BD2011-080a

BLACK SEA TRADE AND DEVELOPMENT BANK

RUSSIA

Country Strategy

2011-2014










THESSALONIKI
JUNE, 2011

BD2011-080a

1
RUSSIA COUNTRY STRATEGY
TABLE OF CONTENTS

TABLES:
Table 1: Basic Macroeconomic Indicators at a Glance
Table 2: Active BSTDB Portfolio as at end December 2010

TEXT:
I. Recent Economic Developments and Outlook
a. Real Sector
b. Public Sector and Fiscal Policy
c. Monetary and Financial Sector
d. External Sector
e. Forecast for 2011-12
II. Overview of Current BSTDB Portfolio
III. Review of Country Strategy 2007-2010
IV. Priorities for 2011-2014

ANNEXES:
Annex I: Post Evaluation of 2007-2010 Country Strategy Russia


2
Table 1: Basic Macroeconomic Indicators at a Glance for RUSSIA
Key Long Term Foreign Currency Sovereign Risk Rating at 31 May, 2011:
Moodys: Baa1 | S&P: BBB | Fitch: BBB

2007 2008 2009 Est. 2010 Proj. 2011 Proj. 2012
1
Population (Million) 142.2 142.0 141.9 141.9 141.7 141.5
2
Avg Exch. Rate (Rubles/ US$) 24.64 24.85 31.77 30.38 28.98 27.98
3
Inflation (CPI Avg.) 9.0% 14.1% 11.7% 6.9% 9.1% 7.7%
4
Average monthly wages (US$) 551.7 695.9 586.7 697.7
5
GDP (Rubles million) 33,258,000 41,444,700 38,797,200 44,491,400 50,901,500 55,390,300
6
GDP US$ million 1,349,756.5 1,668,130.4 1,221,309.0 1,464,663.1 1,756,435.5 1,979,639.0
7
GDP per capita (US$) 9,492.0 11,747.4 8,606.8 10,321.8 12,395.5 13,990.4
8
Real GDP growth, % 8.1% 5.6% -7.8% 4.0% 4.5% 4.5%
9
Official Unemployment (end of period) % 6.1% 6.3% 8.5% 7.5% 6.8% 6.2%
10
Industrial Production Growth, % 6.8% 0.6% -9.3% 8.2% 5.0% 4.7%
11
Agricultural Production Growth % 3.3% 10.8% 1.4% -11.9%
12
Domestic Credit Growth % 37.2% 26.7% 31.4% 31.9% 30.8% 21.7%
13
Domestic Credit/ GDP 23.9% 24.3% 34.1% 39.3% 44.9% 50.2%
14
Foreign Direct Investment - $US million 55,073 75,002 36,500 41,194 43,000 52,000
15
FDI/ GDP 4.1% 4.5% 3.0% 2.8% 2.4% 2.6%
16
Consolidated Budget Balance/ GDP, % 6.0% 4.9% -6.3% -3.6% -2.7% -2.9%
17 Total External Debt- US$ million 463,915.0 480,541.0 467,245.0 488,654.0 405,700.0
18 Total External Debt/ GDP 34.4% 28.8% 38.3% 33.4% 23.1%
19 Public External Debt/GDP 2.9% 1.9% 3.8% 3.2% 2.3%
20 Private External Debt/ GDP 31.5% 26.9% 34.5% 30.2% 20.8%
21 Exports- $US million (Goods) 354,401.0 471,603.5 303,388.5 400,130.9 470,122.1 457,015.0
22 Imports- $US million (Goods) 223,486.0 291,861.0 191,803.0 248,738.1 284,284.0 302,752.0
23 Trade Balance $US mn (Goods) 130,915.0 179,742.5 111,585.5 151,392.8 185,838.1 154,263.0
24 Trade Balance/ GDP 9.7% 10.8% 9.1% 10.3% 10.6% 7.8%
25 Current Account Balance $US mn 77,768 103,530 48,605 71,129 98,855 59,547
26 Current Acct. Bal./ GDP 5.8% 6.2% 4.0% 4.9% 5.6% 3.0%
27 Forex Reserves (end period- exc gold) US$ m 466,750 411,748 416,652 443,591 524,587 552,738
Sources: Central Bank of the Russian Federation; Russian Federation Federal State Statistics Service; IFS IMF April
2011; IMF Russian Federation: 2010 Article IV ConsultationStaff Report and Public Information Notice on the
Executive Board Discussion, Report No. 10/246 July 2010; EIU Country Report- Russia April 2011.


