Economic and Commercial Report for the RUSSIAN FEDERATION

EMBASSY OF INDIA Economic & Commercial Wing Moscow

MOS/COM/202/06/2009 November 2010

Economic and Commercial Report for THE RUSSIAN FEDERATION for the month of October 2010

Executive Summary:

The main indices of economic performance in Russia continue to be positive. According to Russian Federal State Statistic Service, Russia's GDP in the Q2 this year increased by 5.2 % (YoY). In September, GDP grew by 1.8% (YoY) and 3.4% from January-September 2010. Inflation grew by 0.8% in September 2010, totaling 6.2% in the first nine months of 2010. According to the figures released by Rosstat, growth in industrial output is 6.2% in September as compared to 7% in August 2010.

2. According to the Federal Customs Service, Russia's foreign trade surplus increased by 37.2 percent from January-September 2010 (YoY) to US$125.6 bn. Russia's exports in January-September 2010 rose by 37.1 percent to $283.1 billion and imports by 37 percent to $157.4 billion. Bilateral trade with India during Jan- September 2010 amounted to US$ 6.12 bn with exports worth US$ 4.61 bn and imports worth US$ 1.5 bn. Main economic and financial indicators for Russia in the prescribed format are at Annex-I

Major Developments concerning Russian Economy

Privatization

3. First Deputy Prime Minister Igor Shuvalov stated on 20 October that the Russian Government plans to privatize a wide range of state property from energy to agriculture and banking to transportation in the next five years. Recent media reports indicate that the Russian Government would try to raise approximately USD 59 bn through divestment of assets in facilities like Sberbank, VTB and

1 Rosselkhozbank. In addition, Rosneft, Russian Railways, Rostechnologies, Transneft, Aeroflot, and Rushydro have also been mentioned apart from many other companies. A table outlining the major entities to be disinvested is given below:

Sl. Company % equity to be Expected No. disinvested Timeframe 1. Rosneft 15% 2012-2015

2. VTB Bank 10% in 2010 2010 - 2012

10% in 2011

15% in 2012 2. Russian Railways 25% 2013-2015

3. Sovcomflot (Shipping Company) 50% minus one 2011-2013 share 4. Rushydro 8% before 2013; 2011-2015

Reduce state’s stake to 25% plus one share before 2015 5. Federal Grid Company of 4% -- Unified Energy System 6. Rosagroleasing 50% minus one 2013-2015 share 7. United Grain Company 100% Before 2013

Disinvestment plan in regard to other companies is yet to be confirmed. 4. Media reports indicate that the Government has also suggested that the Central Bank should cut its controlling stake in the country's top bank, Sberbank, 2 in 2011-2013. The Russian Government seems to have shortlisted Credit Suisse, VTB Capital, Deutsche Bank, VEB Capital, JS Morgan, Merrill Lynch, Morgan Stanley, Renaissance Capital and Goldman Sachs to carry out the asset disposal.

5. Alrosa President Fyodor Andreyev reportedly stated on 19 October 2010 that the company may hold an Initial Public Offering to sell no more than 20% of its shares and does not rule out holding retail IPO at 50 kopecks per share. (= 1.66 cents)

Russia: External

6. President Medvedev visited Cyprus on 7 October. During this visit, 15 agreements on mutual cooperation were signed. These included:

 An agreement on cooperation in energy conservation and renewable energy sources;

 An agreement on cooperation between the chambers of commerce and industry;

 A Memorandum of Understanding between the RTS and the Cyprus Stock Exchange;

 A Memorandum of Understanding on cooperation in the provision of services, scientific research and education in the field of neurology, genetics and biomedicine.

7. The Russian-Brazilian Inter-Governmental Commission on trade-and- economic and research-and-technology cooperation was held in Brasilia on 8 October. The Commission discussed cooperation in the area of Space Technology, banking, energy sector and various investment projects. On this occasion, Russia’s Ministry of Education and Science and Brazil’s Ministry of Science and Technologies signed a memorandum of understanding and cooperation in the area of nanotechnologies.

8. German President Christian Wolf visited Russia from 12-15 October 2010 and held talks with President Medvedev. The talks focused on cooperation in the sphere of new technologies, establishment of technological alliances between 3 Russian and German companies in such strategic sectors as energy, car manufacturing, energy efficiency and energy conservation, railway engineering and nuclear energy. The two Presidents also reviewed Russian-German ties as part of the Partnership for Modernisation strategy. In particular, they discussed the participation of Siemens in the establishment of the Skolkovo Innovation Centre.

