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CIS Region:

A Study of India's Tradeand Investment Potential

Occasional Paper No.116

EXPORT-IMPORT BANK OF INDIAEXIMBANK


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EXPORT-IMPORT BANK OF INDIA

OCCASIONAL PAPER NO. 116

CIS REGION: A STUDY OF INDIAS TRADE

AND INVESTMENT POTENTIAL

This paper is based on the award winning entry for EXIM BankInternational Economic Development Research Annual (IDERA) Award

2005 for the doctoral dissertation The Nature, Pattern and Impact of

Japanese and U.S. Foreign Direct Investments in Indian Manufacturing

submitted to Delhi School of Economics, University of Delhi, New Delhi

by Dr. Rashmi Banga, Economist, UNCTAD-India Programme, New

Delhi. The dissertation was written under the supervision of Professor

Aditya Bhattacharjea and Professor Biswanath Goldar. The views

expressed here are those of the author and do not necessarily reflect

those of Export-Import Bank of India.

EXIM Banks Occasional Paper Series is an attempt to disseminate the findings of research

studies carried out in the Bank. The results of research studies can interest exporters,

policy makers, industrialists, export promotion agencies as well as researchers. However,

views expressed do not necessarily reflect those of the Bank. While reasonable care has

been taken to ensure authenticity of information and data, EXIM Bank accepts no

responsibility for authenticity, accuracy or completeness of such items.

Export-Import Bank of India

Published by Quest Publications

January 2007


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CONTENTS

Page No.

List of Tables 5

List of Charts 7

Executive Summary 9

1. Evolution and Objectives of the Commonwealth ofIndependent States (CIS) 24

2. Brief Background and Recent Economic Performance ofthe CIS Region 28

3. Financial Sector and Capital Markets 45

4. Foreign Trade of the CIS Region 50

5. Foreign Direct Investment and InvestmentClimate in the CIS Region 69

6. Indias Trade and Investment Relations with the

CIS Region 887. Trade and Investment Potential with the CIS Region 103

8. Exim India in the CIS Region 132

9. Strategy and Recommendations to EnhanceBilateral Commercial Relations with the CIS Region 136

Annexures

1A: Indian Joint Ventures Approved in the CIS Region,1996-2006 (October) 141

1B: Indian Wholly Owned Subsidiaries Approved in theCIS Region, 1996-2006 (October) 144

2A: Investment Promotion Agencies in the CIS Region 147

2B: Chambers of Commerce and Industry in the CIS Region 149

3

Project Team:

Mr. David Sinate, Deputy General Manager, Research & Planning Group

Mr. Priyanshu Tiwari, Manager, Research & Planning Group


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List of Tables

Table Title Pg. No.

No.

A CIS-GDP, Inflation & Current Account Balance 10

2.1 CIS-GDP, Inflation & Current Account Balance 32

2.2A CIS-Select Economic Indicators, 2003-2006 33

2.2B CIS-Select Economic Indicators, 2003-2006 35

2.3 Foreign Exchange Reserves of CIS Countries 42

4.1 Foreign Trade of CIS Countries, 2001-2006 50

4.2 Exports of CIS Countries, 2001-2006 514.3 Imports of CIS Countries, 2001-2006 52

4.4 Intra-CIS Trade, 1995-2004 53

4.5 Intra-CIS Trade Statistics, 2002-2005 53

4.6 Russia's Foreign Trade, 2001-2006 54

4.7 Ukraines Foreign Trade, 2001-2006 56

4.8 Kazakhstans Foreign Trade, 2001-2006 58

4.9 Uzbekistans Foreign Trade, 2001-2006 60

4.10 Belarus' Foreign Trade, 2001-2006 62

5.1 FDI Inflows in the CIS Countries 69

6.1 India's Trade with CIS Countries, 2001-02 to 2005-06 88

6.2 India's Exports to CIS Countries, 2001-02 to 2005-06 89

6.3 Trends in Composition of India's Exports toCIS Countries 91

6.4 India's Imports from CIS Countries, 2001-02 to2005-06 92

6.5 Trends in Composition of India's Imports fromCIS Countries 93

6.6 India's Trade with Russia, 2001-02 to 2005-06 94

6.7 India's Trade with Ukraine, 2001-02 to 2005-06 95

6.8 India's Trade with Kazakhstan, 2001-02 to 2005-06 96

6.9 India's Trade with Uzbekistan, 2001-02 to 2005-06 97

6.10 India's Trade with Belarus, 2001-02 to 2005-06 98

6.11 India's Approved Investments in the CIS Region 101

5


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List of Charts

Chart No. Pg. No.

A. India's Trade with the CIS Region 12

4.1 Exports of CIS Countries (% Share, 2005) 51

4.2 Imports of CIS Countries (% Share, 2005) 52

4.3 Russia's Major Exports (% Share) 55

4.4 Russia's Major Imports (% Share) 55

4.5 Ukraine's Major Exports (% Share) 57

4.6 Ukraine's Major Imports (% Share) 57

4.7 Kazakhstan's Major Exports (% Share) 59

4.8 Kazakhstan's Major Imports (% Share) 59

4.9 Uzbekistan's Major Exports (% Share) 60

4.10 Uzbekistan's Major Imports (% Share) 61

4.11 Belarus' Major Exports (% Share) 63

4.12 Belarus' Major Imports (% Share) 63

6.1 Composition of India's Exports to CIS (2005-06, % Share) 90

6.2 Composition of India's Imports from CIS Countries(2005-06, % Share) 92

7


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INTRODUCTION

Besides being Indias traditionaland important trading partners,

Indias bilateral trade relations withthe CIS region has witnessed anupturn in recent years, while theCIS region is also increasinglyemerging as major destinations forIndias overseas investments.Sustained growth momentum in theCIS region in recent years, buoyantforeign trade and rise in foreignexchange reserves, coupled withsharp rise in FDI inflows into the

region in recent years, wouldpresent opportunities to furtherenhance Indias bilateral trade andinvestment relations with the CISregion.

In light of these developments,the Study analyses, inter alia, recenteconomic performance of the CISregion, trade and investment flows,trends and structure of Indias tradeand investment relations with the CIS

region, and endeavors to identifypotential areas for increased two-

way flow of trade and investmentbetween India and countries in theCIS region. The Study furtheroutlines some strategy and

EXECUTIVE SUMMARY

recommendations that, whilebuilding upon the opportunitiesidentified, would serve to foster

enhanced commercial relationsbetween Indian and the CIS membercountries.

ECONOMIC PERFORMANCE

Economic growth in the CIS regionhas registered robust growth inrecent years, reflecting amongothers buoyant energy and metalsprices and strong domestic demand.Real GDP growth for the region

as a whole strengthened from 7.9%in 2003 to 8.4% in 2004. Stronggrowth momentum in the largesteconomies in the region, such asRussia, Ukraine, Belarus,Kazakhstan, has supportedeconomic activity in other membercountries. During 2005, growthmomentum was sustained, althoughat a lower level of 6.5%. During2006, reflecting high commodity

prices and strong export growth,economic activity has picked up,supported by increased domesticdemand in major countries such asRussia and Kazakhstan. For theregion as a whole, real GDP growth


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is projected to strengthen to 6.8%in 2006 (Table-A).

FOREIGN TRADE AND

CURRENT ACCOUNT BALANCE

Reflecting increased earnings fromoil and commodity exports, thecurrent account surplus of the CISregion has risen from 6.3% of GDP

Table-A:

CIS - GDP, INFLATION & CURRENT ACCOUNT BALANCE

2003 2004 2005 2006 (p) 2007 (p)

Real GDP Growth (%) 7.9 8.4 6.5 6.8 6.5

Inflation (%) 12.0 10.3 12.3 9.6 9.3

Current a/c balance (% of GDP) 6.3 8.1 8.8 10.1 9.4

SOURCE: IMF, World Economic Outlook Sept. 2006; p-projections

in 2003 to 8.1% in 2004, and

further to 8.8% of GDP in 2005.For net energy exports such asAzerbaijan, Kazakhstan, Russia,Turkmenistan and Uzbekistan, thecurrent account surplus was a highas 8.7% of GDP in 2004, whichincreased further to 10.0% of GDPin 2005. Total exports of the CISregion have risen from US$ 196 bnin 2003 to US$ 268 bn in 2004,and further to US$ 345 bn in 2005.Total imports have also risen fromUS$ 134 bn in 2003 to US$ 173 bnin 2004, and during 2005 stood atUS$ 216 bn. The trade surplus ofthe region, which stood at US$48.3bn in 2002, increased to US$ 128.3bn in 2005.

FDI INFLOWS INTO CISCOUNTRIES

Total FDI inflows into the CISregion have been risingcontinuously from an average ofUS$ 4 bn during 1992-97 to reacha peak of US$ 27.2 bn in 2005.Four countries, Russia, Azerbaijan,Kazakhstan and Ukraine, in that

order, together accounted for 95%

of the total FDI inflows in 2005.While in the first three countries,FDI has been driven mainly byprojects in natural resources(especially petroleum and naturalgas), in Ukraine it has been morebroad-based. Besides streamliningthe investment climate with a viewto creating an enabling environment,many of the CIS countries have setup investment and trade promotionagencies, which facilitate inflowsof foreign investment and act as aone-stop-shop for investment-related activities.

