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The Russian Federation is committed to the principles of multiparty democracy, pluralism and market economics in accordance with the conditions specified in Article 1 of the Agreement establishing the Bank. While there has been a welcome reaffirmation of the importance of these principles by the current administration, a more consistent application of them would facilitate attainment of the country’s medium-term development goals. In particular, policy innovations to address Russia’s key transition challenges are most likely to emerge from a free flow of ideas and information, open engagement with civil society and enhanced political competition. Recent efforts to increase transparency, step up judicial reform and the rule of law and combat corruption are particularly encouraging, but implementation will be the key.
Over the last decade and during much of the previous Strategy period, Russia enjoyed high rates of economic growth. Gross domestic product increased by 82 per cent between 1999 and 2008 in real terms, helped by a steady increase in oil price from the low of USD 9 per barrel of Urals brand in early 1999 to the peak of USD 138 per barrel in August 2008. Economic growth resulted in rapidly rising income levels, a reduction in poverty and expansion of the nascent middle class and continued integration into the world economy. The medium-term fiscal framework provided for accumulation of oil revenue stabilization funds that have helped to absorb the effects of the global financial crisis.
However, progress in structural and institutional reforms during this period has been uneven and during the past year the economic landscape has changed dramatically. The Russian economy has been severely affected by the global financial crisis through a steep reduction in commodity prices (terms of trade shock), capital flow reversal and credit crunch, and lower global demand for Russian manufacturing exports. While adjustment to the new external environment will be facilitated by the prudent fiscal management and monetary and public debt policies of recent years, it will likely be associated with structural shifts, as the economic crisis may give rise to banking sector and corporate bailouts involving nationalisations, economic stimulus packages may increase trade barriers, lower demand may translate into weaker competition as firms go out of business, and a sharp fall in foreign direct investment inflows may slow down transfer of technologies and skills and postpone essential investment into modernising and developing new capital-intensive infrastructures, notably in the area of energy. The economic crisis has led to the adoption of a number of restrictive trade measures. WTO accession should remain a priority for Russia. In view of its intention to join the WTO together with Belarus and Kazakhstan, with which it is forming a customs union, it will be important to keep the accession process on track.
Challenges
On its modernisation and transition path Russia faces a number of fundamental challenges cutting across sectors:
- The economic downturn and a fall in global commodity prices emphasized the importance of diversification of output and exports for sustainable long-term economic development. Diversification will in turn rely on both innovation and further integration into the world economy, as well as addressing the infrastructure bottlenecks.
- Lower global demand also highlighted the need to bolster competitiveness of the Russian industry through market-based restructuring and improved production efficiency, in particular energy efficiency where there remain large gains to be made, and has emphasised the importance of developing the MSME business sector.
- Deepening Russia’s integration into the global economy and advancing its membership in the World Trade Organisation is an important anchor to promote competitiveness of domestic industry and services. WTO membership would also lessen trade frictions by providing a rules-based framework and dispute settlement mechanism for measures such as the recently introduced trade restrictions.
- The sharp economic slowdown also highlighted the importance of strengthening the financial sector and capital markets development, and exposed the current fragility of the rouble markets, as the de-dollarization trend of previous years went into reversal.
- Remaining weaknesses in the institutional and regulatory framework and in corporate governance practices need to be addressed to improve the investment climate and revive foreign direct investment.
Strategic directions
In the face of the economic crisis and the identified transition challenges, the core objective of all the Bank’s activities in Russia will be to assist to Russia’s efforts to modernise and diversify its economy to reduce the current concentration on extraction and processing of natural resources and move towards a greater share of value-added manufacturing. The Bank will focus on the need to confront and mitigate the effects of the crisis in the short term and to support the post crisis recovery in the medium term, making the best of its local presence in all regions of Russia.
In parallel with the thematic and sectoral priorities outlined in this document, the systematic implementation of the Bank’s mandate – private sector focus, transition impact, additionality, sound banking, environment – and a continued focus on integrity will drive a strong sense of priority, selectivity and quality in all Bank’s operations.
- In the context of the second phase of the Sustainable Energy Initiative, energy efficiency will become an integral part of the business of each sector of Bank activity in Russia. The Bank will address with increased determination the demand side of energy use by reducing waste of energy and greenhouse emissions in all sectors, which will be important to support corporate competitiveness and combat climate change. An Energy Efficiency Action Plan is being negotiated with the Russian authorities.
- Modernisation, competitiveness and diversification of the real economy will be the overarching priority of the next strategic period, in order to address the immediate financing needs and keep trade flowing in response to the crisis, and promote economic development, competition, productivity and energy efficiency in the medium term.
- In its operations the Bank will focus on facilitating continued trade flows through its Trade Facilitation Programme; ensuring adequate access to working capital as well as refinancing and restructuring support to existing and new clients and supporting resumption of foreign direct investment.
- Beyond the crisis response measures the Bank will focus its direct support to the corporate sector on diversification and enhancing value added manufacturing, focusing on sectors where most impact could be made by the Bank, including a more comprehensive development of the food chain (with a focus on agri-processing and logistics), high tech industries, local forestry companies, automotive suppliers and industrial equipment, without excluding projects with high transition impact in other sub-sectors when appropriate.
- Technical assistance will be provided to identify regional companies and assist them, when needed, to restructure and reach financial, legal, management and corporate standards that would enable them to work with the Bank.
