
2005
CHINESE PORTS' CONTAINER CARGO TURNOVER
CARGO TURNOVER BETWEEN EUROPE AND CHINA
CONTAINER TRANSIT THROUGH RUSSIA
Source: World Bank, TransContainer
The concept of the Silk Road Economic Belt envisages the construction and
modernization of transportation infrastructure of member states, including automobile
and railway roads, ports, border-crossing routes, airports, telecommunications and
electricity facilities, and pipeline transport. In addition, the project calls for the
standardization of infrastructure, customs procedures, and information systems to
achieve the utmost unification of the entire logistics chain in order to speed up and cut
the costs of transfer of goods among countries in the region. The project also envisages
the creation of free-trade zones, the introduction of a single window principle at
customs offices, and the elimination of administrative barriers hampering trade. The
program document on the creation of the Silk Route says that member states should
cooperate in the development of coal, metals, and oil and gas fields, as well as in the
search for new energy sources, and the development of IT and biotechnologies.
Financial integration: China ready to provide funding
The document speaks about the necessity for deeper financial integration, and
proposes to boost volumes of FX swap deals and create a unified bond market in Asia.
The Asian Infrastructure Investment Bank (AIIB), established by 21 countries and
headed by China, should lend financial support to the Silk Road. The whole concept of
creating the Silk Road indicates that the Chinese government is willing to support
countries with good credit ratings and issue yuan-denominated bonds, while Chinese
companies will be able to attract funds from participating countries along the route.
Financing of infrastructure projects within the Silk Road will be facilitated by the Silk
Road Fund, to which the Chinese government has already contributed $100 bln. The
Fund is part of the AIIB. According to the project, China is prepared to act as a
coordinator and initiator under the project framework.
Asian Infrastructure Investment Bank (AIIB)
The Asian Infrastructure Investment Bank (AIIB) an international financial institution
established at Chinas initiative will be a cornerstone source of funding for Asian
infrastructure projects. The bank is currently being developed and is expected to be
officially launched toward end 2015.
The banks focus is on expansion of financial cooperation between countries within the
Asia-Pacific Region, participation in financing of Asian infrastructure projects, as well
as projects designed to strengthen trading and economic ties among countries within
the region and globally. Essentially, the AIIB should act as an alternative for such
financial institutions as the IMF, the World Bank and the Asian Development Bank,
which are considered to primarily support the interests of the US, Europe and Japan.
Moreover, the Chinese authorities estimate Asias overall need for infrastructure
44
The concept of the Silk Road Economic Belt

envisages the construction and
modernization of transportation infrastructure,
standardization of customs procedures and
information systems for utmost unification of
the entire logistics chain in order to speed up
and cut costs of the transfer of goods among
countries in the region.
JULY 3, 2015
investment until 2020 at around $8 trln, a sum that existing development banks simply
lack. Setting up a new bank will boost competition with financial institutions within the
Bretton Woods system.
Only a few years have passed between the time of the ideas conception and its
implementation. The agreement to create the AIIB was signed in October 2014. The list
of founding members includes China alongside 20 other Asian countries (Bangladesh,
Brunei, Cambodia, India, Kazakhstan, Kuwait, Laos, Malaysia, Mongolia, Myanmar,
Nepal, Oman, Pakistan, Philippines, Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan
and Vietnam). The banks charter capital will total $100 bln. In March 2015, the
deadline passed for submission of applications from other states seeking to participate
as founding members. A total of 47 countries submitted applications, including Russia.
The applicants included not only Asian, but also European states (Germany, France,
Austria, Norway and Sweden), Georgia, Turkey, Israel, Brazil and others. The US,
Australia and Japan refused to participate in establishment of the AIIB.
Ranking of development banks by capital
250
200
150
100
50
WORLD BANK
ADB
AIIB
AFDB
CHINA
DEVELOPMENT
BANK
NDB
BRAZILIAN
DEVELOPMENT
BANK
EBRD
Source: banks data, Gazprombank estimates
Russias role in Silk Road Project: some questions remain open