Among the CIS countri es ,overall FDI inflows in Russia have


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been driven by increased foreigninvestment into the oil and extractionindustry, as also inflows into thetrade and catering industry reflectingthe keen interest of foreign investorsto tap the growing consumerpopulation and rising incomes. Witharound 85% of oil production fromforeign investors, the importance ofFDI in Kazakhstancan be gaugedfrom the fact that investment byforeign oil companies into thecountry has been the main driver ofrapid economic growth in recent

years. InAzerbaijan, a combinationof high oil prices and the constructionof the Baku-Tbilisi-Ceyhan (BTC) oilpipeline boosted FDI inflows. InUkraine, FDI inflows have beeninto sectors such as wholesale andtrade, food and agro-processing,mechanical engineering, transportand communications, chemicals and

petrochemicals, and metal and metalprocessing.

Multilateral Agencies Funded

Projects in CIS Region

Multilateral agencies such as theWorld Bank, the Asian DevelopmentBank (ADB), and the European Bankfor Reconstruction and Development(EBRD) are active in fundingdevelopmental projects in the CISregion. In Russia, the World Bankhas 22 active projects, while inUkraine there are 33 active projectsin sectors such as energy andinfrastructure projects, public sectorprojects, and social sector projects,In Kazakhstan, there are 28

investment projects in infrastructuresector, environment and agriculture,while in Uzbekistan, the WorldBank has committed a total of US$639 mn during 1994 to 2006, insectors such as industry and trade;

water, sanitation and flood control;agriculture; law and publicadministration; finance; health andsocial services; transportation; andenergy and mining. The World Bankssupport to Belarus compriseslending, technical assistance, and aidcoordination initiatives, and the Bankhave extended loans in areas suchas social infrastructure, forestrydevelopment, institutional building,and rehabilitation. The World Bankis also active in other CIS countriesin sectors covering natural resourcemanagement, structural adjustmentcredit programmes, highway projectsand agricultural development,

irrigation, education, technicalassistance programmes, health,agricultural research, trade andtransport facilitation, povertyalleviation, and rural finance.

The Asian Development Bankis also active in fundingdevelopmental projects in theCentral Asian members of the CIS,

viz. Azerbaijan, Kazakhstan, KyrgyzRepublic, Tajikistan, and Uzbekistan,and the Bank has, as on end-December 2005, approved around62 projects in these countries,involving cumulative approved loansof US$ 2.28 bn. In the case of EBRD,as at December 31, 2005, the Bank


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had signed 50 investments in Russia,totalling almost 7.2 bn, while inUkraine the Bank had signed around21 projects totalling almost 2.2 bn.In Kazakhstan, the Banks netcumulative investment amounted toaround over 1.3 bn, while EBRDscumulative finance to Uzbekistan, ason December 31, 2005, amountedto 598.7 mn, and signed threeprojects for a combined 35.5 mn in2005. In Belarus, EBRDs cumulativeinvestment as at December 31, 2005,amounted to 198.8 mn. The EBRDis also active in fundingdevelopmental projects in the otherCIS countries.

INDIAS TRADE AND

INVESTMENT RELATIONS WITH

THE CIS COUNTRIES

Bilateral Trade Relations

Indias total exports to the CISregion, after contracting from

US$ 976 mn in 2001-02 toUS$ 924 mn in 2002-03, dueprimarily to decline in exports toRussia which is Indias largesttrading partner in the CIS region,thereafter picked up to amount toUS$ 1.24 bn in 2005-06. Indiasimports from the CIS region, onthe other hand, have registered acontinued rise from US$739 mn in2001-02 to US$ 2.9 bn in 2005-06. Reflecting these trends, Indiastotal trade (exports plus imports)

with the CIS region has increasedmore than two-fold from US$1.7bn in 2001-02 to US$ 4.1 bn in2005-06 (Chart-A). Further, Indiastrade balance with the CIS region,

which registered a surplus ti ll2002-03, moved into a deficit in2003-04 and amounted to US$ 1.65bn in 2005-06, due to the fasterrise in imports as compared to the

rise in exports to the region.

SOURCE: Ministry of Commerce & Industry, Govt. of India.NOTE: Data for imports do not include oil imports as country-wise breakup of oilimports is not available.

Chart-A :

INDIA'S TRADE WITH THE CIS REGION, 2001-02 TO 2005-06 (US$ mn)


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Drugs, pharmaceuticals & finechemicals are the largest exportitems, accounting for 31.8% of Indiastotal exports to the CIS in 2005-06,followed coffee, and machinery &instruments. Other importantexports to the CIS region includetransport equipments, tobaccounmanufactured, plastic & linoleumproducts, and readymades of cottonand accessories.As regards imports,iron and steel have emerged as thelargest import items from the CISregion, with a share of 35.6% of totalimports in 2005-06, followedmanufactured fertilizers, non-ferrousmetals, coal, silver, and newsprint.

Russia continues to dominateIndias overall exports to the CISregion, although the country sharein Indias total exports to the CISregion has declined from 84% in

2000-01 to 59% in 2005-06, whileexports to other CIS members suchas Ukraine, Kazakhstan, KyrgyzRepublic, Azerbaijan, Georgia, andUzbekistan have risen. As regardsimports from the CIS region, besidesRussia and Ukraine, other countriessuch as Kazakhstan, Uzbekistan andGeorgia have also emerged asimportant trading partners.

Indian Investments in the CIS

Region

The CIS region has also emergedas important destination for Indiasoverseas investments in recent

years. During the period 1996(April) to 2006 (February), Indias

overseas investment approved inthe CIS region amounted toUS$ 3.01 bn, accounting for asignificant share of 19.7% of totaloverseas investments approved(US$ 15.3 bn) during the period.In the case of Russia, in fact, thecountry has emerged as the largestdestination for Indias overseasinvestment, accounting for 20% (US$2.83 bn) of the total overseasinvestments approved during theperiod.

In view of the investmentopportunities in the CIS region, anumber of Indian companies haveendeavoured to set up joint ventures(JVs) and wholly owned subsidiaries(WOS) in several sectors in thesecountries. Russia is the largestdestination for Indias overseasinvestment among CIS countries, with

the major sector being petroleumproducts, while other sectorsinclude: drugs and pharmaceuticals;software development services;gems and jewellery; tea processingand labeling; leather and leatherproducts; trading in medicines,spices and other food products;trading in textiles and leather goods,and warehouse operations. InKazakhstan, Indian JVs are

predominantly in drugs andpharmaceuticals, while WOS aremainly in engineering procurementand technical services, real estatedevelopment and construction, civilconstruction, engineeringprocurement and trading in tea. In


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Uzbekistan, major sectors of Indianinvestments include oil and gas,drugs and pharmaceuticals, leatherand products, manufacture of cottonand blended yarn, readymadegarments, and hotels and restaurants.

In Kyrgyz Republic, drugs andpharmaceuticals, hotels andrestaurants, and petroleum productsare major sectors of Indianinvestments, while in Moldova,

Indian investments are primarily inthe pharmaceuticals sector. Further,approved Indian investments inAzerbaijanandUkraine are mainlyin the pharmaceuticals sector, InGeorgia, approvals for Indianinvestments are mainly in industrialexplosives, detonating cord, andmatches.

POTENTIAL AREAS FOR

ENHANCING BILATERALTRADE AND INVESTMENT

RELATIONS

Trade Potential

Based on import demand in theCIS region and Indias exportcapability, the potential items ofexport to the region could includethe following:

Russia machinery (electrical and

non-electrical) and transportequipment, chemical and relatedproducts including pharmaceuticals,food and related products, articlesof apparel and clothing, cotton andsynthetic yarn, plastics and articles,rubber articles, paper and

paperboard, iron ores andconcentrates, rubber products,articles of leather and footwear,ceramic products.

Ukraine machinery and transportequipment, chemicals andpharmaceutical products, iron andsteel products, food and relatedproducts, perfumery and cosmetics,plastics and articles, cotton fabricsand manmade filaments, articles of

apparel and clothing, precious andsemi-precious stones, iron andaluminium ores, petroleumproducts, rubber articles, paper andpaperboard, carpets and other floorcovering, ceramic products.

Kazakhstan machinery andtransport equipment, chemicals andrelated products includingpharmaceuticals, articles of iron andsteel, food products, ores andminerals, petroleum products,paper and paperboard, plastics andrubber articles, unmanufacturedtobacco, cosmetics and toiletries,paper and paperboard, ceramicproducts, furniture & parts.

Uzbekistan food and foodproducts, articles of iron and steel,plastics and articles, machinery &equipments, and parts (electrical &

non-electrical), transport equipment,zinc ores and concentrates,pharmaceutical products,insecticides and herbicides, rubberpneumatic tyres, paper andpaperboard, carpets and other floorcoverings.


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Belarus - Belarus is the fourthlargest importer in the CIS region,after Russia, Ukraine andKazakhstan. In line with Belarusimport demand, potential items ofexports would include: non-electrical and electrical machinery,transport equipment, articles of ironand steel, chemicals andpharmaceutical products, plasticsand articles, food and relatedproducts, rubber pneumatic tyres,raw hides and skins, paper andpaperboard, woven cotton fabrics,and synthetic filament yarn.

Other CIS Countries As regardsother CIS countries, potential itemsof exports would broadly fall underthe following categories: food andrelated products, articles of iron andsteel, non-electrical and electricalmachinery, transport equipments,

petroleum products, plastics andrubber products, carpets and othertextile floor covering, garmentsfabrics and made-ups, furniture andparts.

Import Potential - There is alsoscope to source imports from theCIS countries. Principal items thatcan be imported from Russia couldinclude mineral fuels, iron andsteel, fertiliser, and paper and

paperboard, while organicchemicals, and paper andpaperboard could be sourced fromUkraine. India could import mineralfuels, inorganic chemicals, iron andsteel, electrical machinery andnatural or cultured pearls from

Kazakhstan. The items that holdimport potential from Belarus aremineral fuels, fertiliser and plastics.

