Putin Treads Where Stalin Failed With Plan for Mega-Project

(Bloomberg) -- As billionaire Arkady Rotenberg’s builders race to finish a bridge to Crimea, Vladimir Putin already has a new mega-project lined up for his childhood friend.

The contract to construct a bridge to energy-rich Sakhalin Island -- which Putin estimated may cost about 286 billion rubles ($5 billion) -- will go to Rotenberg’s Stroygazmontazh, according to three people familiar with the plans.

The largesse will come in handy as the company and its owner are were hit with Western sanctions to punish Russia for meddling in Ukraine. The Russian president is reviving a project almost seven decades after Josef Stalin embarked on building a link to the island, just north of Japan.

Speaking in September in the Pacific port city of Vladivostok, Putin touted the bridge plan for Sakhalin as one of several new transport links proposed for the region that “would combine to produce a project on a planetary scale.”

Such mega-projects have become a signature plank of Putin’s economic policy as he approaches what may be his final term in the Kremlin. While critics call the viability and cost of these efforts into question, the president is gambling they can shake the malaise that hangs over Russia in the aftermath of its longest recession this century. Pleased with the progress made by the recent infrastructure feats, Putin approved the Sakhalin plan because he also sees the political appeal of linking remote parts of Russia, the people said.

“It’s more of a geopolitical project -- the wish to bring Sakhalin closer,” said Stepan Zemtsov, a senior researcher at the Gaidar Institute in Moscow. “It’s not about recouping the investment.”

Mega Spending

Sakhalin would cap an unprecedented stretch of infrastructure spending that’s spanned the length and breadth of the world’s biggest country by territory. Ventures ranging from the Power of Siberia pipeline to the 2018 soccer World Cup have cost about 3 trillion rubles.

Rotenberg’s companies have been a major beneficiary of the costly revamp. Not all the construction has paid off economically: a building boom around the 2014 Sochi Winter Olympics has required the Kremlin to bail out the state development bank that funded it.

Given that Stroygazmontazh is under sanctions, its operations are limited to within Russia. Meanwhile, Rotenberg’s business has become so large that it needs to keep up ambitious projects to thrive, two of the people said.

Although the decision to award the deal is already taken, an announcement about the start of construction may only be made next year, said the people close to the Kremlin and Stroygazmontazh. That was confirmed by another person close to state monopoly Russian Railways JSC, which will oversee the work. They spoke on condition of anonymity to discuss matters that aren’t yet public.

No final decision about Sakhalin has yet been made, said Putin’s spokesman, Dmitry Peskov. A representative for the Rotenbergs also said it was premature to comment on the participation of Stroygazmontazh in the project.

Crimea Ride

Stroygazmontazh will turn to Sakhalin once it completes another prestige engineering project, the 228 billion-ruble bridge to the Crimean peninsula, according to the people. The expectation is that the bridge will be ready enough for Putin to ride through during the election campaign, one of the people said. The vote is set for March 18, the fourth anniversary of the annexation of Crimea from Ukraine.

Fitful efforts have been made to build a link across the 7.3-kilometer (4.5-mile) Strait of Tartary, the narrowest point dividing Sakhalin from mainland. All that’s left of Stalin’s attempt, which ended with his death in 1953, is the remains of a Gulag forced-labor camp built for workers. 

Under the current plan, the link would straddle desolate stretches of the coastline, from the tiny settlement of Pogibi -- population 20 -- to Lazarev, a ramshackle town of slightly over 1,000 which is largely cut off from the rest of the mainland.

Bridge to Nowhere?

With only half a million people living in Sakhalin, the bridge will never become economically viable, according to Natalya Zubarevich, head of regional studies at Moscow’s Independent Institute for Social Policy, who says a more sensible solution is to improve the existing ferry service. The island is home to Russia’s first liquefied-natural-gas plant and already linked to the mainland with pipelines for oil and gas. There isn’t enough demand to move people and resources such as timber to warrant a bridge, according to the Gaidar Institute’s Zemtsov.

“No bridge to Sakhalin is needed, it will never pay for itself,” Zubarevich said.

For now, the assumption is that borrowed money will be used for the Sakhalin project, requiring no budget resources, two of the people said. Loans from Japanese banks may be another possible source of funding, according to the person close to Russian Railways.

Russia is counting on Japan to join the project by connecting its northern island of Hokkaido to Sakhalin with a 40-kilometer link of its own, the people said. While an overland crossing from Japan could be an economic game changer for Russia’s Far East, they cautioned there’s been no talks or agreements yet with the government in Tokyo.

Japanese Prime Minister Shinzo Abe was circumspect when asked about the plans at the Vladivostok forum with Putin last month.

“It would be fine to travel to Vladivostok by train,” Abe said. “But for this, our countries need to strengthen mutual trust to make all projects achievable.”

--With assistance from Ilya Arkhipov and Samuel Dodge

To contact the reporters on this story: Evgenia Pismennaya in Moscow at epismennaya@bloomberg.net, Irina Reznik in Moscow at ireznik@bloomberg.net.

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Paul Abelsky, Torrey Clark