3
I. Recent Economic Developments and Outlook
a. Real Sector
Russia enjoyed a decade of high, uninterrupted economic growth between 1999-2008.
Annual real GDP growth averaged 6.9% during this period, resulting in cumulative growth on the
order of 94%, that is, a near doubling of the size of the economy in real terms. Key factors behind
the growth were high consumer demand, and sustained export growth, the latter partly supported by
high energy prices. Investment growth was also robust during this period, with both domestic and
foreign investment growing rapidly. In terms of sectors of origin, most of the growth came from the
two largest sectors of the economy- industry and especially services, including construction- which
grew at double digit rates during most of the boom. By way of contrast, agricultural growth was far
more modest with low single digit rates of growth. As a result, the services and construction sector
has grown over the years such that it now accounts for 58-60% of GDP, industry accounts for 36-
38% of GDP, and agriculture has declined to around 4%.
The period of growth came to a close with the onset of an economic downturn which
followed on the heels of the global financial crisis of late 2008. Russia was hit particularly hard by a
combination of factors including (i) the freezing of global capital markets which left corporations
unable to access external financing upon which they had relied, (ii) a reversal of capital flows
generally and withdrawals from the banking system, (iii) a cessation of a domestic credit boom, (iv) a
significant decline in domestic consumer demand, and (v) a sharp contraction in exports, with the
decline in commodity prices (especially for energy) exacerbating the situation. As a result, both
private consumption and investment slowed, and the effect was worsened by a large rundown of
inventories. The cumulative effect was a decline in real GDP of -7.8% for 2009.
The steepest part of the decline took place in the first half of 2009, with the year on year
decline exceeding 10%. However, the economy began to recover in the second half of the year, aided
by a government stimulus package which included sizeable liquidity injections into the banking
system, as well as a recovery in external demand which boosted the volume and price of energy
resources and other key export commodities. The recovery continued into 2010 with private
consumption recovering further, on the strength of rising real wages and declining unemployment.
Gross fixed investment, which dropped sharply by over 14% in 2009, grew a modest 3.5% which, if
base effects are taken into account, suggests that investment has been slower to recover from the
economic downturn.
On the supply side, industry- which includes commodity exports- accounted for most of the
growth in 2010, growing by an estimated 7.6%, a significant reversal from the -11.6% of 2009.
Services and construction grew a more moderate 2.8% (after having declined -5.4% in 2009) and
agriculture contracted by -11.6% in 2010 (against growth of 1.5% in 2009) mainly due to a heat wave
and drought in 2010. Despite the small size of the sector, the large decline in agriculture impacted
overall growth adversely, limiting real GDP growth for the year to an estimated 4.0% for 2010.
The period of high growth resulted in Russia becoming a top-ten economy globally in terms
of dollar GDP. More importantly, the growth had a significant positive impact on living standards
and social indicators. The nominal per capita income in 2010 of approximately US$ 10.300 is nearly
eight times greater than the per capita income in 1999. If one adjusts for purchasing power parity,
GDP per head rose nearly 2.7 times from US$ 5,850 in 1999 to an estimated US$ 15,630 in 2010
1

1
EIU Viewswire five year forecast tables for Russian Federation.
.

4
Average monthly wages, in dollar terms, increased by approximately 11.3 times. Unemployment
declined from double digits to a low of 5.4% in mid 2008 before rising again during the economic
downturn. As of the end of 2010 it stood at around 7.5%, down from the peak reached during the
downturn in 2009. Poverty rates declined dramatically from over 30% in the 1990s to 13% in 2007,
with progress in both urban and rural areas, although the downturn of 2008-09 somewhat reversed
this trend- at least temporarily. Other social indicators in terms of health care and education,
comprehensive social safety nets, share of the population with sustainable access to basic needs
(water and sanitation), and federal support to more economically depressed regions all showed
improvement, in some cases to a significant degree.

a. Public Sector and Fiscal Policy
Between 2000-2008 the Government achieved fiscal surpluses every year, even though the
surpluses declined in 2007 and 2008 as the economy showed some signs of overheating. Successful
macroeconomic performance was achieved via a range of measures that improved the quality of
fiscal administration. These included (i) budget planning and execution reforms to improve the
efficiency and accountability of budgets and to introduce performance targets, (ii) improvements in
tax administration such as greater transparency and better client service in tax collection and customs
administration, and (iii) achievement of fiscal surpluses and resistance to pressures to spend
increased revenues from oil windfalls.
The economic downturn of 2008-09 changed this picture, with the Government posting a
sizeable consolidated budget deficit of -6.3% of GDP. On the one hand, government revenues
shrank abruptly due to a decline in revenues from energy exports as well as lower tax receipts on
account of the contraction of the economy. On the other hand, the government undertook a major
fiscal stimulus in order to (i) counteract the decline in exports and private consumption and
investment, and (ii) mitigate some of the worst effects of the economic contraction upon the
economy. The total cost of the measures undertaken was on the order of seven percent of GDP, and
amounted to nearly three trillion rubles. Some of the measures involved wage and pension increases,
but substantial support was also provided to the financial sector and to large enterprises. Revenue
and expenditure data confirm this: revenues declined from around 39% of GDP in 2008 to around
34% of GDP in 2009, while expenditures rose from around 34% of GDP in 2008 to over 40.5% of
GDP in 2009. The underlying general government non-oil deficit increased from around 8% of
GDP in 2008 to 15% in 2009.
That such a large stimulus could be undertaken was primarily the result of two factors; first,
public debt was extremely low, at around 6.5% of GDP at end 2008, and even after the stimulus
stood at around 10% of GDP at end 2010. Second, sizeable resources were readily available as a
result of the Reserve Fund, originally established as the Stabilisation Fund in 2004, and modeled
after the oil windfall funds of other countries (such as Norway). This fund was designed partly to
sterilize the potentially destabilizing impact of sudden windfall inflows from abroad and also to
protect government spending against possible future declines in oil prices. In February 2008, the
Stabilisation Fund was split into a Reserve Fund, which was capped at 10% of GDP, and a National
Welfare Fund, which accumulates surplus resources beyond the Reserve Fund and invests in riskier,
higher return vehicles. At their peak, the two funds had accumulated reserves of about US$ 580
billion . The Reserve Fund, which invests in low yielding liquid assets, is available for use when
energy revenues fall, and having accumulated reserves during the period of rising oil prices between
2004-2008, was in position to finance the stimulus program.