Potential Sectors for Investment

Besides trade, the CIS countriesoffer tremendous opportunitiesin te rms of inves tment .Food process ing , re ta i l ing ,pharmaceuticals, informationtechnology, textiles, infrastructure

development present potential forinvestors.

In Russia, potential sectors forinvestment would include energysector, auto vehicles,pharmaceuticals, food processing,retailing, tourism, agri business. InUkraine, focus could be on sectorssuch as agriculture and foodprocessing, energy sector,telecommunications, healthcare,construction and retail, informationtechnology, and financial services.

Potential sectors for investmentin Kazakhstan would include oiland gas, power generation anddistribution, telecommunicationsequipments, medical equipment andsupplies, pollution controlequipment, agricultural machinery,food processing and packaging,

construction and engineeringservices, and mining. InUzbekistan , focus could be onsectors such as energy sector, ITsector, mining sector, food processingand packaging, textile machinery andequipment, and tourism infrastructure.


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In Belarus, the government isactively promoting investment insectors such as updating of thetelecommunications network,modernization of transport system asalso transit transportation via Belarus,airline infrastructure facilities, roadtransport, food processing, packagingfacilities, manufacture of equipmentfor soil cultivation, chemical plantprotection, and biopharmaceuticals.

In Armenia, sectors offeringpotential for investment wouldinclude jewellery and diamondprocessing, electronics, informationtechnology, and light industry(carpet, footwear, textiles andclothing). In Azerbaijan, sectors

wh ich present investmentopportunities are oil and gasequipment, chemical andpetrochemical industry, electric

transmission lines and distributionnetworks, agriculture and foodprocessing, transportationinfrastructure, machine-building,tourism, textiles and light industry,ferrous metallurgy, construction andfinancial services. In Georgia, thekey sectors of economic activity andpotential sectors for investment areenergy, agriculture, trade, tourism,transport, as well as projects in thefood processing andtelecommunications industries.

Sectors such as agribusiness(small-scale farm equipment, foodand textile processing equipment,improved storage and packaging),mining equipment and technology,

electricity generation andmaintenance of distribution systems,tourism infrastructure, IT sector,radio-electronic industry and siliconproduction, small and medium scalelight manufacturing equipments offerinvestment potential in KyrgyzRepublic. In Moldova, the mostpromising sectors for investmentinclude energy sector(modernization, gas pipelines, gasstations and distribution networks),tourism, IT sector, wine-making andfood industry.

In Tajikistan , investmentopportunities are in mining andrelated equipment, medical andpharmaceutical supplies, textilemachinery, telecommunications, oiland gas extraction equipment, eco-tourism, agribusiness and relatedsectors (canning/food processing

equipment, farm equipment). InTurkmenistan, in line with thegovernments priority, potential areasfor investment would include oil andgas industry (exploration,development services andequipment), electrical energy(equipment and services), chemical& mining industry, transportation,communications (equipment andservices), environmental technologyand services, and healthcare andmedical industry.

FOCUS CIS PROGRAMME

Considering the potential of the CISregion, an integrated ProgrammeFocus: CIS has been launched by


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the Government of India with avi ew to si gni ficantly enhanceIndias trade with countries of theCIS Region. The main objective ofthe programme is to increasemutual direct interactions amongbusinessmen by identifying theareas of bilateral interest andinvestment.

The first phase of the Focus CISProgramme had focused on

Kazakhstan, Kyrgyz Republic,Tajikistan, Turkmenistan, Uzbekistan,

Azerbaij an and Ukra ine .Subsequently, with effect from April2004, the scope of the Focus CISProgramme was extended to the restof the CIS countries, viz. RussianFederation, Armenia, Belarus,Georgia and Moldova, therebycovering all the 12 CIS countries.

Under the Focus CIS

Programme, Indias trade with the CISregion is envisaged to be enhancedthrough integrated efforts of theGovernment of India and variousagencies like the India TradePromotion Organisation (ITPO),Export Promotion Councils, ApexChambers of Commerce andIndustry, Indian Missions andInstitutions such as the Export-ImportBank of India (Exim India), Export

Credit Guarantee Corporation(ECGC).

EXIM INDIA IN THE CIS REGION

Export-Import Bank of India (EximIndia) operates a comprehensiverange of financing, advisory and

support programmes to promoteand facilitate Indias trade andinvestment relations with the CISregion. The Bank has fouroperative Lines of Credit (LOCs)of US$ 10 mn to Bank TuranAlem,Kazakhstan, which covers all the12 member countries of the CIS,LOCs of US$ 25 mn to

Vneshtorgbank (Bank for ForeignTrade), US$ 10 mn to

Vnesheconombank, and US$ 10 mnto Absolut Bank, Russia. Further,Exim India is exploring LOCs toother countries in the CIS region.

In the area of project and productexports, Indian companies havesecured several contracts in the CISregion, across various sectors, withthe support of Exim India. Thesecontracts include supply ofpharmaceutical products to Russia,

power project / bauxite project inAzerbaijan, equipment project inTajikistan, and procurement advisoryand auditing services in Georgia and

Armenia. Further, With a view tosupport Indian companies in theirendeavour to globalise theiroperations, Exim India has supported

joint ventures in the pharmaceuticalssector in Kazakhstan, Uzbekistan andUkraine.

To support Indias export to the27 countries of operation of theEuropean Bank for Reconstructionand Development (EBRD), EximIndia has in place an arrangement

with EBRD called the Export CreditLoan Arrangement Technique


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(ECLAT), which provides for mutualco-operation in co-financing andenhancement of export credit to CISand Central & Eastern Europeanregions.

To support Indian consultants totake up projects in the CIS andCentral & Eastern European regions,Exim India has an arrangement withthe International Finance Corporation(IFC) under the latters Private

Enterprise Partnership (PEP)programme, under which Indianconsultants can execute short-termconsultancy assignments for IFCsponsored projects in countries suchas Azerbaijan, Belarus, Georgia,Kazakhstan, Kyrgyz Republic, Russia,Tajikistan, Ukraine and Uzbekistan.

In the area of institutionalstrengthening, export developmentand export capability creation inother countries, Exim India hasrendered technical assistance to anumber of institutions worldwide,including those in the CIS region,such as: export development projectin Ukraine, and enterprise supportfund in Armenia.

In its endeavour to forgealliances and institutional linkages,Exim India has signed Memoranda

of Understanding (MOUs) with anumber of institutions in the CISregion, which include: Export-ImportBank of the Russian Federation,Russia; Vnesheconombank, Russia,Belvensheconombank Belarus,UZBEKINVEST National Export-

Import Insurance Company,Uzbekistan; and National Bank forForeign Economic Activity,Uzbekistan.

Exim India has taken theinitiative of setting up of GlobalProcurement Consultants Ltd. (GPCL),in partnership with leadingconsultancy firms in India, forproviding procurement relatedservices to multilateral agencies such

as World Bank and AsianDevelopment Bank. GPCL hasundertaken project audit assignmentsfor World Bank in a number ofcountries in the CIS region, such as

Armenia, Georgia, Kyrgyz Republic,Uzbekistan, and Russia.

Further, Exim Indias equityholding in Agriculture FinanceCorporation which offers consultancysupport in development of agro-

technology; promoter-membership inSmall Farmers Agri-BusinessConsortium (SFAC), an investmentinstitution whose objectives includespromoting small and medium agri-business ventures, place Exim Indiain a vantage position to share itsexpertise and support developmentrelated activities in the CIS membercountries. Exim India also has inplace an MOU with the Central Food

Technological Research Institute(CFTRI), India, to promote small-scalefood processing projects, and thepublication titled Market Maker:Technology Aided BusinessSolutions (published in English,Russian, French languages)


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delineates project profiles in foodprocessing sector based on CFTRItechnologies. These are userfriendly, simple to operate andmaintain technologies, which couldbe appropriate for SME units incountries in the CIS region.

With a view to promote activeexchange of trade and investmentrelated information, Exim India helpsbring out a quarterly, bilingual

(English and Russian) publicationIndo-CIS Business for the benefitof Indian and CIS businessmen andinvestors. Further, Exim India has alsobrought out a research publicationfocusing on the five Central AsianRepublics, viz. Kazakhstan,Tajikistan, Turkmenistan, KyrgyzRepublic and Uzbekistan, which aremember countries of the CIS.

Exim India has an active

programme which offers a range ofinformation, advisory and supportservices to Indian companies toenable more effective participationin projects funded by multilateralfunding agencies such as the WorldBank, ADB and EBRD. Further, EximIndias Project Preparatory ServicesOverseas Programme (PPSO)provides finance for utilizing Indianconsultancy inputs at preparatory

stage for projects overseas. Thefocus of PPSO is on projects whichhave potential for ultimate fundingby multilateral agencies as alsoprojects in thrust countries / sectors

which offer opportunities for Indianexporters. Leveraging upon its close

linkages developed with multilateralfunding agencies, Exim India alsointervenes on behalf of Indiancompanies to seek redressal inrespect of multilateral tenders.

STRATEGY AND

RECOMMENDATIONS

With potential existing to enhancebilateral trade and investmentrelations, broad strategy and

recommendations to enhance two-way transfer of trade, investmentand technology between India andcountries in the CIS region wouldencompass the following:

Wider Dissemination of

Information : An importantelement of the strategy to boostbilateral trade and investmentrelations would be to effectivelydisseminate relevant information

about the opportunities andpotential existing in fosteringcommercial relations. Reciprocal

vis its by trade and indust rydelegations / economic missions

would serve to increase awarenessin the region about Indiaseconomic reforms, strengths ofIndian industry and exportcapabilities. These trade/economicmissions could focus on specialized

and industry specific fairs andexhibitions; organizing buyer-sellers-meets; joint venturefacilitation; organising specialisedMade in India exhibitionsshowcasing Indian expertise; andpreparation of product catalogues


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in electronic form. These fairs andexhibitions would serve as idealplatform for actively marketingExim Indias Lines of Credit (LOCs)to the CIS region. Relevant partiesin India as well as counterparts inthe CIS region could be apprisedabout the benefits of such creditlines as also about the ways ofutilizing such credit lines. Domesticfinancial institutions in the CISregion could serve as ideal localfacilitating agents in this direction.

