ISNIS:
RUSSIA - Economic & Trade Overview-Part 1(2).
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Provided courtesy of
the Business Information Service
Department of Commerce.
Population:
148.1 million (1996); 51.4 percent of the population of the former Soviet Union (FSU); 81.5 percent are ethnic Russian; 73.9 percent urban; population of Moscow - 9 million; population of St. Petersburg - 5 million.
17,075,400 square kilometers/6.6 million square miles (more than 76 percent of the FSU); spans eleven time zones; covers one-eighth of the world's land surface; largest country in the world; almost twice the size of the United States. Russia is divided administratively into provinces (oblast and krai), metropolitan cities (Moscow and St. Petersburg), 16 autonomous republics with their own independent governments, 5 autonomous regions, and 10 national regions. The autonomous and national regions have less autonomy than the republics.
Inflation levels in Russia have varied greatly depending upon the time period under consideration. In September and October 1993, inflation soared to approximately 20 percent monthly. Inflation fell to about 14 percent in 1993's final quarter, rose to 22 percent in January 1994, and again subsided to 10 percent in February 1994. In August 1994, monthly inflation dropped to approximately 4 percent. In December 1994 and January 1995, monthly inflation in Russia rose again to approximately 18 percent. From February to July 1995, monthly inflation cooled significantly from 11 to 5.5 percent. In August 1995, inflation dipped again to approximately 4.6 percent, followed by 4.5 percent in September and 4.8 percent in October. November and December inflation rates hovered around the 4 percent/monthly mark. February and March 1996 inflation broke the previous lower-end Russian record: 2.8 percent/monthly. Russian monthly inflation for May 1996 was 1.6%, followed by 1.2% in June and a mere 0.7% in July. This downward spiral of deflationary pressure bottomed out in August, when a 0.2% price decrease was recorded. A 12-month inflation rate of only 37.1% was calculated from the end of August. Russian prices rose 0.3% for September. Unemployment, although increasing, remains arguably low. In May 1996, officials of the Russian Federal Employment Service, basing their estimates on International Labor Organization (United Nations) statistical methods, reported unemployment at 8.6% (of the "economically active population"). Actual unemployment may be significantly greater--as many Russians are alleged to be holding more than one officially-reported job. Approximately 6.5% of Russia's able-bodied population is estimated to be working reduced hours or on unpaid leave, frequently in order to receive social benefits and also to establish a "cover" for tax purposes used to conceal income made in the informal sector. However, the combined sum of the unemployment and underemployment rates have remained between 12 and 15% since early 1995. Unemployment was 9.2% at the end of August 1996, nearly the same as at the end of July, announced the Russian State Statistics Committee. The committee estimates 6.68 million people were looking for work, 52,000 less than the month previously. The average wage in Russia was 835,000 rubles per month in mid-1996, or about $164. Real wages (adjusted for inflation) rose 16% in the first half of 1996 over the same period in 1995, recovering from the significant slump experienced last year. Dollar average wages rose over the same period by 91%. A bill passed by the Duma, the lower house of the Russian parliament, that would have raised the minimum wage 26% was rejected in late August by the upper house, the Federation Council. During this reading of the bill it would have been retroactive to July 1, and would have increased government expenditures by almost 9 trillion rubles. GDP The Russian Government reported in January 1996 that Russian GDP totaled Ruble 1,659 trillion in full year 1995. This constitutes a 4% decrease (with adjustments) against the previous year. In December 1995, the Russian Government further predicted Russian GDP at Rubles 2,300 trillion in 1996. Some sources have predicted a slight rise in real GDP for the first time (in 1997) since the beginning of the transition to a market economy. This upward trend has been dependent on the steady growth over the last three years of the trade and service sectors, which were underdeveloped under the centrally planned economy of the USSR. These developments may be partially explained by stable (in certain cases, much increased) energy export levels, improved forest product production, and strong production in the metallurgy and chemicals sectors. Russia's gross domestic product went down by 6% over January-August 1996 compared with a year ago at 1,403 trillion rubles. The GDP decrease in the same period in 1995 was 4%. August 1996 saw 200 trillion rubles' GDP produced, 5% up on the total for July, following a 1% increase from June to July. Secondary indicators of economic activity such as energy output and freight haulage continues to suggest a diminished production decline than that indicated by official statistics. The mystery is somewhat explained by the extent of the informal, or shadow, economy. The Russian Federal Security Service estimates that the shadow economy may account for as much as 40% of GDP, compared with less than 10% in