9. Venezuelan President Hugo Chavez visited Russia from 14-15 October 2010 and held talks with President Medvedev. During the visit, an action plan was signed to develop the Russian-Venezuelan partnership over 2010-2014. The document sets out the main cooperation priorities in politics, economic and financial relations, energy, military-technical cooperation, nuclear energy, telecommunications, agriculture, fisheries, transport, healthcare, tourism, sports, culture, and disaster relief. Nine agreements aimed at developing cooperation in the energy and nuclear energy sectors, and customs were also signed.

10. Russian President Dmitry Medvedev visited Vietnam from 30-31 October 2010 to participate in Russia-ASEAN summit. A framework programme of RF- ASEAN energy cooperation for 2010-2015 was adopted at the end of the summit. During the visit President Medvedev also met with his Vietnamese Counterpart, President Nguyen Minh Triet. The focus was on developing energy sector cooperation, particularly in the field of high-technology. The documents signed included an intergovernmental agreement on building Vietnam’s first nuclear power plant Thuan-1 which is to be completed by 2020, and cooperation agreements in the financial sector, with Russia’s Bank for Foreign Trade (VTB Bank) and Bank for Investment and Development of Vietnam agreeing to set up a $500 million investment fund.

Russia China Cooperation

11. According to media reports, Russia’s Territorial Generating Company TGC- 2, China’s Huadian Corporation and the Industrial and Commercial Bank of China have signed a cooperation agreement on the construction of the Huadian-Tenin combined-cycle – thermal power plant in the Yaroslavl region. The Industrial and Commercial Bank of China’s investments in the project will be at 15 billion roubles (USD 500 mn). A Memorandum of Cooperation between Russia’s Territorial Generating Company TGC-2, China’s Huadian Corporation and the

4 Industrial and Commercial Bank of China was signed during Russian President Dmitry Medvedev’s visit to China in September 2010.

12. There were press reports quoting Russian Deputy Energy Minister Anatoly Yanovsky that Russia intends to use the Chinese loans worth $6 billion to finance investments by domestic coal producers in return for a guarantee to increase supplies to China. This would include coal projects in Sakhalin Island and Elegest, Eastern Siberia. Russia had signed a "loans for coal" agreement with China in September 2010 to jointly develop coal resources in Russia's far eastern areas. The agreement stipulates that in the next 25 years, China will import at least 15 million tons of coal from Russia each year in the first five years and at least 20 million tons per year in the following 20 years.

Oil & Gas 13. Deputy Prime Minister Baimurad Khodzhamukhamedov of Turkmenistan announced on 14 October 2010 in a Government meeting that Russia's independent oil and gas producer Itera has completed the construction of its $176 million natural gas pipeline in Turkmenistan. The pipeline has already been put in operation. The 198-kilometer pipeline will link gas deposits in the Karakum Desert with the Central Asia - Center gas pipeline system running from Turkmenistan via Uzbekistan and Kazakhstan to Russia. Turkmenistan, which annually produces some 75 billion cubic meters of gas, is home to South Yolotan, the world's fourth largest gas field with estimated reserves of 4 to 14 trillion cubic meters. 14. Deputy Prime Minister Igor Sechin, during his visit to Turkmenistan from 21-22 October 2010 stated that Gazprom may participate in a consortium to build the Trans-Afghanistan gas pipeline (TAPI) for the transfer of Turkmen gas to Pakistan and India. He stated that Gazprom may participate in any capacity – builder, designer, participant etc. However, in a statement made on 28 October 2010, Turkmenistan Foreign Ministry denied reports of Gazprom's participation in TAPI gas pipeline stating that there was “no agreement whatsoever” on the participation of Russian companies in the project. 15. During the visit, DPM Sechin also stated that Russia’s electricity export- import operator Inter RAO UES plans to construct power transmission networks to Iran, Afghanistan and Pakistan via Turkmenistan. Inter RAO UES is a Russian trans-national energy company, which controls several generation, distribution and

5 trading assets in Russia and abroad. The aggregate capacity of the power plants controlled by the company is about 18,000 megawatts.