5
With the return of growth, the Government has begun to withdraw the stimulus in order to
reduce the budget deficit and to avoid the risk that fiscal policy might become pro-cyclical and
contribute to an overheating of the economy akin to that observed in 2008 just before the crisis
struck. Encouragingly, the retrenchment is based primarily on expenditure cuts and has conservative
oil price assumptions. To the degree that ambitious privatization plans for the next five years are
enacted and fulfilled, Government targets to reduce the deficit to less than -3% of GDP by 2013
should be attainable and may well be exceeded. Already, for 2010 the overall budget deficit declined
to an estimated -3.6% of GDP, although the decline in the non-oil deficit appears to have been more
limited. As of end January 2011, the Reserve and National Welfare Funds had accumulated
approximately US$ 115 billion.

b. Monetary and Financial Sector
During the years of high growth, Russian monetary policy sought to strike a balance between
combating inflationary pressures on the one hand, and managing appreciation pressures on the Ruble
as a result of rising capital inflows on the other hand. The concern was that a rising Ruble might
undermine the competitiveness of non-commodity based sectors and so the Central Bank of the
Russian Federation (CBR) tried to maintain a policy of controlled and predictable ruble appreciation.
As far as inflation is concerned, perennial efforts to reduce the rate of consumer and
producer price growth to the mid or low single digits proved challenging as the average annual
inflation rate hovered around 10%- occasionally rising a bit higher- and market expectations were
generally that lower rates would be difficult to achieve. However, one side effect of the economic
downturn of 2008-09 was a sharp reduction in price pressures, as growth in consumer prices
declined until mid-2010. Inflation averaged 11.7% for 2009 and continued falling in the first half of
2010, although in the latter part of the year inflationary pressures re-emerged as a result of the full
impact of previously increased budget spending, growth in the money supply, the recovery of global
commodity prices, and above all a sharp decline in agricultural production due to drought and fires
in the summer of 2010 which resulted in a spike in food prices. Averaged over the entire year, the
2010 inflation rate reached 6.9%.
With inflationary pressures subsiding during the crisis, monetary policy and exchange rate
management focused upon supporting stabilization of the financial system, which had come under
considerable stress. When the crisis broke out, the CBR at first tried to manage a gradual
depreciation in order to support the financial system. A sharp rise in capital outflows and a decline in
foreign reserve levels led to abandonment of this effort and devaluation of the Ruble coupled with a
tightening of interest rates in order to restore confidence in the currency. Once the Ruble stabilized,
and with inflationary pressures low, the CBR began a gradual reduction of its benchmark refinancing
rate such that between December 2008 and June 2010, the rate declined by 5.25% from 13% to
7.75%. In late February 2011, this rate was raised 0.25% to 8% in response to the re-emergence of
inflationary pressures (other restrictive measures such as increasing reserve requirements had already
been implemented).
One of the longer term objectives of the CBR is to move to an inflation targeting regime via
use of indirect instruments (interest rates), but full implementation of such a regime has not yet taken
place and a period of transition covering the coming four years is likely. Nevertheless, the CBR has
committed- and made moves- to increase exchange rate flexibility as an important first step in this
direction. Measures undertaken include widening the trading band within which the Ruble is
permitted to fluctuate, and adjusting the band and making it larger. Over the years, the Stabilisation

6
Fund (and its two successor funds) has acted as an important instrument of monetary policy,
permitting the sterilization of foreign exchange inflows from oil sales. The CBR also employs other
mechanisms to sterilize liquidity (e.g. repos, deposit auctions).
Banking Sector & Capital Markets
The banking sector in Russia is regulated by the CBR, which issues operating licenses for
credit institutions and for the conduct of banking operations. As at end 2010
2
At present, the situation is stable, and the Russian banking system is well capitalized, with a
system-wide capital adequacy ratio that stood at 18.4% and a Tier 1 ratio of 12.0% in the third
quarter of 2010
, there were 1,146
registered credit institutions (CIs), down from 1,173 at the end of 2009, an indication of the ongoing
process of consolidation in the financial sector which has seen the number of credit institutions
decline from a peak of over 2,500 in 1994. Out of the 1,146 CIs, 1,012 possessed a license to
conduct banking operations, and 819 possessed a license to take deposits from individuals. A total of
832 CIs were covered by the governments compulsory deposit insurance system. The presence of
foreign banks remains limited. There were 220 CIs with foreign stakes in the authorized capital, of
which 80 were wholly foreign owned CIs and a further 31 were CIs with a foreign stake above 50%.
Out of the 1,012 CIs with a license to conduct banking operations, only 22 had registered
authorized capital above Rbl. 10 billion. A further 133 CIs had authorized capital between Rbl. 1-10
billion, with the remainder having less than Rbl. one billion. Despite the large number of CIs, the
sector is fairly concentrated. The five largest CIs have 47.7% of total banking system assets, the top
20 CIs have 68.6% of total assets, and the 50 biggest CIs account for 80.2% of assets.
In the run-up to the financial crisis of 2008, borrowing accelerated in Russia, albeit from a
fairly low base. Credit growth was over 37% in 2007 and was running at an even higher pace up until
the outbreak of the crisis in 2008. Moreover, a number of Russian banks and corporations borrowed
heavily internationally on the syndicated loan and bond markets. This left them dependent on
continued inflows of external financing and the onset of the crisis had a negative effect on the
Russian financial sector. Faced with sharp increases in capital outflows and withdrawal of deposits
from the banking system, the Government and the CBR intervened in the financial sector (in
addition to the monetary response with the CBR refinancing rate).
The CBR provided increased volumes of liquidity to banks at stable interest rates, while
trying to manage a gradual depreciation of the Ruble in order to offset the loss of access to foreign
financing. This provided breathing room to banks, but came at the cost of a sharp decline in foreign
exchange reserves of over US$ 200 billion. The CBR also relaxed collateral requirements for banks
and offered guarantees for interbank lending to certain banks. Other measures included increases in
the deposit insurance limit, a bail out of 18 Russian banks (at a cost of approximately US$ 11 billion)
by the Governments Deposit Insurance Agency, and state owned banks offering support to a
number of private banks, including via takeover (effectively nationalizing certain distressed banks).
The definition of non-performing loans (NPLs) was also changed, making it difficult to quantify the
true extent of the rise in NPLs. NPLs peaked in mid 2009, at a level around 10% of total loans, but
have subsequently declined as conditions improved.
3

2
Information from CBR statistics available at
. Russian banks are also highly liquid, with liquid assets as a share of total assets at
www.cbr.ru , all figures are as at end-2010, unless otherwise mentioned.
3
Moodys Investors Service Special Comment Russian Banks: Mergers and Acquisitions Will Strengthen the Banking Sector, 17
March 2011.

