RUSSIA - New Plant In Tatarstan.

LG Engineering & Construction of South Korea has been negotiating with the republic of Tatarstan a $2.6 bn deal to build a petrochemicals and oil refining complex. This will be the largest of its type in Russia since the establishment of the federation.

There is much demand for petrochemicals and petroleum products in Tatarstan (see the oil refining sector in DT No. 8).

Background: From a technological perspective, the petrochemical industry

in Russia lags behind those of most developed countries. A wide variety of petrochemicals are produced in the country. But chemical output amounts to just 8% of total industrial production, much lower than in Western economies where the figure stands at 14-15%.

At the end of the 1980s, just before the collapse of the USSR, petrochemical raw materials accounted for 97% of synthetic rubber production, 85% of plastics, 80% of synthetic fibres, and 35% of paint materials. The proportion of polymers produced from petrochemical raw materials in the 1980s was between 80-90%.

Low capacity utilisation in the 1990s reflected a huge fall in GDP faced by Russia, mainly during 1992-1994 and in 1998. The industry was hit by low domestic consumption of petrochemicals combined with a disintegration of trading links with the former Soviet republics.

Russian producers started focusing on exports to West Europe and the Far East, mainly China. This had some positive results in 1995 and in the more recent years, when world demand was strong.

Russia is a major world producer of butadiene. But aside from that its capacities for monomer production are similar to those of relatively small producing regions like Latin America. More than two-thirds of Russian butadiene capacities are based on n-butane rather than on ethylene. As other regions like South-East Asia have built capacities, the Russian position in the world market on monomers like butadiene, ethylene and propylene have become weaker. The Asian countries are in a better position to export to large nearby markets like China, where Russia has been selling in recent years. Many of Russia's monomer production facilities rely on outdated technology and equipment. Modernisation is a pressing need.

Russia is largely self-sufficient. While some petrochemicals are imported, dependence on foreign sources will remain limited for years. Russia is a net exporter of commodity chemicals, and the country is not utilising existing capacities to the maximum.

Consumption & Exports: Local demand for chemicals has rebounded in the six years since Russia's financial meltdown in 1998. That crisis was preceded by a general decline of the economy, especially of basic industrial sectors, as domestic consumption of chemicals fell considerably in the 1990s. The situation was worsened by the fact that, with parts of the former Soviet Union no longer ruled from Moscow, what used to be a captive market for petrochemicals has fragmented into a dozen new countries where Russia is one among competitors. Now, however, Russian demand for chemicals is fairly strong. There is also strong demand for plastics.

Polyethylene is an important export item for Russian producers. Since 1991, a bigger chunk of polyethylene output has been earmarked for export. Polyethylene exports to China have seen relatively large increases and have helped maintain capacity utilisation in Russia. One problem affecting exports to countries outside the CIS is that the Russian petrochemical industry is concentrated around the Volga-Urals region. Transportation costs are high because of the distances involved, and because of the use of rail and river transport - with the latter being vulnerable to the weather.