We could start with a fly in the ointment: this year’s 25% growth of the total value of investment projects is, naturally, a high indicator; however, we owe this growth primarily to the Integrated North Caspian Field Development Program launched by LUKOIL that is worth over USD 21 billion. Despite the fact that the cost of building a gas chemical complex in Budennovsk, the Stavropol Territory, was excluded from the project, the figure of investments to be made under the project has considerably risen for the year. If this factor effect is not taken into account, the growth of the total base of investment projects implemented in the Southern Federal District (SFD) will be at the level of 10% - 12% in value terms. For comparison: we recorded the 17% growth of our base of southern investment projects a year ago in the first post-crisis year: i.e. dynamics were higher. In fact, the investment process development has been much decent this year than expected. However, this decency shows shoots of new contents.
Renewal with a sense
On the whole, this year our base has been renewed at approximately 30% in terms of the number of projects. For comparison: we recorded renewal at the level of 20% a year ago and this was a completely different story than the 15%renewal recorded in the previous year. We arrived at the conclusion that the investment process in the South has entered the maturity phase: certainty came after arrival of major projects. It should be emphasized that the weight of these major projects in the base is quite considerable: the first twenty-six largest projects representing 10% of the total base have accounted for 70% of the total value. The investment flow concentration in the South even grew to some extent in a year.
It turns out that we are having a more considerable increase in the number of investment projects and an increase in their total value growth rate this year. It is hard to escape a conclusion that the number of projects announced last year is higher than that announced before; however, their sizes were more decent. And it is also important to note that projects were renewed in a natural way: projects did not disappear just after having been launched: over fifty projects from the last year’s base were successfully put into operation last year. And the number of new projects exceeded the number of failed ones.
In total, 266 projects have been selected. According to our estimates, their total value amounted to USD 99 billion. We selected only major investment projects worth at least USD 10 million each, being aware that a large number of projects at a lower scale are implemented in the South (both by large and medium-sized companies).
The major resource for a study consists of a unique database of the Expert SOUTH analytical center on investment projects implemented in the territory of the SFD. With the purpose of making up this base, we sent inquiries to the administration of the district entities, the investment development agency, asked the largest businesses of the South, the Bank for Development and Foreign Economic Affairs, other institutional players, entities executing federal target programs, the most active investors from other areas, administrations of certain cities to fill in questionnaires, gathered information from public sources (business media, official companies’ websites, information agencies, etc.), and used our own database. Traditionally, the study did not encompass projects in the area of housing development, creation and reconstruction of social infrastructure projects. The geography of the study includes all the SFD entities; the study was conducted over the period from May to August 2011.
The preliminary base consisted of just 400 projects. We included projects under which works in the field would start no later than in 2013 and those that will be put into operation no earlier than in September 2011. After that, we cleared the base by the degree of “reality” based on available data and information verification conducted. Projects that were included in the final base meet several requirements: a project has an initiator/investor; its implementation is scheduled for no later than 2013 (the period of signing agreements with contractors, beginning of financing); the current degree of project development should be at the level of at least the feasibility study, the business plan, and, preferably, agreements with investors, banks for crediting, execution of the land legal documentation, construction phase, etc. After such screening, we selected 266 projects that we conditionally consider feasible. The first dozens of the largest investment projects are presented by industries in the relevant sections of the study.
In order to ensure data comparability, we continue to analyze information in US dollars. If information was provided in the national currency, we converted rubles into US dollars as of the date of commencement of the second phase of the study (August 01, 2011) according to the exchange rate established by the Central Bank: RUB 27.68 = USD 1.00; in cases where the source amounts were provided in euros, conversion was performed at the same date according to the following exchange rate: RUB 39.52 = EUR 1.00.
Due to the strict methodology, the category of feasible projects could not include two large new projects in the agricultural area: “PARK: industrial and agricultural regional clusters” in Rostov Region worth RUB 20 billion and a pig farming cluster on the territory of Volgograd Region worth more than RUB 22 billion. A pool of investors is required for these projects to be implemented; however, at the screening phase, both clusters were at the stage of negotiations with potential participants.
Another large project worth more than RUB 55 billion, namely “Creation of a polyethylene production complex in Astrakhan Region to be jointly financed by SIBUR Holding OJSC and Gazprom OJSC” was not included in the base due to the continuing phase of negotiations with the said investors. A project of creating a hotel and recreation complex Slavianskiy Trading Quarter in the Volga and Akhtuba bottom land of Volgograd Region worth over USD 1.5 billion was excluded from the base as it passed to the phase of search for investors. Some more decent projects in terms of their costs were suspended as well.
The agrarian sector woke up
The agricultural sector and the food processing industry were the main contributors to the base renewal. This year, the sector is represented by 60 projects totaling over USD 6 billion. Last year, the number of such projects was three times smaller, and their declared value was at the level of USD 4.7 billion. The agricultural sector and the food processing industry are currently the areas in which numerous low-cost projects arise.
The building material industry holds the second position among the “novice” projects. The economic situation improvement promptly renewed the interest of investors for this sector, although most projects were rejected or “frozen” a year ago. Last year, there were only 14 projects worth less than USD 2 billion (2.5% of the total value); today their number is more than 20 representing the double growth in terms of their value.
