EMBASSY OF INDIAEconomic & Commercial Wing

Moscow

MOS/COM/202/06/2009 August 2010

Economic and Commercial Report for THE RUSSIAN FEDERATIONfor the month of July 2010

Executive Summary:

Russian Economy continued on its path to recovery during July 2010. In the first six months of 2010, Russia’s GDP increased by 4.2% (YOY). Industrial output in the period increased by 10.2% and inflation has come down to 5.5%. Gold and foreign reserves as of 30 July increased to over US $ 475 billion.

2. Russia’s foreign trade in the first six month of 2010 increased by over 40% (YOY), with exports increasing by over 50% and imports by 26.5%. Bilateral trade with India in this period also increased by 24.7% with exports to India increasing by 20% [amounting to US$ 3.04 bn] and imports by 43% [amounting to US$ 0.93 bn]. Main economic and financial indicators for Russia in the prescribed format are at Annex-I. Detailed data is available only for 1Q2010.

A. Major Developments concerning Russian Economy

Customs Union: Introduction of Unified Customs Code

3. Following the formation of a Customs Union between Russia, Belarus & Kazakhstan on 1 January 2010, a Unified Customs Code came into effect with regard to Russia and Kazakhstan on 1 July and with regard to Belarus on 6 July. The entry into force of the new customs code in regard to Belarus was delayed because of the differences on the issue of exemption from export duty for oil and petrochemicals export by Russia to Belarus. Russia has taken the position that export duties will be lifted only after the creation of a unified economic space which is envisaged to happen in 2012. The necessary documentation for creation of a single economic area is to be prepared by 1 January 2011.

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4. In response to Embassy’s query seeking information about changes in the applicable rates of customs duties concerning 20 major items of exports from India to Russia, the Russian Federal Customs Service has conveyed that the Unified Customs Code (UCC) has changed the rates of import customs duties for 9 subheadings which may concern goods exported from India to Russia as follows:

№ HS Code RF customs tariff rate

UCC rate

1 8504 403 00 1 15% 10%

2 8504 404 00 0 15% 10%

3 8504 405 50 1 15% 10%

4 8504 408 10 1 15% 10%

5 8504 404 40 1 15% 10%

6 8504 408 80 1 15% 10%

7 8504 409 00 1 15% 10%

8 8703 221 01 0 5% 0%

9 8703 229 01 0 5% 0%

Further, according to Russian Federal Customs Service, the regulation concerning VAT collection and charges for customs clearance of goods imported from India have not been changed.

Russia bans export of food grain

5. Following severe droughts in several parts of Russia, the Russian Agriculture Ministry has revised its grain production forecast for 2010 to 60-65 million tonnes. Subsequently, in the beginning of August, the Russian Government also introduced a ban on export of grain from Russia. The total food-grain harvest in Russia was 97 million tonnes in 2009 and 108.4 million tonnes in 2008.

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Modernization

6. In his speech at a meeting with Russian Ambassadors and PRs on 12 July, President Medvedev identified “Germany, France, Italy, the European Union in general, and the United States” as the “main international partners” for forging “special modernization alliances”. He also noted the significant of Asia-Pacific region as an external source of modernization and called for greater economic engagement with countries of Asia-Pacific region including India.

7. During the visit of German Chancellor Angela Merkel to Russia, a Memorandum of Understanding was concluded on 15 July between German company Siemens and Skolkovo Foundation (the body responsible for setting up Skolkovo Innovation Center – flagship project under Russia’s modernization programme). Under the MOU, Siemens will participate in the Skolkovo project and set up research centers on energy effectiveness and biology. Siemens also concluded MOUs with Russian Railways envisaging establishment of JVs: (i) to produce, supply and service modern Russian electric trains and to localize production of Desiro Rus electric trains; and (ii) for modernization of railway yards/stations. Further, there were press reports suggesting that Siemens was considering setting up a JV with Russian companies Rostechnologii and RusHydro for installation of wind power systems with a total capacity of roughly 5,000 MW by 2020 of which plants of capacity 1,250 MW will be set up by 2015.

8. There were also press reports indicating interest of Italian power generation and distribution company Enel in participating in the Skolkovo project.

Privatization

9. Speaking to press reporters on July 29, Russian Minister of Economic Development Elvira Nabiullina said that the Government will be offering stakes in 11 State-run companies over a period of three years beginning next year (2011). According to Ms. Nabiullina, besides being a source of revenue, the privatization was also aimed at reducing the excessive presence of the State in the economy; attracting investments and modern technology through new owners; improving governance through greater accountability; and creating an enabling economic environment for business development. The sale of assets will be open to foreign investors and the Government expected to raise about US$ 29 billion from it. Necessary Governmental approvals including in regard to taxation were being processed.