7
25.3% at end 2010, higher than pre-crisis rates. Profitability has also been restored, although credit
growth remains weak. Nevertheless, the stabilization of the financial system has permitted the CBR
to exit from its extraordinary liquidity support schemes, and the liquidity level of Russian banks has
resulted in some of them prepaying their debt to the CBR.
For the coming period, a number of reforms are planned in order to reform the banking
sector and to improve the supervisory and regulatory framework. In order to continue consolidation
of the banking system, minimum capital requirements were raised to Rbl 90 million in January 2010,
and will be raised to Rbl 180 million in 2012. Banks with insufficient capital will either have to merge
with other institutions or else risk being transformed into non-bank credit institutions, or even losing
their licenses. To facilitate bank mergers, administrative conditions for mergers and acquisitions have
been eased. Of potentially even greater significance are the Governments plans to partially privatize
a number of state owned banks and to reduce the states stake in the financial sector. In February
2011, the Government sold a 10% stake in Bank VTB, and there are plans to sell a similar sized stake
in Sberbank- the largest bank in Russia- and a 25% stake in the Russian Agricultural Bank. In
addition, authorities are considering other measures to (i) tighten prudential regulation of banks,
providing increased powers to the CBR to supervise banks and their affiliates such as upgrading
information and disclosure requirements and (ii) introduce systemic stability measures such as
counter-cyclical regulatory requirements, restrictions on foreign currency lending, and differentiated
reserve requirements to reduce currency and maturity risks.
There are two stock markets currently operating in Russia both based in Moscow, (i) the
Moscow Interbank Currency Exchange (MICEX), which opened in 1992 and is the larger of the two,
trading in a range of instruments from equities to bonds to derivatives, with 239 Russian companies
listed and a market capitalization around US$950 billion, as at December 2010, and (ii) the Russian
Trading System (RTS), which was established in 1995 and constitutes a trading and settlement
complex that also trades in a broad range of financial instruments from equities to commodity
futures. The Russian stock market is among the larger emerging market exchange systems and has
grown in importance over the years as a vehicle for firms to mobilize financial resources, even
though periodically it has experienced considerable volatility. The Federal Financial Markets Service
(FFMS), established in 2004, is the executive body which regulates Russian financial markets
including securities issuance and trading and supervision of exchanges.

c. External Sector
Debt
During the economic boom period, Russias public debt- domestic and external- followed a
rapid downward trajectory. The Government actively paid down sovereign debt, and from a public
debt level of slightly over 100% of GDP in 1999 (with external debt of 76% of GDP), total
Government debt declined to a low of 6.5% of GDP at end 2008 (with external debt of 1.9% of
GDP). For more than a decade, Russia issued no new public debt on international capital markets,
and even with the onset of the crisis, the Government relied mainly upon accumulated reserves to
finance the stimulus program. However, in April 2010 it issued US$ 5.5 billion in Eurobonds (two
tranches, one for five years and one for 10 years), partly in order to finance the budget deficit, but
also in order to establish market benchmarks and to help stimulate development of domestic
financial markets. Russia is unique among BSEC countries in being a major bilateral creditor in its
relations with a number of countries, and is a permanent member of the Paris Club as a creditor.

8
While public debt is not a concern in Russia, private debt accumulation is a potentially
different story. During the boom period many Russian corporations and banks borrowed heavily,
especially from abroad, and it was their dependence on continued external inflows which contributed
heavily to the economic shock of 2008. The borrowing was highly concentrated, with a small number
of firms accounting for the majority of bonds and syndicated loans contracted. Out of these, a
number were partly or majority owned by the Russian government, and they accounted for around
30% of the external corporate and bank debt. Private external debt peaked in 2009 at 34.5% of
GDP, but has subsequently dropped to 30.2% as at end 2010, and is still declining. Thus, for the
time being it does not represent an imminent threat to financial stability. However, because a
considerable share is owed by firms in which the Government is at least part owner, and because
future external crises may affect the financial sector adversely, thus spurring renewed Government
intervention, corporate exposure remains an issue worth noting and monitoring.
With the onset of crisis, Russia suffered downgrades to its sovereign credit rating from Fitch
and from Standard & Poors, in both cases from BBB+ to BBB during the course of 2009 and with
the explanation that it was due to the sharp economic downturn. By way of contrast, Moodys left its
Baa1 sovereign rating for Russia untouched. These ratings contrast sharply with the treatment of
Russian government securities by capital markets. Having bottomed out at 30-40 basis points in early
2007, three year credit default swap (CDS) levels
4
Trade and the Current Account
on Russian securities rose gradually during 2007-08
up until the crisis, and then suddenly spiked, reaching 860 basis points in November 2008.
Subsequently, though, they declined sharply and by end 2010 were in the neighborhood of 100-120
basis points, below those of many EU countries and also below those of countries which enjoy
significantly higher credit ratings.
Russia has been and remains a major exporter of metals and other primary commodities, but
it is primarily the export of energy resources, oil and natural gas, which account for the countrys
positive trade balance. The trade surplus is regularly on the order of 10% of GDP, or even higher,
although in recent years it has dipped a bit.. In the decade between 2000 and 2010, exports grew by
266% to US$ 384 billion while imports grew 448% to US$ 246 billion. Both figures are lower than
the peak numbers reached in 2008 for exports (US$ 472 billion) and imports (US$ 292 billion) but
represent a substantial recovery of 27% on 2009 figures when exports slipped to US$ 304 billion and
imports to US$ 192 billion (which, in turn, were cumulatively 35% lower than 2008 figures).
Interestingly, despite the growth of external trade during this decade, as a share of Russias GDP it
declined from 58.7% in 2000 to 40.3% in 2010.
Breaking the export and import figures down according to data for 2009 (the latest available),
mineral products, including oil and natural gas, accounted for slightly more than two thirds of
Russias exports (67.4%). Other key export items included metals, precious stones and articles
thereof (12.9%) chemical products and rubber (6.2%), machinery, equipment and transport means
(5.9%), foodstuffs and agricultural raw materials (excluding textiles) (3.3%), and wood, pulp-and-
paper products (2.8%). Principal import items included machinery, equipment and transport means
(43.4% of total imports), foodstuffs and agricultural raw materials (excluding textiles) (18.0%),
chemical products and rubber (16.7%), metals, precious stones and articles thereof (6.7%), textiles,

4
CDS levels represent the amount it costs for an investor to insure a specific amount of debt of a specific maturity. As the
risk of default is perceived to rise, the amount required to insure the debt also rises. Thus, CDS levels are an indicator of
market perceptions of the riskiness of an asset (and the degree of the issuers creditworthiness).

