THE SIBERIAN CENTURY
by Chris Mayer
At the foot of the snowcapped Caucasus mountain range in southwestern Russia is the little resort town of Sochi. Stretching along the coast of the Black Sea, it is a sort of Russian Riviera. The pretty and warm waterfront town, framed against majestic mountains, was a favorite spot for vacationing Soviet officials.
This was where Russian officials chose to unveil their big plans. At a recent investment conference, the Russian government set out its goal to spend $1 trillion on infrastructure in the next 12 years.
(Russia will have to put on quite a pony show, because the plan relies mainly – to the tune of 80% – on private money. Only 20% comes from the Russian treasury. The Russian government, though, is not poor. It has about $127 billion in oil revenues stashed away in its reserve fund.)
In any event, Russia’s plan makes it the biggest infrastructure spending plan outside of China, which spent nearly $1 trillion on infrastructure projects during 2004-2006 alone.
China, like a molting pigeon, keeps shedding its old feathers and changing in dramatic ways. Russia, too, wants a new look. It needs it badly. In some cases, Russia is decidedly worse off than even a decade ago. For example, in the 1990s, Russia had over 1,300 airports. Today, there are about 250 – most of which need serious repairs.
Russia’s road system is woefully poor. Even big cities often depend on single-lane roads. Russia’s road system is only one-tenth as long as America’s. Only 5% or so is good quality. In Russia, that means having more than one lane and a surface that doesn’t buckle under the weight of a car.
What about the railroads? As befits the largest country in the world, Russia’s railroad system is one of the longest in the world. Yet it is still half the length of the U.S. and filled with gaps. Much of it is aging, rusting in the pale sun of the Russian plains and crumbling in the arctic winds from the north. Freight cars crawl along at average speeds of no more than 25 miles per hour.
Still, the Russian economy has sped along like “a fiery and matchless troika” – in the words of the great Russian writer Gogol. It’s something of a miracle, given the shabby shape of its skeletal structure. (Gogol also wrote how the “the road is like a cloud of smoke... the bridges thunder.” Maybe Russia’s infrastructure was never any good.)
According to the Financial Times , “Economic growth averaged 6.7% for 1999-2006... [and] 7.7% this year.” Companies can’t afford to ignore the place, despite widespread corruption and a stifling bureaucracy. Investors, too, will have to keep an eye on Russia. That massive spending plan is, in the words of the FT, “a potential bonanza for international construction and engineering groups.”
ABB Ltd. (NYSEL:ABB) shareholders can toast Moscow and down a shot of vodka in thanks. ABB, you may remember, is our Swiss-Swedish engineering firm and the world’s largest builder of power grids.
And guess where a good chunk of that $1 trillion will go? Some $480 billion will go toward adding capacity and repairing Russia’s electrical infrastructure. The Russians named the plan “GOELRO-2” after Lenin’s 1920s plan to electrify Russia. Incredibly, after building only 30 nuclear reactors during the entire Soviet era, Russian President Vladimir Putin plans 26 over the next 12 years.
As part of this effort, Russia’s electricity monopoly will sell off 20 power generation companies. Some call it the biggest and most complicated industrial overhaul since the Soviet collapse. The sale will bring in as much as $120 billion. The proceeds will go toward shoring up capacity and helping cope with surging demand.
Of the remaining money in the pot, there’s some $400 billion slated for rail. This is why FreightCar America (NASDAQ:RAIL) executives drool when they talk about doing some joint venture in Russia. Then there is another $30 billion for airports...
One of the most interesting things about this plan is where the money goes regionally. More than two-thirds will flow west of the Urals, to Russia’s Asian wing. That is, to Siberia.
Talk about image problems! Until the 19th century, Siberia was just a haven for trappers, traders, numerous scattered native tribes, as well as outcasts and prisoners. In the 20th century, it became the locus of the infamous gulag, a nasty system of forced labor camps that reached its apex under Stalin.
But in this century, Siberia will play a central role in the economic resurgence of Russia. (It also has nine of the 10 coldest cities in the world, considering populations of only half a million or more.)
“Russia’s power will grow with Siberia,” once wrote the Russian poet Mikhail Lomonosov. Indeed, why not? It is here where all of Russia’s natural treasures lay – 85% of its natural gas, 80% of its oil and coal, plus gold, platinum, nickel, diamonds, silver and other metals, and timber. “We’ve got rich reserves of just about the whole periodic table,” cracked a Siberian governor.
