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The Russian Federation is committed to and applying the principles of
multiparty democracy, pluralism and market economics in accordance with the
conditions specified in Article 1 of the Agreement establishing the Bank.
However, a more consistent application of these principles would facilitate
Russia’s global integration and its ability to absorb future shocks.
Russia’s evolution from its Soviet past and from the chaotic early days of
democracy has been swift. Judged against the standards of the Soviet Union,
Russia today stands as a strikingly different country where basic political,
civic and economic freedoms are both guaranteed by the Constitution and, on
balance, enjoyed in practice by its citizens. Judged against the standards of
the 1990s, when the country went through a series of political and economic
crises and the state at times appeared on the verge of collapse, Russia today
has achieved a noteworthy level of political and economic stability that has
reassured markets and the public alike. These are welcome developments.
However, judged against the standards of a developed market-oriented
democracy, Russia today would benefit from further strengthening of democratic
and market-supporting institutions, enhancing accountability, more even-handed
application of the rule of law and firmer protections of human and civic
rights. Moreover, developments over the past two years have seen the
continuation of a trend in which the implementation of these basic elements of
a democratic polity has wavered, raising concern in the international
community. Further progress in the area of democratic governance would help to
unlock Russia’s obvious economic potential.
Economic environment
From an economic perspective, despite recent slow reforms and a trend of
economic recentralisation, there are many positive elements in today’s Russia:
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The stability of the country
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The robustness of economic growth in the last eight years
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The high level of the gold and foreign currency reserves and the accumulation
of the windfall tax revenues from oil and gas into a stabilization fund
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The sound management of foreign debt
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The recent further liberalisation of capital account transactions
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The reduction of the number of people living under the official poverty line
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The expansion of a nascent middle class that fuels domestic consumption and
retail industry development
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The rising level of foreign investment, undeterred so far by assertive moves
to return certain strategic assets to state control beyond the oil and gas
sector
Challenges
There remain however fundamental challenges in Russia’s modernisation and
transition process, including:
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The demographic crisis which hangs over the future of Russia, in particular
the depopulation of Siberia and the Far East, and the brain drain that affects
certain sectors of the economy
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The further integration of Russia in the world economy
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The improvement of the business climate
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The low level of investment compared with the huge investment needs to upgrade
infrastructure and strengthen the competitiveness of the corporate sector
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The need to diversify further the economy away from oil and gas
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The reform of the state (administration, judiciary, law enforcement agencies)
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The underdevelopment of micro, small and medium sized businesses
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The need to make local companies more transparent and to improve their
business and governance standards with a view to improving their access to
finance and capital markets
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The lack of progress in the improvement of security of property rights
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The fight against corruption
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The widespread waste of energy in most sectors of the economy
Strategic directions
In the face of these challenges, the Bank’s strategic directions need to
reflect the Russian Government’s priorities and the Bank’s own analysis of
transition challenges, as well as the evolving needs for the Bank’s support
and finance in accordance with the additionality, transition impact and sound
banking principles, with a strong emphasis on integrity in all Bank’s
operations:
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Economic diversification, competitiveness, entrepreneurship, environment,
energy efficiency, stronger regional presence and policy dialogue at federal,
regional and local level will be central to the strategy
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The Bank is intent on increasing its annual business volume after a period of
relative stability. Russia’s share of the Bank’s annual business volume is
under the CRR3 projected to rise to EUR 1.6 billion in 2010, i.e. 41% of the
Bank’s annual commitments
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The sector allocation of the annual business volume is intended to shift
towards transport, municipalities, power utilities, and the corporate sector,
with an energy efficiency focus cutting across all sectors
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The Bank will aim at increasing indicatively the share of equity in the annual
business volume in Russia to 20% from the current 12%
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There will be an increased effort to develop larger direct projects with
strong demonstration effects, in particular equity transactions, whilst MSME
support will remain a strong priority addressed on a wholesale basis and on a
framework basis
Operational priorities
As per these strategic directions, the Bank’s operational priorities will be:
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Infrastructure investment in the transport, municipal/environmental sectors
using concession mechanisms and public private partnership structures, as well
as attracting government and sub-sovereign co-financing and private sector
finance in order to construct or rehabilitate airports, ports, roads, bridges,
multi-modal logistic centres; improve rail infrastructure and rolling stock;
and develop waste processing, district heating, public transport, water
treatment and housing
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With the beginning of the third stage of power sector reforms, a range of
equity and debt investment opportunities will be actively pursued in the power
sector targeting significant improvement in power generation capacity, as well
as infrastructure modernization and energy efficiency. Further liberalization
of the energy market and diversification of shareholder ownership of power
companies through capital increases will be key. It is expected that the
Bank’s portfolio of commitments to the power sector will reach between EUR 1.5
and 2 billion by the end of 2008
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The corporate sector is projected to be of growing importance - with emphasis
to be placed on expanding equity investments in local manufacturing companies
needing to increase their capital base in order to develop a modernisation and
expansion plan aimed at fostering competitiveness (and improve their
environmental and energy efficiency as part of this plan). The Bank will be
available to support market-based restructuring of industrial companies
associated with demonstrable improvements in corporate governance. Other
priority areas include investments to lift constraints on the development of
oil and gas production and transport as well as continued risk sharing with
foreign strategic investors. Smaller companies, which contribute greatly to
promote economic diversification, will be given an equal priority as larger
companies and will be addressed through private equity funds, framework
lending schemes and MSME programmes with financial intermediaries with a
regional network, including both finance and appropriate technical assistance.
