Regional Report: Russia & CIS

04 November 2011

Construction for the 50 km road and rail link associated with the Sochi Winter Olympics.

Construction for the 50 km road and rail link associated with the Sochi Winter Olympics.

With an area of more than 17 million km2, making it the largest country in the world, and a population of 140 million, Russia should be one of the most attractive construction markets in the world. Add to this the wider Commonwealth of Independent States (CIS) - the loose organisation that succeeded the USSR in the post-Soviet era and comprises all the former territories apart from Estonia, Latvia and Lithuania - and the total area becomes more than 22 million km2, with a population of some 275 million.
But the Russian construction market has proved to be one of the most volatile in the world over recent years due to the wider economy's reliance on commodity exports, along with heavy-handed state control.

Speaking at last month's Committee for European Construction Equipment (CECE) annual meeting in Brussels, Belgium, JCB regional director for Russia and the CIS, David Hill said, "The market hangs on the oil price and about US$ 110 per barrel is the tipping point for the whole economy."

The stop-start nature of the market saw construction equipment sales collapse to 2000 units in 2009, from 12000 in 2008. The surge in commodity prices this year means, according to Mr Bell, sales could hit a record 18500 machines this year. He added that the market could be as big as 40000 units in 2014.

Volvo meanwhile puts the Russian market at about 25000 units this year, and agrees it is seeing a strong rebound. Carl Slotte, head of Volvo Construction Equipment's business in the region says the pick-up began in the second quarter of last year. "It was a dramatic comeback - our sales last year were up +400% compared to 2009," he said. "Within a matter of weeks we went from not being able to sell our machines to a point where we couldn't get hold of enough of them!"

The cyclical construction equipment market perhaps over-emphasises the swings in activity that Russia has seen in recent years. However, data on construction output still paints a picture of boom and bust.

According to economic forecaster PMR, in the pre-crisis years the Russian market enjoyed several years of double-digit growth - as high as +18% in 2006 and 2007, reaching a peak value of RUR 4528 billion (US$ 148 billion) in 2008. The fall during the crash year of 2009 was harder than in many other countries - a -13.2% drop.

But after a flat year in 2010 and a slow start to 2011, PMR says the Russian market is now returning to the kind of growth levels seen in the pre-crisis years. The second half of the year has seen double-digit growth return, with the residential sector particularly strong. Even with a weak first half, construction output in the first eight months of the year was +6.2% higher than the same period in 2010.

Major projects

The global crisis saw several of Russia's more ambitious construction projects shelved. Most notable of all was the Russia Tower scheme, which was to form part of the Moscow City, or Plot 16 multi-use complex, and at 610 m high, would have been the tallest building in Europe.

Construction got underway in late 2007, but was halted just over a year later, with the project being officially cancelled in June 2009. A plan was then devised to use the parts of the structure that had been completed as a parking lot to serve the rest of the development.

But Russia also has high-profile projects that are going ahead. Best known are the various preparations for the 2014 Winter Olympics in Sochi, on the Black Sea Coast. The total investment in staging the games is put at some RUR 330 billion
(US$ 10.8 billion).

Venues for the games are being built in two groups. The Olympic Park will sit on the coast and comprise the Olympic village, the main broadcasting facilities and six new sports venues ranging in capacity from 3000 to 12000 spectators, for events such as skating, ice hockey and curling.

The mountain venues meanwhile will be home to events like skiing, snowboarding, bobsleigh, luge, skeleton, ski jumping and biathlon and a smaller Olympic village will also be built in this location.

In addition to the 15 venues, a lot is being invested in supporting infrastructure. The power supply to the region is being increased some 2.5 times, compared to the capacity in 2009, for example.

In terms of transportation, a light rail system is being built to connect the airport, Olympic park and mountain venues, and the existing 102 km Tuapse to Adler coastal railway is being upgraded to a double-track line and extended to the airport and the mountain venues - a total increase of some 50 km. A new highway will run alongside the rail line, and the terrain is such that some 26 km of this dual route will be spread across 12 tunnels, while it will also feature 46 bridges.

Sochi airport meanwhile is having a new terminal built and its runway extended to allow larger jets to land. The port of Sochi is also being enlarged to allow it to take larger cruise ships.
Another major construction project is underway at the other end of Russia, where Russky Island, near the Pacific Port of Vladivostok, is being prepared for the 20th annual summit of the 21 Asia-Pacific Economic Cooperation (APEC) nations.

The centre-piece of the project is the 3.15 km cable stayed bridge, featuring a 1.1 km central span, linking the island to the mainland, which was approved in 2008 with a budget of
US$ 1 billion. In addition to this, a conference centre is being built on Russky Island, along with several luxury hotels. Vladivostok meanwhile is seeing various improvements to its roads as well as an upgrade to its airport.

The sheer volume of work, combined with the tight timescale has seen a rush of activity. One symptom of this is that Caterpillar supplied nearly 100 pieces of earthmoving equipment to main contractor Crocus ZAO last year, including dozers, soil compactors, excavators, backhoe loaders and gensets.

Future outlook

Given Russia's up-and-down history, questions about future prospects for the construction industry are hard to answer.

PMR for example is bullish, forecasting an average annual increase of +15% in the infrastructure market, with strong growth also coming from the residential sector. Road building will continue to be the major opportunity, and there is now a framework in Russia for Public Private Partnerships (PPPs).

The highest profile project to come out of this was Vinci's win in 2009 of a RUR 50.1 billion (US$ 1.6 billion) concession to build a 43 km stretch of the new Moscow - St Petersburg
toll road.

But it still looks like there will be a long wait for the US$ 570 billion infrastructure investment programme announced in May 2008. Prime Minister Vladimir Putin said the plan would see some 17000 km of roads built, along with 3000 km of railways and more than 100 airport runways, all of which would be funded by central state budgets or state-owned companies.

The only bright spot the industry can be sure of is the construction bonanza that will lead up to the 2018 FIFA World Cup. Russia has allocated RUR 300 billion (US$ 9.8 billion) to the construction of 13 new stadiums and the renovation of another three, and the total spend, including improvements to roads and airports, could be as high as US$ 50 billion.

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