Russia was mentioned in the Silk Road project. In particular, the project
documentation mentions the need to tighten integration between Chinas frontier
provinces with Russias Far East, as well as to upgrade railroad infrastructure
enabling the development of multimodal transportation. Moreover, the project implies
the construction of a high-speed railroad connecting Beijing and Moscow. In
particularly, China could take part in the construction of the high-speed MoscowKazan line, with the Silk Road Fund as a project investor, contributing as much as
RUB 100 bln. Should the deal take place, it will become one of the first transactions
for the fund, which is rather symbolic for the Sino-Russian relationship.
In fact, the Silk Road Economic Belt is already functioning. At the end of 2014, the first
82-container freight train arrived to Madrid from the Chinese town of Yiwu. The entire
trip from China to Europe took 21 days, which is at least twice faster than the alternative
sea route. The train traveled through Zhejiang Province (East China), Xinjiang Uygur
Autonomous Region (North-West China), Kazakhstan, Russia, Belarus, Poland,
Germany, France and Spain. The total length of the main railway line exceeded 13,000
km. For the time being, this is the longest railway line between China and Europe and
virtually repeats the outline of the Silk Road Economic Belt. In June, China launched
another freight train from Harbin to Hamburg. The journey took 15 days, with the train
covering 9,800 km, or 653 km per day. The train ran via Mongolia, Russia, Belarus and
Poland. Now the goal is to reduce the travel time as much as possible, which requires
modernization and unification of all participating countries infrastructure.
45
The idea does not yet involve the

development of a fully functional transport
corridor through the entire territory of Russia.
On the contrary, a key focus will be on the
central transport corridor, which will run
through Central Asian countries.
JULY 3, 2015
APPENDIX 1: RUSSIAN-CHINESE JOINT PROJECTS

Main transportations routes between China and Europe
YEAR
PARTNERS/INVESTORS
PROJECTS/AGREEMENTS/INVESTMENTS
OIL & GAS

The partners jointly own Udmurtneft (Rosneft 49.5%. Sinopec 49.5%), which produces
approximately 6.3 mln tpa.
2006
Rosneft/Sinopec
2009
Rosneft/Transneft/China Development Bank
2011
Rosneft/Sinopec
2013
Rosneft/CNPC
2013
Rosneft/Sinopec
The companies signed a memorandum on long-term oil supplies on a pre-payment basis,

under which the Russian company is to supply up to 100 mln tonnes of oil over a 10-year
period starting from 2014.
2013
NOVATEK/CNPC
CNPC bought 20% in NOVATEKs Yamal-LNG project and signed a long-term deal to supply
3 mln tonnes of LNG per year from Yamal-LNG to China.
2014
Gazprom/CNPC
The parties signed a 30-year contract to supply 38 bcm of Russian gas per year to China via
the Eastern route.
2014
SIBUR/Sinopec
The partners signed an agreement to set up a joint venture in China to produce 50 kt of nitrile
butadiene rubber per year.
2015
SIBUR/RDIF
Chinese companies are taking part in financing of the East Siberia/Pacific Ocean oil pipeline
(ESPO) under guarantees of oil supplies to China via the pipeline.
The partners are jointly working on a geological study within the Veninsk licensed site, located
on the Sakhalin shelf.
The projects goal is to increase the volume of oil supplies to China to 30 mln tpa. The
timeline for supplies is 25 years.
Chinese investors together with the RDIF could enter SIBURs capital and finance the
ZapSib-2 project.
Rosneft/Sinopec
The companies agreed to build a refinery with capacity of 16 mln tonnes in Tianjin by the end
of 2019.
2010
Rosneft/Sinopec
The construction of Tianwan Nuclear Power Plant (third and fourth power units).
2010
EuroSibEnergo/China Yangtze Power
2010
Inter RAO/Shenhua
2012
Eastern Energy Company
2012
TGK-2/Huandian
2014
RusHydro/PowerChina/CTG
The parties signed agreements to jointly build electric power plants in European Russia and
the countrys Far East. In 2015, they signed a deal to set up a JV to operate NizhneBureyskaya HPP.
2014
En+/China Shenhua Group
The companies signed a deal to develop the Zaluzhansk coal deposit; planned production
totals 6 mln tonnes of coal per year.
2015
RAO ES of East/Dongfang Electric International

