Russian Federation: Public Private Partnerships In Russia: An Overview

Last Updated: 21 November 2008
Article by Michael Schwartz and Innokenty Ivanov

Key points

  • Russia's need to improve its infrastructure has led to a concerted move to embrace Public Private Partnerships (PPPs). For investors looking for established methods of entering emerging markets to shelter from the credit crunch, PPPs present an attractive option. However, a number of practical, legal and financial challenges remain, which need to be addressed if PPPs are to form a significant part of the country's infrastructure financing.
  • The Russian government has announced plans to spend about $1 trillion over the next 10 years on improving infrastructure. It has also made it clear that a significant part of this investment will be in the form of PPPs, to benefit from the leverage provided by the efficiency, competition and investment of the private sector.
  • The Russian PPP market is potentially enormous. One of the smallest current PPP roads in Russia, the Orlovsky Tunnel in St Petersburg, at around $1bn is still substantially bigger than the largest road PPP in relatively mature markets such as Germany – the A1 at $672m. Further to the first projects being developed mostly in the transport and, to a lesser extent, the utility sector, there is also scope for future use of PPPs to develop other social infrastructure.
  • The timetable for the first PPPs tendered in Russia was overly optimistic, but several projects are now under way and should provide forward momentum for PPP in Russia.
  • Despite the recent volatility of its economy, the long term outlook for foreign investment in Russian infrastructure remains positive. This investment will be bolstered by the small number of stateowned banks that are likely to provide a significant portion of the financing of imminent projects.

Framework for PPPs in Russia

While they offer distinct advantages, PPPs present a number of practical, legal and financial challenges. In Russia, as in other emerging markets, the embryonic state of the legal and practical framework for PPPs means that relatively few have been implemented to date.

The situation is changing, however, and we are now seeing a drive to replace, modernise and expand the aging infrastructure, which lingers as a remnant of the communist era. In 2007-8 several high-profile PPP projects have been tendered in Russia. These include major road, urban rail and air transport projects and mark the first real test for the relatively new Russian PPP legislation.

There are currently two PPP models being followed in parallel:

  • the federal government's concession law, under which the physical asset remains owned by the government, a fact that makes enforcement of bank security complicated; and
  • a specific regional PPP framework, such as the one developed by the St Petersburg government, where the deal pipeline is regarded as the most advanced in Russia.

The Federal Russian Law on Concession Agreements

The Federal Russian Law on Concession Agreements (the Federal Concession Law), adopted on 21 July 2005, includes provisions on:

  • entities involved in the concession granting process;
  • concession facilities;
  • selection procedure;
  • concession agreement; and
  • certain guarantees for investors and government support issues.

The law's adoption set the stage for the utilisation of PPPs in many parts of the public sector, including transportation, energy, education, health care and utilities.

For the most part, the legislation is flexible and does not impose rules on how relations between the state and private investors will be conducted during implementation of concession projects. Once a concession agreement has been concluded, regulation of the investorstate relationship is to be governed by the detail of the agreement itself.

However, some rules of the Federal Concession Law have been unusual and restrict the parties from having a tender and negotiation procedure and a concession agreement fully in line with international standards. In July 2008 various amendments to the Federal Concession Law were published with the aim of curing these defaults. Certain legal issues, however, remain to be improved, in particular as regards lenders security.

Law on the Participation of St Petersburg in Public Private Partnerships

The government of the City of St Petersburg takes an active role in developing the city's infrastructure, both in the form of projects based on the Federal Concession Law, such as the Western High-Speed Diameter (WHSD) or the Orlovsky Tunnel, and in the form of nonconcession projects, including those based on the private ownership of the facilities.

To regulate its participation in the non-concession based projects, the regional St Petersburg PPP Law was passed in December 2005. It offers a relatively flexible framework for structuring, tendering and supporting PPPs. In particular, by comparison with the Federal Concession Law, the following factors can be seen as advantageous.

  • Flexible form of PPP relationships. Unlike under the Federal Concession Law, there are eight categories of permitted PPP relationships, including those involving private ownership of the assets, such as 'buy-own-operate-transfer' (BOOT) structures.
  • Better framework for structuring the robust security package. The law does not impose restrictions on pledging or assigning rights out of the PPP agreement. Under a BOOT-type structure, pledge or other encumbrance of the asset for the benefit of the banks may also be possible.

