In a bid to overcome weak domestic demand and take advantage of a competitive currency, Russian producers are increasingly looking to export their way out of economic crisis.

Despite commodities continuing to dominate Russian exports, other branches of industry are also looking to break into international markets as a means to increase profits.

Exports are expected to bring some $100 billion to the Russian economy this year, and though oil and gas is likely to account for 55 percent of this figure, up from 42 percent last year, metals, military hardware, machinery and timber exports will also be important.

In the first eight months of this year, 86.5 percent of Russia's exports were sent outside the Commonwealth of Independent States (C.I.S.).

Russian oil companies, meanwhile, are exporting at maximum capacity in order to take advantage of record international prices and reap massive hard currency returns. The petrodollar bonanza is expected to continue through the first quarter of 2001, allowing leading exporters like Surgutneftegas, LUKoil and Yukos to continue to boom.

Though Russia is believed to export around $8 billion worth of goods a month, the State Statistics Committee says around $2 billion of those products are unaccounted for, particularly in relation to military hardware, sales of which are usually deemed a state secret.

Most analysts estimate exports of military equipment at $3 billion to $5 billion annually – with the majority of sales to India, China and Third World countries.

"Exports in physical terms have increased, which is a good tendency," said Alexei Kazakov, economic analyst at NIKoil.

He warned, though, that despite the importance of exports to the Russian economy, the significance of the internal market should not be underestimated. "Domestic demand in industries such as food and textiles is at least as important as exports – perhaps even more important by 40-60 percent."

Kazakov said the downside of a strong export sector could soon appear, with increased hard currency leading to a strengthening ruble and the price advantage of domestic producers evaporating.

One factor hampering any increase in exports of machinery is that domestic factories are now operating at full capacity and cannot further increase production. "The capacity of many existing plants is already 100 percent, so there is little potential for a sharp increase," he said.

Kazakov added that it should be noted that most Russian machinery goes to third world countries, rather than Western nations.

"The West has advanced technology and modern machinery, so Russia is in a better position to export to the Third World," he said.

OIL AND GAS

Russia is currently negotiating with the EU to increase oil and gas exports to member countries. Russia already provides 20 percent of the EU's gas and 16 percent of its oil imports. Although increased oil and gas exports would attract billions of euros to the Russian economy, increasing supply will take time, because, again, Russian pipelines are operating at full capacity.

"Pipeline construction is the crux of the matter as far as the export potential of oil and gas is concerned," said Steve Allen, oil and gas analyst at Renaissance Capital. "But this involves great expense, especially for gas pipelines."

"Increased gas [exports] are on the way, with the Yamal and Blue Stream pipelines in the works," he added." But to double oil export capacity would be problematic – infrastructure would need to be built at a cost of several billion dollars, predominantly in the Caspian and eastern Siberia. He said it would take at least a decade to complete such projects.

Poland last month agreed in principle to the construction of a pipeline that would bypass Ukraine (through which about 65 percent of Russia's exported gas flows) and carry gas to Europe via Poland.

"Gazprom's plans to extend the pipeline around Ukraine through Poland and Slovakia will cost $2 billion, without significantly increasing volume. It would just cut out Ukraine," said Allen.

Meanwhile, Prime Minister Mikhail Kasyanov last month secured a deal with Turkish officials for United Energy Systems to deliver around $50 million worth of electricity to that country. This is seen as a first step in what could be an expanded role of power delivery to Turkey, which has experienced a long-term power deficit.

Gazprom, which exports gas to 25 European countries, is also set to increase supplies to Turkey, where demand is expected to triple by 2010. Russia is hoping to eventually meet nearly 60 percent of that increased demand.

Russia exported 130 million tons of crude oil in 1999, which brought $22.8 billion into the economy. The figure this year is expected to be in line with that of 1999.

In the first half of 2000 Russia exported $11.1 billion of crude, or 64 million tons – the largest buyers being Germany (10.2 million tons), Poland (8.8 million) and Italy (7.8 million).

Russia accrued $12.4 billion last year through natural gas sales, while in the first six months of 2000 this figure was a little more than $8 billion. The overwhelming majority of these exports were to non-C.I.S. countries ($6.2 billion), while C.I.S. states paid $1.75 billion.

Western European countries are also the chief recipients of Russian gas – foremost among purchasers being Germany, France and Italy, who between them in the first seven months of this year received more than 40 billion of the 77 billion cubic meters of exported natural gas.

August 2000 figures show the leading oil distillate exporters as Surgutneftegas ($1.09 billion), Yukos ($815 million), Lukoil ($682 million) – all of which were increases on the same month last year.

The government has also from the beginning of November reduced fuel export quotas from 10 percent to 5 percent of output, though most observers say the move will have a neutral effect.

MILITARY

Russian military exports are heavily concentrated around attack helicopters.

Analysts estimate that such helicopters, whose high price makes them one of the most profitable pieces of hardware in this field, constitute more than half of all military sales.

But a potential cloud on the horizon for helicopter exports is seen as the lack of innovation in the industry. Analysts say that in order to maintain its strong position in the military hardware market, Russia will need to modernize existing models.

"The problem for Russia in the next few years will be that it needs to find new things to offer," said Paul Jackson, an analyst at Jane's All the World's Aircraft. "In particular, many aircraft, such as the MiG 29 and Sukhoi 27 and 30 have run out of steam and need updating."

Jackson said Russia's traditional trading partners for military hardware were still in the driving seat for preferential treatment.

"India and China are still the main purchasers – the relationship with China has been on and off since 1960, but now it seems to be on. India has always had a strong trading relationship with Russia, and in particular good leverage with military equipment, which in the past often went to India first, even before Soviet satellites."

He added that estimating the value of the sector was always hit-and-miss, because the sums involved are often kept confidential. "The financial side of military hardware deals is usually by barter or not disclosed, so it's difficult to guess at prices," he said.

"Asian countries will remain the main purchasers, due to their high political influence in military relations with Russia," said Yelena Sakhnova, a defense analyst with ATON, a Moscow-based brokerage.

She noted, however, that Latin American countries could emerge as a new buyer of Russian military equipment.

"South America is likely to become another major recipient of Russian helicopters," Sakhnova said. "This area could replace the lost eastern European market."

"Brazil, Chile and Argentina have the greatest potential as export markets. Although the United States has monopolized the Argentinian market, the other two countries follow a more independent policy. Rosvooruzheniye [the Russian military export agency] is intensifying its work in the area."

Turkey could also become a major partner in things military, with the country expected to spend $150 billion on weapons over the next 25 years. And Russia is positioning itself to secure a sizeable portion of these contracts.

METALS

Russia supplies 70 percent of the world's palladium, 20 percent of its nickel, 20-30 percent of its platinum and 3 percent of its copper, while ferrous and non-ferrous metals accounted for 14 percent of exports in the first eight months of 2000.

Mikhail Seleznyov, a metals analyst with UFG, said that Russia's already powerful position in the world palladium market was only likely to strengthen.

"Palladium is the most lucrative segment, as Russia controls the market – especially as research and development attempts of automobile companies have failed to find a substitute for palladium or change catalytic converter technology," he said.

Palladium is a critical element in the production of catalytic converters, and is exported mainly to the United States and Japan. Experts said that demand for the metal has doubled over the past five years and is widely forecast to continue to rise.

Exports of nickel are evenly distributed between the United States, Japan and Germany, where nickel is used to produce stainless steel. Platinum, meanwhile, is widely used in jewelry manufacturing in China and India.

With platinum group metal (PGM) prices having risen significantly this year – platinum itself by 38 percent and palladium by 88 percent – this is the area viewed as key to beefing up the metals sector. Metals prices overall are expected to increase by 5.4 percent next year.

Industry leader Norilsk Nickel's export volumes are expected to rise 80 percent this year, with exports accounting for 41 percent of all sales income. Last year's figures were exceptionally low due to the government's slowness in issuing export quotas.

WOOD Products

Russia exported 800,000 tons of paper in the first half of 2000. Total exports for the industry this year are expected to be $3.3-$3.4 billion, with sales of $1.7 billion in the first six months of 2000 giving reason to believe that this target will be reached.

Timber exports were up 14 percent from January to August on the same period last year. Sales were up 13.8 percent to non-C.I.S. countries, and up 36.8 percent to C.I.S. states.

Timber complex enterprises occupy third place for exports behind the fuel and energy complex and metallurgy. The industry itself is expected to grow 8 percent this year.

"Wood is a traditional export whose performance is improving," said NIKoil's Kazakov.

MACHINERY

In 1999, according to the State Customs Committee, machinery products accounted for 11 percent of total Russian exports.

St. Petersburg-based shipbuilding yard Severnaya Verf was Russia's largest exporter in 1999 in sector contracts, thanks to three destroyer battleships it supplied to China at a total value of $320.3 million. Established in 1912, the company specializes in defense and commercial shipbuilding, repair, modernization and utilization of ships.

The Irkutsk Aviation Plant produces and exports Su-27UB and Su-30K jet fighters and spare parts for defense aircraft. The main buyers of its products are Vietnam, China and India. The company's most recent offer is the amphibian Be-200, presented at the Gelendzhik air show last September. Company officials say the plane has a promising export potential. Last year, the company's revenues from exports almost tripled, reaching a figure of $174 million.

The Izhevsk "Kupol" Electromechanical Plant is part of the Antei corporation. For decades the company manufactured computing devices, ground and onboard air defense devices, range finders, radio and radar systems. Currently, the plant is known for its state-of-the-art air defense missile systems, Tor-M1 and Osa-AKM, exported to Belarus, Greece, India, Jordan, Cuba, Poland, the United States and Ukraine. In 1999, the company's exports more than doubled, reaching almost $173 million.

Although the dollar value of exports of AvtoVAZ dropped in 1999 by about 43 percent over the previous year, Russia's largest automotive manufacturers actually increased the number of cars exported. AvtoVAZ cars are sold in 70 countries, including Hungary, Germany, Canada, Finland and France. In some of these countries the plant fully or partially owns dealerships. This year, AvtoVAZ intends to export about 100,000 cars of the expected total output of 675,000 vehicles.

The Moscow-based Design Bureau for Chemical and Transport Engineering exports space machinery to Ukraine and Kazakhstan. In 1999, the company's exports totaled $146.7 million – a significant drop from $436 million in the previous year.