developed economies. Industrial production, since the breakup of the Soviet Union, has been characterized as "free fall." The rate of decline in really industrial output slowed markedly beginning in August 1994, and ended 1995 down 5 percent over 1994. Production of electrical power during this period was 98% of the previous period's production; automotive gasoline 97% of the previous years' production; edible fish- 100.2% of the previous year; synthetic resins- 138% of the previous year. However, poor performance in specific industry sectors put a drag on these positive developments: tractor production was 51% of the previous year's first 3 quarters, televisions 47% of the previous year's first 3 quarters. Although real industrial output continued to slump in the first four months of 1996, falling 3 percent over the same period in 1995, there were signs of improvement in April over March 1996. However, production was 8% down on August 1995, which in turn was 4% up on July 1995 but 4% lower than August 1994. At the sectoral level, some industries experienced far deeper declines than others over the past four years, although few are still in deep decline today. There are clear signs that the raw materials sector and even some parts of the light industry sector - - by far the most depressed sector in the Russian economy -- have experienced some mild recovery since late 1995. The overall picture suggests a flatter industrial production trend for the first half of 1996, with positive growth rates in the second half of the year. This prediction has been supported to a negligible degree by the 0.2% rise in industrial production between June and July. The value of the ruble relative to the U.S. dollar declined significantly in the first two quarters of 1995 and suddenly began a steady appreciation in the 3rd quarter. Since last fall, when the ruble traded at a high of 4,500 to the dollar, it has fallen by almost 20% to 5,350 in August 1996. In real terms, however, the ruble has actually strengthened against the dollar since the spring of 1995. A number of factors have contributed to the ruble's relative stability, including falling inflation, slow money supply growth, effective working of the ruble-dollar corridor (set at 5,100-6,100 rubles to the dollar for the July 1-December 31, 1996 period), and Mr. Yeltsin's re-election. A currency corridor has been employed by the Central Bank since July 1995 to increase ruble stability and to help dampen inflationary expectations. By June 1996, the ruble was trading at roughly R5020/$, about where it was one year earlier. On May 17, 1996, the Central Bank and government announced that the corridor, which since January 1996 was set at R4550-R5150/$, would be replaced with a crawling band mechanism, whose parameters would shift gradually from R5000-R5600/$ on July 1, to R5500-R6100/$ by the end of 1996. These moves were seen to be generally positive, as it would contribute to Russian macroeconomic stability-- and interpreted as efforts to establish a more 'natural' Ruble-to-foreign currency rate. However, it is only with the "luxury" of recently and significantly increasing foreign exchange reserves (estimated between $14-15 billion in October 1996) that the Russian pledge to intervene in currency markets has become credible. Russian Government debt, as reported by the Russian Ministry of the Economy, has decreased from approximately 10% of GDP in late 1994, to only 3.2% in the first two quarters of 1995. In end-year 1995, the Russian Government predicted that the deficit would reach Rubles 818 trillion in 1996, or an increase to approximately 3.7% of Russian GDP. Russia assumed the all of the foreign debt of the Soviet Union. Russia maintains substantial foreign debt. As of early January 1996, Russian authorities reported that their total foreign debt was approximately $120.4 billion: approximately $103 billion of this debt was inherited from the Soviet Union, and approximately $17.4 accumulated since the break-up. Russia took on the solitary burden of these debts after reaching an agreement with the other former Soviet republics whereby Russia would assume the FSU's debt in exchange for the other NIS abrogating any claims on the FSU's foreign assets. Of $120 billion, approximately $80 billion is principal, while the remaining amount constitutes interest and payment arrears accumulation. Compared to arrears originating in former Soviet times, Russian entities have minor payment arrears to OECD countries. The Russian Government has reached a settlement on rescheduling old Russian sovereign debt within the framework of the Paris Club. Russia has also negotiated a settlement agreement with the London Club in November 1995 on rescheduling old Russian commercial debt over a period of 25 years, and both parties are due to sign on to the memorandum in November of this year. As of August 12, 1996 Russia's Vnesheconombank has made $1.38 billion in debt payments to members of the London Club since February of last year. Resolutions of the outstanding bad debt between Western Government and Russian commercial creditors under the Paris and London clubs, has now opened up the possibility of resolving the estimated $7 billion of unsecured debt owed foreign companies. These structural improvements have given Russian firms the ability to tap into international capital markets, and this has been pursued in several instances.