9
textile articles and footwear (5.7%), wood, pulp-and-paper products (3.0%), and mineral products
(2.4%)
5
Foreign Direct Investment
. In terms of trade partners, the EU accounted for slightly more than half of Russias trade
turnover (50.3%) making it the single largest trading partner. In terms of individual countries, the
Netherlands (8.5% of total trade), Germany (8.4%) and China (8.3%) were Russias largest trade
partners. Among BSEC members, Ukraine was the largest trade partner- and with 4.6% of Russias
total trade the sixth largest partner- followed close behind by Turkey, which at 4.2% was the seventh
largest trade partner globally.
Other BSEC members accounted for less than one percent of Russias trade, with Bulgaria,
Romania, Greece, Serbia, and Azerbaijan the next largest BSEC trade partners. It bears mentioning
that for a number of BSEC countries Russia was either the largest trade partner or one of the top
trade partners. Trade between Russia and other BSEC members increased by around 240% between
2000 and 2009, slightly ahead of the overall external trade growth of 230% for Russia over the same
time span. During this period, exports to BSEC members (up 255%) grew more rapidly than imports
from other BSEC members (up 203%).
Moreover, Russias economic impact on a number of neighboring countries, including certain
BSEC members, is enhanced by the existence of large emigrant communities which send remittances
to their respective home countries. Remittances by foreigners working in Russia remain an important
source of income in the countries of origin, a fact underscored by the recent economic downturn. As
a result of Russias economic downturn in 2009 and the rise in unemployment, remittance levels fell
and countries with sizeable emigrant communities suffered significant economic contractions.
Similarly, as the Russian economy picked up in the latter part of 2009 and through 2010, the
neighboring countries returned to economic growth.
The trade surplus remains the key behind current account surpluses, although in recent years
they have been smaller, on the order of 4-5% of GDP, down from outturns on the order of 10% of
GDP that occurred regularly in the middle of the previous decade. Other items of the current
account, including the services balance, the income balance and current transfers, are in deficit.
While the current account remains favorable, and other indicators such as reserves remain quite high
at around 18 months worth of imports, the non-energy current account has regularly run deficits
over -10% of GDP and is expected to continue doing so in coming years. That the non-energy
current account for a major energy exporter is in deficit is not remarkable, but the level of the deficit
underscores the dependence on the energy sector.
Foreign direct investment (FDI) flows has fluctuated historically, and during the boom
period it increased significantly in nominal terms but also as a share of GDP, peaking at US$ 75
billion, or 4.5% of GDP in 2008. The crisis resulted in a downturn in FDI levels, to 3.0% of GDP in
2009 (US$ 36.5 billion) and to 2.8% of GDP in 2010 (US$ 41.2 billion).
Russia is keen to attract FDI and has made attracting increasing levels in coming years a
strategic priority. Moreover, Russia is an attractive investment destination with advantages such as a
large internal market, quality labor force, extensive resources, and proximity to the EU and other key
markets, but it has enjoyed mixed success in business environment rankings.
Russias standing has improved substantially in an important indicator of country risk and
business environment in which it is rated: Euromoney magazines country risk index. In this index,

5
Data From Russian Federation Federal State Statistics Service, www.gks.ru .

10
Russias score has risen (improved) substantially over the years, coming in 61.5 (out of a perfect
score of 100) in September 2010, which ranks well above the average for the BSEC region of 52.6,
and below the EU average of 75.0.

d. Forecast for 2011-12
In November 2008, the Government of Russia issued its 2020 Development Strategy
6
Developing Russias human potential through major improvements in education, housing,
pensions, and environmental protection, among other areas;
, which
identifies six key priorities for Russia towards meeting its objectives of growth and economic
diversification, improvements in human development, and regional development. The priorities
include:
Creating a competitive institutional environment that stimulates entrepreneurial activity and
attracts capital;
Diversifying the economy through innovative technological change;
Strengthening Russias global competitiveness in traditional economic sectors (energy,
transport, agriculture) and reducing the depletion of raw materials;
Promoting spatial development to decrease regional inequalities in living standards;
Strengthening Russias external economic status as a main financial center and a contributor
to global public goods.
For 2011, real annual GDP growth is expected to be on the order of 4.5% or so, and for
2012-14 annual real GDP growth rates are expected to range between 4-5%. While these figures are
smaller than those achieved during the boom period, they would still permit achievement of
objectives for economic growth, human capital and living standards improvement. Due to the
dependence on energy exports, the projections are subject to some uncertainty, both on the upside
and the downside. Recent announcements to accelerate privatization and liberalize certain sectors of
the economy, along with ongoing efforts to strengthen the financial sector and to improve the
business environment, could boost growth prospects further.
Fiscal policy is expected to be conservative, as the Government continues the post-stimulus/
post-crisis fiscal retrenchment and aims to achieve general government budget deficits below 3% of
GDP by 2013, a target which should be met and may easily be exceeded if revenues recover robustly.
By way of contrast, fighting inflation may prove more challenging, and maintaining single digit rates
could prove difficult if food prices remain high, if inflows from energy (and other sources) surge, or
if the exchange rate is held down to support other export sectors of the economy. Nevertheless,
monetary policy for the coming three years targets a reduction in inflation to 6-7% in 2011, to 5-6%
in 2012 and to 4.5-5.5% in 2013. Encouragingly, greater attention is being given to controlling price
levels than to managing the exchange rate, as there are no quantitative targets for the Ruble exchange
rate. This represents a step towards the stated intention to move towards a floating exchange rate,
with the CBR intervening only in cases of excessive currency volatility.