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10. According to press reports, stakes are proposed to be offered as per the following list which may undergo some changes before finalization:

Company Current State Stake, %

Planned Stake Sale, %

Transneft 78.10   27.10  

Sberbank 60.30 9.30

VTB 85.50 24.50

Rosneft 75.16 24.16

Rosselkhozbank 100.00 49.00

Federal Grid Co. 79.11 28.11

RusHydro 60.38 9.38

Sovkomflot 100.00 25.00

Rosagrolizing 99.99 N/A

Rosspirtprom 100.00 N/A

United Grain Company 100.00 N/A

OIL and GAS

11. There were several reports in the Russian media about the Russian Government’s plan to hold auctions for development of Trebs and Titov oil fields. Trebs and Titov are the last strategic oil fields located in Russia’s Nenets Autonomous District with estimated extractable ABC1 reserves of 78.1 million tons and 132.8 million tons, respectively. According to the press reports, the Ministry of Natural Resources had recommended the minimum price for auction as about 18 billion Rubles (about US$ 600 million) whereas the Ministry of Energy had evaluated the optimal starting price at 60 billion Rubles (about US$ 2 billion.). [Subsequently, on 10 August, the Russian Federal Agency on Subsoil Use (ROSNEDRA) released the broad parameters for the auctioning. The starting price for the license to develop the fields has been fixed at 18.171 billion rubles (about US$ 600 million). Initial bids are to be submitted by 20 September and detailed

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bids with technical and economic proposals are to be submitted by 28 October. Final auctioning will be held on 2 December. According to the press release of ROSNEDRA, participation is open to foreign companies based in Russia. However, there were press reports quoting officials of Russian Ministry of Natural Resources that Trebs and Titov being strategic oil fields, foreign investors will be able to take part in the tender only in partnership with a Russian Company that will have the controlling stake. Foreign entities will also require the permission of the Governmental Commission on Foreign Investment.]

12. Russia and Bulgaria signed an agreement on 16 July outlining a roadmap for undertaking techno-economic assessment of the Bulgarian section of the South Stream gas pipeline. The document was signed by Bulgarian Minister of Economy and Energy Traicho Traikov and Russian Minister of Energy Sergei Shmatko in the presence of Bulgarian PM Boyko Borisov. The South Stream pipeline envisages transportation of Russian gas to Western Europe bypassing Ukraine. The offshore part, to be operated by Russia's Gazprom and Italy's ENI, will run for 900 km (559 miles) from Russia's mainland under the Black Sea to the Bulgarian coast and carry up to 63 bcm of gas annually. The launch of the gas pipeline is planned for December 2015. Intergovernmental agreements have been signed by Russia with Bulgaria, Serbia, Greece, Hungary, Slovenia, Croatia and Austria for the implementation of the project. Russia and Bulgaria had signed an agreement on the South Stream project in January 2008 under which techno-economic study was to be completed by mid-2010. However, until recently, Bulgaria's participation in the project had become uncertain following the announcement by Bulgarian PM Borisov about their decision to review the previous agreement on Bulgaria’s participation.

Pharmaceuticals

13. Russian company Rosnano announced on 30 July that they will allocate US$ 250-300 million to its Swiss subsidiary Rusnano Capital for purchase and development of experimental drugs. The subsidiary plans to buy molecules capable of producing the pharmaceuticals of the future. British investment company Celtic Pharma will act as a partner and contribute another $250-300 million for a total investment of up to $600 million.

B. Bilateral Exchanges/Visits

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14. A delegation comprising Dr. Shyam Agarwal, Joint Secretary, Department of Commerce and Smt. Alka Tyagi, CMD, Hindustan Diamond Company Pvt Ltd., visited Russia on 12 – 13 July to discuss prospects for enhanced cooperation between Russian and Indian companies in the area of trade in rough diamonds.

15. A delegation led by Russian Deputy Minister of Industry & Trade G.V. Kalamanov, visited India on 21 July to participate at the meeting organized by Department of Industrial Policy & Promotion in regard to the India-Russia joint venture on titanium products. Mr. Kalamanov also met Secretary, Department of Pharmaceuticals to discuss various issues concerning bilateral cooperation in the pharmaceutical and bio-pharmaceutical sectors.

Trade Enquiries

16. The Embassy responded to 34 trade queries from Indian businessmen and 5 queries from Russian businessmen during the month of July 2010.

(Munu Mahawar)Counsellor (E&C)

Distribution: As per standard list

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Annex-ITable 1GDP at current prices(US$1= Ru 29.98)

2008 2009 Jan-Mar 2010

Rubles billion 41256.00 39016.1 9862USD billion 1376.21 1301.5 328.97

Source: Central Bank of Russia

Table 2

FOREIGN TRADE

Jan-June 2009 2009 Jan- June 2010 (% change YOY)

Import [USD bln]

82.4 167.457 104.2 (26.4%)

Export [USD bln]

125.4 301.750 188.2 (50.07%)

Total (USD bln)

207.8 469.207 292.4 (40.71%)

Source: Ministry of Economic Development of the Russian Federation

Table 3

TOP 5 IMPORTS (USD million.)