Russia accounted for approximately 60% of the GNP of the Soviet Union prior to its dissolution. Russia continues to hold the preeminent economic position of the CIS states because of its inherited resource base and its vast population. Russia ranks as either the largest, or one of the largest, producers of many key commodities and products. It is well-endowed with natural resources and raw materials such as petroleum, diamonds, gold, copper, rare metals, manganese, bauxite, uranium, silver, graphite, and platinum that are a source of hard currency because of worldwide demand. Some of the most important mineral reserves are located in the autonomous republics and regions. Russia has been a leading international player in select manufacturing sectors, such as consumer goods, chemicals and military aerospace.
Russia manufactures approximately 62% of all the machinery made in the FSU and nearly 60% of the FSU's crude steel (Russia is the world's largest steel producer after Japan). Other key industries are chemicals, timber and wood products, paper, and non-ferrous metals. State monopolies still dominate in all major industries. Nearly 15% of Russia's industries are defense related.
Russia holds first place in the world's production of natural gas, third place in oil production, and fourth place in the mining of coal. Natural gas reserves are immense, about 40% of the world's total, concentrated along with the oil deposits in West Siberia, with additional significant deposits located offshore north of the Arctic Circle and in the Russian Far East. Russia's proven oil reserves are currently estimated at about 25 billion tons, just behind those of Saudi Arabia. The country pumps over 600 billion cubic meters (bcm) annually, and exports 240 bcm of that production. Gazprom, currently a state owned monopoly, controls an immense supply network built over the past 20 years. According to a major study released by Gazprom and the European Bank for Reconstruction and Development, the system includes over 140,000 km of main pipelines and 250 compressor station complexes. Although a reliable supplier, Gazprom currently suffers from lack of investment and monitoring procedures and system deterioration due to severe climate and terrain, some of its management and operating practices, inadequate information systems, inefficient compressor workshops, corroding and ruptured pipeline, and leaking valves. Another main area of concern is upgrading refinery technology to Western standards. Over 40% of current output is in heavy fuel oil, inhibiting the competitiveness of the Russian oil industry on a global scale. Required investments, if implemented, would be between $500 million and $3 billion through the year 2000. To alleviate this lack of investment capital, Gazprom has recently turned to international capital markets for investors. Russia's peak production of crude oil was in 1988, when the then Soviet Union pumped 569.5 million tons. In 1995, Russia produced about 305 million tons of crude oil, despite the breakup of the Soviet Union and loss of large oil bearing areas in Kazakstan and Azerbaijan, as well as many internal sources of oil field equipment. The massive yearly production decreases have since stabilized, most recently shown by a mere 1.5% production decrease for the first six months of 1996. A "clearing out" of the industry is also shown by these latest figures, with major oil enterprises', such as LUKoil, production levels decreasing by less than 1%. Russia's current level of exports is about 22% of total production, but internal consumption has fallen, partly due to downswings in industrial activity. Much progress has been made on normalizing domestic oil prices, which have now reached 75% of world market prices. However a presidential decree issued on October 17 placed a freeze on domestic oil prices effective until January 1997, at which time a new regulation scheme comes into force. Export levels have not dramatically increased since 1991, because of physical limitations inherent in the pipeline system. Although U.S., European, and other foreign companies have formed joint ventures with Russian oil producers, the immense investments required are currently inhibited by the Russian tax and legal regimes, both currently undergoing reform. The law on production sharing passed in December 1995 provided some incentives, although less than those which had been hoped for. The full implementation of these arrangements has been hampered by the opposition in parliament. Export tariffs on crude oil (also natural gas), excise taxes on production, and the limited capacities of some of the export pipelines, pose additional barriers. With reasonable reform and consequent improved investment environment, oil production could climb to 350-370 million tons annually by 2010.