The $1bn Pulkovo Airport concession and the $1bn plus Nadzemny Express light rail project are the most high-profile examples of PPP projects that are not being done under the Federal Concession Law, but are BOOT structures under general civil law and the St Petersburg PPP Law.

Development institutions

In November 2005 the Investment Fund (IF) rules were adopted by the Federal Russian government, signalling another move towards PPP. The IF is intended to be one of the state's primary PPP funding sources and to act as a catalyst in attracting private investment. For 2008, the IF's volume has reached $3bn. Investments to be made from the IF may take the form of, among others:

  • funding up to 75 per cent of total capital project costs as equity investment or financing certain assets in exchange for an ownership title to the assets; or
  • a guarantee on 60 per cent of the borrowings for the purposes of the project.

To qualify for IF support, an investment project must comply with public sector priorities, generate social benefits, have a negative stand-alone net present value (NPV) justifying state support for implementation and generate economic profit if support is provided (creating a positive NPV).

In May 2007 the Federal Law on the Russian Bank of Development (Vneshekonombank, VEB, which is a banking institution fully owned by the Russian state) was assigned with promoting Russian infrastructure, including via financing or otherwise supporting PPP projects. VEB is currently considered as one of the institutions that will play a key role in the further development of Russian PPPs. One of the recent moves to confirm this perception has been creation of a PPP task force within the bank to study, standardise and promote PPP practices in Russia.

Business issues for potential investors

Transparent legislative frameworks and tender processes are essential to attracting high-calibre applicants to bid on tenders. In this respect the current framework for PPPs in Russia has a number of drawbacks.

Restrictions on the concessionaire's ability to grant security over the project assets or rights under the concession agreement. Under the Federal Concession Law the parties are not allowed to pledge the asset or the rights under the concession agreement and a security assignment over such rights is only limited to a period after the asset is completed. Although alternative security instruments are available in Russia, such as a pledge of shares in the concessionaire, the limitations on the agreement and asset related securities makes finding lenders and structuring a security package more difficult. Under the St Petersburg PPP Law this is not an issue.

  • Exclusion of the PPP models that incorporate ownership of assets by private sponsors (for example, BOOT). Under the Federal Concession Law, assets built under the concession agreement are owned by the grantor on their completion, with the concessionaire granted only a long-term lease and concession rights. This reduces the range of PPP models that may be used to implement a project and limits flexibility for the grantor. Unlike the Federal Concession Law, the St Petersburg PPP Law does not include such restrictions and allows for multiple forms of PPPs.
  • Negotiability of bid documentation. While bid procedures under the Federal Concession Law have recently been amended to facilitate post-tender negotiation of key terms, in particular to give parties more flexibility to amend the time schedule to close the deal, there are still certain procedural imperfections that need to be cured. The St Petersburg PPP Law is more flexible in this respect.
  • Concerns in relation to the truly independent forum for dispute resolution. Russian policy favours Russian court jurisdiction in disputes over international arbitration yet there are doubts about the independence of the Russian court system. In a number of the current projects the grantor decided for an internationally recognised arbitration.
  • No specific federal legal framework for non-concession based PPPs. Although the regional PPP laws may in some cases be more reasonable than the Federal Concession Law, the risk of using such laws is that the correlation between the federal and regional law in this area is not fully clear from the legal perspective and has not yet been tested in practice.

Current PPP projects in Russia

The majority of current PPP projects in Russia are in the transport and infrastructure sector. The potential volume of private investment in transport infrastructure has been estimated at €12-15bn per year.

The Western High Speed Diameter motorway (WHSD)

The WHSD is a high-speed motorway linking St Petersburg's trade seaports, including the Grand Port, with the national road network. To the north it will provide a connection to the 'Scandinavia' motorway. It will connect the north-western, central and southern parts of St Petersburg and play a vital role in the city's development as a major world transport hub.


  • Construction started in September 2005 and is expected to be completed in six to seven years.
  • Mostly eight-lane with an overall length of 46.6km.
  • Total project contract value estimated at around $9bn.
  • Approximately 50 per cent of construction costs contributed by the Federal government.

