Boosting Russia's Export Trade

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When the crisis cracked down on the Russian economy last November -- the first remedy suggested by most of the economists was a diversification of economy. That was necessary, no doubt about that. However it will involve a huge effort and investment required and years of time. Faster results could be obtained by boosting Russia's export trade.

Most of the goods that Russia is currently exporting is oil, gas coal, electricity, timber, chemicals, defense industry products, gold and diamonds, metals and ore, agricultural products, power plants including atomic power plants, IT services and brands from Kalashnikov, to Stolichnaya to Bolshoi to Tchaikovsky to Anna Karenina and gulags.

Oil and gas is the historic stronghold for Russian exports. This sector received its biggest boost following the completion of the Druzhba pipeline that enabled Russian oil and gas to flow to friends in socialist eastern Europe. The trade in this sector is about to receive its second boost, as the East Siberian pipeline is launched in the fall of this year.

Following the electricity reform and reshaping of the Russian electricity generation and transmission, we can expect that we will soon see a splash in export volumes in electricity.

We can expect to see increase in volumes of exports in the areas of traded carbon permits, fertilizers and coal as more capacity goes online, agribusiness products etc.

Russia's best shot at increasing exports (at least in volume terms) is by concentrating on goods traded on commodities exchanges. As these goods are bought and sold without the hassle on exchanges in Europe, Asia and in the United States and they include oil, electricity, metals, precious metals and grains and meat.

Contracts on deliveries of Russian oil, nickel, copper, gold and silver have been easy to sell on global commodities exchanges for a number of years already. The new goods arriving on global commodities exchanges from Russia include electricity, grains, carbon permits.

Ideally, a properly functioning domestic commodity exchanges would have been the best solution to boost Russian exports. The buyers would have been able to come to the domestic exchange and shop for goods directly and the volumes would grow.

There are however at least three obstacles, which delay a booming trade on domestic commodities exchanges. They include ruble rate, which is fixed against the basket and is not allowed to move quickly. Prices on the domestic exchange will by law be set in rubles, but an efficient ruble commodity exchange domestically is not possible without a freely convertible ruble.

The second obstacle is the monopoly of transportation services by Russian Railways, Transneft and Gazprom. For an outsider to ship the stuff by any of these three service providers would be impossible and anybody who has a preference tariff with any of these three companies will be in a better competitive position than other exporters.

The third obstacle is VAT and the cumbersome mechanism for VAT returning. Prices with VAT will prevent buyers from buying and will send buyers to shop in Singapore and Dubai rather than make purchases in Moscow or St. Petersburg. Moreover, the VAT returning mechanism provides a lot of room for corruption and to this day it is not clear whether VAT is a big budget hole and Russia is actually losing money on VAT

Finally, boosting exports goes hand in hand with making the ruble more popular. Russia must support its exporters and international importers from Russia by providing easy ruble financing to exporters. This could be either done via state banks or through exports facilitation agencies.

It is interesting that in the course of this arguments, entering the WTO is not the biggest priority for Russia to boost export trade. Even in steel sector, which is thought as the biggest winner from the Russian entry in the WTO, we note the tremendous changes in the geography of exports. While previously, most of the Russian steel was sold to Europe and US, since 2009 the biggest buyer of Russia steel is Iran, (unlikely to become a WTO member). But of course, integration of Russia into an organization which sets the global rules of trade is very welcomed and Russian entry into the WTO will be very positive event, to which the RTS will likely react by adding anther 20%. Before that happens, though Russia should spend valuable time supporting its exporters to boost the exporting capabilities of their businesses. After the WTO entry, the state support of exporters will be partly regulated by the WTO.

There is no doubt that the prices on exports are down due to the crisis. The oil price is down; the steel price is down. The gas price is drifting south and fertilizer prices are a lot softer. Both the prices and volumes could be negatively affected by the crisis. But increasing the efficiency of exporters and focus on export volume growth could provide flexibility to an otherwise rigid and fragile economy.