Russian National Projects investment program

On 23 May, Russian Prime Minister Dmitry Medvedev instructed the ministries of finance and economic development to identify funding sources for the National Projects for 2018-2024, estimated at RUB25 trillion (USD304.3 billion).

• Lack of clarity on the funding sources of the "National Projects" investment programme makes it unlikely to be implemented in full in 2018-2024.
• State contract implementation will likely depend on the country's immediate budgetary situation; any sudden changes, for instance, due to decreases in the oil price, would likely trigger contract reviews, delays and cancellations.
• Russian firms are likely to be prioritized over their Western contractors; allocation of contracts is likely to be non-transparent and biased, favoring businessmen close to the Kremlin.
• Western firms are still likely to serve as suppliers of equipment or high technology for the implementation of the National Projects if domestic alternatives are not present or too costly.

On 7 May, Russian President Vladimir Putin, following his reinauguration for another six-year term in office, presented and authorized the implementation of the 2018 Executive Order on National Goals and Strategic Objectives. Based on the presidential address, the government later developed a 2018-2024 national programme that consists of 12 "National Projects" with 150 development goals. The 2018-2024 strategic programme resembles the similar 2012-2018 plan, which was designed and implemented during Putin's previous term. However, the new National Projects require significantly larger government investments: USD32 billion was envisaged in 2012, while the 2018 plan proposes USD304 billion. Out of this amount USD207.6 billion has been allocated in the budget plan for 2018-2020 but sources of funding for the remaining USD79.9 billion have yet to be identified,

Key priorities have also changed, with infrastructure development, education and health care being prioritized in 2018 (44% of all goals), while the 2012 programme focused on improved governance, military, defense and social policies (56% of all goals). The new National Projects are focused primarily on purchases of equipment, capital investment and government contracts for goods and services.

Infrastructure priorities
The largest number of goals, or almost 20%, constitutes measures on infrastructure development, particularly regional road networks, railways and regional airports. Of this the Russian government intends to invest by 2024 around USD140-180 billion in the development of the roads network alone.

Although the previous 2012-2018 national programme aimed to attract foreign companies for road construction, domestic companies ended up dominating the initiative. For instance, in 2017 companies controlled by Russian tycoon Arkady Rotenberg ranked third in terms of allocation of government contracts for road construction and maintenance, winning tenders for almost USD1.5 billion, including those for the construction of the Kerch Strait Bridge from the Russian Krasnodar region to Crimea peninsula.

The 2018-2024 strategic programme does not include any specific measures to attract international companies. It aims to bring over 50% of regional roads and 85% of roads in large metropolitan areas in line with national quality standards and to decrease the number of overloaded roads by 10%. To boost the construction sector, the government planned to extend the use of bank loans, not specifying the source of infrastructure mortgages. International media reported that China is likely to be the major investor in construction projects in Russia, especially in Siberia and the Far East.

The infrastructure priorities also include improvements to both Trans Siberian and Baikal-Amur railways to increase their combined capacity by 50% by 2024 to 180 metric tons of annual cargo movements. The Russian government also prioritizes development of regional airports and point-to-point air routes outside of the Moscow aviation hub, particularly in the 13 cities with the population of over 1 million. Currently, the four Moscow airports combined are responsible for 64% of total air passenger movements in Russia. Other specific goals include investments in the seaports and in transport accessibility, both by road and railway, of the ports.

Digital economy
The government continues to increase control over the country's IT sector, transferring the implementation of various digital services to local providers. From public service digitalization, which had been stipulated by the 2012-2018 national programme, the new set of priorities has been significantly expanded to the private sector. With planned investments of USD21 billion by 2024, the government plans to develop infrastructure for high-speed transmission, processing and storage of large amounts of data and to start using locally produced software by the state-owned companies and the government.

Data suggests muted government spending
The latest data released by the Russian Federal State Statistical Service (RosStat) indicate some revival in government spending in 2017. The sector rose by 0.35%. While the last year's positive full-year results were welcome news, they were lower than the 0.62% growth rate in 2016. Prior to that, Russian government spending shrank by an average of 2.6% during 2014-15, when the authorities were forced to rein in spending hit by the crude oil price collapse and Western sanctions over the Ukraine crisis, and then the ultimate two-year recession between 2015-16.

In recent years the Russian government has been heavily drawing from its hard currency reserve funds to meet more pressing social spending needs, the expensive military overhaul, and supporting state-owned large companies hit by high borrowing costs due to financial sector sanctions. The Russian National Wealth Fund is at USD63.91 billion as of May 2018, nearly 50% lower than its original reserve levels. The National Wealth Fund was merged recently with what was left from Reserve Fund, after the latter was heavily used to meet pension payments.

While the government has not indicated if the reserve fund will be involved in financing some of the infrastructure projects, considering its relatively low reserves, the Russian authorities need to look elsewhere to meet these new financing needs.

Outlook and implications
In December 2017, President Putin claimed that 93-94% of all strategic goals listed in the 2012-2018 National Projects programme had been achieved. Assessments by independent Russian analysts, however, indicate that the average implementation rate was 30-40%. The 2018-2024 National Projects set more qualitative, than quantitative indicators (47 numerically specified targets in 2018 versus 54 in 2012) and fewer deadlines. As the funding for the new 2018-2020 National Projects is yet to be confirmed, it is likely that multiple goals will not be implemented in the long term due to lack of financing and widespread corruption in the sectors, especially in construction and infrastructure.

Russian companies are likely to be prioritized as primary contractors for the National Programme goals, especially in sectors such as construction and infrastructure. Based on the practices of the previous six years, it is likely that the most lucrative contracts will be given to firms associated with businessmen close to President Putin and key government ministers. Foreign firms, especially from those countries that maintain economic sanctions against Russia, are likely to be relegated to subcontractor roles to supply equipment or technology. In case of competition between Western firms and firms from countries viewed as friendly (such as China or India) the latter would likely be favored over Western firms. However, if domestic or Asian alternatives for equipment and high-technology supply are not available, there will be opportunities for Western firms to serve as subcontractors. This will be especially the case with the priority projects, swift delivery of which the Kremlin will be prioritizing for political purposes. A proposed railway bridge to Sakhalin island in the Russian Far East, to connect it to the Khabarovsk region on the mainland, would serve as a potential example for such a priority project.