- Financing the Mittelstand and micro, small and medium enterprises (MSMEs), as key sources of competition, productivity, diversification and jobs, through direct investments or framework lending schemes with financial intermediaries and through private equity funds, will be a key priority to address the needs of the real economy. A specific effort will be made to open new channels to reach MSMEs, including working together with the authorities to design innovative support and financing schemes.
- This overarching priority of modernisation, competitiveness and diversification of the real economy will be supported by active infrastructure development and efficient financing mechanisms.
- Infrastructure Development: Recovery and diversification of the economy will not be possible without the necessary infrastructure that would ensure physical flow of goods, access to utility services and supply of energy to industry. The immediate challenge is to ensure availability of public and IFI financial support for critical infrastructure projects, and to support viable private companies and municipalities in the sector. To assist Russia in meeting its medium term transition and development goals, the Bank will continue to provide investment in the transport and municipal infrastructure sectors using concession mechanisms and public private partnership structures, as well as working with private companies, with an increased effort in the rail sector. The Bank will finance investments in generation and transmission capacity, to support the momentum of liberalisation and renew ageing and inefficient power infrastructure, using where appropriate an integrated approach, with an increased focus on energy efficiency, so as to meet the needs of the industrial sector. The Bank will work with private sector companies, and, selectively, with well managed market oriented state owned entities promoting reform, restructuring or commercialisation of their activities in those sectors, to address key infrastructure bottlenecks, while supporting competition, transparency and good corporate governance practices. Lastly, the Bank will have a focussed activity in the oil and gas sectors, in projects that promote energy efficiency, good governance and best environmental practices.
- Efficient Financing Mechanisms: Another key priority is to stabilize the financial sector to enable it to resume its crucial role of an intermediary for financing of the real economy. To address this, the Bank will focus in its current operations on existing clients’ balance sheet strengthening as well as on support to consolidating initiatives. The Bank will continue in the medium term to seek new partners especially in the regions, probing new relationships by trade facilitation and MSME lines. The Bank will give a new prominence to domestic capital market development and local currency funding to help address the excessive reliance of the Russian economy on external sources of funding. Systematic efforts will be undertaken to deepen capital markets through the support of insurance companies and development of on-shore savings and investment vehicles, including equity funds, leasing, and pension and life insurance. Through continued policy dialogue and in co-ordination with other IFIs the Bank will contribute to developing a robust capital market infrastructure. The financial crisis has made equity funding even more necessary and even more difficult to attract. The Bank will therefore actively seek equity investment opportunities in companies and banks, all the more that the use of the equity instrument enables the Bank, through its proactive investor role, including on investee company boards, to influence positively corporate governance standards.
- Four important considerations will be present in the operations of the Bank:
- The Bank will aim to assist Russia in transforming its advantages, including a well-educated population, into successful knowledge based industries and innovations across all sectors of the economy. The Bank will encourage the use of best available technologies and practices.
- The Bank will direct its investments into sectors where there is clear and sustained political will and momentum for market friendly reforms. It will reinforce policy dialogue efforts in these sectors to promote transition, with a focus on addressing legal and regulatory issues that arise from specific project experience. Areas of special attention will be the development of the institutional and regulatory framework for promoting energy efficiency, encouraging competition, ensuring equal access to infrastructure, tariff reform, improving the framework for private sector participation in provision of transport and utilities services, banking sector and capital markets regulation. The Bank will promote, when appropriate, systematic approaches combining policy dialogue and financing mechanisms, in order to achieve greater impact.
- In all its activities the Bank will promote competition, integrity, transparency and higher standards of corporate governance and business conduct, as well as good environmental practices.
- For activities with state-owned companies, the Bank’s involvement will focus on such enterprises that operate competitively and are moving to participation in the market-oriented economy, and on enterprises in transition to private ownership and control. The Bank will actively support the efforts of the Russian Government to accelerate privatisation of stakes in state-owned companies, and to bring back into private ownership companies and banks in which the economic crisis has forced the state to increase its involvement. The Bank will consider pre-privatisation investments in state companies that the government is committed to privatise, to support corporate governance improvements and restructuring to increase attractiveness of such companies for the private sector. The Bank will also consider investing along-side strategic investors in state companies at the time of privatisation or taking a minority equity stake during IPOs.
In working to achieve the above, the Bank will continue to closely co-ordinate with other IFIs in its policy dialogue efforts, in activities in the context of the Northern Dimension initiative, and in mobilising co-financing for priority investment programmes, in particular with the European Investment Bank, which is considering increasing its operational scope and budget in Russia and will remain a key partner for EBRD, as well as the Russian Bank for Development (Vnesheconombank).
Implementation of the priorities underlined above will require strong and sustained technical cooperation support, particularly in energy efficiency, infrastructure and municipal sectors but also in the financial sector and the corporate sector to assist companies to implement international accounting and corporate standards in order to access financing. The Bank will seek technical support for the development and implementations of its projects from existing and new donors, including the Russian Federation.
The Bank will continue to ensure that all EBRD operations in Russia meet sound banking principles, have transition impact, are additional and are subject to the Bank’s Concession Policy and Environmental and Social Policy and incorporate, where appropriate, Environmental and Social Action Plans, which will contribute to a high selectivity and quality of projects financed by the Bank. The Bank will continue to channel the major part of its investments to the regions of Russia to support regional development and growth.
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