Development institutions as a diversification tool for Russian Economy Oleg Solntsev Task leader http://www.forecast.ru 2008
Industrial product variety index in Russia 1 40 39.3 38 36 34 32 35.8 32.3 31.7 30.6 33.5 35.0 35.6 35.0 35.1 35.0 35.8 37.3 30 28 26 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1 Product variety is estimated as inverse of Herfindahl-Hirschman Index for selected product groups Source: Rosstat, CMASF calculations Industrial product variety in Russia steadily rose for the last two years 2008 2
Russian export product variety index (1998=1) 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 constant 2002 prices current prices Source: Rosstat, CMASF calculations Product variety of export in constant prices started to rise. Currently, Russia is among countries with fastest-expanding export variety. 2008 3
Relative export variety of Russia and different countries, 2005 210 250 144 138 119 200 150 79 72 73 67 100 Germany Europe US China Brazil Latin America Ukraine North Africa 31 Australia and Oceania 12 Kazakhstan 5.8 Russia 50 0 Source: UN, CMASF calculations Although fast-growing, level of variety of Russian exports is very low compared to other countries and country groups. Russian export variety is low even compared to most transition economies or other raw materials export-oriented countries. 2008 4
Contemporary diversification policy Tax policy (redistribution of extra revenues from export, low profit tax, etc.); Diverse tariff policy (equipment imports, timber exports etc.); Restructuring, consolidation and development stimulation at strategic tegic industries based on large government share in equity (atomic energy equipment, aerospace, shipbuilding, defense industries etc.).); Design of several industry and sector development strategies connected to government; Reactivation of regional industrial policy in cooperation with federal f government; Increase in state investments in strategic and socially sensitive industries (growth of 60% in 2007); Establishing network for development institutions 2008 5
Reasons to reinforce diversification policy Current state of infrastructure (transport, energy etc.) limits building of new production facilities; Labor market potential is slim with low mobility and deficit of educated and experienced workforce; Competition intensifies both on domestic and export markets; Business needs long-term development strategies to form its own priorities 2008 6
Main drivers for establishing a network of development institutions Severe shortage of long-term financing supply - Low share of long-term credits in Russian banking system (15% without Sberbank); - Rapid growth in non-financial sector demand for long-term credit (in constant prices demand more than tripled in the last three years); - Lack of long-term liabilities hinders increase in long-term lending because of financial stability concerns (this imbalance is estimated at 2-3% 2 of GDP yearly) Adverse effects - Rapid growth of external corporate borrowing threatening medium-term financial stability; - Slowdown of diversification as long-term lending goes to high-margin raw materials exporters at the cost of other sectors Possible solutions - Forced development of internal corporate bond market expands long-term borrowing capabilities; - Establishing development institutions to provide long-term financing (funds provided by pension savings, government funds) 2008 7
Main drivers for establishing a network of development institutions Significant competitive disadvantages on third-country product markets - Lack of export finance and insurance, insufficient corporate foreign outlet network, inferior pre- and after-sale service etc.; - Absence of state support for SME (including innovation businesses) s) foreign expansion Adverse effects Loss of traditional and new external market niches Possible solutions - Developing infrastructure for state support of non-row materials exports to provide services to national businesses like corresponding export-import banks or export insurance agencies do; - Co-financing hi-tech strategic industry product development and promotion by development institutions (aerospace, shipbuilding, electronics, ICT etc.). 2008 8
Main drivers for establishing a network of development institutions Innovation infrastructure flaws slow transfer from fundamental research to R&D to grown venture projects Low density of innovation networks «science education small and medium innovation businesses large businesses»; Inadequate innovation support at earlier stages (innovation idea,, concept, scientific presentation, pre-seed seed); Deficit of experienced innovation managers, entrepreneurs and corresponding training facilities Adverse effects Degradation of science and technology potential; Increasing dependency of strategic industries on technology import Possible solutions Filling in the gaps in venture project development system (seed-stage stage financing, innovation networks etc.).); Creation of specialized institutions to develop defense technologies and technologies to provide long- term competitive advantage 2008 9
2007 is a year of development institutions establishment Passing a law on Development Bank (currently, capital of this institution is over $10 $ bn.); Capitalization of Russia Venture Company (a government- sponsored fund of funds) to over $1.2 bn.; Establishment of Russian Corporation of Nanotechnologies (capital over $5 bn.); Establishment of Utilities Reform Facilitation Fund (near $10 bn.) 2008 10
Network of development institutions addresses most current market failures in Russia Tasks for the Overcoming Infrastructure Solving innovation Socially Correcting Correcting Supporting development economy Development propagation/vc sensitive regional institutional international institution (by market diversification problems industry imbalances flaws expansion failures addressed) barriers support and Overall Strategic inequalities Institutions R&D Development Bank (VEB) X X X X X X X X Russian agricultural bank Russian development bank (RBR) X X Russia Venture Company, Russian ICT investment fund, regional PE/VC funds X Russian Corporation of Nanotechnologies X Utilities Reform Facilitation Fund X Agency for Home Mortgage Lending (AHML) X X Regional development funds&corporations X «Special economic zones» Corp. Х Х RosAgroLeasing X RosExImBank X 2008 11
Development institutions: perspectives Finalizing strategies, dividing activities and clearly defining responsibilities of each institution; Setting up coordination mechanisms inside the network; Establishing independent monitoring and auditing of the activities; Forming feedback channels to development institutions from the business (advisory and coordination boards for development institutions, independent directors etc.); Expanding into new areas of development institutions (e.g. stimulating institutional development of domestic financial markets) 2008 12
Dilemmas for Development Institutions Financial sustainability or economic effects? Financial sustainability or ability to provide long- term financing? Independence from private interests or feedback with private business? Project portfolio: diversification or concentration? 2008 13
A need to use world s s best practices of international development institutions Efficiency assessment practice of institution activities (IDB, ADB etc. ); How to establish transparent decision-making mechanisms? Includes society and interest-groups feedback like EBRD practice; Eliminating information asymmetries hindering new activity areas by performing projects with significant impact visible to the public; Practice of forming a network of correspondent banks to provide risk sharing, lending administration and distribution outsourcing 2008 14