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Exim Bank Projects Russia's
Economic Recovery in 2010

Russia's economic growth took a beating in 2008 due to a sharp fall in industrial production. However, it is likely to pick up in 2010, according to a study by the Export Import Bank of India (Exim Bank). The study says that India's exports to Russia rose 14 percent during the year while its imports shot up by 72 percent over the previous year.

Real GDP growth rate of Russia moderated to an estimated 5.6 percent in 2008, as compared to 8.1 percent in the previous year, primarily on account of a drop in industrial output. In absolute terms, GDP stood at an estimated US$ 1,676.6 billion in 2008, with a per capita GDP of US$ 11,823.7. Average consumer price inflation rose sharply to 14.1 percent in 2008, as compared to 9.0 percent in the previous year, primarily owing to a sharp rise in the cost of commercial services and utilities and also the rise in food prices during the first half of 2008. Services sector dominated the GDP, accounting for 57.5 percent in 2007, followed by Industry (37.1 percent) and Agriculture (5.4 percent) sectors. The official currency of Russia is the rouble (Rb). The exchange rate is estimated at Rb 24.85: US$ 1 in 2008 appreciating from Rb 25.58: US$ 1 in 2007, mainly due to higher oil export earnings and capital inflows during the first half of 2008. Russia's total international reserves decreased by 10.3 percent to US$ 427.1 bn in 2008, as compared to US$ 476.4 bn in the previous year, mainly owing to higher capital outflows during the second half of 2008. Reserves represent an import cover for 17.6 months. Total external debt rose to US$ 407.2 bn in 2008, as compared to US$ 370.2 bn in the previous year. However, external debt as percent of GDP fell to 24.3 percent in 2008, as compared to 28.6 percent in the previous year (Table).


Exim Bank of India LOCs in the
CIS Region
Line of Credit (LOC) is a special financing mechanism through which Export-Import Bank of India (Exim Bank) extends finance to support export of projects, goods and services from India on deferred payment terms. Exim Bank extends Lines of Credit to overseas financial institutions, regional development banks, sovereign governments and other entities overseas. The Indian exporters can obtain payment for eligible value from Exim Bank, without recourse to them, against negotiation of shipping documents. Exim Bank also extends LOCs at the behest of Govt. of India. Exim Bank has now in place 123 Lines of Credit, covering over 95 countries in Africa, Asia, Latin America, Europe and the CIS, with credit commitments of over US$ 4.07 billion, available for financing exports from India. In the CIS region, Exim Bank has extended 5 Lines of Credit amounting to US$ 65 mn, which include: Vnesheconombank, Russia; Vneshtorgbank (Bank for Foreign Trade), Russia; Absolut Bank, Russia; Bank TuranAlem, Kazakhstan; and National Bank of Uzbekistan (NBU), Uzbekistan


Trade and External Sector
Russia's exports increased by 33.1 percent to an estimated US$ 471.6 bn in 2008 from US$ 354.4 bn in 2007, mainly as a result of higher fuel export prices during the first half of 2008. Oil, fuels & gas were Russia's principal exports, accounting for 65.2 percent of total exports in 2007. Other major items of exports were metals (13.5 percent), chemicals (5.5 percent) and machinery & transport equipment (5.0 percent) in the same year. The Netherlands was the major export destination for Russia, contributing to 11.8 percent of Russia's total exports in 2007, followed by Italy (8.3 percent), Germany (8.1 percent), and China (5.2 percent). Russia's imports increased by 30.6 percent to an estimated US$ 291.9 bn in 2008 from US$ 223.5 bn in 2007, mainly as a result of higher food prices and growth in investments during the first half of 2008. Russia's principal import item was machinery & equipment, accounting for 43.9 percent of total imports in 2007. Other important items of imports in the same year were chemicals (12.0 percent), food & agricultural products (11.7 percent) and metals (6.6 percent). Germany is the leading source of Russia's imports, accounting for 11.2 percent of total Russian imports in 2007, followed by China with a share of 7.3 percent. Other important origins of imports in the same year were Ukraine (5.6 percent) and the US (3.9 percent). As a result, Russia's trade surplus increased to US$ 179.6 bn in 2008 from US$ 130.9 bn in the previous year. Current account surplus also increased to an estimated US$ 102.4 bn in 2008 from US$ 77 bn in 2007, primarily due to increase in trade surplus.

Table: Russia Macroeconomic Indicators
Note: b- Estimates; c- Projections. Source: IMF; EIU.