The opportunities are so large that Muscovites wonder, “Could this be the Siberian century?”
I know what you’re thinking. As an investor, you’re about as interested in Russia as you are in acquiring a pet alligator. It eats, it bites, and it gives no quarter. Yes, Russia has a definite image problem. It labors under a lot of stereotypes.
It is cold and gray. The people are grumpy and drunk. The government is corrupt and mean. Violence is all too common. But stereotypes often melt away when you are on the ground in a place. Anthony Bourdain, the travel writer, remarks in his new book No Reservations : “In Russia, people are not outgoing, or cheerful or even particularly friendly... until you get halfway down the vodka bottle, that is.”
Bourdain downed plenty of vodka during his stay in Russia. And he found that if you do, the Russians open up. Under a vodka-induced haze, Russia started to make sense. “Soon you begin to understand the magic of the birch forests, the fierce Russian winters, the sad majesty of black crows on snow-covered fields. You vow to reread Tolstoy, to read Gogol – in Russian. Then you throw up in your shoes.”
It’s sort of like that, too, when you try to wrap your head around investing in Russia. Not in the sense that you have to drink a lot of vodka to understand Russia. But there’s a lot that’s hard to understand. Yet there’s also a lot of appeal. Like China or India, it’s a tough place to invest in. But like China and India, it’s where the growth is. It’s where magical changes take place virtually overnight.
Consider that Russian home prices have gone up for five consecutive years. A mortgage industry that began only in 2002 issued $20 billion in mortgages in 2007. There are over 36 million cars in Russia. As recently as 1995, there were only 11 million. Plus, the Russians are traveling more. Some 7.7 million traveled abroad last year, compared with only 2.6 million in 1995.
Finally, consider that there are over 66 billionaires in Moscow alone, second only to New York. Russia has over 119,000 millionaires.
So Russia has real hope and progress now, not the kind that sits like dust at the bottom of an old coffee mug, but the kind that fills a vodka glass and buys caviar. It’s the kind where you, as an investor, can make a little money.
At the foot of the snowcapped Caucasus mountain range in southwestern Russia is the little resort town of Sochi. Stretching along the coast of the Black Sea, it is a sort of Russian Riviera. The pretty and warm waterfront town, framed against majestic mountains, was a favorite spot for vacationing Soviet officials.
This was where Russian officials chose to unveil their big plans. At a recent investment conference, the Russian government set out its goal to spend $1 trillion on infrastructure in the next 12 years.
(Russia will have to put on quite a pony show, because the plan relies mainly – to the tune of 80% – on private money. Only 20% comes from the Russian treasury. The Russian government, though, is not poor. It has about $127 billion in oil revenues stashed away in its reserve fund.)
In any event, Russia’s plan makes it the biggest infrastructure spending plan outside of China, which spent nearly $1 trillion on infrastructure projects during 2004-2006 alone.
China, like a molting pigeon, keeps shedding its old feathers and changing in dramatic ways. Russia, too, wants a new look. It needs it badly. In some cases, Russia is decidedly worse off than even a decade ago. For example, in the 1990s, Russia had over 1,300 airports. Today, there are about 250 – most of which need serious repairs.
Russia’s road system is woefully poor. Even big cities often depend on single-lane roads. Russia’s road system is only one-tenth as long as America’s. Only 5% or so is good quality. In Russia, that means having more than one lane and a surface that doesn’t buckle under the weight of a car.
What about the railroads? As befits the largest country in the world, Russia’s railroad system is one of the longest in the world. Yet it is still half the length of the U.S. and filled with gaps. Much of it is aging, rusting in the pale sun of the Russian plains and crumbling in the arctic winds from the north. Freight cars crawl along at average speeds of no more than 25 miles per hour.
Still, the Russian economy has sped along like “a fiery and matchless troika” – in the words of the great Russian writer Gogol. It’s something of a miracle, given the shabby shape of its skeletal structure. (Gogol also wrote how the “the road is like a cloud of smoke... the bridges thunder.” Maybe Russia’s infrastructure was never any good.)