The energy sector is a leader in terms of reduction of the number of presented projects: 41 projects in 2011 against 73 projects in 2010. However, its value dynamics are quite different: this year the total declared value of energy projects is several USD billions higher than a year ago. On the one hand, this can be explained by the fact that several small and relatively inexpensive projects were put into operation (mainly in the network area), including some projects related to preparation for the Olympic Games and for this reason they were excluded from the base. On the other hand, some expensive projects were added: for example, creation of the Volga Silicon complex for production of polycrystalline silicon and photo energy systems in the territory of Volgograd Region that is worth almost USD 1.9 billion.
Changes in other sectors were not so dynamic in terms of the number of portfolios. Oil and oil and gas projects requiring several years to be implemented (the sudden growth of their value is explained above) are stable. The minimum changes were observed in engineering and transport infrastructure, coal and glass industries. A couple of telecommunication and communication projects were added.
Two projects excluded from the top ten leaders
This year, the project of a resort city in Tenginskaya village worth USD 5 billion (former Novomikhaylovskiy trading quarter) was excluded from the top ten largest investment projects of Russia’s South. According to our information, this project was suspended; Investment Company REGNUM LLC, an investor, states that the project is at the phase of being approved; no other information is made available. We also failed to obtain confirmation that the investor implements the project of developing territories of Kavkaz agricultural firm near Anapa totaling more than USD 2.6 billion. The other eight largest projects are still included in the base.
The oil and oil and gas industries represented by three projects worth USD 27 billion are the unconditional leaders among the ten top projects as well as in the base in general. Tourism (USD 8.3 billion) and the engineering and transport infrastructure represented by construction of the highway and railway from Adler to the Alpika-Service mountain climate resort worth USD 8.2 billion account for almost the same contributions to the top ten projects. Tourism is represented by two projects: construction and operation of the Rosa Khutor ski resort (USD 1.8 billion) and creation of an artificial territory of the Federation Island sea resort (USD 6.5 billion).
The energy industry is represented by tree projects totaling almost USD 6 billion: construction of Novy Rostov coal HPP (USD 2 billion) and the 3rd and 4th power units of Rostov Nuclear Power Plant in Volgodonsk (USD 2.1 billion), the Kremniy-in-Ru project (USD 1.99 billion). The chemical industry is represented by the project of exploration and extraction of potassium salts in the Gremiachenskoye field located in Kotelnikovo District of Volgograd Region (USD 3.4 billion).
We have already considered the general situation in the South of Russia on the whole; now we should look at the SFD specifics given the fact that contribution of the District to the base of investment projects implemented in the South was about 75%. If we compare the industry-specific structure of the SFD and NCFD largest investment projects, we can observe several distinctive features. The main conclusion is that the SFD accounts for all infrastructure investments in the South of Russia. If this sector ranks second in terms of the weight of projects with the share of 17.1% here, the share of such projects in the Caucasus totals just 1%: the time of infrastructure investments has not come here yet.
The three leading industries in both districts are the same, but their positions are different. Tourism is a leader in the Northern Caucasus accounting for 31% of the total value of investment projects while this sector ranks fourth in the SFD. Energy projects in the Caucasus hold the second place (the natural conditions make it possible to implement hydro energy projects here by using the possibilities of mountain rivers) and account for one quarter of the total base; energy projects in the SFD account for 16.3% and hold the third position. The oil and oil and gas industries in the SFD hold the first position while they rank third in the new federal district. However, projects in the chemical production area are primarily concentrated in the NCFD; for this reason, their share in the SFD is 3.7% although, on the whole, it was 8.53% in the South a year ago.
Changes in industry priorities
According to our database, the oil and oil and gas industries, infrastructure projects, energy and tourism sectors account for the main amounts of investments in the South (see Diagram 3). They represent 78.5% of the total investments.
The oil and oil and gas industries moved from the fourth position to the first one announcing 12 projects that are worth USD 30 billion. The engineering and transport infrastructure sector represented by 37 projects continues to hold the second position. And its share decreased to a certain extent to be 17.1%. The position held by the energy sector remains the same: it ranks third in terms of importance; this sector announced 41 projects worth USD 16 billion.
After our study excluded a resort city in Krasnodar Region and the Slavianskiy Trading Quarter complex, tourism moved from the first position to the fourth one. However, this sector ranks second in terms of the number of investment projects: this year they amount to 48 and their total declared value is USD 14.7 billion.
Kuban growth nature
It is easy to forecast that Kuban continues to be a leader in the rating; its portfolio of projects has risen to reach USD 50 billion within a year against USD 41 billion in the previous year and resulted in a 22% growth. Therefore, the Krasnodar Territory accounted for 50% of the selected feasible investment projects of the South. Last year, Kuban was represented by 161 projects; the number recorded in this study decreased by 10% and is 178. It is interesting to know that the amount grows here faster than the number: this trend reverses this year’s general trend. This means that the nature of the investment growth in the Krasnodar Territory is different than that in the South in general.
If we single out Kuban projects that are, one way or another, related to preparation for the Olympic Games, it will turn out that they account for two thirds of the total value declared in the Territory in general. These are mainly projects pertaining to the engineering and transport infrastructure, tourism, and energy sectors. It is impossible to overestimate importance of the decision of the International Olympic Committee for the economic development of the area.
The aforementioned information on the project in the oil and gas industry in the North Caspian area has considerably affected changes in the regional structure of data moving Astrakhan Region up to the second place and Rostov Region down to the third position. The Rostov Region portfolio has remained at practically the same level. As regards the remote Adygea and Kalmykia areas, their total share remains at a low level of 1.3% despite the growth of their projects in value terms.