Close Linkages with Investment

Promotion Agencies: To enhanceinvestment relations, focus could beon building closer institutionallinkages with key investmentpromotion agencies in the CISregion such as:

Armenian DevelopmentAgency, Armenia;

Aze rbaijan Export andInvestment PromotionFoundation (Azerinvest),

Azerbaijan;

Belarusian Foreign InvestmentPromotion Agency (BFIPA),Belarus;

Georgian National Investmentand Export Promotion Agency(GNIEPA), Georgia;

Kazakhstan InvestmentPromotion Center (Kazinvest),Kazakhstan;

National Agency for AttractingInvestments (NAAI), Moldova;

National Agency for ForeignInvestments, Russia;

State Agency for ForeignInvestment (SAFI), Turkmenistan;

Ukrainian Center for ForeignInvestment, Ukraine;

Foreign Investment Agency,Uzbekistan.

Such linkages would serve as

important source of detailedinformation about existing potentialareas for investment, investmentregulations and incentives, as alsoprospective investment partners.

Technology Transfer and

Development : With restructuringand expansion of different sectorsin the region, Indian companiescould endeavour to emerge as keyknowledge and technology partners

as also suppliers of machinery andequipment in sectors such astextiles and clothing,pharmaceuticals, medicalequipment, food processing,packaging. Besides catering to thelocal regional markets, such

ventures could serve as export hubsto the expanded EU region.

Cooperation in IT Sector : WithIndia having emerged as a leading

IT powerhouse, Indian IT firmscould explore the opportunities inthe CIS region, and focus oninvesting in subsidiaries or joint

ventures in the areas ofe-governance, financial services and


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e-education. Indian companiescould also share their expertise inproviding and developing softwareprogrammes and services for banksand financial institutions in theregion. Designing specialisede-learning courses on the web forproviding technological assistance,manufacturing process know-how,troubleshooting and other technicalareas also present opportunities. Aninteractive portal could bedeveloped, hyper-linked with keyindustry/trade association andchambers in the region with facilityfor identification of project profiles,partner search, match making, etc.

Cooperation in the Banking/

Financial Sector : Facilitating andpromoting bilateral trade andinvestment relations would call forrenewed efforts to put in place a

proper mechanism for financialtransaction between India andcountries in the CIS region.Towards this end, the State Bankof India (SBI) has set up a BranchOffice in Moscow, and aRepresentative Office in Tashkent,Uzbekistan. Indias leading privatesector bank- ICICI Bank enteredinto WOS operations in Moscow,in 2005. In view of the potential

for enhancing bilateral trade andinvestment relations, openingbranches/representative offices inother countries in the region, anddeveloping correspondent relations

with select banks in the region

would serve to facil itate andpromote commercial relations.

Focus on Multilateral Funded

Projects : Multilateral fundingagencies such as the World Bank,

Asian Development Bank, EBRDare active in funding developmentprojects in the CIS region. Thesefunded projects are mainly in areassuch as energy and mining,agriculture, transportation, health

and social services, law and justice,finance, industry and trade. Focuson these funded projects andincreased participation by Indianproject and services exporters insuch projects would serve toenhance Indias commercialpresence in the region countries.

At the same time , efforts toparticipate in technical assistancein terms of project preparation and

advisory services in such fundedprojects would support increasedpresence in the region. Further,institutions such as Exim Indiacould co-invest with Indiancompanies in select projects, andencourage partnership with localentrepreneurs and local investmentagencies. Such projects couldsubsequently attract investmentsfrom the multilateral fundingagencies.

Cooperation in Entertainment

Industry : With Indian moviesgaining popularity in manycountries in the CIS region, Indianmovie makers could consider


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selling their rights for screeningmovies in the CIS region, whichcould enhance distribution of Indianmovies in the region. There is alsopotential for Indian movie makersto explore some of the countriesin the CIS region for shooting filmsat fresh and new locations. In thepast, most of the Indian moviesshot abroad have been in placeslike Switzerland, USA, Italy, etc.However, some of the countrysidein the CIS region could provideeconomical locations for shootingIndian movies.

Focus on Privatisation /

Acquisition of Hotels : Many ofthe hotels in the CIS region areup for privatization as there arefew local groups interested inrenovating these hotels. This couldbe an ideal opportunity for Indian

hotel groups to acquire some hotelsand renovate them. In some of theCIS countries, there are few hotelsthat could be rated as 5-starcategory and suitable for business/ pleasure stay. At the same time,majority of the hotels requirerenovation and modernisation.

Investment by way of Indian

style Ayurveda / Wellness

Centers : With increasing

awareness and demand for Indianstyle Ayurveda and Wellnesscenters in the CIS region, Indiancompanies could therefore explorethese opportunities. Along withacquisition of hotels in the CISregion, renovation of hotels could

be by way of investment in settingup Indian style Ayurveda /Wellness centers in such hotels tocater to the rising demand for suchfacilities in the CIS region. Further,imparting training to localpractitioners would facilitateacceptability of such treatments /centers.

Closer Economic and Trade

Integration : There could be

greater economic and tradeintegration with Russia and otherCIS countries. A positivedevelopment in this direction hasbeen the signing an MOU forsetting up a joint study group toexamine the feasibility of acomprehensive economiccooperation treaty (CECA) betweenIndia and Russia. As the twocountries are large economies,

experiencing rapid economicgrowth, there is immense potentialfor expanding trade and economicrelations. Given the strong scientificand technological background ofRussia and the new emergingexpertise of India in science andtechnology, the two countries could

work together on innovative newtechnologies in biotechnology,pharmaceuticals, and spaceexploration programmes and aircraftmanufacture.

Understanding Local Culture

and Language :Although many ofthe CIS countries have startedcarrying out documentation workin their local languages, most CIS


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countries are still using the Russianlanguage. In light of this, businessorganisations, trade bodies anduniversities could focus on trainingexecutives and students in Russian.Further, understanding the localcultures, business practices andhabits would serve to facilitatebusiness interactions and fosterlinkages with counterparts in theCIS region.

Other Recommendations :Exporters can develop their own

websites giving information about

the manufacturing facilities, productdetails & the features of thecompany to promote trade; Smalland medium sized IT firms can beencouraged to focus on thesecountries and invest in subsidiariesor joint ventures to take upassignments in e-governance,financial services and e-education;India should increase direct flightsto cover more cities in the CISregion and also increase thefrequency of destinations to whichflights are already operating.


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The Commonwealth of IndependentStates (CIS) was established onDecember 8,1991, by the Minsk

Agreement signed by the Headsof State of the Republic of Belarus,the Russian Federation and theRepublic of Ukraine. The formalclause stating the dissolution ofSoviet Union was included in thesubsequent treaty signed in Almaty,Kazakhstan, by all the former SovietRepublics, except the Baltic Statesand Georgia. In December 1993,both Georgia and Azerbaijan joined

the CIS.The CIS thus includes all the

former Soviet Republics except theBaltic States. At present, the CISunites Armenia, Azerbaijan, Belarus,Georgia, Kazakhstan, Kyrgyzstan,Moldova, Russia, Tajikistan,Turkmenistan, Ukraine andUzbekistan.

The CIS sought to fill theinstitutional vacuum resulting fromthe disintegration of the Soviet Unionand to ensure continued co-operationin trade and military policy andrecognition of borders. The mainorgan of the CIS is the Council ofthe Heads of State, the supremebody of the organization. The

Council co-ordinates the co-operationof the executive authorities of thestates in economic, social and other

spheres.In September 1993, the Heads

of the CIS States signed anAgreement on the creation ofEconomic Union with the purposeof forming common economic spacebased on free movement of goods,services, labour force and capital.The agreement aimed at elaboratingco-ordinated monetary, tax, price,customs and economic policy;

bringing together methods ofregulating economic activity andcreating favourable conditions for thedevelopment of direct productionrelations.

STRUCTURE OF CIS

Council of the Heads of States:This is the supreme body of theCIS that discusses and solves anyprinciple questions of the

Commonwealth connected with thecommon interests of the participantstates.

Council of the Heads of

Governments: This Council co-ordinates co-operation of the

1. EVOLUTION AND OBJECTIVES

OF THE COMMONWEALTH OF

INDEPENDENT STATES (CIS)


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executive authorities of themember states in economic, socialand other spheres of their commoninterests.

Inter-Parliamentary Assembly:

The Assembly was established inMarch 1995 by the leaders ofSupreme Soviets (parliaments) ofthe Commonwealth countries as aconsultative institution to discussproblems of parliamentary co-operation and develop proposalsby the parliaments of the CIS states.

Economic Court: Economic Courtfunctions with the aim of ensuringthe meeting of economiccommitments in the framework ofthe CIS. Its terms of referenceinclude settlement of interstateeconomic controversy arising inmeeting economic commitments

envisaged by agreements anddecisions of the Council of theHeads of States and the Council ofthe Heads of Governments of theCIS.

Council of Foreign Ministers: Itis the main executive body thatensures co-operation in the fieldof foreign policy activities of themember states of the CIS onmatters of mutual interest,adopting decisions during theperiod between the meetings ofthe Council of the Heads ofStates, the Council of the Headsof Governments and by theirorders.

