Russia Finds Few Spots to Put Oil Wealth to Work

MOSCOW -- Late last year, the Kremlin gave his bank $7.5 billion and a broad mandate to invest urgently in upgrading Russia's decrepit infrastructure and outdated industry.

But for the moment, Vladimir Dmitriev, chairman of state-owned Vneshekonombank, is holding on to most of his bank's money. The problem? Too few good deals to invest in.

"There aren't enough well-prepared investment projects," Mr. Dmitriev complains in an interview. After decades without major investments in Russia, he says, the basics needed to prepare big capital projects -- engineering companies, project designers -- have atrophied. "This is a big brake on implementing large projects," he says.

For now, Vneshekonombank has put about $4 billion of the oil money the government gave it last year into short-term deposits, helping the local banking system weather the global credit turmoil. Several other big state companies set up last fall to stimulate investment are similarly heavy on cash, waiting for other uses for their billions in capital.

The lack of projects is just one of several barriers Russia is facing on its drive to rebuild roads, bridges, ports and power plants. Everything from skilled managers to cement is in short supply.

The scale of the Kremlin's plans is daunting. Enriched by revenues from its oil and gas exports, Russia plans to spend $1 trillion on infrastructure over the next decade, according to government officials. With the Kremlin increasing the state's role in the economy in recent years, much of that money is coming from the government budget -- and some economists fear this is likely to strengthen the government's hand in the economy even more. Moscow's role is also raising concerns about how efficiently the money will be spent.

To help draw private investors to its projects, Vneshekonombank hopes to use public-private partnerships, putting in some of its own money to attract other capital. "The role of the bank is to put up the flag behind which private investors will follow," says Mr. Dmitriev, 54 years old, a former Soviet diplomat who worked in the finance ministry in the 1990s before moving to state-owned banks.

A novelty in Russia, the public-private partnerships are the latest fashion. Government officials tend to want the private investors to bear all the risks, without providing any assurances about returns, according to bankers.

"This is one of the most expensive ways of financing infrastructure" because of the complexity of the deals, Natasha Khanjenkova of the European Bank for Reconstruction and Development warned at a conference in Moscow this spring.

Mr. Dmitriev says his bank is working to set up a national center to develop these partnerships and that Vneshekonombank hopes to attract four to five rubles of private investment for every ruble it puts in.

Last month, Prime Minister Vladimir Putin, chairman of Vneshekonombank's advisory board, endorsed what he called the bank's "ambitious" plan to boost its lending portfolio to 850 billion rubles (about $36.3 billion) in 2012 from just over 200 billion rubles today. Mr. Dmitriev says the bank hopes to get more inflows from the government but is also planning domestic and international borrowing to fund its huge expansion.

One of its latest projects is a $1.7 billion wood-pulp plant in an underdeveloped region of Siberia near the city of Angarsk. The government is building rail and road links, as well as ensuring electric supply for what Mr. Dmitriev says is the first new pulp plant in 30 years in Russia, which has some of the world's largest forests. Until now, he notes, most of the factories processing Siberian wood were built across the border in northern China.

Mr. Dmitriev says preparatory work for the project took two years and required the creation of a special engineering company. With the project under way, he says, the bank is now looking for an outside investor to take over. So far, much of the bank's business is with state-controlled companies.

Mr. Dmitriev says his bank's board, made up of top government officials, will protect the bank from getting involved in politicized projects that could be risky.

Nonetheless, Vneshekonombank has been involved in a number of politically sensitive deals already. At the end of last year, it spent about 1 billion euros ($1.58 billion) from the government's capital infusion to buy a stake in Airbus parent European Aeronautic Defence & Space Co. from OAO VTB, a state-controlled bank.

VTB's purchase of that stake in 2006 set off alarm bells in Europe, where officials feared the Kremlin was trying to muscle in on the strategically important Franco-German company, and rebuffed Moscow's efforts to play a greater role in EADS. VTB, which unlike Vneshekonombank is publicly traded, unloaded the underperforming stake. Mr. Dmitriev says his bank plans to swap the EADS shares for a stake in the Kremlin's new aerospace company this fall.

Vneshekonombank also is tasked by the government with helping Russian companies that want to expand overseas, another key Kremlin goal. So far, the bank has lent 350 million euros to a state oil company to rebuild an oil refinery in the Serb part of Bosnia. The bank is planning to invest about 20 billion rubles for a 25% stake in OAO Inter RAO UES, a state-controlled company that is buying up electric-power assets in the former Soviet Union and elsewhere.