Grain Export Ban

16. Prime Minister Putin stated on 22 October 2010 that the Russian Government has decided to extend the moratorium on grain exports until July 1, 2011. He stated that despite the drought, around 60 mn tonnes of grain had been harvested this year which would meet only domestic demand.

New Export Terminal

17. There were press reports quoting the head of Lavna Trading Port Company that Russia plans to build a new export terminal in the Kolskiy bay of the Barents Sea, which lies to the north of Russia and Norway. This terminal will be worth $300-$500 million with a capacity of shipping 18 million tonnes of coal per year. According to Igor Rusu, the head of Russian State Agency Rosmorport, construction of the three-phase project will start in 2012, and the first phase, shipping 6 million tonnes of coal, will be completed by the end of 2014. The new port is expected to provide a cheaper path to Europe and beyond for Kuzbassrazrezugol, Russia's second-largest steam coal miner.

Investment in Skolkovo

18. The President of the Skolkovo project Viktor Vekselberg reportedly indicated that Skolkovo Innovation Center will need a financial injection of up to 200 billion rubles ($6.7 billion) over three to five years. Half of this figure would be injected by the government and the rest would be financed by private businesses. The center will focus on research in five priority spheres: energy, information technologies, communication, biomedical research and nuclear technologies. He further stated that the projects would be based on the principle of co-financing and the obligatory participation of both Russian scientists and foreign partners.

Bilateral Visits

6 19. Mr. A. Raja, Minister of Communications and IT, paid an official visit to Moscow and St. Petersburg from 10-15 October 2010. He was accompanied by senior officials of Ministry of Communications and IT. In Moscow, Mr. Raja had a bilateral meeting with Mr. Igor Shegolev, Russian Minister of Telecom and Mass Communication. He also visited the Emergency Response Center and Micron chip manufacturing facility. In St. Petersburg, Mr. Raja had a meeting with the Governor of St. Petersburg Ms. Valentina Matvienko. He also had interactions with representatives of Russian telecom companies and the faculty members of St. Petersburg State University of Telecommunications.

20. A delegation led by Shri S Sundareshan, Secretary, Ministry of Petroleum & Natural Gas, visited Russia from 30 September to 4 October 2010. In Moscow, the delegation had meetings with senior officials of the Russian Government as well as with the top management of Russian oil and gas companies. The delegation also visited the assets of Imperial Energy in the Tomsk region and had a meeting with the Governor of the region.

21. The 16th session of the Working Group on Trade & Economic Cooperation (under the aegis of the India-Russia Inter-Governmental Commission on Trade, Economic, Scientific, Technological and Cultural Cooperation) was held in New Delhi on 5-6 October 2010.

Trade Enquiries

22. The Embassy responded to 29 trade queries from Indian businessmen and 19 queries from Russian businessmen during the month of October 2010.

23. This issues with the approval of Counsellor (E&C).

Mayank Singh Third Secretary (E&C) 30 November 2010

Distribution: As per standard list.

7 Annex-I

Table 1 GDP at current prices 2008 2009 Apr - June 2010 (US$1= Ru 29.98) Rubles billion 41256.00 39016.1 10859.4 USD billion 1376.21 1301.5 356.04

Source: Russian Business Consulting

Table 2

FOREIGN Apr - June 09 2009 Apr – June 10 TRADE Import [USD 38.21 167.457 54.1 bln]

Export [USD 67.8 301.750 97.1 bln]

Total 106.01 469.207 151.2 (USD bln)

Source: State Customs Committee of the Russian Federation

Table 3

TOP 5 Apr - June 09 2009 Apr – June 10 IMPORTS (USD million.) Machinery, 15575.4 70568.0 22272.6 equipment and transport means Chemical products 6487.8 28348.6 8736.6 and rubber Food products and 7020.8 27136.3 8713.2 agricultural raw materials Metal and metal 2387.5 10301.1 3977.5 products Textile and 1746.8 8877.9 2918.8 footwear

Table 4 8 TOP 5 IMPORT Apr - June 09 2009 Apr – June 10 DESTINATIONS (USD million.) Germany 4720.465 22864.120 6233.217

China 4511.175 21200.437 8748.405

Ukraine 2170.841 9181.499 3353540

Japan 1749.981 9129.099 2396.454

USA 2016.216 7254.393 2713.663

Table 5

TOP 5 Apr - June 09 2009 Apr – June 10 EXPORTS (USD million.) Fuel and energy 41876.3 190020.1 63111.8

