The Western High Speed Diameter (WHSD) road concession promises to be the first real test of domestic lender appetite for local currency project finance debt in Russia. VTB Capital and Gaz­prom­bank, as equity providers, won the concession, to build the road’s central section and operate all of it, from the city of St Petersburg in early August.

The two financial institutions, both with deep ruble funding resources, have provided a financial proposal alongside the bid, and would be able to fund the debt component of the project’s R69 billion ($2.37 billion) private sector funding requirement. Given the fate of an earlier version of the WHSD’s concession, which fell victim to the credit crunch, the two sponsors might feel that trying to broaden the funding base for the road is not worth the time and cost.

There are several precedents on which the financing might draw, not the least of them the federal government-guaranteed bonds that were used to finance the northern and southern sections, as well as some road improvements around Moscow. VTB comes to the project from closing the financing for Pulkovo Airport in St Petersburg, which attracted strong levels of offshore development finance bank support.

But guaranteed bonds will not be available for the privately-built section, and offshore lenders will struggle to cope with the concession’s ruble revenues. The sponsors will look at whether the broader local bank market, the incipient local bond market, and development finance institutions can be of any use in rounding out the debt requirement.

St Petersburg is funding construction of the 8.7km southern and 26.2km northern sections with government contributions and the issuance of R10 billion in 20-year bonds. The issuer, OJSC Western High-Speed Diameter, is city-owned, and the city will contribute R51 billion in federally-provided funding towards the central section’s R120 billion total cost.

The central section, of 11.7km, presents the greatest levels of construction risk, because it involves the building of three bridges (two of them cable-stayed) and a tunnel. Even with the past history of the road, the presumed benefits in construction cost and life-cycle maintenance make using a private developer attractive. The private consortium will also maintain the northern and southern sections. The con­struction contractor is a joint venture of Italy’s Anstaldi and Turkey’s Ictas Insaat.

The toll road will generate ruble revenues, which places limits on the sponsors’ financing options. The financing for Pulkovo is frequently cited as the best available template for other Russian PPP projects. That it enjoys this cachet says more about the leisurely development of Russian PPP than Pulkovo’s applicability to other transportation, not to mention social infrastructure, assets. Pulkovo’s ability to earn foreign currency allowed it to build up a bank following that couldn’t help but inflate expectations for later deals.

The Eu1.24 billion ($1.7 billion) finan­c­ing brought in a long list of development banks as lenders: Vnesheconombank (VEB), the Inter­national Finance Corporation, Euro­pean Investment Bank, Eurasian De­vel­opment Bank: Nordic Investment Bank, Black Sea Trade and Development Bank. Given the importance that such lenders attach to good transport links between Russia and its neighbours, none of the names is surprising. But the syndication of the Pulkovo B loans brought in an impressive haul: DZ Bank, Banco Espirito Santo, KfW IPEX, Mediobanca, Nordea, RZB, Standard Bank, and Unicredit.

Only VEB, the mainstay of Russian infra­structure finance, might be considered a lock for the WHSD. Asked whether the multilateral development banks will be a major part of the financing, Oleg Pankratov, VTB Capital’s head of infrastructure capital, notes that the EBRD, for example, has the ability to fund in rubles. The EBRD is among the multilateral lenders most seriously considering involvement in the WHSD. Other development banks may have the treasury operations to support some ruble lending.

A better bet may be the export credit agencies, which do have the ability to provide coverage in foreign currency. Pan­kra­tov notes that Sace has the ability to cover foreign currency loans, and could potentially provide credit support for Astaldi’s obligations under the central section construction contract. But long-term local currency debt from agencies, where the bulk of the project content is domestic, is a struggle.

As for the possibility of using dollar debt and then hedging this exposure, Pankratov says that “there is liquidity in the long-dated cross-currency swap market but the hedging could be expensive. The additional costs will eat up the benefits in pricing and tenor very quickly.”

The final option, outside of the small num­ber of Russian banks with the resources and expertise to fund a large road, is the so-far untapped pool of institutions, pension funds and insurance companies interested in gaining exposure to infrastructure. The ministry of finance-guaranteed bonds have sparked some interest in infrastructure, but uncovered participations are unlikely.

“If you are talking about bondholders taking construction risk, you’re talking about the future,” says Pankratov. “Even in western Europe, there has been little interest in uncovered project bonds. The Russian bond market in general is very small, and I think we’d have to see a large number of corporates issuing bonds with very long maturities before the project bond market takes off.”

Given the menu of options, the temptation to use an all-bank solution will be immense. But the pressure to open up the market will not go away. Russia’s ministry of transport has floated plans for a high-speed rail line linking St Petersburg, Mos­cow and Nizhny Novgorod. The Eu20 billion line will need to be chopped into small­­er sections just to be digested by sponsors and contractors, even before being pitched to lenders. At some point a sponsor will need to spend the time and money to work with unfamiliar sets of lenders.