Banking activities are regulated by the Central Bank of Russia (CBR). Russia has more than 2,300 commercial banks. The number of these banks is gradually and naturally being reduced as more stringent capital reserve and other requirements are being imposed upon new banks by the CBR, although several bankruptcies have recently occurred in the industry. About 20-30 of these institution are considered sound, professional banks. Russian business newspapers commonly carry ratings which claim to name the best banks with which to hold accounts/do business. Observers should take several newspaper/magazine ratings and determine which banks are, on a recurring basis, ranked as superior performers. The Central Bank cut its annual refinancing rate from 80% to 60% effective on 21 October. This is the fourth reduction in 1996 (the refinancing rate was cut from 160% in February). The bank wants to bring the refinancing rate closer to the interest rate on the market for interbank credits, which at present is 40-50% annually. The new refinancing rate is also closer to the current yields on state short-term bonds (treasury bills), which dropped from some 70% in August to 55-60% a year in mid-October. The government acknowledges that with annual inflation at around 20% the interest rate will have to come down to roughly 25% if investment is to revive. Personal deposits at Russia's Sberbank, the government-regulated national savings bank, have risen 58.3% from 51.145 trillion rubles as of January 1, 1996, to 80.951 trillion rubles as of October 1, 1996. As of early October, the Sberbank accounted for 72.5% of all private savings in Russian banks against 68% at the beginning of the year. The services which Russia's new commercial banks provide have been gradually improving. Domestic cash settlements which once took as long as 2 months to finalize--and in some cases were "lost" or inexplicably and severely delayed, can now be accomplished in less than two weeks, and in some cases, overnight. A reliable inter-bank clearing system does not exist presently, partly due to the inadequate Russian telecommunications infrastructure and lack of a fully developed regulatory framework. Adding to their credibility, a wide variety of Russian banks have now established correspondent banking relationships with OECD country-based financial institutions. The following U.S. banks are frequently mentioned as having established a large number of correspondent relationships with Russian banks: NorWest Bank, Citicorp/Citibank, Chase Manhattan Bank, Chemical Bank, BankAmerica Corporation, Bankers Trust, Bank of New York, and Republic National Bank. Further, Russian banks are rapidly becoming members of the SWIFT international clearing and funds-transfer system. Many Russian banks are currently researching how they might open branch offices of their institutions in the U.S., Europe, and Asia. A Russian equivalent to the American Federal Deposit Insurance Corporation is presently being planned. Russian authorities have worked swiftly to increase the statutory minimum capital requirements for new banks. Credit cards are increasingly being used as means of payment in Russia. Currently, there are about 300 banks in Russia licensed to deal with foreign currency accounts; about 150 have licenses to perform the full range of banking services with foreign currency in both domestic and foreign markets. During 1993-1995, foreign banks made significant inroads toward establishing actual operations in Russia. The first foreign bank to obtain a license to operate in Russia, Bank Austria, received an "offshore license" in late 1992. Since then, 12 other Western banks have received licenses to operate in Russia. During mid- to late-1993, many foreign banks, including Chase Manhattan, Citibank, Credit Lyonnais (France), Dresdner Bank (Germany), and ING (Netherlands) have received a "general license, " allowing them to accept deposits and make loans to both Russian and foreign clients with minimal formal limitations. On November 18, 1993, Russian President Yeltsin issued a decree which restricted foreign banks in Russia from handling accounts of Russian citizens and businesses, including joint-venture banks with over 50% foreign assets, until after January 1, 1996. Many banks judged the 1993 measure as being inapplicable to banks which had established actual banking operations prior to November 15, 1993. On June 10, 1994, President Yeltsin signed Decree 1184 which restores the rights of some foreign banks in Russia to do business more freely and in accordance with the letter of their previously-granted general licenses. At face value, the decree excluded both U.S. and Turkish banks, specifically on the grounds that neither the U.S. nor Turkey had ratified Bilateral Investment Treaties with Russia. In practice, however, several of those banks have gone ahead with their plans to establish their planned offices. During the beginning of 1995, Russian authorities continued to maintain that one of the chief reasons for the lack of clarity over whether U.S. banks can be issued a general license is the lack of an operational Bilateral Investment Treaty between the two countries (awaiting Russian Parliament ratification).
