The invasion of Russia by Western corporate lawyers has been going on for some time, but there is a new type of lawyer taking an interest in the country – the project finance advocate.
US and UK firms are evenly matched in the corporate stakes. But with Russia’s traditional focus on the New York financial markets tempered by an increasing eye on London, UK firms have a clear advantage in the project finance market.
Having been conceived in the early 1990s, the UK PPP model is mature and well advanced. It was also a model for Russia’s Federal Law No 115-FZ, adopted in July 2005, which sets out the country’s stance on concession agreements.
The experience that the leading UK firms can bring to the table, coupled with strong local offerings in Moscow, puts them a step ahead of the competition.
Freshfields’ gripFreshfields Bruckhaus Deringer has been quick off the mark, securing the Russian Federation, which controls much of the country’s infrastructure development and operation, as a client. The firm is working closely with the federation’s ministries on feasibility studies and project implementations.
Freshfields has had a long-term focus on the Russian market. Its local office was advising on small-scale projects in the last century, when PPP projects were still in their infancy.
Through this work it made an ally of the Russian Federation – and a powerful ally it is. The firm has now been retained to advise on Russia’s first large PPP project – a lucrative mandate and one that will set the tone for the market’s future.
With Freshfields’ strong grip on the public sector, rival firms such as Allen & Overy, Clifford Chance, Herbert Smith, Linklaters and Lovells, which all have designs on Russian PPP work, are battling to win the affections of wary investors.
The big banks, credit agencies and international project developers are remaining cautious, meaning firms with strong local resources such as CMS Cameron McKenna, DLA Piper and Salans may still lose out to the heavyweights.
PioneersWastewater treatment, dams and other social infrastructure projects have already been closed, but it is transport infrastructure that is offering the best prospects.
The biggest PPP deal in Russia right now is the Western High Speed Diameter (WHSD) project in St Petersburg. The $3bn (£1.54bn) project to construct a motorway linking St Petersburg’s trade ports with the national road network will be the first concession agreement to come under Federal Law No 115-FZ.
Freshfields is advising the Russian Federation and the City of St Petersburg as the joint grantors of the project. Being the first concession agreement of its kind, the work is labour intensive, with a number of complexities to be thrashed out before a final bidder is selected. A concession agreement is expected before the end of 2007.
Freshfields Moscow-based finance partner Innokenty Ivanov, who is leading on the deal locally, says: “In Russia the law allows the postponement at any time to negotiate further on the tender document or concession agreement. The end of 2007 is the plan, but this could change at any time.
“There are always the general Russian risks, but it’s important the government will assume some of the risks in this project to the extent needed to make the project bankable. Being the first of its kind, the success of future projects depends on the success of this one.”
Being cautiousRussia’s minister of transport Igor Levitin has been a big promoter of PPPs, and at a recent round table discussion he announced: “I’d like to especially stress that the Ministry of Transport views the implementation of projects based on PPP principles as one of the most strategic priorities of its activities.”
Lovells Moscow head of banking Alexander Rymko says: “There’s the political will to make this happen, but, as with everything in Russia, a lot of investors are taking time to look at the developments before committing.”
The clients may not be rushing to commit, but the interest is certainly there. A roadshow held in London last December to outline the bidding process for the WHSD project attracted some 130 interested parties.
Freshfields project finance partner Bobby Stewart, who presented at the roadshow with Ivanov, says the interest is unprecedented.
“I’ve been getting a lot of calls from investment banks, financial investors, sponsors etc that have seen the firm name and know us, but don’t know anyone in Russia,” he says.
“There’s a lot of potential in this market no doubt, but there’s still an awful lot of toe-dipping in the water,” Stewart adds.
At the roadshow rival law firms watched with interest as Freshfields gave a presentation on how the first concession agreement would be structured.
“There are a number of questions to be answered and a lot of work yet to be done,” says one rival City project finance lawyer advising a project bidder. “Our client’s considering this project very carefully, but there are a lot of assurances they require to be sorted out before they can proceed with any real confidence.”
One of the major sticking points is the uncertainty over the process for disputes. The possibility of attempting to settle a dispute in the Russian courts is giving even the most robust sponsors and lenders reason to pause.
Stewart concedes that it will be a touchy point when negotiating with potential bidders. “We’ll need to see where we get to with the market on that. We accept it will be an issue for the sponsors and the banks and we’ll have go to through a process to make sure the transaction is bankable.”
It is an evolutionary period for this sector of the Russian market and the risks offer high rewards. This is more than just a highway to ease St Petersburg’s traffic congestion – the success or failure of this guinea pig project will determine the future of the market.
TOP RUSSIAN INFRASTRUCTURE PROJECTS
The Western High Speed Diameter (WHSD) motorway
Value: Estimated $3bn (£1.54bn)
Description: 46km high-speed motorway linking St Petersburg’s trade seaports with Scandinavia in the north and Russia’s road network in the south.
Status: Pre-qualification closes 28 February. Freshfields instructed by Russian Federation and City of St Petersburg as public sector grantors. Qualifying bidders expected to be announced by October.
The Moscow to St Petersburg motorway
Value: Estimated up to $7bn (£3.58bn)
Description: 650km toll motorway linking Moscow and St Petersburg.
Status: Early feasibility planning stages. May be split into several projects covering smaller sections of motorway.
The Orlovski Tunnel
Value: Estimated $1bn (£510m)
Description: Road tunnel under St Petersburg’s River Neva that will open inland shipping to international transport.
Status: Proposed by the Baltic Metropoles Network, a representative forum for major cities around the Baltic Sea, and a powerful lobby group for PPPs.
Value: To be determined.
Description: Redevelopment of Murmansk Port, including an offshore oil storage and transit terminal and associated railway networks.
Status: The multibillion-dollar project is still in the early stages of proposal.