Council of Defence Ministers: Itis a body of the Council of theHeads of States responsible formilitary policy of the member statesof the CIS.

Economic Council: The EconomicCouncil is the main executive body,

which ensures implementation ofthe decisions of the Council of theHeads of States and the Council ofthe Heads of Governments of the

CIS on realisation of the Agreementfor creation of free trade zone as

well as on other matters of socio-economic co-operation. TheEconomic Council consists of theDeputy Heads of Governments ofmember states of the CIS.

Executive Committee: TheExecutive Committee unitespermanently functioning executive,administrative and co-ordinating

bodies of the CIS, and organisesthe activities of the Council of theHeads of States, Council of theHeads of Governments, Council ofForeign Ministers of member statesof the CIS, Economic Council andother bodies of the Commonwealth,among others.

Interstate Bank: The mostimportant function of the InterstateBank is organisation and

implementation of multilateralinterstate settlements betweencentral (national) banks in relationto trade and other transactions, as

well as co-ordination of monetarypolicy of the member states.


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The Interstate Bank wasestablished in accordance with thedecision of the Heads ofGovernments in December 1991 forco-ordinating activities of statisticalorganisations of the CIS countries,developing and implementing aunified statistical methodology on thebasis of mutual consultations,securing comparability and continuityof statistical elaboration, facilitating

wide-scale information exchange inthe framework of the CIS, organisingseminars and employing other formsof rendering assistance to nationalstatistical services.

Free Trade Zone of the CIS

In 1993-94, the CIS countries tookmeasures aimed at transition tomultilateral regime of free tradeon the basis of a correspondingagreement on establishment of afree trade zone. But the CIScountries failed to set up and agreeon a multilateral list of exits fromthe free trade regime, stipulatedby the Agreement.

A free trade zone is the firststage in building the CIS EconomicUnion. In the process of its formationthe CIS countries need to passthrough several stages. These

include: Elimination of obstacles for free

movement of commodities andservices (cancellation ofcustoms duties/fees, as well asequivalent taxes and fees,

qualitative restrictions and otherobstacles);

Establishment and developmentof an effective system ofmutual accountancy andpayments in trade and otherkinds of operations;

Co-operation in the conduct oftrade and economic policy forimplementation of the

Agreement on free trade in thefield of industry, agriculture,transport, finances, investments,social sphere, as well as indevelopment of faircompetition etc.;

Facilitating the intersectoral andintrasectoral co-operation andscientific and technical co-operation;

Harmonisation and unification

of legislation of the membercountries to the Agreement tothe extent that is necessary fora proper and effectivefunctioning of the free tradezone.

Specification of measures onestablishment of a free trade zonecan be found in: (i) The Plan-Schedule of implementation ofproposals on establishment andfunctioning of the free trade zone,adopted by the CIS Council of Headsof State on 21st June, 2000; and (ii)The Plan of measures for realisationof the Program of actions fordevelopment of the Commonwealth


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of Independent States for the periodup till 2005, adopted by the CISCouncil of Heads of Government on20th June, 2000.

Only four CIS countries (KyrgyzRepublic, Georgia, Moldova, and

Armenia) have joined the WTO. Thelargest CIS economies - Russia,Ukraine, Kazakhstan and Belarus -are currently working towardsbecoming WTO members.

CIS Unified Currency Space

In July 2001, the Interstate Bank,the International Association ofExchanges of the CIS countries,MICEX (Moscow InterbankCurrency Exchange) and MICEXSettlement Chamber signed anagreement of co-operation in thesphere of forming a unifiedcurrency space for members of the

CIS.The participants expressed their

intention to promote more effectiveinteraction between member

countries of the Commonwealth inthe sphere of currency and financeson the basis of the project ofintegrated CIS currency market. Theproject was approved in April 2001by the CIS Interstate CurrencyCommittee. This project is aimed, inparticular, at forming a unified tradingsystem on the basis of the existingcurrency exchanges with the use ofcommon technological andorganisational standards, includingthe system of mutual quotations ofnational currencies and theunification of trading and settlementmechanisms. The implementationof this model will allow in future toincrease the turnover and liquidityof the currency market for currencies

with limited convertibility (CLC). Thiswill make these currencies moreattractive for settlements for foreigntrade deals between the CIS

countries and contribute to theinvestment attractiveness of theeconomies of the Commonwealthcountries.


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2. BRIEF BACKGROUND AND RECENT

ECONOMIC PERFORMANCE OF

THE CIS REGION

This chapter presents a briefbackground of the CIS countries,highlights recent economic and

sectoral performance, and foreignexchange reserves of CIS countries.

BRIEF BACKGROUND

Russia

Russia stretches across vastexpanses of Europe and Asia, andborders 15 countries. With an areaof 17,075,200 sq. km., it is thelargest country in the world,

covering almost twice the territoryof the next-largest country, Canada.Russia is richly endowed withnatural resources, which are apotential source of great economicstrength. Russia accounts for almost11% of worlds oil production, 25%of natural gas, and one-fifth ofglobal nickel and cobalt production.The country is also a leadingproducer of coal, iron ore, non-ferrous metals, gold, platinum anddiamonds.

Russia has an associationagreement with the European Union,proposes to join the World TradeOrganisation, and currently receivesMFN treatment from the United

States. The WTO Working Party onthe Accession of the RussianFederation, had its 30th meeting in

March 2006, and bilateral marketaccess negotiations on goods andservices are in progress.

Ukraine

Ukraine has a land area of 603,700sq km, comparable in size toFrance. It borders Russia to thenortheast, Belarus to the north,Poland, Slovakia and Hungary tothe west, Romania and Moldova

to the southwest and the BlackSea to the south. Ukraine is the

worlds fif th-largest producer ofiron ore and also possesses the

worlds second-largest reserves ofmagnesium. It also possessesseveral potential oil and gas fields.

Ukraine has signed Free TradeAgreements with each of the formerSoviet republics except Tajikistanand is also a member of GUUAM.

The GUUAM is a regionalorganisation that groups togetherGeorgia, Ukraine, Uzbekistan,

Azerbaijan and Moldova to deepeneconomic co-operation for thedevelopment of the east-west tradecorridor and energy transport routes.


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Ukraine also has a partnership andco-operation agreement (PCA) withthe European Union. As regards WTOmembership, the 16th meeting on the

WTO Working Party on accessionwas held in June 2006, and bilateralmarket access negotiations are inprogress.

Kazakhstan

On December 16, 1991, the

Republic of Kazakhstan became thelast of the former Soviet Republicsto declare its independence. On

August 30th, 1995 , a newconstitution was approved in anation-wide referendum. TheRepublic of Kazakhstan is a hugecountry covering a total area is2,717,300 sq. km and the totalpopulation in 2005 was 15.1 mn.

Kazakhstan has the Caspian Sea

regions largest recoverable crude oilreserves and claims most of the seasbiggest known oil fields.Kazakhstans combined onshore andoffshore proven hydrocarbonreserves have been estimated to bebetween 9 and 17.6 bn barrels.Economic growth in recent years hasbeen propelled by Kazakhstansgrowing petroleum industry.

Kazakhstan is a member of theEurasian Economic Community(EAEC) along with Russia, KyrgyzRepublic, Belarus and Tajikistan.This organisation, which wasestablished in 2001, is a successorto the Customs Union between the

same countries and is intended toharmonise trade tariffs and create aEurasian free trade zone. Bilateralmarket access negotiations are inprogress with respect to WTOmembership.

Uzbekistan

Uzbekistan borders Afghanistan,Kazakhstan, Kyrgyz Republic,Tajikistan and Turkmenistan, with

a total area is 447,400 sq. km.Minerals and mining are importantto Uzbekistans economy. Gold isUzbekistans second most importantforeign exchange earner.Uzbekistan has an abundance ofnatural gas, used both for domesticconsumption and export, andsignificant reserves of copper, lead,zinc, tungsten, and uranium.

Uzbekistan has applied for

membership in the World TradeOrganisation (WTO), and submittedits Memorandum of Trade Regimein November 1998. The Governmenthas made a number of changes toits customs, IPR and tariff regimesto bring it into WTO compliance. Thethird meeting of the WTO WorkingParty took place in October 2005.

As a member of the CIS, Uzbekistansexports to Russia enjoy duty-free

status, giving Uzbekistan access tothe large Russian market. The US hasgiven Uzbekistan most favourednation (MFN) status. In 1999, the EUratified a partnership and co-operation agreement (PCA) withUzbekistan. It has signed bilateral


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agreements with Georgia, KyrgyzRepublic, Moldova and Russia, andis also a member of GUUAM.

Belarus

The Republic of Belarus is alandlocked nation-state in EasternEurope, which borders Latvia,Lithuania, Poland, Russia andUkraine. Belarus covers an area of207,600 sq km. Belarus has small

deposits of oil, oil shale and coal.Its economy depends on supplyingmanufacturing goods like machineryand components to Russia. The fuelsector has become increasinglyimportant in recent years, with thecountrys two oil refineries makinguse of cheap crude supplies fromRussia and record high exportprices to expand productionconsiderably.

Belarus is a member of theEurasian Economic Community(EAEC) along with Russia,Kazakhstan, Kyrgyz Republic andTajikistan. It has signed bilateralagreements with Moldova, Russia andUkraine. As regards WTOmembership, bilateral market accessnegotiations are ongoing. The WTO

Working Party last met in May 2005.