6
Information of the 2020 Development Strategy from the World Banks Country Partnership Strategy Progress Report fo the Russian
Federation for the Period FY07-FY09, dated 30 July 2009.

11
II. Overview of Current BSTDB Portfolio
As of 31 December, 2010, the active BSTDB portfolio in Russia consisted of 20 operations
approved by the Board of Directors (BoD), involving an investment of 231.8 million (US$
307.1m). Of these, 17 operations were signed for 189.3 million (US$ 250.9m) and the outstanding
disbursements were at 120.8 million (US$ 160.1m). Russia ranks second across the board in the
BSTDB portfolio, with 20.3% of BoD approved operations, 18.8% of signed operations, and 18.1%
of amounts outstanding in the total portfolio. Relative to the Banks active portfolio at the end of
2006, Board approvals increased by 156.5%, signings by 183.0%, and amounts outstanding by
196.8%.
Table 2: Active BSTDB Portfolio in Russia as at end December 2010
All Figures in Euros Million BoD Approval
Date
Approved
Amount
Signed
Amount
Amount
Oustanding
Probusinessbank (PEF, MBC, SBC,
SME)
14-Oct-01/ 31-May-
03
3.8 3.8 -
Teleset 5-Jun-04 7.5 7.5 1.5
NBD Bank 28-Jul-06 3.8 3.8 0.5
Center Invest 4-Feb-07 7.5 7.5 7.5
Zolotaya Semechka 10-Apr-07 7.5 7.5 1.0
Rosevrobank 16-Jun-07 15.1 15.1 8.2
Teleset II Corporate Financing 16-Jun-07 15.1 15.1 11.3
MDM Bank (former URSA Bank) 1-Dec-07 27.2 27.2 18.8
Credit Bank of Moscow
Subordinated Loan
23-Jul-10
22.6 15.1 15.1
Bank Zenit Subordinated Loan
6
10-Apr-09 15.1 15.1 15.1
AMT Bank (former Slavinvestbank
SME & BTA Bank)
4-Apr-08
11.3 11.3 6.3
Evrofinance Bank Subordinated
Loan
13-Jun-09
24.2 24.2 24.2
NBD Bank SME II 7-Jun-08 3.8 3.8 2.5
Kulon Yugros* 6-Aug-09 9.8 9.8 4.9
Vyksa Plate Mill* 16-Apr-10 15.0 - -
Kaluga Industrial Park Loan* 16-Apr-10 6.8 6.8 3.0
Kaluga Industrial Park Equity* 16-Apr-10 1.8 0.8 0.8
Pulkovo Airport* 16-Apr-10 15.0 15.0 -
NBD Bank SME III 3-Dec-10 3.8 - -
Europlan SME IV 3-Dec-10 15.1 - -
Total 231.8 189.3 120.8

III. Review of Country Strategy 2007-2010
The current evaluation was performed by the Banks Evaluation Office as per the respective
Evaluation Policy. It reveals the performance of the Banks 2007-2010 Country Strategy, Russian
Federation. Its goal is to provide accountability to the Board of Directors and Board of Governors

12
as well as facilitate the decision-making by the Banks Management and Boards on the eventual
update of the country strategies.
The evaluation of the respective country strategy compares the stated targets with actual
results as of end of 2010, and provides a country-oriented analytical picture. A mid-term evaluation
of the Country Strategy was conducted in early 2009 and reported to the Board of Directors and
Board of Governors in June 2009, as part of the Annual Evaluation Overview, issued by the
Evaluation Office.
Performance of Country Strategy 2007-2010, Russian Federation
The 2007-2010 Country Strategy was approved by the Board of Directors in early 2007,
reflecting an in-depth independent evaluation of the implementation of the BSTDBs earlier
strategies, conducted by the Evaluation Office in late 2006. It was aligned with the objectives of the
Banks Business Plan 2007-2010 and was therefore evaluated in that context.
Overall, the implementation of the Country Strategy was consistent with the Business Plan
implementation. The performance of the strategy is rated as Excellent, as two targets reached 200%
and the other two targets 300%, while the sector coverage is very wide, with some concentration in
financial intermediation. For a more comprehensive overview, see Annex I.

IV. BSTDB Operational Priorities for 2011 - 2014
The Banks role and priorities are defined (i) in accordance with the priorities and targets laid
out in its Medium-term Strategy and Business Plan 2011-2014 and (ii) country needs and objectives, as well
as (iii) available resources, strategies and policies of BSTDB. In this respect, BSTDB will seek viable
opportunities and will continue closely monitoring the developments in the Russian economy in
order to stand prepared to support bankable projects. In addition the Bank shall seek co-financing
opportunities with international financial institutions (IFIs), public sector institutions and private
partners.
BSTDB will focus in the next four years on providing support for the implementation of the
Government program and priorities, while responding to market demand. The Bank will consider
undertaking activities and providing services as may advance its purpose, paying special attention to
activities promoting export of goods and services, and development of infrastructure, including
energy efficiency. Due consideration will be paid to supporting the objective of Russia to diversify
the economic base of the country and to reduce dependence on raw materials and commodities. This
implies supporting manufacturing and other high value added activities. It also means that issues of
increasing relevance such as helping to promote food security will be taken as factors in considering
the priority of potential operations, at a time of rising food prices and increased global market
uncertainty.
Another area that cuts across sectors and will be an important consideration for Bank
involvement in operations in Russia is the extent to which such a participation would help to create
new jobs in the economy. Employment creation is a crucial consideration due to its high
development impact and positive social impact, and BSTDB will seek to achieve tangible gains in this
area, either directly or through its SME operations which normally target fast growing firms that wish
to expand activities (and thus create new jobs).
Based on the 2011- 2014 BSTDB Business Plan, the Bank would expect to approve between
three and four new operations per annum in Russia during this period, for approximately 32-47