India-Russia Bilateral Trade Relations
India's exports to Russia recorded a rise of 14.9 percent in 2008-09 to US$ 1080 mn from the previous year's US$ 940.2 mn, mainly on account of a rise in exports of transport equipment. India's imports from Russia amounted to US$ 4.3 bn in 2008-09, which is a rise of 72.0 percent from the previous year's US$ 2.5 bn. This rise can be attributed to increases in imports of manufactured fertilizer, and iron & steel. As a result, India's trade deficit with Russia increased in 2008-09 to US$ 3.2 bn from US$ 1.5 bn in the previous year (Chart).

Chart: Trend in India's Trade with Russia (US$ mn)
Important items of India's exports to Russia in 2008-09 were pharmaceutical products (30.6 percent), transport equipment (9.0 percent), tea (7.3 percent), machinery & instruments (5.3 percent), coffee (4.1 percent), cotton yarn fabrics & madeups (3.8 percent), unmanufactured tobacco (3.7 percent), processed fruits & juices (2.7 percent), primary & semi-finished iron & steel (2.5 percent), and RMG cotton (2.5 percent). Important items of India's imports from Russia during 2008-09 were manufactured fertilizer (37.4 percent), iron & steel (11.5 percent), petroleum crude (6.5 percent), non-ferrous metals (5.7 percent), silver (5.5 percent), transport equipment (4.7 percent), synthetic & reclaimed rubber (3.9 percent), coal, coke & briquettes (3.9 percent), newsprint (3.0 percent) and project goods (2.4 percent).

Outlook
Real GDP growth is expected to contract by 7.0 percent in 2009, as a result of sharply lower commodity prices, restricted access to external financing and reduced external demand. However, GDP growth is expected to recover to 2.5 percent in 2010. Falling commodity prices and a sharp slowdown in demand growth are expected to help contain inflationary pressures. However, rouble depreciation is expected to have an inflationary impact. Annual inflation is expected to reach 12.2 percent by the end of 2009, and to fall to 9.4 percent by the end of 2010. Although more moderate weakening of the rouble is expected by the end of 2009, further strong pressure on the currency appears unlikely, unless there is a further drastic fall in the oil price or there is a significant loosening of monetary policy. Thus, average exchange rate is expected to depreciate to Rb 32.50: US$ 1 for 2009 and further to Rb 33.50: US$ 1 in 2010. The steep fall in international oil prices and a drop in Russian oil production are expected to lead to a sharp shift in the balance of payments in 2009, narrowing the current account surplus to US$ 28.5 bn (2.2 percent of GDP), and improving to US$ 46.8 bn in 2010 (3.3 percent of GDP).






Major Power Project Links North-South Kazakh Regions
 A new power link connecting coal-rich northern Kazakhstan to the energy-hungry south of the country was officially opened recently, bringing a successful conclusion to a major EBRD investment aimed at improving the reliability and efficiency of electricity transmission in the Central Asian nation.

Kazakh President Nursultan Nazarbayev attended a ceremony in Ekibastuz in northern Kazakhstan marking the completion of the 1,100-kilometre-long overhead transmission line. The new link doubles the volume of electricity carried to central and southern parts of the country, including the densely-populated Almaty area.

“This is a great example of the EBRD bringing concrete achievements on the ground,” says Aida Sitdikova, the EBRD operation leader for the two projects needed for the construction of the new line. “It took two projects to do it because of the sheer scale but now it's there, plus there were no major cost overruns or delays.”

The building of the power link was partly financed by the EBRD, which syndicated some of its US$148 million investment to commercial banks. The World Bank and the Development Bank of Kazakhstan also invested in the two projects, which were worth a combined total of US$ 350 million.

“The improvement in the power supply should be noticeable this year,” says Ms Sitdikova. “Before the link was built, the Almaty region was on the brink of experiencing a major power shortage, which could have been disastrous during the bitterly cold winter season.”

The new transmission line, which is owned and run by the Kazakhstan Electricity Grid Operating Company (Kegoc), will remove some of the need for expensive energy imports from neighbouring Uzbekistan and the Kyrgyz Republic. In order to recover its investment, Kegoc will increase transmission tariffs. But, as Astana-based EBRD Associate Banker Maira Karassaeva points out, these only account for some 10 per cent of the end-user cost. As a result, the tariff increases are not expected to place a big burden on consumers.

The construction of the North-South Kazakhstan transmission line is one of several EBRD projects involving Kegoc that have been signed over the last decade, one of which is still ongoing. By the time they are completed, power will be distributed throughout the country more reliably and with far fewer losses due to outdated equipment.

“Coal is still the main option for power generation in Kazakhstan, but the Bank is trying to get the Kazakhs to focus on developing their use of coal in as efficient and clean a way as possible using modern technology,” says EBRD Director of Power and Energy Nandita Parshad.

“The Kegoc projects have an important energy efficiency contribution as they help to reduce losses,” Ms Parshad adds. “Plus our involvement with the company had a major influence on the government when it came to signing Kazakhstan's Sustainable Energy Action Plan.”