ArmeniaArmenia is a landlocked countryin the southern Caucasus betweenthe Black Sea and the Caspian Sea,bordered by Turkey to the west,Georgia to the north, Azerbaijan to

the east, and Iran and theNakhichevan exclave of Azerbaijanto the south. Armenias mineralresources include marble, basalt,granite, molybdenum, perlite, lead,bauxite, zinc, copper, gold andsilver. As a predominantlymountainous country, Armenia haslittle arable land and relies heavilyon imports for its food. Armenia

joined the WTO on February 5,2003.

Azerbaijan

Azerbaijan lies at the crossroads ofEurope and Southwest Asia with acoast on the Caspian Sea. It hasborders with Russia in the north,Georgia in the northwest, Armeniain the west, southeast andsouthwest, and Iran in the south.Some 50% of the total land area isagricultural land and 2.5% is urban.Forests cover 13% of the country.The main mineral endowment isoil, of which Azerbaijan is one ofthe worlds oldest producers.

Azerbaijan has been a memberof the Council of Europe since 2001.The economy is largely based onindustry. Industries include machinemanufacture, petroleum and othermining, petroleum refining, textile

production, and chemical processing.Agriculture accounts for one-third ofAzerbaijans economy.

As regards WTO membership,the latest meeting of the WorkingParty was held in March 2006.


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Bilateral negotiations on marketaccess are underway.

Georgia

The Republic of Georgia is acountry to the east of the BlackSea, most of which is located inthe South Caucasus. It sharesborders with Russia in the northand Turkey, Armenia and

Azerbaijan in the south. Georgia

has substantial mineral watersources, with an estimated 2,300springs. Georgia also has one ofthe richest manganese deposits inthe world, located in Chiatura andSachkhere, about 130 km west ofTbilisi. It has deposits of copper,gold and oil in relatively smallquantities. Georgia joined the

WTO on June 14, 2000.

MoldovaMoldova covers a total area of33,700 sq km, is a landlockedcountry in Eastern Europe, locatedbetween Romania to the west andUkraine to the east. Moldova hasfew raw minerals such as gypsum,limestone, sand and gravel used inthe construction industry.

Agriculture is the most importantsector in Moldovas economy.

Three-quarters of the countrysterritory is agricultural land ofwhich majority consists of highlyfertile soil. Moldova is a memberof WTO since July 26, 2001.

The main crops are cereals,sugar beet, sunflowers, potatoes,

vege tables (primari ly tomatoes ,cucumbers, onions and cabbages)and fruits, particularly apples andgrapes. Grapes are Moldovas mostimportant value-added crop andexport product.

Turkmenistan

Turkmenistan is the second largestCentral Asian country. It possessesthe worlds fifth largest reserves

of natural gas, and has substantialdeposits of oil. The total area is488,100 sq. km and the totalpopulation was 6.1 mn in 2005.Turkmenistan has taken a cautiousapproach to economic reform,hoping to use gas and cotton salesto sustain its economy.

Tajikistan

Tajikistan is nestled between

Kyrgyz Republic and Uzbekistan tothe north and west, China to theeast, and Afghanistan to the south.The total area is 143,100 sq. kmand the total population in 2005

was 6.8 mn. Tajikistan has richdeposits of minerals, including goldand silver, as well as hugehydroelectricity potential owing todense network of rivers. Petroleum,uranium, mercury, brown coal,

lead, zinc, antimony, tungsten aresome other items also found there.

Bilateral market accessnegotiations are underway for WTOmembership, and the WTO WorkingParty held its latest meeting inOctober 2006.


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Kyrgyz RepublicKyrgyz Republic is located inCentral Asia to the west of China.The border countries are China,Kazakhstan, Tajikistan andUzbekistan .The total area is198,500 sq. km and the totalpopulation in 2005 was 5.2 mn.The Kyrgyz Republic has gold,antimony, tin, uranium andpolymetallic ores and limited

reserves of hydrocarbon. KyrgyzRepublic joined the WTO onDecember 20, 1998.

ECONOMIC PERFORMANCE

Economic growth in the CIS regionhas registered robust growth inrecent years, reflecting amongothers buoyant energy and metalsprices and strong domestic demand.Real GDP growth for the region

as a whole strengthened from 7.9%in 2003 to 8.4% in 2004. Stronggrowth momentum in the largesteconomies in the region, such asRussia, Ukraine, Belarus,Kazakhstan, has supportedeconomic activity in other membercountries. During 2005, growth

momentum was sustained, althoughat a lower level of 6.5%. During2006, reflecting high commodityprices and strong export growth,economic activity has picked up,supported by increased domesticdemand in major countries such asRussia and Kazakhstan. For theregion as a whole, real GDP growthis projected to strengthen to 6.8%in 2006 (Table 2.1).

Reflecting increased earningsfrom oil and commodity exports, thecurrent account surplus of the CISregion has risen from 6.3% of GDPin 2003 to 8.1% in 2004, and furtherto 8.8% of GDP in 2005. For netenergy exports such as Azerbaijan,Kazakhstan, Russia, Turkmenistanand Uzbekistan, the current accountsurplus was a high as 8.7% of GDPin 2004, which increased further to

10.0% of GDP in 2005. Total exportsof the CIS region have risen fromUS$ 196.1 bn in 2003 to US$ 267.9bn in 2004, and further to US$ 344.7bn in 2005. Total imports have alsorisen from US$ 133.5 bn in 2003 toUS$ 172.8 bn in 2004, and during2005 stood at US$ 216.4 bn.

Table 2.1:

CIS GDP, INFLATION & CURRENT ACCOUNT BALANCE

2003 2004 2005 2006 (p) 2007 (p)Real GDP Growth (%) 7.9 8.4 6.5 6.8 6.5

Inflation (%) 12.0 10.3 12.3 9.6 9.3

Current a/c balance(% of GDP) 6.3 8.1 8.8 10.1 9.4

SOURCE: IMF, World Economic Outlook Sept. 2006; p-projections


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ECONOMICGRO

WTHINCISMEMBERCOUN

TRIES

Selectmacroeconomic

indicatorsforthe

CISc

ountriesisgiven

are

Table2

.2(A)and

Table

2.2

(B)

Table2.2

(A):

CISSELECTECO

NOMICINDICATORS,2003-2006

Year

Russia

Ukraine

Kazakhstan

Uz

bekistan

Belarus

Armeni

a

GDP

(US$

bn)

2003

431.5

50.1

29.7

10.0

17.5

2.8

2004

581.4

64.8

40.7

10.3

22.9

3.6

2005

744.2

82.9

52.6

10.7

29.1

5.0

2006*

-

RealGDPgrowth(%)

2003

7.3

9.6

9.3

4.2

7.0

13.9

2004

7.2

12.1

9.6

7.7

11.4

10.1

2005

6.4

2.6

9.4

7.0

9.3

13.9

2006*

6.5

5.0

8.3

7.2

7.0

7.5

Inflation(%)

2003

13.7

5.2

6.4

14.8

28.4

4.7

2004

10.9

9.0

6.9

8.8

18.1

7.0

2005

12.6

13.5

7.6

21.0

10.3

0.6

2006*

9.7

9.3

8.5

19.3

7.9

3.0

Population(mn)

2003

144.6

47.4

15.0

25.6

9.8

3.0

2004

144.0

47.0

15.0

25.9

9.8

3.0

2005

143.0

46.7

15.1

26.2

9.8

3.0

2006*

Table 2.2 (A) Contd.


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PerCapitaIncome

2003

2974.4

1057.0

2053.3

390.6

1785.7

903.2

(US$)

2004

4043.8

1378.7

2695.4

397.7

2336.7

1193.5

2005

5324.9

1719.5

3690.8

415.4

2969.4

1666.7

2006*

Currenta/c.bal

(US$mn)

2003

35,845

2,891

-273

862.8

-424

-189.5

2004

59,920

6,804

500

937.0

-1043

-161.7

2005

84,249

2,531

-500

1082

469

-204.2

2006*

105,993

-700

1500

880

-512

-229.5

Exchangerate,avg.

(Localcurrency:US

$1)

2003

Rb30.69

H

RN

5.33

Tenge149.6

Som

971.3

BRb2051

Dram

579

2004

Rb28.81

H

RN

5.32

Tenge136.0

Som

1020.0

BRb2159

Dram

534

2005

Rb28.28

H

RN

5.12

Tenge132.9

Som

1115.0

BRb2154

Dram

457

2006*

Rb27.80

H

RN

5.05

Tenge125.4

Som

1255.0

BRb2220

Dram

440

Localcurrency

Rouble

Hryvnya

Tenge

Som

Belarusian

Dram

(Rb)

(HRN)

Rubel(BRb)

*Datafor2006areestimates

SOURCE:Internatio

nalMonetaryFund(IMF),WorldBankandInstituteofInternational

Finance(IIF).

Table2.2

(A)Contd.

Year

Russia

Ukraine

Kazakhstan

Uzbe

kistan

Belarus

Armenia


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Table2.2(B):

CIS-SELECTECO

NOMICINDICATORS,2003-2006

Year

Azerbaijan

Tajikistan

TurkmenistanGeorgia

Moldova

Kyrgyz

Republic

GDP(US$bn)

2003

7.1

1.6

5.2

4.0

2.0

1.9

2004

8.5

2.1

6.1

5.4

2.6

2.2

2005

11.9

2.2

7.2

7.1

3.1

2.4

2006*

RealGDPgrowth(%

)

2003

10.4

10.2

17.1

11.1

6.6

7.0

2004

10.2

10.6

14.7

5.9

7.4

7.0

2005

24.0

6.7

9.6

9.3

7.1

-0.6

2006*

25.6

8.0

9.0

7.5

3.0

5.0

Inflation(%)

2003

2.2

16.4

5.6

4.8

11.7

3.7

2004

6.7

7.1

5.9

5.7

12.5

4.1

2005

9.7

7.7

10.7

8.3

11.9

4.3

2006*

8.7

7.8

9.0

9.6

11.5

5.7

Population(mn)

2003

8.3

6.6

6.0

4.3

3.6

5.0

2004

8.3

6.7

6.0

4.3

3.6

5.1

2005

8.4

6.8

6.1

4.3

3.6

5.2

Table 2.2 (B) Contd.