13
million per year. Over the four year period, this implies around 14 approved operations for
approximately 158 million. With the Bank determined to raise the level of commitments (signed
operations) to approved operations to over 85%, the Bank expects signings for 2011-2014 to be on
the order of 12 operations for 139 million ( a range of 28-42 million per annum).
These indicative targets are based on the Base Case Scenario of the MTSBP, and given
appropriate circumstances and sufficient operational opportunities the Bank would make efforts to
exceed this level. In case of higher regional economic growth rates, increased demand for Bank
funding, and an improved situation in financial markets, a phased increase in the average number and
size of operations would allow the Bank to move towards achieving the targets envisaged under the
High Case Scenario. Moreover, at the Mid-Term Review, depending upon performance and
prospects, the above targets may be revised upwards
7
Financial Sector Strategy
.
Although coverage of Russia will not be limited to particular regions to the exclusion of
others, the Bank will try to place greater emphasis on the Southern Regions of Russia- Rostov,
Krasnodar and Stavropol, due to the greater scope for achieving regional cooperation or finding
operations involving multiple countries, which in turn would result to a larger degree to fulfillment of
BSTDBs mandate. The neighboring North Caucasus may also receive greater attention, due to
prevailing local economic needs that hold promise for higher developmental impact from such
operations. Undertaking cross-country operations- either private or public- with direct (and indirect)
benefits accruing to Russia and at least one other BSEC country, will become an increasing area of
emphasis for BSTDB.
Areas for BSTDB Financing:
BSTDB considers support for the financial sector in Russia an important strategic priority.
Since BSTDB began operations, the following products have been introduced through selected
financial intermediaries in Russia: Trade Finance, SME Finance, SME Leasing, Mortgage Finance.
The Bank has also considered options to take equity participations in selected financial
institutions and funds, and has developed quasi-equity products, such as subordinated loans. The
share of operations to financial institutions in the BSTDB portfolio increased at a fast pace over the
past four years. Currently, the share of exposure to the Russian financial sector represents 81% of
total country exposure with emphasis on SME facilities, quasi-equity instruments and mortgage
financing. During the coming four year period this share will be reduced as other sectors will receive
higher priority.
Nevertheless, the Bank will be open to operations that would be concentrated in the
Southern Regions and/or contain high priority elements such as regional cooperation or high
employment creation potential. In such cases, the Bank would consider operations involving (i) SME
financing and lease financing, and (ii) investments in equity funds which provide support to medium
and small companies, as well as selective direct investments in equity for banking counterparties with
which the Bank has maintained longstanding business relationships.

7
Under no circumstances would targets be revised downwards unless the lower case scenario of the 2011-2014 BSTDB
Business Plan were to be followed.

14
BSTDB involvement will be determined by assessment of the potential of such involvement
weighed against the risks, and the extent to which involvement with such institutions will play a
catalytic role and provide development benefits and demonstration effects.
Beyond banking operations, BSTDB will look at additional possibilities to contribute to the
development and deepening of Russian financial markets such as raising financing in the local
market, should market condition and operational volumes justify such an endeavor.
Manufacturing and Enterprise Sector
Overall, bankability of a proposed operation will remain the primary consideration for the
Banks decision whether or not to become involved, alongside the extent to which it fulfills the dual
mandate of the Bank to promote economic development and regional cooperation.
As the Russian economy overcomes the aftereffects of the global financial crisis, it is widely
believed that this market will experience downward pressures on lending interest rates. Availability of
liquidity, both in Russian rubles and foreign currency, due to increased activity of major State owned
banks is estimated to result in selectivity regarding potential high quality clients.
The Bank will need to continue its focus on smaller businesses with high growth potential,
good job creation potential, and strong corporate practices. These companies would be dynamic,
well managed, and forward looking, but may lack experience working with IFIs. Moreover, they may
require improvements in reporting standards and governance capacity in order to improve their
efficiency of operation and their transparency. Such firms are likely to continue playing an important
role as potential BSTDB customers.
The Bank will aim to work with Russian firms which expand their activities in other BSTDB
countries. The Bank will use mid- and long-term corporate loans to Russian companies, including
those with foreign participation, in a more flexible way, by offering such financing not only for the
purpose of financing capital expenditures but also for financing of working capital requirements, as
well as for re-financing of existing bank borrowings of Russian corporate clients.
BSTDB transport and manufacturing strategy in terms of banking instruments:
Project Finance limited recourse transactions;
Continuing emphasis on financing in the form of Equity and Quasi Equity instruments;
Co-financing with other international financial institutions, Russian and foreign commercial
banks;
Work with medium-sized Russian companies.
Areas of particular focus in transport and manufacturing strategy:
Metallurgy, minerals and mining, chemical and pharmaceutical industry, manufacturing of
fast moving consumer products, food processing industry;
Development and operation of airports, sea and river port terminals;
Real estate development, including development and operation of wholesale and retail trade
distribution networks, warehouse facilities and logistics centers, office space, tourism,
recreation and catering facilities.
Agri-industry and related activities that help to contribute towards greater food security
Energy and Infrastructure (E&I)