Russia has been implementing unprecedented economic reforms in the agribusiness sector over the past few years. These reforms are opening up a vast new market for U.S. agribusiness companies. Agribusiness is arguably the largest sector in Russia and one of the most important. Approximately 20% of the Russian labor force is presently employed in the food industry, however the sector provides only 13% of the GDP and contributes only 1.1% of the government revenues. Total subsidies to agriculture, including forgiveness of loans and local government support, amounted to $13 billion in 1995, while the value of total agricultural production was $10.6 billion. For 1997, the Russian Ministry of Agriculture and Food has asked for $6 billion in Federal support; the Finance Ministry has suggested that the agricultural sector may expect to receive about $4.3 billion in direct payments. In July 1996, the last region in Russia to subsidize prices of certain staple commodities, Ulyanovsk rayon, abandoned the practice, signaling the growing agreement on the need for free-market reforms in the agricultural sector. In Russia, declining central control, the shift to private and corporate farms, and decreasing production subsidies will enable the country to better satisfy consumer needs in the long term. In the short term, however, reforms have idled some resources, including labor, land, processing plants, and distribution channels. Reforms have created substantial dislocations in the Russian economy as subsidies are cut and farms and food plants are forced to downsize. Food production gaps have been filled by imports of foodstuffs, currently estimated at around 20% of food consumed in Russia. Predictably, tariffs on food items have become a divisive political issue in the Russian government, both on the floor of the legislature, as well as between the Ministry of Agriculture and the Ministry of Foreign Affairs. Conservatives and agrarians alike are responding to the governments' free trade policies by working to expand the use of non-tariff measures, such as sanitary norms and quality standards, in order to reduce the volume of imports. These policies will not alter the basic situation: massive structural reform is needed in the agricultural sector in order for it to be competitive on the global market. The primary problems are the avoidance of land code reform, and the lack of a centralized statutory authority, characterized by overlapping jurisdictions and contradictory policies within the federal government and extending out to the regional administrations.
Key elements of President Yeltsin's reform program have been price liberalization, financial stabilization, and privatization. After the election, some doubt has arisen, not with respect to the Russian Government's commitment to these cornerstones, rather, relative to the speed that Mr. Yeltsin will continue to undertake these reforms particularly due to revenue shortfalls. Rampant federal government spending due to campaign promises has appears to have outstripped resources, likely resulting in a significant budget deficit, ballooning up to 4.33% of GDP far over the 3.85% stipulated by IMF tranche negotiations. Price controls have been lifted on almost 90% of wholesale and retail goods. Although there are still price controls on certain sectors, such as housing and telephone costs (increasingly, these controls are been lifted), some prices were seen to be remaining artificially low. Energy costs, for instance, have risen from between 7 and 10% of the world energy market price, to 75% (wholesale domestic fuel oil only) in late October 1996. To reduce the budget deficit, the government has slashed defense spending, introduced a value-added tax, reduced investment, and cut subsidies for consumer and industrial enterprises. At the urging of its multilateral creditors, the Yeltsin government has recently created a special commission to expedite tax collections. The government has also taken measures to demonopolize domestic trade, deregulate foreign trade, and decentralize the distribution system. These measures have been continued with renewed vigor by Yeltsin's post-election economic team.
The Yeltsin government has considered privatization of state-owned enterprises and other entities to be a cornerstone in building a market economy. Russia has made significant inroads towards accomplishing its goals in this area. According to Russian official statistics, Russia's emerging private sector--incorporating fully and partially privatized former state enterprises and firms which were never state-owned--accounted for nearly 50% of Russia's GDP in the first half of 1994. Between 60 and 65% of the Russian workforce today is employed in private enterprises. As of October 1993, 77 of 89 Russian regions were participating in the Government privatization program. As of January 1994, 11,000 of Russia's approximately 14,500 medium to large scale enterprises were privatized through voucher auctions, which now occur at the rate of approximately 600 per month. Approximately 80% of small shops and restaurants (establishments with under 200 employees) had been privatized as of mid-1994. On October 1, 1992, the Russian government began distributing privatization checks each valued at 10,000 rubles to every citizen (a voucher is roughly equivalent to the value of six weeks' worth of wages). These vouchers were distributed through the end of January 1993 and were valid through 1993. They could first be used to buy shares in employees' factories, enterprises up for auction, or can be deposited in private investment funds. At that time, individuals could sell their vouchers for cash, to Russians as well as foreign investors. The Government has, for approximately 2 years, been holding voucher auctions to sell tourist hotels, hard currency beriozka shops, and 200 selected large industrial enterprises. The State Property Management Committee (Goskomitnushchestvo or GKI) plans to expand the coverage of vouchers to include housing, small shops, restaurants, service centers, and some urban land. Of these