Infrastructure left to rot may cripple Russia

MOSCOW Fri Feb 20, 2009 11:43am GMT

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MOSCOW (Reuters) - The global downturn is forcing Russia to shelve indefinitely the long-delayed renewal of its infrastructure, leaving it at risk of a new era of stagnation that could last well beyond the present financial crisis.

In spheres such as transport and housing, infrastructure inherited from the Soviet Union is already breaking down. Analysts have warned for years that the life-span of most roads, bridges and other basics is running out.

The Kremlin has seen this coming. Last year, Prime Minister Vladimir Putin laid out an ambitious plan to spend $1 trillion (700 billion pounds) on infrastructure over the next 10 years. But that was when Russia's oil was expensive and western loans were cheap.

"Now there is nothing left for infrastructure," said Igor Gorchakov, an industry analyst at law firm Baker & McKenzie. "The sector has ceased to be a priority."

Analysts and investors warn that the consequences of such a policy will be dire. It will sap 6 percent in GDP growth every year until the infrastructure work is done, Gorkachov said, and that could leave Russia treading water when global growth eventually starts to recover.

BRAKE ON ECONOMY

For the Russian public, poor infrastructure is a daily problem. They feel it in the perpetual traffic jams, the weeks without hot water every summer, and the bumpy landings in many regional airports, where about half of the runways are unpaved.

The same holds true for Russia's oil fields, power grids, ports and other nuts and bolts of the economy. It explains at least some of the deadly gas explosions and mine accidents that have plagued Russia in recent years.

"Infrastructure has become one of the main brakes on the growth of the economy," Yury Molchanov, deputy governor of Russia's second largest city of St. Petersburg, told a recent business conference.

"Even when the budget situation was fine, there was not enough money to go around because the need for investment was virtually limitless," he said.

The budget situation is no longer fine. It is set for a deficit of 8 percent this year, while gross domestic product is due to shrink by 2.2 percent, according to state forecasts.

SPENDING SLASHED

Faced with this contraction, and the 70 percent fall in the price of Russia's main export -- oil -- the government is currently working on a major federal budget revision and infrastructure has been outlined as the main area for cuts.

"Russia has enough resources only to support its banking system and the social sphere," an official in Putin's government said on condition of anonymity.

The state's Investment Fund, a coffer of oil windfalls meant mainly for regional infrastructure, was cut in half to 64 billion roubles (1.2 billion pounds) last month.

Even development spending for the 2014 Winter Olympics in Sochi, a project seen as sacred a year ago, will be cut 15 percent, Deputy Prime Minister Dmitry Kozak said on Tuesday.

By contrast, the United States and some European nations are funnelling more money into infrastructure in an attempt to create jobs and support sectors such as construction, metals, cement and engineering.

CRISIS IN FOCUS

The regional head of Volvo Trucks, which services clients in all of these industries, said investors are counting on infrastructure spending above all.

"For the efficiency of the economy, that is the single most important factor: continued focus and even accelerated focus on infrastructure," said Lars Corneliusson, managing director of Volvo's division in Russia.

But gradually, the state has turned its focus to anti-crisis measures, such as supporting the value of the rouble with some $200 billion of federal reserves in the past three months.

Private capital, which was initially to account for up to 60 percent of infrastructure investments in Russia, has meanwhile pulled out of all but a few public-private partnerships.

So the 6 percent infrastructure drag on GDP growth is likely to last longer than the global downturn. Depending on when the state can start spending and guarantee profits for private investors and banks, estimates range from 5 to 25 years.

"It can go on as long as they can stomach the economic costs of it," said Paul Roger of Renaissance Capital.

Gorchakov put it more bluntly. "Planes will start falling a bit later," he said. "But the hot water pipes will start bursting sooner. Just think about it -- most of these things have not been fixed since Soviet days."

(Additional reporting by Dmitry Zhdannikov and Alfred Kueppers; editing by Stephen Nisbet)

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