Jan-March 2009

2009 Jan-March 2010

Machinery, equipment and transport means

14160.0 70568.0 15474.5

Food products and agricultural raw materials

5603.3 28348.6 6914.2

Chemical products and rubber

5080.3 27136.3 6956.7

Metal and metal products

1964.2 10301.1 2712.1

Textile and footwear

2324.8 8877.9 2661.0

Source: State Customs Committee of the Russian Federation7

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Table 4

TOP 5 IMPORT DESTINATIONS (USD million.)

Jan-March 2009 2009 Jan to March 2010

China 4665.58 22864.120 6939.215Germany 4282.37 21200.437 4540.673USA 1801.40 9181.499 1661.655Ukraine 1710.71 9129.099 2562.301Japan 1758.31 7254.393 1510.704Source: State Customs Committee of the Russian Federation

Table 5

TOP 5 EXPORTS (USD million.)

Jan-Mar 2009 2009 Jan-March 2010

Fuel and energy

34732.4 190020.1 63025.7

Metal and metal products

7029.3 32129.2 8860.9

Chemical products and rubber

3709.2 17556.6 4927.4

Machinery, equipment and transport means

2471.2 16619.6 3753.5

Wood, pulp and paper items

1722.2 8167.5 2055.6

Sources: State Customs Committee of the Russian Federation

Table 6

TOP 5 EXPORT DESTINATIONS(USD million.)

Jan-Mar 2009 2009 Jan to March 2010

Netherlands 6411.725 36297.075 12370.752Italy 4780.399 25057.729 7033.314

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Germany 3063.059 18711.603 6509.974Ukraine 1833.645 13761.295 4639.898Turkey 3741.021 16401.558 5048.066Sources: State Customs Committee of the Russian Federation

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Table 7FOREIGN TRADE WITH INDIA

Jan-June 2009 2009 Jan- June 2010 (% change YOY)

Import [USD million]

652.552 1524.097 933.646 (43.07%)

Export [USD million]

2532.834 5936.091 3038.463(19.96%)

Total [USD million)

3185.316 7460.188 3972.109(24.69%)

Sources: Ministry of Economic Development of the Russian Federation

Table 8TOP 5 IMPORTS FROM INDIA (USD million)

Jan-Mar 2009 2009 Jan to March 2010

Pharmaceuticals 96.059 463.361 113.315Electrical machinery and equipment, their parts, audio recording equipment, TV etc

26.639 126.246 39.156

Coffee, tea and spices. 19.432 119.717 34.493Tobacco and its industrial substitutes

16.131 95.238 20.836

Boilers, machinery and mechanical appliances; parts thereof.

10.876 88.974 19.150

Source: State Customs Committee of the Russian Federation

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Table 9TOP 5 EXPORTS TO INDIA (USD million.)

Jan-Mar 2009 2009 Jan- March 2010

Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof.

122.721 826.463 107.623

Fertilizers 204.882 776.615 346.672Means of surface transport (automobiles and parts etc)

167.344 669.601 129.758

Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts.

130.320 577.503 93.336

Iron and steel 72.607 359.312 87.392Source: State Customs Committee of the Russian Federation

Table 10 Rate of ExchangeAs on July 2010

July 01 July 31 Monthly average

Average M-o-M change

1 RUB / 1 USD

31.2554 30.1869 30.2211 2.45%

1 RUB / 1 EUR

38.2097 39.4694 38.8395 2.21%

Source: Central Bank of Russia

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Table 11Countries with the Largest Accumulated Investments in the Economy of Russia

  2008 2009

Year I quarter

I half 9 months Year

  million US dollars

Investments - total 264599 226742 242462 262394 268226

Cyprus 56902 36282 40264 47042 49128

Netherlands 46346 44492 44993 49426 48619

Luxemburg 34402 32690 36707 37947 37157

United Kingdom 30811 27580 24584 25622 23585Germany 17425 15285 16256 19811 19226

China 832 944 6034 6183 10343

Ireland 9662 8778 9121 9240 9212

France 9542 8608 9907 8516 8622

Japan 4077 5749 6090 6989 8301

Virginians (UK) 8267 6048 6813 7444 7925

  as percentage of total

Investments - total 100 100 100 100 100

Cyprus 21,5 16,0 16,6 17,9 18,3

Netherlands 17,5 19,6 18,6 18,8 18,1

Luxemburg 13,0 14,4 15,1 14,5 13,9

United Kingdom 11,6 12,2 10,1 9,8 8,8

Germany 6,6 6,7 6,7 7,6 7,2

China 0,3 0,4 2,5 2,4 3,9

Ireland 3,7 3,9 3,8 3,5 3,4

France 3,6 3,8 4,1 3,2 3,2

Japan 1,6 2,5 2,5 2,7 3,1

Virginians (UK) 3,1 2,7 2,8 2,8

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Table 12

Foreign Investments in the Economy of Russia (Country-wise)