areas, private ownership of land has been one of the most controversial issues (in November 1993, the subject was clarified- see below). On June 30, 1994, phase one of the Russian privatization drive came to a close. The second part of the privatization, begun on July 1, 1994 by decree, was oriented in several directions: a.) the sale of vouchers in Russian companies for cash on the open securities markets and through tenders; b.) workers will have diminished rights to purchase shares in the companies for which they work (the most popular form of privatization in the first phase was a 51% employee controlling interest in the organizations); c.) the privatization of some of the largest Russian enterprises which usually remain state-owned/state-controlled (e.g. the United Utility of Russia, the overall body responsible for power generation in Russia, Aeroflot, the former Soviet national airline, and Lukoil, the largest oil-producing organization in Russia). As opposed to phase one where 1992 prices were used to arrive at an organization's value, after July 1, company valuations were based upon January 1994 prices in order to assess the worth of these organizations. A new phase of privatization was initiated in the period between October-November 1995, where shares in approximately 136 enterprises, considered to be the "crown jewels" of Russian industry, are being auctioned off--chiefly to domestic investors. The list of firms includes major enterprises in the transportation, metallurgy, machine-building, forest products, fuel and energy, and light industry sectors. (For a full list, please call the BISNIS Flashfax--(202) 482-3145 and request doc. # 6603). Stock in some of the most promising Russian entities has been successfully sold on internal Russian stock markets to-date. For an example of a highly successful stock market placement, nearly 50% of the United Utility of Russia has been offered on the open stock markets. Similar "success stories" exist in the case of Rostelecom, the organization which controls approximately 90% of domestic long-distance and international telephone traffic flows. In order to boost revenues from privatization, Russian Government applied a new model for privatization sales in the second half of 1995 nicknamed as "equity-for-loans auctions". The concept behind this new model was to raise long term loans from major Russian banks in exchange for giving to the bankers control stakes in largest Russian enterprises as collateral together with voting and management rights. This controversial privatization process generated USD 1.1 bln worth of loans in 1995. In January of 1996, the Russian Government reported full year 1995 GDP figures, which claimed that 70% of the Russian GDP was comprised of goods and service activity accounted for by the private sector. This constitutes an increase from the previous year when it was estimated that private sector services and goods production accounted for 62% of 1994 GDP. The government's emphasis on privatization has continued up to this day. Most of the shares dispensed during fiscal year 1996 were to domestic Russian shareholders, rather than foreign investors. Efficiency in corporate governance are thus on the rise, with pragmatic liberal executive taking the reins from Soviet-era managers. While actual revenues have not been as high as predicted by outside observers, the government's policies are still essentially comprised of free-market ideals. President Yeltsin's reelection has insured that proactive macroeconomic stabilizing policies will still be pursued, and his cabinet has retained a strong pro-market character.
While a decree on land privatization was issued in January 1992, it was not until October that the first private plots were sold at auction. The former Russian Parliament was reluctant to pass land reform laws. President Yeltsin's decision to dissolve this Parliament in September of 1993 cleared the way for progress on this issue. With few limitations, Yeltsin's decree 1767 on land of October 1993 allowed the free sales and purchase of land--to Russians as well as to joint-ventures with foreign participation. Fully foreign-owned companies were not allowed to purchase land outright. In practice, 49 to 99 year leases are used on land abundant in natural resources (e.g. forestry). Prices for office space in Moscow rival, and in many cases exceed prices for similar space in high-priced markets such as Tokyo. Current real estate prices in the capital have risen to around $1200 sq/meter annually, 1.5 times the rates in Paris and London, twice as high as New York, and four times the prices found in the German market. Russian legal practice is somewhat clearer over the ability for companies to own buildings than it is over buildings' tenants to own the land upon which those buildings rest. However only in St. Petersburg has true real-estate reform been implemented. Decree 1767 simultaneously lays the foundations for a mortgage system, enabling banks to lend money to farmers. The land/property purchase/sales process has moved slowly because the real estate business (actors, laws, institutions) is as yet undeveloped. The actors which normally play integral rolls in land/home purchasing and sales in the West, i.e. real estate agents, title companies, and law firms, are in their infancy and are not numerous. The lack of a central land registry, which would guarantee title to a land/property purchaser, is a further obstacle to the natural development of this sector. Recent developments in the sector have included a Presidential Decree in March of 1996 establishing the right to own and sell land. The Communist-led lower house of the legislature subsequently passed a land code in late May 1996 that prohibited the selling of privately-held agricultural lands or shares in private farm enterprises. Preferential allowances were given for collective farms, but the upper house of the legislature vetoed the code. A resolution committee has been negotiating differences over the land code since, leaving the Presidential Decree of March still in effect.