According to the Financial Times , “Economic growth averaged 6.7% for 1999-2006... [and] 7.7% this year.” Companies can’t afford to ignore the place, despite widespread corruption and a stifling bureaucracy. Investors, too, will have to keep an eye on Russia. That massive spending plan is, in the words of the FT, “a potential bonanza for international construction and engineering groups.”
ABB Ltd. (NYSEL:ABB) shareholders can toast Moscow and down a shot of vodka in thanks. ABB, you may remember, is our Swiss-Swedish engineering firm and the world’s largest builder of power grids.
And guess where a good chunk of that $1 trillion will go? Some $480 billion will go toward adding capacity and repairing Russia’s electrical infrastructure. The Russians named the plan “GOELRO-2” after Lenin’s 1920s plan to electrify Russia. Incredibly, after building only 30 nuclear reactors during the entire Soviet era, Russian President Vladimir Putin plans 26 over the next 12 years.
As part of this effort, Russia’s electricity monopoly will sell off 20 power generation companies. Some call it the biggest and most complicated industrial overhaul since the Soviet collapse. The sale will bring in as much as $120 billion. The proceeds will go toward shoring up capacity and helping cope with surging demand.
Of the remaining money in the pot, there’s some $400 billion slated for rail. This is why FreightCar America (NASDAQ:RAIL) executives drool when they talk about doing some joint venture in Russia. Then there is another $30 billion for airports...
One of the most interesting things about this plan is where the money goes regionally. More than two-thirds will flow west of the Urals, to Russia’s Asian wing. That is, to Siberia.
Talk about image problems! Until the 19th century, Siberia was just a haven for trappers, traders, numerous scattered native tribes, as well as outcasts and prisoners. In the 20th century, it became the locus of the infamous gulag, a nasty system of forced labor camps that reached its apex under Stalin.
But in this century, Siberia will play a central role in the economic resurgence of Russia. (It also has nine of the 10 coldest cities in the world, considering populations of only half a million or more.)
“Russia’s power will grow with Siberia,” once wrote the Russian poet Mikhail Lomonosov. Indeed, why not? It is here where all of Russia’s natural treasures lay – 85% of its natural gas, 80% of its oil and coal, plus gold, platinum, nickel, diamonds, silver and other metals, and timber. “We’ve got rich reserves of just about the whole periodic table,” cracked a Siberian governor.
The opportunities are so large that Muscovites wonder, “Could this be the Siberian century?”
I know what you’re thinking. As an investor, you’re about as interested in Russia as you are in acquiring a pet alligator. It eats, it bites, and it gives no quarter. Yes, Russia has a definite image problem. It labors under a lot of stereotypes.
It is cold and gray. The people are grumpy and drunk. The government is corrupt and mean. Violence is all too common. But stereotypes often melt away when you are on the ground in a place. Anthony Bourdain, the travel writer, remarks in his new book No Reservations : “In Russia, people are not outgoing, or cheerful or even particularly friendly... until you get halfway down the vodka bottle, that is.”
Bourdain downed plenty of vodka during his stay in Russia. And he found that if you do, the Russians open up. Under a vodka-induced haze, Russia started to make sense. “Soon you begin to understand the magic of the birch forests, the fierce Russian winters, the sad majesty of black crows on snow-covered fields. You vow to reread Tolstoy, to read Gogol – in Russian. Then you throw up in your shoes.”
It’s sort of like that, too, when you try to wrap your head around investing in Russia. Not in the sense that you have to drink a lot of vodka to understand Russia. But there’s a lot that’s hard to understand. Yet there’s also a lot of appeal. Like China or India, it’s a tough place to invest in. But like China and India, it’s where the growth is. It’s where magical changes take place virtually overnight.
Consider that Russian home prices have gone up for five consecutive years. A mortgage industry that began only in 2002 issued $20 billion in mortgages in 2007. There are over 36 million cars in Russia. As recently as 1995, there were only 11 million. Plus, the Russians are traveling more. Some 7.7 million traveled abroad last year, compared with only 2.6 million in 1995.
Finally, consider that there are over 66 billionaires in Moscow alone, second only to New York. Russia has over 119,000 millionaires.
So Russia has real hope and progress now, not the kind that sits like dust at the bottom of an old coffee mug, but the kind that fills a vodka glass and buys caviar. It’s the kind where you, as an investor, can make a little money.
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