The MSME sector will be further strengthened through the Turnaround Management
(TAM) and Business Advisory (BAS) programmes. The Bank will be pursuing
actively the development of its activities in the regions of Russia and, in
accordance with the high priority expressed by the Russian authorities, will
examine opportunities to develop financing to high technology companies
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There is still a range of opportunities open to the Bank for supporting the
development of the financial sector and financial intermediation in Russia.
There is also a need for consolidation of the banking sector which the Bank
will address by supporting mergers and acquisitions. The Bank’s partners will
include strong regional banks and large banks with a national presence or
those banks looking to build a national presence through acquisitions. The
EBRD will also be looking at expanding the range of financial instruments
available in Russia by assisting banks and non-bank financial institutions in
the areas of leasing, insurance and mortgage lending
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The Bank will seek to improve energy efficiency wherever possible through its
projects and policy dialogue. The power sector, industries whether large or
small and medium-sized and district heating will be the main focus. It will
also seek to promote emission trading as a way of enhancing the viability and
returns of emission reduction projects
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Across all sectors, the Bank will pursue actively project origination in the
regions of Russia, including through the planned opening of two resident
offices in the Volga Federal District and in the Southern Federal District and
the possible future opening of another resident office in Western Siberia, the
locations of which will be based on a business case. The Bank will be open,
accessible and flexible to support investment opportunities in all regions of
Russia, including in the Moscow region, in the Central Federal district, and
in the St Petersburg region given their economic importance. In accordance
with the priorities expressed by the Russian authorities, the Bank is prepared
to make an increased effort to cluster projects across various sectors in the
Kazan, Krasnodar, Krasnoyarsk and Perm regions, in the Far East Federal
District and in any other region where transition can be furthered. The Bank
will further analyse the investment climate in the regions of Russia.
Wider range of instruments to be used
The Bank will use a wider range of instruments to achieve its objectives, such
as:
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Increased utilisation of the equity instrument in all sectors, in particular
in the power sector, the industrial sector and the banking sector, including
selective Bank’s participation in Initial Public Offerings
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Design and financing of Public Private Partnerships in conjunction with
government and sub-sovereign entities, supported by an expansion of the Bank’s
rouble funding in the Russian bond market
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Increased project co-financing with Russian banks, in particular in the area
of rouble-denominated loans
Business breakdown of Bank's activities
Over the strategy period, the expected indicative business breakdown of the
Bank’s activities would see core infrastructure sectors - transport, municipal
- rising together to about 20-25 per cent of annual commitments. The power
sector share is expected to account for another 15-20 per cent of annual
commitments. The share of natural resources projects (oil, gas, mining) is
expected to be 5-10 per cent. Direct business with the corporate sector
(general and specialised industries) is expected to account for 30-35 per cent
whilst MSME support (private equity, working capital and medium term finance
to MSMEs) is expected to account for another 10 to 15 per cent of commitments.
The proportion of projects in the banking and non-banking sectors (including
trade facilitation) is expected to be within a 10 to 15 percent range.
Strengthened management
In order to implement this strategy, management of the Russian operations has
been strengthened with the appointment of a Business Group Director for Russia
based both in Moscow and in London and exercising direct leadership within the
Bank’s matrix structure upon three Directors based in Moscow, covering between
them the whole array of the Bank’s activities: infrastructure/energy,
corporate and financial. Moreover, the number of professional staff will be
doubled over the next 12 months from the current 40 to about 80, consistent
with the annual budget approved by the Board of Directors, whilst staff
expertise will be strengthened.
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