During 1993, Russia imported $27 billion worth of goods, down approximately 27% from 1992. Russian exports abroad increased to $43 billion in 1993 from $42.4 billion in 1992. In 1993, Russia maintained a strong positive balance of trade with foreign countries ($16 billion in 1993). In terms of dollar value, natural resource exports constitute the bulk of Russian exports in 1993 and 1994. During full year 1994, Russia exported to the U.S. approximately $1.7 billion in goods. The U.S. exported a total of $2.5 billion in 1994, off somewhat from its export of $2.9 billion during 1993. Decreasing U.S. agricultural exports to Russia explain much of the decline in total U.S. exports. Fuel and energy exports accounted for approximately one-half of total Russian exports abroad. Coal, iron ore and timber, in that order, are the most prominent Russian exports, next to foreign markets. Russia's chief export market is Germany, which imports nearly twice as much as the next largest importer of Russian goods, China. Italy, the United Kingdom, Hungary, Japan, and the United States, in descending order of importance, follow Germany and China as markets for Russian goods. Russia's foreign trade surplus is $24 billion for the first eight months of 1996, with imports of $31 billion and exports $55 billion. Total trade turnover was 8.1% up on the same period in 1995. While trade with the "far abroad" rose only 3.2%, trade with the CIS rose 27.2%, testifying to a modest revival of economic ties between the former Soviet states. Energy products continued to accounted for 45% of Russia's overall exports. Russia accounts for approximately 75-80% of U.S. exports and imports to/from the former Soviet Union. U.S. manufactured exports to Russia have risen significantly since the split-up of the Soviet Union, while U.S. agricultural exports have gradually decreased. The most important U.S. exports to Russia, in order of prominence, include: meat, machinery, and tobacco. Aluminum, silver (and other platinum group metals), other base metals, diamonds, raw steel, crude oil, inorganic and organic chemicals, fish and seafood, fertilizer, in that order, are the most important Russian exports to the U.S.
U.S. goods destined for Russia are potentially subject to three Russian levies: an "import duty/tariff," a "Value Added Tax," and an "Excise Tax." Customs procedures are constantly being revised and need to be followed closely by U.S. exporters. Unfortunately, although companies may follow the letter of Russian import regulations, receiving authorities will often give conflicting accounts of present requirements. As of November 25, 1993, importers of goods into Russia subject to import duties and excise taxes are obliged to pay these fees at Russian customs entry points. Previously, importers had been able to fax border customs officials a guarantee of payment; collection of all fees was then carried out by customs officials when goods reached their final destination. A document entitled garantinoe obyzateltsvo (obligatory guarantee of payment), certifying that the importer of the goods will pay applicable levies, may be required by Russian Customs authorities. Effective January 1, 1996, the Central Bank of Russia--in an effort to stem the tide of illegitimate contracts for imports into Russia (and resulting capital flight from Russia abroad)--will institute an "import passport" system. Presently, Russian exports are included in such a system, originally designed to halt the illegal exports from Russia of high-priced metals, oil, and other dear commodities for hard currency. The new system requires issuance of a "passport" by the importer's bank for payment of a specific import contract. The importer will have 180 days either to document the entry of the goods with the Russian Customs Service (and attendant quality and quantity, as stipulated in the contract and "passport") or return the hard currency issued in payment. Failure to comply with this regulation may make the importer liable for a hard currency penalty in the amount of the payment. Often, Russian Customs Authorities will require supplementary documentation, such as a copy of the contract between the exporter and consignee, before allowing the shipment to enter Russian terrain. (see BISNIS supplementary publication--"Exporting Goods to Russia") Temporary imports by foreign companies, such as those sending samples or for display at trade fairs, are subject to a 3% monthly (of the combined, normally-applicable levies) payment to Russian authorities. Tariff or VAT exemptions or "lightenings" have successively been eliminated in order for the Russian Government to gather more revenue, decrease the amount of exceptions, and thus increase the predictability relating to duty rates. Russia's potential accession to the World Trade Organization/GATT will partially drive the logic which undergirds future changes in tariff and other import levy rates. The first comprehensive tariff shift occurred on May 6, 1995 (Russian Government Decree 454, effective July 1, 1995); the end result of this revision was an increase in the mean import duty from 11.4 (1994) to 12.5 (1995). Most negatively affected were agribusiness-related imports into Russia. With these changes, the Russian Government raised the minimum duty to 5%, except for a reduced number of duty-free goods, and lowered the maximum duty to 30%, except for a limited amount of "luxury" goods. Since the June 1993, March 1994, and May 6, 1995 Harmonized Schedules (HS) and aforementioned revisions are not widely disseminated, extremely lengthy, and relatively complex, importers may wish to contact BISNIS with specific questions on Russian import