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PerCapitaIncome(

US$)

2003

855.4

258.1

750.0

921.7

555.6

380.0

2004

1024.1

333.3

866.7

1

180.6

722.2

431.4

2005

1416.7

338.2

984.6

1

422.2

852.9

461.5

2006*

Currenta/cbal.

2003

-2021

-5

92

-374.8

-130.4

-99

(US$mn)

2004

-2600

-57

-500

-425.7

-70.0

-101

2005

-600

-18.2

300

-800.0

-285

-191

2006*

-3700

-73.9

300

-800.0

-505

-83

Exchangerate,avg.

(Localcurrency:

2003

Manat0.98

S3.06

Manat10,034

Lari2.15

Lei13.94

Som43.65

US$1)

2004

Manat0.98

S2.97

Manat10,379

Lari1.92

Lei12.33

Som42.65

2005

Manat0.95

S3.12

Manat10,870

Lari1.81

Lei12.60

Som41.01

2006*

Manat0.91

S3.25

Manat11,175

Lari1.79

Lei13.00

Som41.44

LocalCurrency

Manat

Somoni

Manat

Lari

Leu(Plural

Som

(S)

(Official

Lei)

rateis

fixedat

5,200)

*-Datafor2006a

reestimates

SOURCE:Internatio

nalMonetaryFund(IMF),WorldBankandInstituteofInternational

Finance(IIF).

Year

Azerbaijan

Tajikistan

TurkmenistanGeorgia

Moldova

Kyrgyz

Republic

Table2.2

(B)Contd.


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Among the largest economies,economic activity in Russia sloweddown with a real GDP growth of6.4% in 2005, as compare to 7.2%in 2004, driven by a combination oflower output growth in the energysector, economic uncertainties thatundermined investments and anincreasingly negative contributionfrom the external sector. During2006, real GDP growth is estimatedat 6.5% boosted by increaseddomestic demand.

InUkraine, slowdown in exportdemand combined with weak growthin investment led to a sharpdeceleration in real GDP growth to2.6% in 2005, down from a growthof 12.1% in 2004. Reflecting pickup in export, real GDP growth in2006 is however expectedstrengthen up to 5.0%.

In Kazakhstan, the boom in theoil and gas sector has driveneconomic growth in recent years.Real GDP growth was sustained at arobust 9.4% in 2005, as comparedto 9.6% in 2004. Supported byindustrial output growth of 10.0%and construction growth of 11.2%,transport and communication grewby 12.2%, while trade and otherservices expanded by 10.4%. In

2006, real GDP growth is expectedto remain robust at 8.3% reflectingamong others, increased domesticdemand.

In case ofUzbekistan, RealGDP growth rate increased from

4.2% in 2003 to 7.7% in 2004. Thiscan be attributed to a growth in theindustrial sector, and an expansionin the agricultural sector. In 2005,real GDP growth was maintained at7.0%, and real GDP growth in 2006is expected to sustained at 7.2%,supported by new investments in oil& gas sector and gold mining.

In case of Belarus, real GDPgrowth stood at a robust 9.3% in

2005, reflecting strong Russiandemand for Belarusian manufacturedoutputs. Domestic demand alsoremains an important driver ofgrowth in Belarus, aided bygovernment prioritising ambitious

wage targets, however real GDPgrowth is forecasted to be 7.0% forthe year 2006, due mainly toinsufficient capital investment and

weakening Russian demand.

In Armenia, real GDP reacheda robust growth of 13.9% during2005, as compared to 10.1% in 2004.Investment by Russian and several

western companies into the miningand non-ferrous metallurgy sectorsresulted in a pick-up in the growthrate in industry.

In case ofAzerbaijan, after thesharp decline in output in the early

nineties, rapid growth commencedin 1997, mainly owing to large-scaleFDI into the oil and gas sector. RealGDP growth since 2000 hasaveraged over 10% per year, andstood at a robust 24.0% in 2005.During 2006, real GDP growth is


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expected to be sustained at strong25.6%.

Economic growth has been rapidin Georgia in the last few years,

with real GDP growing by 5.9% in2004 and increased to 9.3% in 2005.Strong growth in construction due tobuilding of two oil pipelines, as alsorobust growth in the extraction andmanufacturing sector have boostedeconomic activity, still the real GDP

for 2006 is expected to be sustainedat 7.5%.

Moldovas real GDP growth in2005 stood at 7.1%, as compared to7.4% in the previous year, aided bya significantly improved agriculturalperformance and strong exportperformance due to Russias robusteconomic performance, which playsa key role in Moldavian exports.

The economy ofTajikistan isdiversifying away from dependenceon aluminum and cotton. The realGDP growth slowed down to 6.7%in 2005 from 10.6% in previous year.However, reflecting strong growthin retail trade and industrial output,real GDP growth is projected tostrengthen to 8.0% in 2006.

In Turkmenistan, real GDPregistered a lower growth of 9.6%

in 2005 as compared to 14.7% in2004. Due to strong performance ofthe hydrocarbons and cotton sectors,

which are the main contributors tooverall output.

In Kyrgyz Republic, real GDP

growth after contracting sharplyduring 2005 is expected to strengthenduring 2006 to reach the real GDPgrowth rate of 5.0%. The economicrecovery was primarily due toincreased output from the Kumtorgold mine, which is the single mostimportant constituent of KyrgyzRepublics economy accounting foraround 40% of industrial output andalmost half of the countrys exportrevenue. From a decline in previous

year, economic activity is expectedto sharp turnaround in current year.

SECTORAL PERFORMANCE

In this section, recent sectoralperformance of select economiesin the CIS region, viz. Russia,Ukraine, Kazakhstan, Uzbekistanand Belarus, are highlighted.

Russia

Agr icul tura l sector con tributesaround 5.6% to GDP. With over45% of its total land area underforest cover, timber is one of themost important export items. Fishis another important export item

with Russia accounting for 25% ofthe worlds production of fresh andfrozen fish and about one third ofglobal output of tinned fish.However, production of fish andother sea products has contractedin recent years.

Industrys contribution to the GDPin 2005 was 38.0%. Russia inheritedan industrial base that was energyintensive and oriented towards low


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value-added basic processing anddefence. The government has maderestructuring of the military-industrialcomplex a priority, with theobjective of reviving high-technology sub-sectors.

Russias exceptionally richnatural resource endowments havemade it a major source of most typesof minerals, and in many cases the

world s leading produce r and

exporter. In particular, there are vastreserves of fuels and metal ores,including substantial deposits ofgold-bearing ore. The countryaccounts for about 11% of worldoutput of coal, 25% of gas, 20% ofglobal nickel and cobalt production,12% of worlds aluminum productionand is a leading exporter of non-ferrous metals. The country is also aleading producer of gold, iron ore,

platinum and diamonds.The services sector contributed

56.4% to the GDP in 2005. Since1995, the share of services in theGDP has been around 55-58%.Retailing was one of the sectors tobe privatized, and is a principal areafor new business launches as its unitsare relatively small and do notrequire significant capital investment.Retail trade is among the fastest

growing sectors of the economy, withturnover up by an average of 9.3%a year in 2001-03.

Ukraine

The agricultural sector currentlyaccounts for less than 15% of GDP;

down from 23.4% total GDP in2001. The most significant steptowards laying the groundwork forthe sectors recovery was taken inDecember 1999, when aPresidential decree was issued tobreak up collectivised agriculturalenterprises into private farms. This,combined with additional reformsin 2000 designed to reduce theGovernments interference in thesector and support private sectorlending to producers, helped toachieve Ukraines first year ofpositive agricultural sector growthin 2000. The break-up of collectivefarms fostered the emergence of amarket for leased agricultural landand generated new businesses and

joint ventures. In addition, thereforms helped to stimulate lendingto agricultural producers andalongside a considerable reduction

in the cost of credit.

The industry sector contributed40.0% of GDP in 2003. Theindustrial sectors expansionremained strong in 2004 at around13.4%, helped by sustained domesticand external demand that boostedalmost all parts of the manufacturingsector. The manufacturing sectoraccounts for more than 75% of total

industrial production and has beenthe driving force behind Ukraineseconomic recovery. Low value-addedmanufacturing sectors, particularlymetallurgy, have underlined therecovery in economic growth inrecent years.


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Ukraine is the worlds fifth largestproducer of iron ore and possessesthe worlds second largest reservesof magnesium. Ukraine alsopossesses coal and several under-exploited oil and gas fields whoseproduction volumes satisfy only aboutone-tenth of total domestic needs,

with the rest being imported.

The construction industryscontribution fell from approximately

7% of GDP in the early 1990s tobelow 5% of GDP in recent years.

After a weak performance in 2002,the sector registered a rebound in2003 and 2004 due primarily toongoing construction andengineering works in the oil and gassector and in railway transportsystems. A boom in housingconstruction has also contributed tothe sectors recent expansion.

Kazakhstan

The contribution of industry to GDPwas 30.9% in 2005. After a sharpcontraction in production between1990 and 1995, industrialproduction recovery subsequentlyfuelled by foreign investment inoil and metals. Industrial output,over half of which is accountedfor by the oil and gas sector,

remained strong in 2004.The oil sector is dominated by

foreign investors. Around 85% of oilproduction is from foreign investors,

with the remaining from the state-owned oil company, Kazmunaigaz.