Corporation
The companies plan to cooperate in implementation of joint projects in Russias Far East.
UTILITIES
The partners signed an agreement to set up a joint venture called YES Energo to build
electricity generation capacities in Siberia.
The companies signed a memorandum of understanding to build a plant for production of
synthetic liquid fuels from coal.
Inter RAOs 100%-owned subsidiary that was created to export electricity to China.
The construction of a 450 MW combined cycle cogeneration plant in the city of Yaroslavl with
financing from ICBC.
ENGINEERING/TELECOMMUNICATIONS
2010
Tencent/Digital Sky Technology (DST)
2011
Fuyao Glass
2014
Tula Region/Great Wall Motors
2014
Lifan
Construction of a full-cycle facility in Lipetsk region is being considered with capacity for
60,000 automobiles
2014
Hawtai Motors
Construction of an automobile manufacturing plant is being considered with capacity for

100,000 cars
2014
GAC
Construction of an automobile manufacturing plant is being considered with capacity for

50,000 cars
2014
State Transport Leasing Company/ICBC
Purchase of 10% of DST shares.

Construction of an automobile glass manufacturing plant in Kaluga region.
Construction of an automobile manufacturing plant with annual capacity of up to 150,000 cars
Contract to lease three Boeing 777-300ER aircraft is to be transferred to Aeroflot
2014
MegaFon/Huawei
Seven-year contract with Chinas Huawei for shipment and maintenance of communications
equipment
2014
Rostec/Sinomach
Rostec agreed to create a JV with Chinas Sinomach, which will invest $10 bln in utilities,
transportation and infrastructure projects
46
JULY 3, 2015
YEAR
PARTNERS/INVESTORS
PROJECTS/AGREEMENTS/INVESTMENTS
METALS
2010
Xiyang Group
2012
China Nonferrous Metal Industry Foreign

Engineering and Construction/Metals of Eastern
Siberia
2012
CIC/Polyus Gold
2013
CIC/Uralkali
2014
Metalloinvest/Hopu Investments
IRC
2015
Polyus Gold/China National Gold Group

Corporation
The Chinese metals and mining company Xiyang Group will invest $483 mln in the first stage
of development of an iron ore mine in Chita Region alongside construction of a steel-making
facility adjacent to the mine.
Commercial development of a multi-metal Ozyornoye field in Buryatia and construction of
Ozyornoe GOK. NFC acquired a 50% stake in Ozyornoye.
Acquisition of a 5% stake.
Acquisition of a 12.5% stake.
Strategic partnership agreement for co-development of Udokan copper field.
IRC production of iron ore and ilmenite (raw material used for titanium production) at the
Sino-Russian border. 40.4% held by Petropavlovsk (Russia), 31.4% by General Nice
(China), and 4.5% by Minmetals Cheerglory (China).
Partnership agreement, including co-development of the Natalka field.
FINANCIAL SECTOR
2013
Moscow Exchange/CIC
2014
RDIF and Heilongjiang Province
2014
VTB/Bank of China
2014
VTB/China Exim Bank
2014
RDIF/CIC
Acquisition of a 5.6% stake.

