Vladimir Yakunin - The Treacherous Path - An Insider's Account of Modern Russia

I was desperate to learn. I became, once again, the boy who swallowed books whole, who studied so hard that his parents had to force him to go out and skate at the ice rink. I had to educate myself, all over again, about huge subjects such as macro-economics, and complex and highly focused ones such as innovations in loading technology, warehousing and freight processing. We made the acquaintance of leading experts in the field and we travelled constantly, the length and breadth of Europe, even during our holidays. We would come back from almost every visit equipped with a piece of knowledge that was completely new to us: in Germany we’d see how port schemes could belong to the local government rather than disappearing into the hands of private investors; in Rotterdam we’d learn about new automatic systems for processing containers.

Mr Izrailit was so hungry for any knowledge that he thought might give us a technological advantage that he travelled to China to see how similar projects had been conducted there. Even now, a decade or more later, there are few Russian coal ports using equipment as advanced as what you can find at Ust-Luga, something that has been a decisive element in the port’s ultimate success. So, for instance, Ust-Luga is now one of the few ports in the world to be equipped with a transporter supply of railcars for unloading, and our scheme for unloading and storing coal was unprecedented in its ability to reduce the process’s environmental cost (we spray the coal with mist to suppress the dust).

And it was not just a question of introducing new technology; we also had much to learn about how best to secure the necessary finance for such a complex and expensive endeavour. One of Izrailit’s cleverest innovations was to break up the project as a whole into a number of parcels. This meant that what might previously have been seen by potential investors as an impossibly large risk (there were few if any companies or individuals willing or able to commit to the astronomical sum of $2 billion) suddenly became a far more approachable proposition.

Perhaps that was one of the few advantages in having to build from the ground up: we could learn from others’ mistakes. We saw what had worked, and what had not, and watched how other nations had balanced the interests of the public with the priorities of private entrepreneurs – it was the best kind of university.

One problem that stared out at us as soon as we began studying the way the ports were functioning in the Baltic republics was they were all free economic zones, with tax breaks for the private companies operating out of them, which obviously made them incredibly attractive to investors, and far cheaper to use. It was my responsibility to try and secure the same advantages for our project. But no matter how hard I tried, no matter how fiercely I argued, the Ministry of Finance would not agree. They put up a concrete wall, hid behind it, and refused to accept the idea of offering a reduced rate to potential investors. They just saw it as lost income. Eventually we managed to persuade the regional government to offer tax incentives, which was something, but it was never sufficient to allow us to compete on a level playing field with the Baltic countries.

Business in Russia at that moment was growing wildly, like an abandoned garden. It was full of energy, but nobody could control it and, because of that, a lot of tricky, predatory things were going on. There was an assumption that the Ust-Luga development would be another one of the quasi-criminal privatisations that we had all seen too many times before. In this scenario, the state would build the port and then hand it over for a nominal price to greedy investors, who could then cash in.

We made it crystal-clear from the very start that nobody would be getting any part of this port for free – after all, the state had already made a substantial investment, which they wanted to be paid back. So if investors wanted a place at the table, they had to enter at a fair market price. And, just as importantly, they also had to commit to the programme of investment that we were proposing. Essentially, while the state would pay for (and retain ownership over) the deep-sea channel and the piers, as well as responsibility for safety and regulation, the rest of the burden had to be shouldered by the private companies. They had to be willing to invest in the development of the roads, the railways, the electricity, the whole infrastructure, and also to guarantee that they would be able to secure the volume of traffic that they had promised in their original bid.

Crucially, JSC Ust-Luga, as port developer, also held a 25 per cent blocking share in each investment project, and would only pay its portion of the costs after the completion of construction. This meant we could ensure that everything proceeded in a coordinated fashion. If we had not done so, there was the danger that the entire plan of the port would disintegrate into small pieces. It was essential that, through us, the state retained central control.

In practice this meant that every rouble invested by the government was matched by five roubles of private money. While all around us it seemed as if the state was being systematically stripped of its assets, we were building a crucial element in the nation’s economic infrastructure – one that could have substantial implications for both its wealth and security – at minimal cost to the public purse. In fact, most subsequent PPP Russian projects – notably St Petersburg’s North-West Orbital and the St Petersburg to Moscow Highway – have been based on legislation drawn up for Ust-Luga.

But investors are beholden to shareholders, not the greater good of society, and our stringent terms meant that although there were many companies who wanted to take control of the existing terminal in Ust-Luga, there was only one that I could actually persuade to pay for it. We saw a lot of potential investors come in with the same attitude: if I’m putting the money in, then I’m the owner and everyone else can go to hell. They chose not to take their interest any further. I guess later they were sorry not to have done so, though if it is any consolation to them, they were not the only ones who would come to regret their decision.

We entered into tough negotiations with Kuzbassrazrezugol, a coal-mining company owned by two well-known entrepreneurs: Mr Bokarev and Mr Makhmudov. This was no one-day talk – it dragged on and on, across a number of meetings, with both sides arguing fiercely, seemingly unwilling to give even an inch. Eventually, we were able to persuade them that the long-term strategic benefits of operating this terminal far outweighed the costs of the initial investment, though even once we’d reached an agreement between the state and Kuzbassrazrezugol, the complex ownership structure and status had to be resolved. Finally, however, we settled all these questions, they paid the considerable sum of $4 million, and we set to work on building Russia’s most modern coal terminal.

The involvement of Mr Bokarev and Mr Makhmudov, who had previously owned shares in the port at Tallinn, was an important symbol of our progress – and the very existence of the coal terminal gave us something tangible we could show to convince other potential investors – but this was not in itself sufficient to outweigh the challenges posed by a number of significant obstacles in our path – everything from a much-loved local fish to huge global institutions.

Take a map, look where St Petersburg is; you will see that the Finnish port of Kotka is almost next door. And just across the Gulf of Finland is Tallinn. Russian goods passing through their ports provided almost 10 per cent of their GDP. If they could stop Ust-Luga, they could protect their interests for decades to come – so we were hit at every level. On the one hand there was a subsidised campaign that was intended to demonstrate how the construction of the ports would ruin the ecology of the Gulf of Finland and the Baltic Sea – for instance, there was a ferocious attempt to highlight the danger it was alleged the development would pose to a special saltwater fish called the Koryushka (or smelt), which came to the region every year to breed in its marshes. The people of St Petersburg have a sentimental attachment to the Koryushka – during the spring it pervades the whole area with the smell of fresh cucumber – and now they were being told that it was likely that the port of Ust-Luga would destroy its habitat for ever.