Investment by foreign oil companiesinto Kazakhstan has been the driverof economic growth in recent years.Key oil consortia in the countryinclude:

Tengizchevroil (TCO) aconsortium led by ChevronTexaco (US) to develop thegiant Tengiz field in westernKazakhstan. Others in theconsortium are ExxonMobil

(US), LUKoil (Russia) andKazmunaigaz;

Karachaganak Petroleum

Operation (KPO) led by BG(UK) and ENI (Italy), withChevronTexaco and LUKoil, todevelop the giantKarachaganak field in north-

western Kazakhstan;

Agip Kazakhstan North Caspian

Operating Company (AgipKCO) Agip KCO operates onbehalf of a consortiumcomprising ENI, ExxonMobil,Inpex (Japan), PhillipsPetroleum (UK) and Total(France), and is developing thenewly discovered Kashaganfield in the Caspian sea.

The second largest industrialsector, as well as the second largest

exporter and destination of foreigninvestment, is the metal industry.Kazakhstan accounted for 90% of theformer Soviet Unions chromereserves and half of its lead,tungsten, copper and zinc. In


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addition, it also possesses one-fifthof its coal. The main steel maker isMittal Steel, which owns and runsthe former Karaganda Mining andMetallurgical Kombinat.

Although the agricultural sectoremploys at least 20% of the

workforce, its share of GDP shrankfrom 34.9% in 1990 to 6.7% in 2005.Grain production dominates thesector followed by meat and wool.

The trade and transport sectorscontributed 12.8% and 12.1%,respectively, to GDP in 2005. Thecontribution of trade and catering hasbeen around 15-17% since 1995,

whereas the transport andcommunication sector has beencontributing around 10-13% to theGDP since 1995. There has beenimportant growth in services since1991. Starting from a low base, the

sector has grown virtually every yearsince independence.

Uzbekistan

Agriculture contributed to around33% of GDP in 2003. Uzbekistanis among the worlds ten leadingproducers and exporters of cotton.

Weak global prices, poor harvestsand excessive state control havecontributed to a fall in cottonsshare in export earnings from 39%in 1998 to average about 21% in2002-04.

The industrial sector accountedfor 22.0% of GDP in 2003, ascompared to 33.0% in 1990. The oil

and gas sector has been a priorityrecipient of investment under theimport substitution program.Uzbekistan has eliminated mostenergy imports and is now a modestexporter of gas and refined oilproducts. The government plans toincrease exports through investmentsin new fields. In addition, the sectoris set to receive substantial newinvestment from foreign companies.The government is funneling credittowards traditional heavy industry,such as steel, rather than towards thelabour intensive agro-industry. Thegovernment is also trying to developthe textile industry in order toincrease the value-added of itsexports.

Uzbekistan is also among theworlds leading producers of gold.Industry sources estimate that

Uzbekistan mined 86 tonnes of goldin 2003. Gold is also the countryssecond largest export, accounting foraround 10-20% of export earnings.

The services sector (includingtrade) contributed 43.0 to the GDPin 2003, up from 34% in 1990.However, development of servicesoutside the financial sector has beenconstrained. Trading in domesticallyproduced food and imported goods

in the bazaars is a major form ofeconomic activity.

Belarus

The contribution of agriculture toGDP was 7.5% in 2005. Agricultural


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production dropped steadilythroughout the 1990s. Although thesector recorded 1.8% growth in2001, after growing by 8.9% in2000, a lack of reforms in theagricultural sector remains a causefor concern and a significant dragon growth. In absence ofrestructuring or an end to widespreadprice controls, the sector continuesto face constraints in attracting theinvestment needed to renew its stockof heavy machinery.

In 2005, industry contributed 9%to the GDP and the sectorsperformance is closely tied to theRussian market. Reflecting this,restoration of Soviet supply lines hasled to the revival of the sector in

the second half of the 1990s. Thesetrade links with Russia are of keyimportance to the industrial sector.

Services related to trade andtransport have posted some growthin recent years owing to increasedtrade with Russia and Belaruslocation as a transit corridor betweenRussia and Europe. Transport andcommunications contributed 27.4% toGDP in 2005. The share of trade and

catering was 9.7% of GDP in 2005.

FOREIGN EXCHANGE

RESERVES

Table 2.3 presents the level offoreign exchange reserves in theCIS countries during 2001 and2005.

Table 2.3:

FOREIGN EXCHANGE RESERVES OF CIS COUNTRIES (US$ mn)

(EXCLUDING GOLD)

2001 2002 2003 2004 2005

Russia 32,542 44,054 73,175 120,809 175,891

Ukraine 2,955 4,241 6,731 9,302 19,110

Kazakhstan 1,997 2,555 4,236 8,473 6,084

Uzbekistan 903 850 1,162 1,564 1,475

Belarus 391 619 595 749 1,137

Armenia 320.8 425.0 510.2 575.9 755.0

Azerbaijan 896.7 721.5 820.9 1089.6 1,220.0

Tajikistan 92.6 89.5 111.9 157.5 162.8Turkmenistan 2,055 2,346 2,673 2,714 3,314

Georgia 159.4 197.6 190.7 382.9 473.2

Kyrgyz Republic 264 289 365 528 570

Moldova 228.5 268.9 302.3 470.3 597.5

SOURCE: IMF, World Bank, Institute of International Finance (IIF).


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RussiaRussias foreign exchange reservesdecreased by nearly 35% from1997 to 1999 as a result of capitaloutflows following several currencycrashes in East Asia. The floatingof the Rouble in August 1998allowed the Russian Central Bankto avoid the complete depletionof its reserves. Foreign exchangereserves began to recover strongly

thereafter due to high internationaloil prices. Forex reserves rose fromUS$ 24.3 bn in 2000 to anestimated US$ 175.9 bn at the endof 2005. Level of reserves in 2005represented around 18 months ofimport cover.

Ukraine

Even before the currency crisis of1998, Ukraines foreign exchange

reserves had been consistently low,at only around one month of importcover. The financial turmoil coupled

wi th the ris ing deb t ser viceobligations, reduced the level ofreserves to just two weeks ofimport cover by early 1999.However since mid-2001, reserveshave grown rapidly from under US$2 bn to a record US$ 9.3 bn at theend of 2004. At end-2005, reserves

are estimated to have increasedfurther to US$ 19.1 bn, representingabout 6 months of import cover.

Kazakhstan

Kazakhstans foreign exchange

reserves picked up at the end of1997 to US$ 1.7 bn, equivalent to2.5 months of import cover. Theeconomic crisis in the second halfof 1998, however, forced the NBK(National Bank of Kazakhstan) tosell foreign exchange, pushingreserves down. Growing oil export

volumes and rise in oil prices havehelped reserves to recoversubstantially to US$ 8.4 bn in 2004,representing an import cover of7.4 months. The government hasalso set up an oil windfall fund,the NFRK, to receive the hard-currency income stemming fromhigher oil exports. This fund,however, is only to be used forbudgetary support and not forimport cover. At end-2005,reserves decreased further toUS$ 6.1 bn, with an import coverof 4 months.

Uzbekistan

Uzbekistan does not publish dataon foreign reserves. According tothe IMF, the level of net reserves(gross reserves less IMF liabilities)at the end of 2001 was US$ 1.1bn equivalent to 4.2 months ofimport cover. Reserves areestimated to have risen in recent

years due to rapid rise in export

receipts and healthy world goldprices. Foreign exchange reservesare estimated to be around US$1.5 bn at the end of 2005,representing an import cover of4.7 months.


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BelarusBelarus foreign exchange reserveshad plunged to only two weeksof import cover in 1998 due tothe currency crisis. But rosegradually between 1999-2003. Thistrend continued in 2004, when

foreign exchange reserves reachedUS$ 749 mn, helped mainly dueto the Belarussian Roubles relativestability. In 2005, the level ofreserves increased further toUS$ 1.1 bn, representing an importcover of around 0.8 months.


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3. FINANCIAL SECTOR AND

CAPITAL MARKETS

This chapter examines the financialsector and capital markets in selectcountries of the CIS. The chapter

focuses on the role of CentralBanks, the network of commercialbanks and financial institutions,along with the capital markets.

RUSSIA

The Central Bank of the RussianFederation (Bank of Russia) wasfounded on July 13, 1990. Thebanks functions include organisingmoney circulation, monetary

regulation, foreign economicactivity and regulation of theactivities of joint stock and co-operative banks.

Banking Sector

The banking sector in Russiaenjoyed rapid growth during the1990s due to massive foreignexchange speculation, andnumerous opportunities for handling

soft credits and state funds. By2004, Russia had more than 2500banks. The financial crisis of August1998 seriously affected the sector.Since then, balance sheets haveimproved significantly, but banklending has been slow to take off.

In 2004, lending to the privatesector grew by 48.6%, but thestock of corporate loans

outstanding, at around 12% of GDP,is still much lower than indeveloped market economies.

Although Russia still had around1300 licensed banks in 2004, state-controlled institutions, especiallySberbank and Vneshtorgbankdominate the sector. The RussianCentral Bank have move tointernational accounting standards(IAS) from year 2005, an increase in

minimum capital requirements to 5m (US$ 5.5 mn) by 2007 andplanned improvements in the rulesgoverning mergers and acquisitions(M&As) will finally bring aboutmuch-needed consolidation in thesector. Major banks have alsoannounced IPO plans for 2006,

which are- Vneshtorgbank (VTB),Gazprombank and Rosbank.

Foreign banksF

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