Metal and metal 7340.2 32129.2 10149.4 products Chemical products 4168.8 17556.6 5870.2 and rubber Machinery, 3465.8 16619.6 4207.6 equipment and transport means Wood, pulp and 2062.3 8167.5 2513.3 paper items

Sources: State Customs Committee of the Russian Federation

Table 6

TOP 5 EXPORT Apr – June 09 2009 Apr – June 10 DESTINATIONS (USD million.) Netherlands 7726.225 36297.075 14115.623 Italy 5849.404 25057.729 6864.987

Germany 4709.537 18711.603 5643.579

Turkey 3296.889 13761.295 4946.327

Ukraine 2773.785 16401.558 5312.940

9 Sources: State Customs Committee of the Russian Federation

Table 7

FOREIGN Apr - June 09 2009 Apr – June 10 TRADE WITH INDIA

Import [USD 340.537 1524.097 533. 687 million]

Export [USD 1412.084 5936.091 1396.215 million]

Total [USD 1752.621 7460.188 1929.902 million)

Sources: Ministry of Economic Development of the Russian Federation

Table 8

TOP 5 IMPORTS FROM Apr – June 09 2009 Apr – June 10 INDIA (USD million)

Pharmaceuticals 109.854 463.361 135.294

Electrical machinery and 19.163 126.246 65.868 equipment, their parts, audio recording equipment, TV etc

Coffee, tea and spices. 28.042 119.717 33.584

Tobacco and its industrial 19.353 95.238 20.776 substitutes

Boilers, machinery and 21.166 88.974 17.730 mechanical appliances; parts thereof.

Table 9

10 TOP 5 EXPORTS TO INDIA Apr – June 09 2009 Apr – June 10 (USD million.)

Nuclear reactors, boilers, 219.183 826.463 133.193 machinery and mechanical appliances; parts thereof.

Fertilizers 192.948 776.615 232.519 Means of surface transport 192.629 669.601 141.795 (automobiles and parts etc)

Electrical machinery and 145.998 577.503 75.921 equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts.

Iron and steel 129.156 359.312 102.404

Table 10 Rate of Exchange

As in October 01 October 31 Monthly average Average M-o-M October 2010 change

11 1 RUB / 1 30.51 30.78 30.64 0.8 % USD

1 RUB / 1 41.43 42.75 42.09 3.08 % EUR

Source: Central Bank of Russia

Table 11

Countries with the Largest Accumulated Investments in the Economy of Russia

2009 2010 I half 9 months Year I quarter I half million US dollars

Investments - total 242462 262394 268226 265801 262637 Cyprus 40264 47042 49128 52184 53834 Netherlands 44993 49426 48619 43279 42288 Luxemburg 36707 37947 37157 36384 36629 Germany 16256 19811 19226 20296 22610 United Kingdom 24584 25622 23585 20466 19369 China 6034 6183 10343 10201 11442 Ireland 9121 9240 9212 9051 9717 Japan 6090 6989 8301 8499 8665 Virginians (UK) 6813 7444 7925 15398 7222 USA 7992 7608 7161 6638 6703

as percentage of total

Investments - total 100 100 100 100 Cyprus 16,6 17,9 18,3 19,6 20,5 Netherlands 18,6 18,8 18,1 16,3 16,1 Luxemburg 15,1 14,5 13,9 13,7 14,0 Germany 6,7 7,6 7,2 7,6 8,6 United Kingdom 10,1 9,8 8,8 7,7 7,4 China 2,5 2,4 3,9 3,9 4,4 Ireland 3,8 3,5 3,4 3,4 3,7 Japan 2,5 2,7 3,1 3,2 3,3 Virginians (UK) 2,8 2,8 2,9 5,8 2,7 USA 3,3 2,9 2,7 2,5 2,5

Source: "Federal State Statistics Service"

Table 12 INFLATION January February March April May June July August Sept 2010 2010 2010 2010 2010 2010 2010 2010 2010 Rate of Inflation 8.0 7.2 6.5 6.0 6.0 5.8 5.5% 5.4% 6.2% (% YOY)

