Page 12 - RusRPTJuly18

CREEC, Russian Railways' major Chinese partner, says that the Eurasia route -- a flagship trans-Eurasian rail corridor from Beijing to Berlin through Russia -- is unattractive to investors at market rates. It needs state help.
Russia's ability to profit off of China's Belt and Road Initiative (BRI) is reaching its limit due to lack of financing, poor investor returns, and tight political control over concessions that enrich supporters. Investors and operators can't legally negotiate concessions and need tens of billions in cheap credit. China is not paying for Russia's infrastructure needs.
At a presentation by China Railway Eryuan Engineering Group (CREEC), the company claimed that market credit rates of 5.75% annually wouldn't attract investors to finance 60% of the project as hoped. CREEC presented its findings in a working group with Russian Railways (RZD).
The initiative dates back to a proposal last August led by Igor Shuvalov, then serving on PM Medvedev's team. RZD openly admits the project's viability depends on state financing from Russia and China. The route from Beijing to Berlin was estimated to cost $110bn total. The Russian part costs over $55bn. CREEC knows that returns are low on such an investment, citing profitability for investors at a 2.88% annual interest rate for loans and financing.
In that scenario, it would take 28 years to pay the cost back fully in taxes and profits. It'll probably take longer. RZD says the Moscow-Kazan leg can be built using state grants, but that avoids reforms to allow concessionaires to negotiate terms for their investments. Concessionaires currently lack that right. RZD wants to keep Russian money in the family and deny outside investors and operators any say in how they profit, but there isn't enough money kicking around to afford it.
2.7 Only a fifth of banks independent from CBR
A new report from the rating agency ACRA found that only a fifth of Russian banks (accounting for 36% of the sector’s assets) can raise capital independently without sacrificing financial stability. This means that the state is the only stable source of financing for most banks.
According to the study, by the end of 2017, banks holding assets worth 89% of the sector saw a sharp drop in their average capital generation rates, from 76 basis points in 2016 to minus 86. That's a swing from satisfactory returns to losses. The situation will likely remain grim for the next three to five years.
The report attributes the decline to the 1.45 trillion rubles ($24bn) in losses recorded by large Russian banks that were cleaned up last year. These include Otkritie, Binbank and Promsvyazbank, for which the Central Bank (CBR) spent 2.62 trillion rubles ($42bn) to save.
The report also notes an overall trend of decreased interest in the banking business, due in part to tighter regulation on the creation of reserves for distressed assets. Higher capital requirements have lowered sector rates for dividend payments from 81-84% in 2015-2016 to 56% in 2017 (not including Sberbank, which skews the data).
While economists agree interest is declining, they disagree about why. Economist Yuri Belikov argues it stems from certain banks' inability to work in market conditions. Fitch's senior director Alexander Danilov agrees, stating that a large number of banks are “redundant,” and it's unsurprising that weak players will quietly leave the market. Meanwhile, according to Danilov, the core of the banking sector (two-thirds by assets) is stable, as it consists of either strong players (Sberbank, Alfa-Bank, Sovcombank, etc.), or weaker
RUSSIA Country Report July 2018 www.intellinews.com