The winning bidder, announced in June 2008, was the WHSD-Nevskij Meridian consortium, which includes Strabag, Basic Element, Bouygues, Hochtief, Egis Projects and the Russian construction firm Mostoodryad No. 19.

Banks should be attracted to the project by the number of wellestablished sponsors involved. Among other commercial banks, HSBC and Gazprombank are seen as interested in the project.

The WHSD is important for the Russian Federal government, which is keen to use it as a flagship for implementing PPPs, despite concerns over the project's complexity.

The first section of the Moscow to St Petersburg motorway

The first 58km section of the toll motorway linking Moscow and St Petersburg (a total of 650km) aims to relieve congestion on one of the busiest highways in Russia.


  • Estimated value of up to $2.1bn.
  • Includes the construction of five bridges, eight junctions and 21 flyovers.
  • Is estimated to take five years to complete.
  • Half of the funding is expected to come from the state with the remainder to be covered by private sources, including international banks and companies.

The Northwest Concession Company of Vinci and one of the Russian transport majors Ntrans, have been announced the preferred bidders. Under the current timeline the parties are to close the deal in six months.

The Orlovsky Tunnel

This 1km-long tunnel under the River Neva in St Petersburg will open inland shipping to international transport. It will also increase the general capacity of the Volgo Baltic Waterway and is therefore beneficial to the federal transport network. It will also significantly improve the traffic situation in the adjacent areas of the city.


The government of St Petersburg is the project's grantor.

  • In August 2006, the project was allocated more than $300m from the IF with the balance of the funding to be provided by the St Petersburg city budget.

In December 2007 its was announced that four bidders had made it through pre-qualification. These are: Nevskaya Concessionaya Companiya (led by Vinci); Nevskij Tonnel (featuring Strabag, Basic Element and Egis Project); Boyuguesproekt Opereiting (led by Bouygues); and Neva Traverse (led by Hochtief).

Pulkovo Airport

Pulkovo Airport in St Petersburg is arguably the most important part of the transport infrastructure in north-western Russia and it is fast developing. The City of St Petersburg will take the lead in its improvement following an authorisation by the Russian cabinet in early 2008 for the Federal Property Agency, jointly with the Air Transport Agency, to hand over the federal property of Pulkovo Airport to the city administration.


  • $1.5bn is to be invested, through a special-purpose vehicle, to upgrade the airport, enabling it to accept long haul flights.
  • The official target for announcing the winning consortium is March 2009, with the contract to be signed by the end of June.
  • The concession agreement is likely to last for 30 years.

On 12 August 2008 it was announced that seven bidders had been shortlisted. These are: GMR Infrastructure; Petroport (Leader Asset/ Vienna Airport Group); Nevsky Airport (Basic Element, Changi Airport and Strabag); Financial-Industrial Company 'Farvater' (VTB Bank, Fraport and Copelouzos); Nevsky Sky (Macquarie Airports and Macquarie Renaissance); St Petersburg International Airport (Renova and Hochtief); and TAV Airports Holding Company.

Nadzemny Express

Beginning at Baltic Pearl in the Krasnoselskiy district, this 26.5km rail line will pass through five southern city districts, ending at the Obuchovo metro station. The project will also encompass a 22km extension of the system to Pulkovo Airport and a further 22km extension to Petrodvorets (Naukograd).


  • The successful bidder will be required to design, build, part finance and maintain the system, which will have 16 stations and 30km of track.
  • The project has an availability payments structure.
  • The concession will run for 30 years.

In April 2008 it was announced that five bidders had been shortlisted. These are: Mitsui; a consortium of Ansaldo Transporti Sistemi Ferrovanti, Soares da Costa Grupo SGPS, ATM Azienda Transporti Milanesi and `koda Transportation; Yuzhny Express, comprising Alstom, Bouygues, Tranadev and Mostootryad 19; Strelna-Express, comprising Bomardier and Vinci; and Express-Severnoy Stolitsy, comprising Strabag, Siemens and Basic Element and VTB Bank.

Risks for potential investors

Despite clear political and financial commitment to developing PPPs from both the federal government and the government of the City of St Petersburg, the existing legal and administrative frameworks place a number of hurdles in the way of investors. Of particular concern are laws governing budget regulation, tax issues, licensing and antimonopoly regulation.