12 Industrial 98.9 100.9 102.7 106.0 108.9 105.5 106.2 109.6 108.2 producer price index, as % of December of previous year

Source: Central Bank of Russia

Table 13: International Reserves (in million US$) Date Gold and of which foreign Foreign of which exchange exchange Foreign SDRS Reserve Gold reserves reserves exchange position in IMF 01.11.2010 497,082 463,767 452,905 8,930 1,932 33,315 Source: Central Bank of Russia

Table 14: External Debt of the Russian Federation as at the end of September 2010 (estimate) ( in billions of US dollars)

Dec Marc June Septe Dece Marc June Septe 2008 h 2009 mber mber h 2010 mber 2009 2009 2009 2010 2009 (esti mate) Total 479.4 446.4 467.9 476.8 471.6 473.7 456,0 480,2 60 25 General Government 29.5 27.4 30.0 31.2 31.3 30.9 35,45 35,81 1 5 Federal Government 28.2 26.2 28.5 29.5 29.5 29.1 32,96 33,18 4 6 New Russian Debt 23.6 21.7 24.1 25.0 26.3 25.9 29,89 30,20 3 2 Multilateral creditors 4.5 4.3 4.1 3.9 3.8 3.6 3,430 3,264 IBRD 3.8 3.6 3.5 3.3 3.2 3.0 2,883 2,725 Other 0.7 0.6 0.6 0.6 0.6 0.6 547 539 Other credits 1.4 1.2 1.1 1.1 1.0 0.9 839 819 Foreign currency bonds 17.3 15.9 18.4 19.4 20.3 20.2 24,33 24,91 2 3 Eurobonds, issued by public 1.7 1.4 1.7 1.8 1.8 1.8 6,367 subscription and Eurobonds related to GKO restructuring 6,161 Eurobonds related to London Club 15.1 14.0 16.3 17.3 18.1 18.0 17,74 18,10 debt restructuring 1 3 MinFin Foreign Currency Bonds 0.4 0.4 0.4 0.4 0.4 0.4 443 (Series VII ) 429 13 OFZ 0.1 0.1 0.1 0.2 0.8 0.8 976 887 Other 0.3 0.3 0.3 0.3 0.3 0.3 315 319 Debt of the former USSR 4.6 4.4 4.4 4.5 3.2 3.2 3,072 2,984 Paris Club member countries 0.0 0.0 0.0 0.0 0.0 0.0 9 9 Debt owed to former socialist 1.4 1.4 1.4 1.4 1.3 1.3 1,168 countries 1,250 Other official creditors 1.9 1.9 1.9 1.9 1.8 1.8 1,762 1,756 MinFin Foreign Currency Bonds 0.0 0.0 0.0 0.0 0.0 0.0 1 (Series III, IV, and V) 1 Other 1.2 1.2 1.2 1.2 0.0 0.0 456,0 480,2 60 25 Local Government 1.3 1.2 1.5 1.7 1.8 1.8 35,45 35,81 1 5 Loans 1.1 1.0 1.1 1.1 1.1 1.1 32,96 33,18 4 6 Ruble denominated bonds 0.2 0.2 0.4 0.5 0.7 0.7 29,89 30,20 3 2 Monetary Authorities 2.8 2.5 3.9 12.2 14.6 12.2 3,430 3,264 Loans 0.0 0.0 0.9 0.0 2.4 0.0 2,883 2,725 Currency and deposits 2.8 2.5 3.1 3.2 3.4 3.6 547 539 Other (SDR allocation) 9.0 8.9 8.6 839 819 Banks (excluding equity capital) 166.3 146.4 141.7 135.9 127.2 128.9 24,33 24,91 2 3 Other sectors (excluding equity 280.9 270.2 292.3 297.6 298.5 301.7 6,367 capital) 6,161 Debt liabilities to direct investors 31.0 31.5 41.8 45.0 45.7 48.4 18,10 and to direct investment 17,74 3 enterprises 1 Loans 236.1 225.6 233.7 233.3 234.7 232.5 429 443 Debt securities 8.2 7.6 8.8 12.5 13.9 16.5 976 887 Financial leases 2.8 2.9 2.9 2.8 2.8 2.8 315 319 Other 2.8 2.6 5.1 3.9 1.4 1.4 3,072 2,984

(As on 12 October 2010) Source: Central Bank of Russia -x-x-x-