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A Potential Bonanza for Infrastructure Investors

By Chris Mayer, editor, Capital & Crisis
Saturday, January 26, 2008

At the foot of the snowcapped Caucasus mountain range in southwestern Russia is the little resort town of Sochi.

Stretching along the coast of the Black Sea, it is a sort of Russian Riviera. The pretty and warm waterfront town, framed against majestic mountains, was a favorite spot for vacationing Soviet officials.

This was where Russian officials chose to unveil their big plans. At a recent investment conference, the Russian government set out its goal to spend $1 trillion on infrastructure in the next 12 years.

Russia will have to put on quite a pony show, because the plan relies mainly – to the tune of 80% – on private money. Only 20% comes from the Russian treasury. The Russian government, though, is not poor. It has about $127 billion in oil revenues stashed away in its reserve fund. In any event, Russia's plan makes it the biggest infrastructure spending plan outside of China, which spent nearly $1 trillion on infrastructure projects during 2004-2006 alone.

China, like a molting pigeon, keeps shedding its old feathers and changing in dramatic ways. Russia, too, wants a new look. It needs it badly. In some cases, Russia is decidedly worse off than even a decade ago. For example, in the 1990s, Russia had over 1,300 airports. Today, there are about 250 – most of which need serious repairs.

Russia's road system is woefully poor. Even big cities often depend on single-lane roads. Russia's road system is only one-tenth as long as America's. Only 5% or so is good quality. In Russia, that means having more than one lane and a surface that doesn't buckle under the weight of a car.

What about the railroads? As befits the largest country in the world, Russia's railroad system is one of the longest in the world. Yet it is still half the length of the U.S. and filled with gaps. Much of it is aging, rusting in the pale sun of the Russian plains and crumbling in the arctic winds from the north. Freight cars crawl along at average speeds of no more than 25 miles per hour.

Still, the Russian economy has sped along like "a fiery and matchless troika" – in the words of the great Russian writer Gogol. According to the Financial Times, "Economic growth averaged 6.7% for 1999-2006... [and] 7.7% this year." Companies can't afford to ignore the place, despite widespread corruption and a stifling bureaucracy. Investors, too, will have to keep an eye on Russia. That massive spending plan is, in the words of the FT, "a potential bonanza for international construction and engineering groups."

ABB Ltd shareholders can toast Moscow and down a shot of vodka in thanks. A long-time holding in my Capital & Crisis advisory, ABB is a Swiss-Swedish engineering firm and the world's largest builder of power grids. We're up about 50% on the stock.

Some $480 billion of Russia's infrastructure spending will go toward adding capacity and repairing Russia's electrical infrastructure. The Russians named the plan "GOELRO-2" after Lenin's 1920s plan to electrify Russia. Incredibly, after building only 30 nuclear reactors during the entire Soviet era, Russian President Vladimir Putin plans 26 over the next 12 years.

As part of this effort, Russia's electricity monopoly will sell off 20 power generation companies. Some call it the biggest and most complicated industrial overhaul since the Soviet collapse. The sale will bring in as much as $120 billion. The proceeds will go toward shoring up capacity and helping cope with surging demand.

One of the most interesting things about this plan is where the money goes regionally. More than two-thirds will flow west of the Urals, to Russia's Asian wing. That is, to Siberia. It is in Siberia where all of Russia's natural treasures lay – 85% of its natural gas, 80% of its oil and coal, plus gold, platinum, nickel, diamonds, silver and other metals, and timber. "We've got rich reserves of just about the whole periodic table," cracked a Siberian governor.

I know what you're thinking. As an investor, you're about as interested in Russia as you are in acquiring a pet alligator. It eats, it bites, and it gives no quarter. Yes, Russia has a definite image problem. It labors under a lot of stereotypes. It is cold and gray. The people are grumpy and drunk. The government is corrupt and mean. Like China and India, it's a tough place to invest in. But like China and India, it's where the growth is. It's where magical changes take place virtually overnight.

Consider that Russian home prices have gone up for five consecutive years. A mortgage industry that began only in 2002 issued $20 billion in mortgages in 2007. There are over 36 million cars in Russia. As recently as 1995, there were only 11 million. Plus, the Russians are traveling more. Some 7.7 million traveled abroad last year, compared with only 2.6 million in 1995.

Finally, consider that there are over 66 billionaires in Moscow alone, second only to New York. Russia has over 119,000 millionaires.

So Russia has real hope and progress now, not the kind that sits like dust at the bottom of an old coffee mug, but the kind that fills a vodka glass and buys caviar. It's the kind where you, as an investor, can make a little money.

I'm not ready to jump into Russia in a big way yet. But I believe Russia's spending plans are further evidence an investor should find Western companies that supply materials and equipment to the world infrastructure boom – like ABB – and load up on any weakness in the Western stock markets.

Good investing,

Chris Mayer

Editor's note: Chris Mayer is the editor of Capital & Crisis, a monthly advisory we consider required reading at DailyWealth. With Chris' research, you can always count on contrarian investment ideas you won't read about anywhere else. Click here to learn more about Capital & Crisis and how Chris has compiled one of the most amazing track records in the business. We think a subscription is one of the best investment deals available today.

Market Notes


In addition to electricity, water, and transportation assets, our friend Chris Mayer has highlighted the most essential of infrastructure investments: land.

Last October, we featured Chris' commentary on the huge global trend of converting privately held real estate assets to publicly held real estate assets.

Put simply, the developing economies of Asia, Latin America, and Eastern Europe have tremendous amounts of private land to be converted into public holdings like we've done here in the U.S. Over the next few decades, fortunes will be made owning the right shopping malls, warehouses, apartment buildings, and office parks.

This week's chart – originally featured
in Chris' January Capital & Crisis issue –
illustrates the rapid growth of this trend.

Brian Hunt

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