Countries with the Largest Accumulated Investments in the Economy of Russia(USD million)

2007 2008 2009(9 months)

Investments - total 220595 264599 262394

Cyprus 49593 56902 49426

Netherlands 39068 46346 47042

United Kingdom 29235 30811 25622

Luxemburg 29161 34402 37947

Germany 11786 17425 19811

USA 8579 8769 7608

Ireland 7131 9662 9240

France 5919 9542 8516

Virginians (UK) 4800 8267 7444

Japan 3100 4077 6989

Source: "Federal State Statistics Service"Table 13

INFLATION January 2010

February 2010

March 2010

April 2010

May 2010

June 2010

July 2010

Rate of Inflation (% YOY)

8.0 7.2 6.5 6.0 6.0 5.8 5.5%

Industrial producer price index, as % of December of previous year

98.9 100.9 102.7 106.0 108.9 105.5 -

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Source: Central Bank of Russia

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Table 14:

International Reserves (in million US$)

Date Gold and foreign exchange reserves

of which

Foreign exchange reserves

of which

Foreign exchange

SDRS Reserve position in IMF

Gold

01.08.2010

475,307 448,043 437,551 8,625 1,867 27,264

Source: Central Bank of Russia

Table 15:

External Debt of the Russian Federation as at the end of March 2010 (estimate) ( in billions of US dollars)

  Dec 2008 March 2009

June 2009 

September 2009 

December 2009 

March 2010(estimate)

Total 479.4 446.4 467.9 476.8 471.6 473.7

General Government 29.5 27.4 30.0 31.2 31.3 30.9

Federal Government 28.2 26.2 28.5 29.5 29.5 29.1

New Russian Debt 23.6 21.7 24.1 25.0 26.3 25.9

Multilateral creditors 4.5 4.3 4.1 3.9 3.8 3.6

IBRD 3.8 3.6 3.5 3.3 3.2 3.0

Other 0.7 0.6 0.6 0.6 0.6 0.6

Other credits 1.4 1.2 1.1 1.1 1.0 0.9

Foreign currency bonds 17.3 15.9 18.4 19.4 20.3 20.2

Eurobonds, issued by public subscription and Eurobonds related to GKO restructuring

1.7 1.4 1.7 1.8 1.8 1.8

Eurobonds related to London Club debt 15.1 14.0 16.3 17.3 18.1 18.0

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restructuring

MinFin Foreign Currency Bonds (Series VII )

0.4 0.4 0.4 0.4 0.4 0.4

OFZ 0.1 0.1 0.1 0.2 0.8 0.8

Other 0.3 0.3 0.3 0.3 0.3 0.3

Debt of the former USSR 4.6 4.4 4.4 4.5 3.2 3.2

Paris Club member countries 0.0 0.0 0.0 0.0 0.0 0.0

Debt owed to former socialist countries 1.4 1.4 1.4 1.4 1.3 1.3

Other official creditors 1.9 1.9 1.9 1.9 1.8 1.8

MinFin Foreign Currency Bonds (Series III, IV, and V)

0.0 0.0 0.0 0.0 0.0 0.0

Other 1.2 1.2 1.2 1.2 0.0 0.0

Local Government 1.3 1.2 1.5 1.7 1.8 1.8

Loans 1.1 1.0 1.1 1.1 1.1 1.1

Ruble denominated bonds 0.2 0.2 0.4 0.5 0.7 0.7

Monetary Authorities 2.8 2.5 3.9 12.2 14.6 12.2

Loans 0.0 0.0 0.9 0.0 2.4 0.0

Currency and deposits 2.8 2.5 3.1 3.2 3.4 3.6

Other (SDR allocation)       9.0 8.9 8.6

Banks (excluding equity capital) 166.3 146.4 141.7 135.9 127.2 128.9

Other sectors (excluding equity capital) 280.9 270.2 292.3 297.6 298.5 301.7

Debt liabilities to direct investors and to direct investment enterprises

31.0 31.5 41.8 45.0 45.7 48.4

Loans 236.1 225.6 233.7 233.3 234.7 232.5

Debt securities 8.2 7.6 8.8 12.5 13.9 16.5

Financial leases 2.8 2.9 2.9 2.8 2.8 2.8

Other 2.8 2.6 5.1 3.9 1.4 1.4

(As on   5th April 2010)  Source: Central Bank of Russia17

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