International Construction Regional Report: The CIS
By Chris Sleight11 November 2013
Russia’s construction industry is a key driver of overall growth in the country – the largest economy in the CIS.
Thanks to government spending and private projects in the oil and gas, infrastructure and housing sectors, the country’s construction market has been forecast to see up to +9% year-on-year growth in 2013, reaching a value of RUB 6.6 trillion (US$ 220 billion), according to research company PMR.
Longer-term forecasts also paint a solid picture – a report from Global Construction Perspectives and Oxford Economics estimates that Russia’s construction market will grow +5% a year between now and 2025.
A sizeable chunk of the medium-term growth is down to investment supporting upcoming international sporting events – the 2014 Sochi Winter Olympics, 2016 World Hockey Championship, and the 2018 FIFA World Cup.
RUB 664 billion (US$ 20.6 billion) is expected to be spent in Russia over the next five years in preparation for the 2018 World Cup alone, while estimates have put the total cost of the Sochi Olympics as high as US$ 50 billion.
While all this investment and long-term potential represent a clear opportunity for international construction community, it does not come without risks. It is no secret that Russia can be a difficult place to do business, for a range of reasons.
For instance, the country scored an average of four on this year’s Transparency International Global Corruption Barometer, where a score of one means not at all corrupt and five means extremely corrupt.
In fact, Russian opposition politician Boris Nemtsov has alleged that corruption among officials and businesses working on the Sochi Winter Olympics has added US$ 30 billion to the cost of constructing venues and infrastructure for the event.
He said the original budget was around US$ 12 billion, and the estimated US$ 50 billion price tag as it now stands would make the games the most expensive Winter or Summer Olympics ever.
The allegations were made in a report, Winter Olympics in the Subtropics, written by Mr Nemtsov and Leonid Martynyuk, a member of the Russian liberal Solidarity movement.
However, at least one contractor that is directly involved in construction ahead of the Sochi Olympics denies these allegations. Igor Pankin, CEO of Transstroy, a subsidiary of Russian conglomerate Basic Elements, said, “This [corruption on Sochi contracts] hasn’t been our experience at Transstroy and it is not the way we run our business.”
Transstroy’s projects for the Sochi Olympics include the Kurortny avenue road and tunnel contract – aiming to increase access to Sochi by providing an alternative route, including construction of eight tunnels.
“Russia’s construction industry is changing the way it undertakes projects, more public-private partnerships and life cycle contracts are being formed. The market is becoming more transparent, but remains highly competitive,” Mr Pankin added.
But there are other issues that have also affected major infrastructure projects in Russia, including delayed and cancelled projects. For instance, construction of the 367 MW Kudepstinskaya thermal power plant in Sochi that was intended to be part of the city’s preparations for the Winter Olympics was cancelled earlier this year.
Construction had been delayed for various reasons, from the changing of the general contractor after TGK-2 quit the project, to the protracted issue of the state expert appraisal, and the absence of an energy delivery contract. In the end the Ministry of Energy reduced Sochi’s electricity consumption forecast by -40%, from 1,380 MW to 850 MW – essentially making the plant redundant.
And concerns have also been raised about preparations for the 2018 World Cup. According to PMR, it will be a huge challenge for Russian officials to develop nine stadiums for the tournament by the end of 2017.
For instance, the construction of Zenit Stadium in St Petersburg is expected to be completed no earlier than the fourth quarter of 2015, even though the project was launched in 2007. And despite the fact that the construction of a new stadium in Saransk was started in 2010, there has been little progress, said PMR.
Transstroy’s Mr Pankin said a new approach to Russia’s tendering system was needed. “Today, the price of the project is determined by the projection phase documentation. It’s on this basis a customer makes a price and holds a competition for the construction.
“A winning contractor elaborates and provides detailed documentation of the process which in the details often differ substantially from the project. As a consequence the price and timescales of project change. However, a contractor has to keep the original contract price and work completion time. Consequently there is a gap in the balance sheet, and material losses.”
There are also some issues on the construction equipment side, with some international manufacturers complaining of delays for imports to Russia.
Indeed, the Committee for European Construction Equipment (CECE) CECE and Russian member association AEB used June’s CTT trade in Moscow to re-iterate their support for the equal treatment of all manufacturers.
At the moment, non-Russian companies are suffering from the disposal fee the government imposed in September 2012 – charges which apply to each wheeled vehicle imported to Russia or manufactured in Russia, according to CECE.
CECE and AEB are currently working with Russia’s Ministry of Trade & Industry with a view to amending the legislation and developing a more balanced approach.
Nevertheless, there is a huge market for construction equipment in Russia. According to CECE secretary general Ralf Wezel, one in three tower cranes produced and sold in Europe are currently going to Russia. “Russia remains one of the growth engines for our industry,” he said.
Jean-Claude Doucene, sales director for CIS countries at Manitowoc, echoed this. “Over the past two years we have seen a growing demand for cranes in Russia. And we expect market conditions to remain positive,” he said.
Other international construction equipment manufacturers are also moving to take advantage of the Russian market. Turkey’s Hidromek, for instance, plans to expand its operations in Russia this year with a new dealer support and after sales office.
Head of export Mehmet Nazim Barbarosoglu said Russia represented a huge opportunity for the manufacturer. “There is an almost endless demand for construction machines,” he said.
Elsewhere, RM-Terex, Terex Construction’s Russian manufacturing joint venture with Russian Machines, this year launched four new graders for the local market. Meanwhile, a joint venture between Palfinger and Sany is also targeting Russia with cranes developed specifically for the country’s needs.
In addition, Volvo Construction Equipment inaugurated a new 20,660 m2 excavator factory in Kaluga earlier this year – a SEK 350 million (US$ 52 million) investment, and the manufacturer’s first factory in the country.
Volvo CE head of CIS business Per-Erik Lindström summed up the company’s perspective on the Russian market. “We plan to double our sales in the country by 2015 and the excavator manufacturing in Kaluga will play a vital role in achieving those growth ambitions.”
Mr Lindström said Volvo CE was present in over 180 countries around the world, and was used to most kinds of challenges, particularly in emerging markets.
“One of the biggest challenges in Russia is the countryside. To efficiently cover such a wide territory with the dealer network is a very interesting challenge both for us and for our dealer.”
He also touched on the issues with corruption in the country. “Volvo CE, being a part of Volvo Group has zero tolerance to corruption. We have grown from hundred unit business to thousands of units business in Russia, we have established industrial presence. We could do it without being involved into any kind of corruption.
“We will continue to do business in the same way. If it comes to delays for importing components – planning is a key. We have gained good experience in handling importation and logistics in Russia during these years.”
It seems clear that Russia will likely provide substantial prospects for the construction industry in the coming years, but it is also likely that international contractors and manufacturers will have to work hard to get a slice of the action.