Creation of a special-purpose fund investing in Chinese and Russian agricultural projects
amounting to $2 bln.
VTB signed a partnership agreement with Bank of China.
VTB and China Exim Bank signed an agreement to provide a credit line to the former in RMB
and RUB with a sum equivalent value of $2 bln.
Acquisition of a 45% stake in Russian Forest Products.
TRANSPORT AND INFRASTRUCTURE

2014
Mosinzhproekt, China International Fund and China

Railway Construction Corporation
2014
GTLK/ICBC
2015
Mosinzhtrans, Nizhegorodmetroproekt and China

Railway Eryuan Engeneering Group
2015
RFDI/CIC
2015
TEPK/China Civil Enginring Construction

Corporation
An agreement was signed to construct the new southwest branch of the Moscow metro.
Potentially, Chinese companies may not only invest but also participate in construction of this
line.
Agreement on leasing of three Boing 777-3ER aircraft, which will be transferred to Aeroflot.
Design work on the Moscow-Kazan HSR
Construction of a bridge across the Amur river. The Russian part of the bridge will be built by
the company Rubikon, the shareholders of which are subsidiaries of the Russian Direct
Investment Fund (RFDI) and China Investment Corporation. According to the Chinese partys
calculations, the new bridge will shorten the delivery distance through Heilongjiang province
to Khabarovsk and Moscow by 500 km, thereby reducing the delivery time by seven hours.
The length of the bridge is 2.215 km, of which the Russian part will be 0.315 km. The
throughput capacity will total between 5.2 mln tonnes of freight per year (first stage) and 2021 mln tonnes (second stage).
Construction of the Elegest Kyzyl Kuragino railroad with a length of 410 km
Source: GK Avtodor
47
JULY 3, 2015
APPENDIX 2: LIST OF INFRASTRUCTURE BONDS

