The $500 million Merrill Lynch Russia Infrastructure Basket (MLEMRIB) comprises 18 stocks spanning the telecommunications, energy, steel, utilities and transport industries. Each component stock must have a minimum capitalization of $100 million and a daily trading turnover of $1 million, with the component stocks being reviewed every six months.
The launch of the index comes in the wake of the creation last May of the Merrill Lynch Emerging Market Infrastructure Index (MLEMII), which seeks to capture exposure to the $1 trillion-worth of infrastructure spending that the firm believes will be invested in emerging markets by 2010. When that index launched, Merrill forecast that infrastructure spend in Russia would be $185 billion by the end of 2009, principally in an effort to facilitate the export of commodities via road, rail, sea and air routes. According to Merrill Lynch forecasts at the time, Russia was set to be the second-biggest emerging market spender on infrastructure, accounting for 16% of the total $1 trillion spend through to 2010, versus a 36% share for the biggest spender, China.
Russian companies accounted for 10% of the MLEMII, spanning the oil and gas, telecoms and utilities sectors.
Merrill Lynch is by no means the only firm targeting what promises to be a highly lucrative market. At the end of 2007, Stockholm fund manager East Capital teamed up with Norway’s Orkla Financial Investments to launch the East Capital Power Utilities Fund, which is targeting investment opportunities stemming from power sector reform in Russia and the Commonwealth of Independent States on both a listed and unlisted equities basis.
Other institutions are taking the classic private equity-type infrastructure-financing route. Last year, for example, Renaissance Capital teamed up with infrastructure specialist Macquarie Bank of Australia to develop an infrastructure advisory and investment firm. It is reported to be looking to create a $1 billion infrastructure fund of its own. Rival firm Troika Dialog is also said to be considering a similarly sized fund dedicated to investing directly in housing, energy and utilities projects.
HSBC is working with Gazprombank and Basic Element, the investment vehicle for leading Russian oligarch Oleg Deripaska, on a bid to build an $8 billion toll road project around St Petersburg. VTB Europe, the investment banking arm of leading Russian bank VTB, has been building an infrastructure team to advise on the public-private partnership projects forecast to emerge in the next few years.