By K. Ravi

Russia’s track record in water and wastewater infrastructure isn’t enviable, if one goes by the following statistics—nearly 60 percent of Russians drink water that doesn’t meet appropriate quality standards and about 70 percent of wastewater is discharged without treatment by municipalities across the country. Does this mean there’s a lucrative market for water and wastewater treatment equipment in Russia? Maybe yes, maybe no.

Yes, because the necessity to install equipment to meet relevant standards and replace aged equipment is there. No, because market conditions still aren’t mature enough to support these needs. With the right kind of strategies, companies could still penetrate into this market and operate successfully. This analysis focuses on major challenges, drivers, restraints and end-users of the Russian niche market.

Major challenges
The abrupt collapse of the erstwhile Soviet economy led to a low priority being assigned for water pollution control during the 1990s. Though there has been significant reduction in the volume of pollutants discharged into bodies of water due to factors such as the closure of non-performing industries, re-profiling of enterprises and general industrial slowdown, water infrastructure development is besieged with numerous challenges. Primary among those are:

  • Pumping of domestic sewage directly into rivers and bays without proper treatment. In places such as Vladivostok, discharges are as high as 90 percent.
  • Outdated water treatment technology, and inefficient plants and machinery.
  • Usage of potable water for industrial needs.
  • Frequent breakdowns, leakages and source water contamination due to pipeline systems that are largely obsolete and corroded.
  • Absence of stringent regulations for water and wastewater treatment.
  • Lack of coordination between federal, state and municipal agencies with regard to financing, operatiown, tariff collection and management of water supply facilities.

Even though environmental awareness has increased during the last decade, lack of finances has hampered any large-scale development. Hence, development of this market has proven to be elusive. The situation, however, is changing slowly.

Market drivers
Is the tide changing for the better?

Russia has recognized the need for adhering to international water quality and environmental standards to attract more foreign investment. In addition, the pressure from international environmental protection agencies—both governmental and non-governmental—is making the Russian government talk tough on water pollution. Since most of the current water treatment projects in Russia are funded by multilateral financing agencies such as the World Bank and the European Bank for Reconstruction and Development (EBRD), the role of foreign suppliers of water equipment has increased in recent years, thus bringing in sophisticated technology and practices. This is acting as a market stimulant, and there’s at least one success story for others to emulate.

Vodokanal St. Petersburg—the municipal water treatment company for St. Petersburg, Russia’s second largest city—has been highly successful in attracting foreign funding because of its ability to adopt advanced technologies, its close contact with foreign countries, and its financial independence from the city’s budget. The agency has received about $165 million in direct loans from EBRD for various water treatment projects. The organization also earns its revenues for repaying these loans by functioning as a technology dealer in Russia for various overseas organizations, including Vivendi OTV’s dewatering and sludge incineration technology.

More recently, it has signed an agreement valued around $110 million with a Swedish-Finnish consortium—NCC AB of Sweden, YIT Rakennus Oy, and Skanska Eastern Europe Oy of Finland—to install a new wastewater treatment plant. The project is mainly financed from Nordic sources and is scheduled to be completed in 2004. Of course, there’s an international dimension to the market development in St. Petersburg and other cities in the region.

International impact
The sewage waters from Northwest Russia’s major industrialized cities such as St. Petersburg, Murmansk, Kalinin-grad, Cherepovets, Petrozavodsk and Archangelsk have a direct impact on environmental conditions in the Gulf of Finland, the Baltic Sea and the White Sea. This, in turn, impacts countries such as Finland, Norway, Sweden, Estonia and Poland.

Hence, the governments of these countries have recognized and acted on the need for greater safeguards for water quality in the region, and have increased their assistance to Russia for controlling water pollution. For instance, Finland allocates about $6-8 million every year for environmental projects in Eastern Europe. The Netherlands is also closely involved in a number of water management projects—including drinking water supply, bathing water quality, and protection against flooding—in the greater St. Petersburg area. This is one of the major reasons why the water treatment market in northwest Russia is growing more rapidly than the rest of the country.

End-user analysis
The Vodokanals (municipal water treatment companies) are possibly the largest customer base for suppliers of water and wastewater treatment equipment in Russia. These municipal agencies are generally dependent on revenues from three sources—namely, the public, government-owned agencies such as schools, hospitals, and military establishments and industries. The tariffs for freshwater and sewage services for the first two groups are regulated for social and political reasons.

Hence, tariffs for industries are unusually high to compensate for revenue losses from the other two sections. During the Soviet era and into the early ’90s, most industries managed to discharge their wastewater without treatment, since legislation lacked the teeth to penalize the polluters.

Industry: Emerging end-user group
Russia’s federal government, as well as local authorities, have now amended the laws to impose stiff penalties for water polluters, charging industries for the use of natural resources such as freshwater, and offering credit facilities and benefits to those that implement environmentally friendly technologies and practices. This has provided incentive for industries to implement their own water and wastewater treatment programs. Industries are therefore emerging as an attractive end-user group for suppliers of water treatment products.

Industries such as oil and gas, chemicals, energy, mining, ferrous and non-ferrous metallurgy, petrochemicals, pulp and paper, and timber are potential customers for water treatment equipment in the near future. The precarious financial condition of most of these industries, except a few of the bigger ones, however, would prohibit them from undertaking these capital intensive environmental projects.

One of the ways of overcoming this problem would be for water treatment companies to get involved with suppliers of process equipment, so as to include wastewater treatment plants as components of the main process requirements. The financing part could also be tied up with the main plant, thus making it commercially more viable.

Businesses owned by foreign companies or those started as collaborations between Russian and foreign companies constitute another potential customer group, for which financing might be relatively easy to come by. Overseas equipment suppliers should initially target such companies for market penetration. Subsequently, they should move toward Russian-owned companies, and later toward government enterprises.

About the author
K. Ravi is an industry analyst with Frost & Sullivan’s Environment & Energy Group based in Chennai, India. For more information, please contact Cynthia Cabral, media relations executive at Frost & Sullivan, at (210) 247-2440 or email: [email protected]


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