ISSUE
RATING
(S&P/M/F)
VOLUME.
RUB BLN
PLACEMENT
TIMELINE
OFFER
MATURITY
COUPON
(CURRENT)
COUPON
FORMULA*
CREDIT
ENHANCEMENT
Russian Railways-32
BB+/Ba1/BBB-
10.0
July 2012
July 2022
June 2032
11.2
CPI + 210 bps
Russian Railways BO-09
BB+/Ba1/BBB-
25.0
June 2013
June 2028
10.1
CPI + 100 bps
BB+/Ba1/BBB-
25.0
June 2013
April 2043
9.3
CPI + 100 bps
BB+/Ba1/BBB-
25.0
September
2013
August 2033
16.0
CPI + 100 bps
BB+/Ba1/BBB-
25.0
October 2013
September
2033
17.7
CPI + 100 bps
November
2038
17.9
CPI + 100 bps
November
2028
9.3
CPI + 100 bps
BB+/Ba1/BBB-
25.0
November
2013
Russian RailwaysBO-10
BB+/Ba1/BBB-
25.0
December
2013
Russian Railways
BO-19
BB+/Ba1/BBB-
25.0
June 2014
May 2044
10.1
CPI + 100 bps
Russian RailwaysBO-16
BB+/Ba1/BBB-
25.0
October 2014
September
2039
17.9
CPI + 100 bps
Russian Railways -33
BB+/Ba1/BBB-
15.0
March 15
February 2040
12.4
CPI + 100 bps
Russian Railways -34
BB+/Ba1/BBB-
15.0
March 15
February 2040
12.4
CPI + 100 bps
Russian Railways: total
240.0
FGC UES-22
BB+/Ba1/BBB-
10.0
August 2012
July 2022
July 2027
13.9
CPI + 250 bps
FGC UES-23
BB+/Ba1/BBB-
10.0
June 2013
April 2048
16.0
CPI + 100 bps
FGC UES-28
BB+/Ba1/BBB-
20.0
June 2013
April 2048
16.0
CPI + 100 bps
FGC UES-26
BB+/Ba1/BBB-
15.0
August 2013
June 2048
17.9
CPI + 100 bps
FGC UES-27
BB+/Ba1/BBB-
15.0
August 2013
July 2047
17.9
CPI + 100 bps
FGC UES-29
BB+/Ba1/BBB-
20.0
October 2013
July 2048
17.9
CPI + 100 bps
October 2048
16.0
CPI + 100 bps
FGC UES-30
BB+/Ba1/BBB-
10.0
December
2013
FGC UES-34
BB+/Ba1/BBB-
15.0
December
2013
October 2048
16.0
CPI + 100 bps
FGC UES-37
BB+/Ba1/BBB-
20.0
May 2015
March 2050
17.9
CPI + 100 bps
FGC UES-38
BB+/Ba1/BBB-
20.0
May 2015
March 2050
17.9
CPI + 100 bps
FGC UES: total
155.0
Gazprom-BO-19
BB+/Ba1/BBB-
15.0
November
2013
October 2043
n/a
CPI + 100 bps
Gazprom-BO-20
BB+/Ba1/BBB-
15.0
November
2013
October 2043
n/a
CPI + 100 bps
Gazprom: total
30.0
Face value and
interest payments
are guaranteed by
the government if
concession deal is
terminated
Main Road-3
-/-/-
8.0
November
2010
October 2028
8.4
CPI (YoY)
+0.5*GDP
growth rate
(YoY)
Main Road-6
-/-/-
8.2
December
2012
November
2028
10.0
CPI (YoY)
+0.5*GDP
growth rate
(YoY)
Main Road-7
-/-/-
1.4
November
2012
October 2029
8.4
CPI (YoY)
+0.5*GDP
growth rate
(YoY)
North-West
Concession
Company-3
-/-/-
5.0
October 2011
September
2031
12.5
CPI + 300 bps
Government
guarantee for face
value payment
North-West
Concession Company
-4
-/-/-
5.0
October 2011
September
2031
12.5
CPI + 300 bps
Government
guarantee for face
value payment
48
JULY 3, 2015
ISSUE
RATING
(S&P/M/F)
VOLUME.
RUB BLN
PLACEMENT
TIMELINE
OFFER
MATURITY
COUPON
(CURRENT)
COUPON
FORMULA*
CREDIT
ENHANCEMENT
Western High-Speed
Diameter -1
-/Ba3/-
5.0
June 2011
April 2016
May 2031
8.75
Fixed before
offer
Government
guarantee for face
value payment
Western High-Speed
Diameter -2
-/Ba3/-
5.0
June 2011
April 2016
May 2031
8.75
Fixed before
offer
Government
guarantee for face
value payment
Western High-Speed
Diameter -3
-/Ba3/-
5.0
March 2012
February
2017
February 2032
9.15
Fixed before
offer
Government
guarantee for face
value payment
Western High-Speed
Diameter -4
-/Ba3/-
5.0
March 2012
February
2017
February 2032
9.15
Fixed before
offer
Government
guarantee for face
value payment
Western High-Speed
Diameter -5
-/Ba3/-
5.0
March 2012
February
2017
February 2032
9.15
Fixed before
offer
Government
guarantee for face
value payment
Two Capitals
Highway 1
-/-/-
15.0
May 2015
2030
n/a
1st through 11th

coupons
13.45%; 12th
through 59th
coupons CPI
+3%
st
Two Capitals
Highway
Concession
companies:
Total
-/-/-
15.0
May 2015
2030
n/a
Bonds are secured

by cash claim
collateral
th
1 through 11
coupons
14.1%. 12th
through 59th
coupons CPI
+3%
Bonds are secured

by cash claim
collateral
82.6
507.6
49
JULY 3, 2015
APPENDIX 3: RUSSIAS LARGEST PUBLIC

INFRASTRUCTURE COMPANIES
COMPANY
SHAREHOLDER
STRUCTURE
BONDS
DESCRIPTION
INVESTMENT APPEAL
Russian Railways is the key

investor in rail infrastructure. Its
annual investment budget totals
RUB 400-450 bln financed via
the companys own cash flow,
government contributions and
bond issues, including
infrastructure bonds at a rate of
inflation + 1%.
100% state-owned
19 bond issues
in circulation
Russian Railways, a natural monopoly managing Russias

railroad infrastructure, is one of the worlds top three
transportation companies in terms of revenues and assets. The
company provides a full range of services in such areas as rail
transportation, provision of locomotive haulage and railroad
infrastructure assistance; repair of rolling stock; long-distance and
suburban passenger transportation; container transportation,
logistics and engineering services. The companys total debt
stood at RUB 843 bln as of end 2014, of which 47% was in the
form of eurobonds, 20% in ruble-denominated bonds and 24% in
ruble infrastructure bonds. The companys net debt/EBITDA ratio
rose from 1.79 as of end 2013 to 2.37 as of end 2014 due to
revaluation of FX borrowings denominated in rubles.
Summa Group
(65%), free-float
(35%)
$415 mln
eurobonds
issued in 2018,
$219 mln
eurobonds
issued in 2020.
RUB 5 bln ruble
bonds issued in
2018
FESCO Group is a transportation holding that incorporates a

railroad operator, Commercial Port of Vladivostok (VMTP), as well
as a proprietary fleet in the Far East, operating sea transportation
between Russia and Asian countries. The economic crisis
coupled with ruble devaluation pushed the company into financial
hardship. The new management team has arranged debt
restructuring. As of end March 2015, the companys net debt
stood at $776 mln and net debt/EBITDA at 4.3x.
The company significantly

benefits from development of
trading ties with China as well
as expanded growth of
container shipments in the
region.
RUB 5 bln ruble

bonds issued in
2018
Russias leading intermodal container shipment operator. The

company owns 59% (27,000) of Russias total fleet of fitting
platforms, operates 46% of railroad container shipments and 23%
of container processing at Russia-wide railroad terminals.
Operates over 60 proprietary container terminals in Russia,
Kazakhstan and Slovakia.
The company significantly

benefits from development of
trading ties with China as well
as expanded growth of
container shipments in the
region. TransContainer is
developing container cargo
shipments between Asia and
Europe through Russia and
Kazakhstan.
NCSP Group
(NCSP RX)
Transneft (37%),
Summa Group
(27%), state
(20%)
None
NCSP Group is Europes third-largest seaport operator and

Russias No. 1 stevedoring company in terms of cargo turnover.
The Group owns three ports in Russia: Novorossiysk on the Black
Sea, Primorsk on the Baltic Sea and Baltiysk in Kaliningrad
region. The Groups seaports are parts of international
transportation corridors linking Russia with Mediterranean, Near
Eastern, North African, Southeast Asian, and North and South
American countries, making it a key transit channel for Russias
imported and exported cargoes.
The company is extending

seaport capacities for container
and other goods shipments and
is the major trading seaport of
the Northern-Southern
transportation corridor.
Global Ports
(GLPR LI)
APT Terminals
(30.75%), N-Trans
Group founders
(30.75%), Polozio
Ent. (9%), Ilibrinio
Ent. (9%), free
float (20.5%)
None
Global Ports is Russias top operator of container sea terminals

located on the Baltic Sea and in the Far East. Terminal facilities
allow it to transship over 4 mln TEU per annum.
The company benefits from

increased container shipments
in Russia.
None
Russias largest transport construction company with an order

