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Russia

Russia Needs To Do The Heavy Lifting To Become An Export Nation

Moscow's goal be an exporter of manufactured goods must be done in the face of major political and financial uncertainties.

A Russian ship carrying used cars docks in Japan
A Russian ship carrying used cars docks in Japan
Aleksandra Romanyicheva

MOSCOW — The government has stated on many occasions that manufactured exports, instead of raw materials, should be the engine of economic growth for Russia. But making the leap onto the market for exporting goods is a major challenge.

"One of the most formidable barriers for potential exporters is the colossal amount of work required to secure credit," says Rodion Surkov, whose company Ruselprom is a leading producer of electrical equipment in Russia.

Commercial financial institutions are not prepared to take on the risks associated with supporting exports, citing financial and political unknowns, management difficulties and low profit margins. It doesn’t help that many of Russia’s traditional export markets are in the relatively unstable countries of the Middle East and Latin America.

But at least one of the problems facing exporters was solved when the Russian Export Insurance Agency (REIA) opened two years ago. Most commercial insurance agencies refuse to offer insurance for exporters, so the outfit fills a crucial gap. State-sponsored export insurance agencies are common around the world, since exporting is considered risky not just by Russian insurers, but also by insurers worldwide.

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Port of Taganrog - Alexxx1979

But accessibility of export insurance is just one step towards creating a better economic environment for Russian companies. Peter Fradkov, head of REIA, says he has been actively working with banks and regulatory agencies to try to stimulate lending to exporters. The first step was a change to Bank of Russia regulations — in force since Jan. 1 — that allows banks to accept export insurance as loan collateral without having to establish reserves. Previously, banks making loans to exporters had to evaluate the loan risks and have up to 100% of the loan amount in reserve, which made it extremely difficult for exporters to get credit.

Another change Fradkov pushed forward has to do with the way banks evaluate the credit-worthiness of their portfolio, using a coefficient. The lower the coefficient, the better, and Fradkov managed to reduce it to evaluate credit given to exporters.

It is also now easier for exporters to handle deals in foreign currencies without worrying about breaking regulations.

Is it enough?

But will these simple measures stimulate manufactured exports and begin to change the ratio of raw materials exports, which now represent two-thirds of Russia’s total? According to Aleksander Knobel, head of the Laboratory for International Trade at the Gaidar Institute, creating the Russian Export Insurance Agency was critical, but is simply not enough.

“Giving Russian exporters of manufactured goods access to export insurance and guarantees just gives them the same conditions as exporters from other countries who are active in the international market. Without that, there is no way to increase exports,” he says. “There is no universal recipe that would immediately allow us to increase our competitiveness. ... There’s a long global practice that we just need to follow. In that sense, it’s easier for us, because we just have to look at what is being done in other countries, but putting it into practice is harder for us,” Knobel says.

In his view, the highest priority should be removing export barriers within Russia. For example, to export a product, a company has to prove that it could not be used for military purposes. “Exporters have trouble getting to the market because of administrative barriers,” he says. “Plus, at the moment the custom’s service doesn’t work very well, and that is delaying exports. In ratings of effectiveness of the customs system, Russia is in last place.”

The government has prepared a road map of sorts for improving exports, but many outside experts say that even this plan is too “bureaucratic.”

For the moment, is seems that institutional changes are still stalled, and developing Russia’s export market still has institutional hurdles to overcome. Fradkov admits that he often does things that would seem inappropriate for the head of an export agency — for example, personally escorting exporters to meetings with bankers.

“It is not a classic role for an export agency at all, but we are living with the reality that the export market is still in the phase of early development.”

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