Market risks

The recent dramatic devaluing of Russia's stock market has undoubtedly raised general concerns over market volatility. Similarly, currency exchange risk is currently a cause of anxiety. Russia's foreign currency rating is currently BBB+ (Fitch and S&P). On 23 October, S&P announced that its outlook on Russia had been downgraded from stable to negative as a result of the cost to the Russian government of its bank rescue plan. In addition, investment in Russia is still affected by concerns over sovereign risk and revenue security, and by the perception that its commercial banks carry political risk. One result of these uncertainties is that export credit agencies are increasingly being approached by bidders to finance or underwrite PPPs.

Other, more general concerns include:

  • the geographical concentration of the major projects;
  • the potentially negative attitude of consumers to being charged for services that used to be free – eg the toll roads; and
  • a considerable level of corruption at federal, regional and municipal levels.

Financing and the 'credit crunch'

While the liquidity crisis is undoubtedly having a global impact, the outlook for infrastructure investment in Russia is complicated and conclusions difficult to draw. Some analysts believe that the recent deterioration of Russia's stock market may reflect a growing pessimism on the future of its economy. However, what is fairly certain is that Russia will not experience a repeat of the events of 1998. It is in a far better position to manage this downturn due to tighter regulation, stronger capitalisation and accumulation of the world's third largest foreign exchange reserves.

Infrastructure projects are, by virtue of their long term nature, notoriously robust in times of economic downturn. Although the completion of deals may take longer and the number of banks involved in syndication may increase, the sentiment is that the projects will be completed eventually.

Some factors particular to Russia do count against it as a preferred country for foreign investment. One is the vast size of the projects, such as the WHSD and the Moscow to St Petersburg motorway, which are being carried out at the same time and competing for liquidity. On the other hand, the momentum and demand for investment opportunity that has built up behind projects such as Puklovo Airport are likely to spur on their development.

In terms of Russian investment, a number of small, state-owned banks still dominate the Russian banking system and even the leading private banks are not strong enough to become serious players in the upcoming PPP deals. In fact the main effect of the credit crunch on the Russian banking system has been to further widen the gap between the largest banks and their smaller competitors. For the time being, stateowned banks, such as VTB Bank, Sberbank and Gazprombank, as well as Vnesheconombank, will play a vital role in providing a significant part of the funding for infrastructure deals.

In addition, a number of special infrastructure funds are being created in Russia to encourage equity investment and it may be that a lack of projects rather than a lack of available money may prove to be the problem. By comparison, capital markets are not expected to become a serious source of infrastructure financing in the near future.

Recent developments

By the end of July 2008, the IF had approved 12 projects with a total value of $38bn. It has also been announced that the Russian Ministry of Regional Development will review a number of new regional projects by September 2008.

The European Bank for Restructuring and Development and the Russian Development Bank recently agreed to explore the possibility of co-financing projects in certain areas and in February 2008 a memorandum of understanding was signed. Their priority sectors include transport infrastructure, energy and municipal services and those with significant environmental and energy efficiency potential. With the help of other interested organisations, the two institutions will also consider setting up a unit to help manage the project preparation process for PPPs in infrastructure, a move that could be extremely beneficial in attracting investors.

Future opportunities

Short term, private investment in Russian infrastructure is bound to suffer as a result of global market uncertainty. However, the federal government has not indicated any weakening of its commitment and expectations for the long term development of Russia remain optimistic. The speed at which infrastructure projects are completed should accelerate once the concession law has been tested with the first project to come to closing.

The success of the city of Sochi in winning the bid for the 2014 Winter Olympics will stimulate much infrastructure rejuvenation in the area. One major proposal is for a new offshore terminal in Sochi's port to allow cruise ships to dock. The proposed terminal would have a 3,000-passenger capacity and would be completed in time for the 2014 Winter Olympics.

To ensure that the area is ready for the Games, the Federal Target Programme for the Development of Sochi was initiated in 2006 and will run until 2014. The Krasnodar regional government plans to spend $11.7bn on development projects and the programme is being co-ordinated by the Russian federal government. It is expected that many of the projects will be completed using PPPs.

Whereas most PPPs in the pipeline in Russia focus on transportation, airports and ports, in coming years it is anticipated that this form of project finance can be adapted for use on social infrastructure projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions