Speech

Jeffrey L. Miller
Senior Vice President and Head of Export Finance
Export-Import Bank of the United State

Conference on "Russia In Asia - Asia In Russia:
Energy, Economics and Regional Relations"
Washington, D.C., July 22, 2004

INTRODUCTION

Good afternoon. 

Distinguished speakers and guests, I'm delighted to be part of this important conference.

I want to talk to you about a recurring theme in today's speeches and panels: that trade will play a key role in integrating Russia fully into the world of stable, free-market economies. And of course, energy is a huge component of this potential trade.

The West, particularly the United States, wants to diversify energy sources from the Middle East to other, more stable regions. And Northeast Asia already is a critical component in this diversification. But huge investments will be needed to further expand and modernize Russia's energy sector. Private financing alone cannot do it, nor can public funds.

It will take a cooperative effort by export credit agencies, such as Ex-Im Bank; international financial institutions, including global and regional development banks; and private lenders. We must all work together to make this happen, for the benefit of Russia and all of its main trading partners.

RUSSIA'S TRADE

As I mentioned, enormous investments will be required to help Russian companies access the goods and services they need to grow. The potential for trading partners to supply technology, capital equipment, services, and investment is great. 

It appears that Russia may be on the right track. Cumulative foreign investment in Russia increased by 50 percent in 2003 from the previous year. Foreign direct investment was up 69 percent, while the investment category consisting mostly of loans rose 47 percent. Russia's trade surplus last year was $60 billion - up from $46 billion the year before. Russian exports to the United States rose 26 percent during 2003 to $8.6 billion, while U.S. exports to Russia increased 2.2 percent to $2.45 billion. Russia's exports to Asia, meanwhile, jumped from $11 billion in 1999 to $19 billion in 2002.

In addition, Russia's trade is likely to be enhanced by the fact that the OECD upgraded Russia last year from risk category 5 to category 4. This upgrade has lowered the minimum premium for Russian transactions charged by export credit agencies, and is a sign of increased confidence in Russia's economy.

ENERGY

The energy sector in particular represents a unique opportunity for Russia to expand its trade relations with the world's industrialized nations. 

Let's talk about natural gas. Many are familiar with Russia's huge oil reserves, and Ex-Im Bank has financed the export of more than $1 billion in U.S. equipment to help modernize and develop Russia's upstream and downstream capacities. But, in addition to its oil sector, Russia has been blessed with more than 25 percent of the world's natural gas reserves, an estimated 1.6 trillion cubic feet. This represents almost twice the reserves of Iran, the country with the next largest reserves, at .9 trillion cubic feet.

It is estimated that consumption of natural gas, which is a more environmentally friendly fuel, will grow at an average annual rate of 1.8 percent during the next 20 years, with the greatest increase projected for the North American market. In industrialized Asia, natural gas consumption over that same period is also expected to grow by 1.8 percent annually, to 6 trillion cubic feet by 2025. In developing Asia, consumption is expected to grow from 7 trillion cubic feet in 2001 to 17 trillion cubic feet in 2025. 

This increase in natural gas consumption will require bringing new gas resources to market, either by pipeline across land routes, or liquefied if transported by sea.

At present, North America produces nearly as much natural gas as it consumes. It is anticipated that this will soon change. Within six years, it is expected that North America's consumption will exceed production by nearly 2.0 trillion cubic feet, or nearly 8 percent of total current consumption. In the absence of any new discoveries, this gap is expected to widen to 5 trillion cubic feet in 2020, and 6 trillion cubic feet in 2025. For North America, at least, it is clear that trade will be essential in meeting the shortfall. The challenge, therefore, will be to develop the necessary infrastructure to transport such resources to world markets.

For our part, since the mid-1990s, Ex-Im Bank has supported $2.8 billion in projects involving natural-gas exploration, pipelines, and LNG facilities, as well as projects fueled by natural gas around the world. 

EX-IM BANK IN RUSSIA'S ENERGY SECTOR

As I mentioned earlier, Ex-Im Bank has been active in developing Russia's oil and gas industry. Almost 50 percent of our portfolio in Russia is in this area.

We have helped support modernization efforts of more than a dozen oil companies with medium- and long-term financing, and we are looking at several pipeline projects that would help bring Russian oil and gas to market.

Ex-Im Bank is prepared to work with sponsors to develop projects that are well-structured, technically feasible, environmentally friendly, and have a well-balanced risk profile. Ex-Im Bank prides itself on its expertise in this sector. 

For example, Ex-Im Bank acted as a major financier in developing Middle Eastern gas resources during the mid-1990s. Thus, the development of Qatar's gas fields may illustrate Ex-Im Bank's potential role in Russia. Qatar is a relatively new supplier to the LNG market, sending its first shipment to Japan in 1997. In the mid-1990s, Qatar decided to commit resources to develop its huge gas reserves, which rank third in the world behind Russia and Iran. The country partnered with international companies that have expertise and global networks, including ExxonMobil, Mitsui, and Marubeni. Two main projects were developed for Qatar Gas and Ras Laffan. Qatar Gas developed a long-term contract with key Japanese companies, such as Chibu Electric Company. RasGas established a long-term relationship with Korea Gas. These long-term contracts created the financial creditworthiness that attracted public- and private-sector financiers, who provided the needed capital to complete these projects. Today Qatar is a major player in the world's LNG market.

Now, let me turn to Russia. Certainly, Sakhalin II can be a similar project that will transform Russia, as Ras Laffan and Qatar Gas transformed Qatar. Sponsored by Shell, Mitsubishi, and Mitsui, Sakhalin II involves the development of the first liquefied natural gas project in the Russian Federation. The project contemplates construction of an offshore extraction rig, onshore pipeline, and a two-train terminal to be built on the southern tip of the island.

The Sakhalin II project is expected to have a capacity of 9.6 billion tons per year. It is projected to begin shipments by 2007-2008. The financial basis for the project will be long-term off-take contracts with several Japanese utilities that will be secured by Ex-Im Bank and the other senior lenders.

In addition to our fairly rigorous credit standards, the project must meet strict environmental standards. Ex-Im Bank, which takes its environmental stewardship very seriously, is proud of the fact that in 1995 it became the world's first export credit agency to adopt environmental guidelines for projects that we finance. Our environmental guidelines, which have been revised and extended several times, require that the Bank make quantitative and qualitative assessments of projects in terms of their potential impact on a variety of environmental criteria. Sakhalin II would be no exception.

While this project is clearly important for U.S. exporters who will supply equipment and services, it also demonstrates how a well-structured, creditworthy project can facilitate regional trade and bridge the gap between Russia's natural resources and its ability to serve the marketplace.

PROMOTING CROSS-BORDER CONNECTIONS

Ex-Im Bank support for Sakhalin II will not only finance exports, but also spur cross-border connections and ties among the nations of the Northern Pacific Rim. 

Pipeline projects clearly can foster improved regional relations, as the example of the Baku-Tbilisi-Ceyhan Pipeline project demonstrates. This nearly 1,100-mile pipeline, with a capacity of 1 million barrels per day, will transport crude oil from the Sangachal terminal in Azerbaijan through Georgia to a marine export terminal in Turkey, on the Mediterranean. Ex-Im Bank is working with six other export credit agencies, as well as a number of international financial institutions and private lenders, to finance this $3.4 billion project. 

Another way in which Ex-Im Bank's efforts can help enhance regional relations is the parallel financing agreement with Vnesheconombank that we signed with President Putin last fall. The agreement paves the way for cooperation between Ex-Im Bank and Vnesheconombank in providing medium- and long-term finance for projects in third countries using U.S. and Russian goods and services.

EX-IM BANK SUPPORTS DIVERSIFICATION OF RUSSIA'S ECONOMY

Despite the enormous potential of Russia's energy sector, Russia must diversify its economy in order to sustain long-term growth. Commodities such as oil and natural gas, metals and timber account for 80 percent of Russian exports, and leave the Russian economy particularly vulnerable to fluctuating world commodity prices.

Ex-Im Bank continues to support investments in Russian infrastructure projects, housing, optics, medical equipment, farm machinery, and other sectors that will benefit the Russian economy in the long term. In addition, Ex-Im Bank has strengthened its ties with a number of Russian financial institutions to help Russian buyers acquire more U.S. goods and services. We also have a number of credit lines - big and small - with various Russian banks. These total nearly $200 million and are for the purpose of financing U.S. exports that would be useful to Russian companies.

STRENGTHENING THE RULE OF LAW

There are still some issues that Russia must address. Recent events at Yukos and Sakhalin III have raised concerns about the weak rule of law and the potential for corruption.

Western investors, exporters, commercial lenders, and export credit agencies need to be able to work with a government that applies policies and laws consistently and fairly. 

While Russia has made significant progress with reforms, it still needs increased transparency, better corporate governance, and a more open business environment to attract continued investment. Reform already enacted need to be more effectively implemented, and Russia needs to move further along the path of reform.

FINANCING IS CRITICAL 

This brings me to my final point: While there has been substantial foreign investment in the Russian energy and other sectors, more investment is needed to sustain this development. We need to work together with other export credit agencies and private banks and with international financial institutions, both multilateral and bilateral. We need to expand our co-financing initiatives with other export credit agencies. This gives both countries involved the leverage to win export opportunities that might not have been available to companies of either country alone. And, as I've suggested, we must ensure that the environment is protected in developing Russia's infrastructure.

CONCLUSION

To sum up, it is important that Russia succeed economically in this interdependent world. Trade is critical to Russia's success. Russia is a strategic market for investors and exporters worldwide, a vital source of energy, and an enormous market for a wide range of products. Given its history and size, it is a key member of the world community. 

President Putin said that he wants the Russian economy to double in size in just 10 years, which implies 7 percent annual average growth. This is a tall order, but Ex-Im Bank would like to assist in this endeavor. To realize this goal, during the next 10 to 15 years, Russia will need to undertake a massive modernization of its economy and infrastructure, including the important energy sector. This growth will require huge investments, as well as technology, capital equipment, and services provided by industrial countries.
It will also take an open, transparent business environment, governed by the rule of law, and cooperation among a wide range of public and private financial institutions -- including export credit agencies -- to achieve this. 

Thank you.