book value exceeding RUB 300 bln. Mostotrest is AK Avtodors
top contractor. In particular, the company was contracted for most
of the Moscow St. Petersburg road. In addition to roads,
Mostotrest is a large contractor for airport infrastructure
construction. The company owns a 50% stake in North-Western
Concession Company, a concessioner of the 15-58 km segment
of the Moscow St. Petersburg highway. In addition, Mostotrests
portfolio includes a number of smaller-scale concession contracts
that are currently under construction, but will soon become a
source of the companys cash flow.
Mostotrest is a direct
beneficiary of heightened
investment in transport
infrastructure and development
of road concessions, in which
the company is already a large
player.
Russian
Railways
(BB+/Ba1/BBB-)
FESCO (FESH
RX, SD/-/B-)
TransContainer
(TRCN RX, /BB+/Ba3)
Mostotrest
(MSTT RX)
United Transport
& Logistics
Company (UTLC)
(50%), FESCO
(24%), EBRD
(9.25%), others
(16.64%)
Non-state pension
fund
Blagosostoyaniye
(63.63%), free
float (36.37%)
50
HQ: 16/1 Nametkina St., Moscow 117420, Russia. Office: 7 Koroviy val St.
Research Department
+7 (495) 983 18 00
EQUITY SALES
FIXED INCOME SALES
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FIXED INCOME TRADING
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Copyright 2003-2015. Gazprombank (Joint Stock Company). All rights reserved

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With the exception of information directly pertaining to Gazprombank, the latter shall not be liable for the accuracy or completeness of any information shown herein. All opinions and judgments herein represent solely analysts personal opinion regarding the
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JULY 3, 2015

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

To build or not to build

Source: Federal Special-Purpose Program,

Infrastructure investment breakdown

Source: Finance Ministry, CBR, Gazprombank estimates

Pension savings dynamic, RUB bln

NON-STATE PENSION FUNDS

Top 15 country-recipients of Chinese direct

Cooperation between Russia and China in the development of

0 500 1,000 1,500 2,000 2,500 3,000 3,500

while the proportion of off-budget investments will be on the rise.

Reduction of infrastructure investment... In 2015, investments will be cut

Investment in infrastructure, RUB bln

Source: Heritage Foundation

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

Sources of financing .......................................................................................................................................... 29

Legislative amendments ................................................................................................................................. 35

New Silk Road .................................................................................................................................................. 42

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

INVESTMENT IN INFRASTRUCTURE: BEST TO

An increase in government spending on

Consequently, we believe that the best solution is to maintain public investment on a

During the current period of high interest

A range of substantial amendments that heighten the potential to attract investment

The quality of presentations on large infrastructure projects implemented by such

The government also continues to reorganize the countrys airports. Moscows

Russia has intensified talks with China regarding joint development of

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

Investment in Russian infrastructure projects stagnating, not

Federal Budget Spending for 2015-17;

Federal Target Program: Development of the Transport System of Russia until

Transport Strategy until 2030;

Federal Law on Concession Agreements on Securities Market;

Investment programs of Russian Railways, Avtodor, airport operators, and large

Throughout 201620 a total of RUB 11 trln

It is impossible to cut the financing of many

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

Total electric utilities

Source: Gazprombank estimates

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

Investment in infrastructure, RUB bln

Investment in infrastructure, 2011-2015 vs. 201620, RUB bln

Breakdown of investment in infrastructure, 201620, RUB bln

Source: Federal Target Program. Gazprombank estimates

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

Railroad infrastructure: Eastern Polygon is the only major project

At the projected annual average inflation rate

Over the next few years, the largest projects

RUSSIA > EQUITY RESEARCH > INFRASTRUCTURE

Largest railway infrastructure projects

EXPECTED TIMELINE FOR

Construction of the ProkhorovkaBataisk railway

Expansion of railway approaches to seaports of

Expansion of railway approaches to southern seaports

Expansion of the TobolskSurgut railway

Construction of the SalekhardNadym railway (for gas

Construction of a railway bridge across the Ob River

Moscow-Kazan High-Speed Rail Project

Core investment projects

Electricity supply, electrification and dispatching control

EXPANSION OF TRANSSIBERIAN RAILWAY AND

APPROACH TO FAR EAST

RECONSTRUCTION OF BOTTLENECKS ALONG TRANSSIBERIAN RAILWAY AND ENSURING COAL SHIPMENT