tariffs. On April 11, 1996, a new Presidential Decree (No. 413) raised tariffs on a wide array of goods, across all business sectors. The Value-Added Tax (VAT) is applied to nearly all goods imported into Russia. As of April 1, 1996, the levy commonly known as the VAT is applied at a standard rate of 20% (23% previously, based on 20% typical=20 "VAT," and 3% of which was called a "special tax"). Most foodstuff are subject to only a 10% VAT tax. For a complete list of affected HS codes, please contact BISNIS. In late April and early May 1994, considerable confusion arose among Russian officials and in foreign company circles about how and when the VAT is applied. On May 13, 1994, the Russian Finance Ministry and the Russian Tax Service clarified these exemptions. Imported goods would be exempt from the VAT under the following circumstances: a.) when the imported goods are classified by the Russian Government as "humanitarian assistance;" b.) when resources are acquired within the framework of gratuitous technical assistance from foreign states in keeping with intergovernmental agreements, or under contracts with foreign organizations and firms for joint scientific work. Exemptions from the VAT and "special tax" would be granted under the following conditions: a.) a foreign investment in the form of assets of joint Russian-foreign ventures (generally construed to mean equipment imports); b.) foreign investments in the form of loans and credits by foreign banks and credit institutions, provided a license from the Russian Central Bank is not required. In the case of joint-ventures, and other joint business establishments, the importer can generally receive a credit for VAT paid on its corporate tax returns. Even given these general guidelines, application (or non-application of the VAT) on certain imports, remains somewhat unclear and at times unpredictable. An Excise Tax is levied on most imported goods considered "luxurious," such as cars, jewelry, alcohol, and cigarettes. This tax was dramatically increased on March 15, 1994. The present range of excise taxes run between 35 and 250%. From time-to-time specific commodity excise rates are changed. Please consult BISNIS for the applicable current rates. Russian Customs officials calculate potential levies on imports by compounding the different rates. The import duty is calculated on the "value of the good established for customs purposes." This customs value, or "CV," could include any applicable shipping and handling terms which may be included in the price of the shipment (e.g. CIF or FOB), in addition to the stated price of the particular goods. An excise tax, if applicable, is calculated as a percentage of the CV of the goods. The VAT is calculated as a percentage (generally 20%) of the sum of the good's CV and, where applicable, the excise duty. As of August 18 1996, Russian individuals are exempt from import duties for the first $1,000 worth of goods brought in from travels abroad, provided the combined weight of the goods are under 50kg. Above this limit, the tax is 60% of the value as determined by official customs schedules. This ceiling rises to $5,000 for persons that have spent more than six months abroad, and $10,000 for those moving to Russia. Goods imported into Russia via international post are duty-free up to $100 value. Russian Presidential Decree 244 (March 6, 1995) seriously put into doubt a vast array of special tariff exemptions and lightenings. This decree cancels provisions of 25 presidential decrees on individual customs privileges whose term had expired and annuls privileges of over 34 decrees still in effect. This decree put into question special tariff privileges connected with the operation of "free economic zones" (e.g. Kaliningrad, Nakhodka), as well as many of the special rates on special goods quoted above. See more (below) on Free Economic Zones. Since the initial announcement of this measure, several attempts by the Duma have tried to revise or rescind portions of it, and elections have shuffled the governmental apparatus that produced it. Those contemplating exporting to Russia and anticipating special rates on any import levies should proceed with extreme caution, as the business community becomes informed about the degree of execution and conformity with this measure and other like it. Pursuant to Russian Government Order 612 "On Protection of Consumer Rights", goods imported into Russia from July 1, 1993, are required to first pass safety/quality testing/certification. At first mandatory certification was applied to selected goods and products under this consumer protection law. In 1995, however, the list of products subject to mandatory certification was broadened. Now all industrial products need certification under 1995 worker safety legislation. Analysis of food products is required at least yearly in accordance with Russia's Ministry of Health. At present, products may be tested/certified either through the Russian joint-stock company Soyuzexpertiza or Soyuzexpertiza's sole agent in the U.S., S.G.S./U.S. Testing (Tel: 1-800-288-3747 ). This process may prove lengthy and cumbersome (thus, costly) for some U.S. exporters, and any certification costs should be researched and taken into consideration before signing a contract. Some products and equipment, for example oil/gas, mining and health equipment require a license prior to certification by Russian agencies or ministries. U.S. exporters of telecommunications equipment have found this testing regime particularly onerous. (Several publications updating and detailing the certification issue are available from BINIS). 
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