«High-speed Railway»
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05 november

High-speed link between Europe and Asia

The first high-speed railway line (HSR) construction project is taken to the design phase. Once the costs are clear, financial partner will be defined. The project has its history. All Russian railway executives sought to take Russia to the club of HSR countries. The first HSR project (Moscow-Saint Petersburg) with a dedicated high-speed track was developed by the Ministry of Communications in 1990s. Railwaymen do not like to remember the failure that resulted in financial losses for foreign investors, criminal proceedings and a huge pit of the would-be railway station in the centre of Saint Petersburg (later used to build Galereya shopping mall with over 300 stores, 10 cinema halls and a bowling club). However, the railway sector aspiration for high speeds had remained. Russian Railways, based on the Ministry of Communications, could, within five years, launch Moscow-Saint Petersburg line with the first eight high-speed trains, named Sapsans, supplied in 2008 by Siemens. Vladimir Yakunin, President of Russian Railways, called it “high-speed traffic” since the train design allows for acceleration up to 300 km/h. But as Sapsans use the same tracks as freight, passenger and suburban trains, they hardly move faster than the Soviet R200 express train, with a possible acceleration up to 250 km/h only on Okulovka-Malaya Vishera section, while other sections have a 220 km/h speed limits. The project, however, was recognised successful: Sapsans running between two Russia's largest cities took a substantial market share from air carriers. Flights between the two capitals are still popular, of course, but the air fare has dropped. The line now almost fully meets the consumer demand for land transportation. Therefore, investments in new high-speed links between Moscow and Saint Petersburg is not feasible so far. Engineers gain speed. HSR-2 between Moscow and Kazan, a “real” high-speed railway with a potential Yekaterinburg and Chelyabinsk extension, is currently a priority project. The long lasting story of public and interdepartmental discussions of HSR-2 unexpectedly ended up with an execution, this spring in Moscow, of a Russian-Chinese Memorandum of Cooperation, which gave the project a start. With Beijing as the terminal stop. Russian Government allocated funds for design works: the 2015 budget is RUB6 bn, and about RUB15 bn in 2016 (totally RUB 20.9bn). Estimated construction cost is currently RUB1.07 tn, and it will be updated only after the design is developed and approved by Glavgosexpertiza. Alexander Misharin, First Vice President of Russian Railways, who oversees the project, expects the works to be completed by the end of 2016. A Russian-Chinese project team has been set up to manage the design process and develop the project's legal and financial models. Sergey Nekrasov, First Vice President of Gazprombank, a project team member, told Kommersant that the team holds regular meetings in different formats in China or Russia. In October, the team had its fourth session in Chengdu, the capital of Sichuan. “We, the financiers, are sometimes envious of the technical subteam's impressing progress”, says Mr. Nekrasov. According to him, surveys are actively underway throughout the route of the would-be-line; Mosgiprotrans' and CREEC's specialists have already started drilling on 76 of 91 wells. Mr. Nekrasov says that at this phase the most important project task is to develop a detailed design and have it approved by Glavgosexpertiza. Only when fully ready, with clear engineering solutions and costs, the project can be presented to investors.“Now that design works are still in progress and costs are not yet updated, it is difficult to calculate potential return on investment and cash flows to define acceptable financing terms”, he notes. He adds that in Q1 2016 at the latest, High-Speed Rail Lines, Russian Railways' subsidiary responsible for the project, will announce and hold a bidding to select a team of project consultants to include a large bank, a Big Four consulting company and a legal advisor. Risk economy. Financiers from Russian and Chinese state-owned banks and financial institutions are currently discussing tentative approaches to intergovernmental cooperation on HSR-2 project. As Alexander Misharin stated earlier, cooperation will be in a PPP format: project construction and operation will be concession-based. Sergey Nekrasov affirms that the project may use a concession framework, however, both on the Russian and Chinese part, private partners are most likely to be represented by state-owned companies only. “The project's financial consultants are tasked, among other things, with the so-called market-sounding, i.e. to learn opinions and comments of potential investors in the project”, tells Mr. Nekrasov. “They should be interviewed to identify who are ready to enter projects with such payback period, whether they are ready to work in public-private framework, what risks they can accept and on what terms. After that, we will understand who will be the potential equity investor and who will invest in financial instruments: redeem bonds, issue guarantees and extend currency loans”. By the way, currency risk mitigation is one of the most challenging tasks to be solved by Russian and Chinese financial authorities. According to Sergey Nekrasov, given the project scale, the challenge is really great. “It has to be solved”, he underlines. “And it's not only about the volume or term: currently there are no appropriate instruments of long-term RUB/RMB currency risk hedging”. He says that Chinese companies are quite conservative, and to a large extent the issue resolution depends on the Russian party, since even the Russian Ministry of Finance and the Central Bank do not have a common strategy. According to Mr. Nekrasov, the first steps have been made, for example, the central banks of the two countries entered into a $24 bn currency swap contract in 2014. “In my opinion, Russian companies, banks or even the Government should be given a possibility to offer their RMB bonds at a Russian stock exchange, which has no limitations for that, and potentially at the Shanghai Stock Exchange. It would be logical to expect RUB offers from Chinese partners. Our bank is actively working on such algorithm. Trade transaction counterparties would then have currency available and would not suffer currency risks”, proposes Gazprombank's First Vice President. High-speed negotiations. Given the geopolitical nature of HSR-2, the project negotiations involve top political circles of the participant countries. On the Russia Calling Investment Forum in October, in answering the question of Dietrich Moeller, President of Siemens Russia, Russian President Vladimir Putin suggested that the German business should not only consider equipment and technology supply for the HSR, but the project financing in general. “Such large-scale projects as construction of a high-speed railway, in this case Moscow-Kazan section and further extensions, are not only about economic metrics and costs, including the cost of lending. It's a question to your Government rather than ours: if project participants have a limited access to European financing, we will not have many options left. And in this case, the Chinese financing proposal may be decisive”, said Vladimir Putin. Sergey Nekrasov from Gazprombank states that the doors for western partners "are not closed, but rather wide open”. Moreover, many experts believe that Russia now is in a good position for negotiation: there is a Chinese alternative to German technologies definitely preferred by the railway monopoly in recent years. On the other hand, in negotiating with Chinese partners Moscow can request better financing terms, since it can turn back to the western market, which still treats Russia as a promising site for its high-tech products. Given that Chinese economy has a huge potential and the project may be a strategic one for China, they may extend a long-term credit facility almost at any interest rate”, underlines Sergey Nekrasov. Chinese lending agreements, however, often bind the borrower by Chinese equipment supplies or other related terms. Financing, therefore, might be cheap on the surface, but bind the borrower with certain material provisions. According to Sergey Nekrasov, the Chinese party had offered Russia a cheap loan to finance the HSR design, but “luckily, at that phase Russia could engage its own financing sources and avoid tough commitments to the Chinese party”. The strategic partnership with China on HSR-2 implementation undoubtedly opens  long-term favourable perspectives both for direct parties of the future transactions and other Russian industries to be involved in the global project”, says Gazprombank's First Vice President. Russian Railways could launch Moscow-Saint Petersburg line with the first eight high-speed trains, named Sapsans, supplied in 2008 by Siemens. Source: Kommersant.

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