Russias Logistics Industry

June 2012

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Russias Logistics Industry

OVERVIEW Spanning nine time zones and some of the most extreme climates anywhere on the globe, Russia vitally needs a solid logistical infrastructure to service domestic needs, industrial development and national cohesion. The logistics market in Russia has historically been under-developed, though government investment since 2008 has helped upgrade some of the countrys infrastructure. Moreover, Russias location at the heart of Eurasia makes it an indispensible nation for the global logistics and transport industry. The government has recognized this, making infrastructure development a priority for the coming years, and already foreign transport and logistics companies are making significant investments in this huge and largely untapped market.

INDUSTRY CONSOLIDATION AND GROWTH There have been a number of deals by foreign firms entering or expanding in the Russian logistics sector. As well as this, Russian firms are consolidating within the sector, and taking part in cross-border deals that will integrate Russian logistics with the global industry. Below is a selection of recent deals that showcase the dynamism and change in the sector. DHL has invested more than 176 million ($250 million) in Russia over the past five years. This investment has helped them rebound healthily from the 2008 crisis, putting them in a strong position today. They use Russia as an important centre to connect both West to Europe and South to China. They make use of existing rail opportunities while pushing for even more investment in the road network, to really make the most of Russias ongoing opportunities. In May 2012, Raven Russia completed a deal worth 165 million ($215 million) to acquire the Pushkino Logistics Park 213,000 square meter logistics complex near Moscow. The site has three warehouses and two infrastructure buildings with space for rent of 213,000 square meters. Almost totally rented out, the park generates an annual rent of 18.6 million, reflecting a stabilized yield of 11.5 percent. The tenants include Auchan, DHL, Leroy Merlin and NLC. Scottish logistics company InterBulk won a contract on May 2, 2012 to provide packaging, warehousing and loading operations in Siberia. The contract, worth about 8.1 million ($13.1 million) over 10 years, comes on top of a number of existing InterBulk contracts in Russia, and will provide services for a subsidiary of petrochemical company Sibur at a polyethylene facility in Tomsk. Russian freight firm Globaltrans announced in April 2012 that it is buying the railcar unit of Metallinvest, to boost its fleet to 60,000 units. This will give Globaltrans a 7 percent market share of overall cargo volumes in Russia, which relies on rail to deliver oil products, grain and steel to its home and export markets. Globaltrans forecasts more consolidation in the Russian freight sector.

WHAT THEYVE SAID We must proceed from the following basic task today we must create advanced, powerful infrastructure capacity in railway transport and form a clear series of priority projects for the long-term perspective, and most important, we need to be fully clear on the funding. Vladimir Putin, then-Prime Minister of Russia on developing the countrys rail infrastructure, 26 April 2012. "This is an important transaction for us, as Sibor is one of the largest petrochemical companies in Russia. It is a key area of growth for us geographically, along with China and the Middle East, and allows us to expand our service offering, as we will be working very closely with the customer and improving their operation at the site." InterBulk finance director Scott Cunningham on the signing of a logistics contract for work in Siberia, 2 May 2012. The Russian market for us is a growing sector and the future for our natural expansion of the business. Today most of our traffic is concentrated between Poland and the western countries Germany and the Netherlands where we have our regular connections to the major ports of northern Europe. Jarosaw Kubiczek, Business Development Manager of PCC Intermodal on the importance of Russia for his company, 18 April 2012 Despite the economic crisis, Russia presents great opportunities to investors, developers and construction companies. The [Russian infrastructure] market is largely untapped. Oleg Pankratov, Head of Infrastructure Capital at VTB capital, on the potential for infrastructure investment in Russia , May 2010.

OPPORTUNITIES FOR THE FUTURE

There is still scope for large investments to be made in the Russian logistics industry. This growth could come either from constructing new logistics hubs and terminals, or from expanding the size and potential of existing bases. Moscow and St Petersburg are currently the main logistics centers in Russia, and still offer large scope for development. Increasingly Samara, Nizhny Novgorod, Kazan, Yekaterinburg, Novosibirsk and Rostov are proving themselves important in an ever less centralized infrastructure network. Companies wanting to exploit these opportunities will need to be quick, flexible, reliable and professional. Infrastructure stimulus offers a good way to invest in Russias accelerating economy. With adequate infrastructure investment, Russia will be able to act as a transit hub from the established markets in Europe to the fast-growing economies of Asia. EXTERNAL SOURCES DHL Russia Russian Railways Logistics Russia The Moscow Times Automotive Logistics Russia RZD-Partner Market Research 103 Meridian East