15
The role of the Russian Federation in the field of natural resources is recognized worldwide,
and opportunities in the sectors of energy and infrastructure (E&I) are the crucial factors for
attracting investment to the Russian Federation. The plans recently announced by the Russian
Government for global modernization of the countrys assets and infrastructure is another important
factor for the mobilization of financials resources into the country.
Given the E&I development needs, so long as projects are bankable, the Bank will be keen
to offer support. This applies to all key relevant energy and infrastructure sectors, including oil and
gas, energy (especially renewable) and electricity, transport infrastructure, telecommunications, and
municipal infrastructure. The presence of an appropriate competitive environment and regulatory
framework will be an important consideration in ascertaining bankability alongside development
impact.
The Bank will continue to ensure that all BSTDB E&I operations in the Russian Federation
meet sound banking principles, comply with the Banks Environmental Rules and Procedures, and
incorporate, where appropriate, Environmental and Social Action Plans.
The Bank will also maintain its contacts with complementary international financial institutions
(IFIs) and organizations such as EBRD, IFC, KfW, DEG, OeEB, etc. to seek ways to coordinate
activities and share experiences.
Areas of particular focus include the following:
Oil & Gas
Projects involving new construction of, or rehabilitation of existing, energy transportation
infrastructure (pipelines, railways, maritime transportation facilities), that are designed to
alleviate some of the existing bottle-necks, especially for exports. The Bank will support
projects designed to improve regional energy transport and handling infrastructure, such as
transportation and distribution of natural gas, and rehabilitation of gas processing and
storage facilities;
Provision of financing for downstream operations, particularly the upgrading of oil
refineries to increase production, and improve the quality and environmental acceptability of
refined products, (for example reducing sulphur content of diesel and allowing the
production of unleaded gasoline and production of other high quality oil products);
Support projects that are designed to develop local distribution of natural gas in an
environmentally friendly way.
Other Natural Resources
Mining projects especially involving cooperation with other BSEC countries.
Energy and Electricity
Projects envisaging upgrading, modernization and expansion of renewable energy
infrastructure, for facilitation of generation, production, distribution and sale of electricity;
Projects envisaging upgrading, modernization and expansion of conventional energy
infrastructure, for facilitation of electricity generation, production, distribution and sale;
Projects which lead to improved energy efficiency and energy conservation;
Municipal Infrastructure

16
Municipal projects with or without sovereign or municipal undertakings or guarantees where
municipalities, local regional governments or companies linked to municipalities or local
regional governments are in the role of the borrower or ultimate guarantor;
Projects supporting public-private partnerships since municipal and urban infrastructure
needs are broad ranging but also potentially amenable to such partnerships which could help
alleviate current bottlenecks in cost-effective ways;
Projects supporting private concessions in, among others, the water supply and sewage
sector, as well as projects designed to improve waste management (solid and liquid);
Municipal energy efficiency projects.
BSTDB Energy and Infrastructure strategy in the Russian Federation in terms of banking
instruments:
Corporate recourse financing transactions;
Project Finance limited recourse transactions;
Exploration of financing in the form of equity or quasi-equity;
Co-financing of transactions with other international financial institutions and commercial
banks;
Participation in syndicated facilities for E&I deals in the Russian Federation



17
ANNEX I: Post Evaluation of 2007-2010 Country Strategy Russian Federation (approved 04.02.2007)
2007- 2010 TARGETS RESULTS (end of 2010)
General Sectors Target operations:
Number approved/
number signed;
USD approved/
USD signed (million)
Actual operations:
Number approved/
number signed;
USD approved/
USD signed (million)
Evaluation Summary
Focus:
Southern
Regions,
Intensified
marketing
efforts.
Expand the
range (and
tenor) of
products to
the larger
and more
developed
firms.
Focus on
emerging
second tier,
smaller
companies.
Support
Russian
firms and
banks to
expand in
BSEC
Countries
1. Transport and manufacturing
Metallurgy, minerals, mining, chemical and
pharmaceutical industry, fast moving
consumer products, food processing
Ports, shipping and real estate
development (trade distribution networks,
warehouse facilities, office space, tourism,
recreation, etc.); heavy machine-building;
high-tech; timber and wood processing.
2. Energy Sector & Natural Resources
Regional energy transport infrastructure
Mining (cooperation with BSEC
countries)
Electricity capacity and transmission;
Post privatization of generation facilities
3. Telecommunications, IT and Media
Wire and wireless telephone services.
Corporate financing for BSEC expansion
IT assembly, and software development.
4. Municipal Infrastructure
High development impact projects
without sovereign financing - PPP in
water/sewage.
Municipal energy efficiency projects;
Other, e.g. urban renewal, infrastructure.
5. Trade Finance and Financial Sector
Support emerging private financial sector
SME modernization programs
Leasing and promotion of regional trade
Equity/quasi equity in select FIs (incl.
subordinated loans).
Other: microfinance, municipal lending
and multipurpose lines for commercial
banks.
14/12
170/142

27/26
497/437

1. Volume: substantially above target
Approved number: 193%
Approved volume: 292%
Signed number: 217%
Signed volume: 308%
2. Sector coverage:
Center Invest Bank (SME)
Nizhneserginskiy (Manufacturing, repaid)
Zolotoya Semechka (Agriculture, Private)
Seventh Continent (Repaid, retail)
Teleset II Corporate (Telecom)
Teleset II Equity (Telecom, exited)
Expobank (Trade Finance, repaid)
Bank Soyuz (FI, syndicated, prepaid)
Credit Bank of Moscow (SME, prepaid)
Credit Bank of Moskow (subordinated loan)
Bank Zenit (SME)
BTA Bank (SME)
Evrofinance (mortgage, prepaid)
Evrofinance (subordinated loan)
NBD Bank SME II
NBD Bank SME III
Rosevrobank (mortgage)
MDM Bank (former URSA Bank, mortgage)
AMT Bank (former Slavinvest, SME)
Kulon Yougros (construction, removed)
Vyksa Plate Mill (manufacturing)
Kaluga Industrial Park Loan (real estate)
Kaluga Industrial Park Equity (real estate)
Pulkovo Airport (transport)
Europlan SME IV
Wood Pellets (removed)
Rostov Coal Mine (removed)
3. Performance: Excellent. 2 targets reached at 200%
and the other 2 targets at 300%. Broad sector coverage.