Russia and the international economy /на англ. языке/

Russia and the international economy /на англ. языке/





 


OUTLIINE

1.   Russia within the
International Trade System ……………………………3

2.   Regulation of External
Economic Activities………………………………..4

3.  
Foreign Trade Pattern……………………………………………………….6

1.  
Russia and the international trade system

According to a medium-term forecast
for developments in the area of the international economy, business revival is
cumulating momentum after the recession it experienced in early 1990s. It had a
relevant effect on the world trade. In 1994 the average international trade
turnover showed a 9.5 percent growth being a record figure in the last 20 years
and by 3 times exceeding the increase in the international production. In 1995
the World Trade Organization estimated 8 percent increase in trade turnover as
compared with a 3 percent growth in the world production. World Bank experts
think that in the next 10 years an average increase in foreign trade will make
6 percent annually.

An economic run-up in
most industrialized countries was followed by a growing demand for many
products and a consecutive price hike on international markets.

Oil markets showed a
balance of demand and supply in 1995. Average prices of Dubai oil were at $ 123
per metric ton, by 14.9 percent exceeding 1994 averages. Owning to small
increase in the world oil consumption and practically unchanged supply
situation no perceptible change of prices is expected.

A trend of natural gas
prices on markets in Western Europe was practically the same as the oil price
dynamics. In 1995 average prices were by 13.4 percent higher as compared with
1994.

Prices of nonferrous
metals have risen dramatically. In 1995 average world prices were as follows:
aluminum — $ 1806 per metric ton (20.3 percent rise in comparison with 1994),
copper — $ 2933 (higher by 23.3 percent), nickel — $ 8063 (19.3 percent
growth).

As a result of the
1994-95 record price surge in the whole period after the World War II cellulose
joined the leaders with a 50 percent price hike (up to more than $ 1000 per
metric ton). According to a middle-range outlook price stabilization
accompanied by a slight price rise is expected.

As market relations
develop, process of internal price structure formation continues in Russia and
it gradually closes to the price system existing on world markets. In 1995
contract prices grew perceptibly, however, prices of a majority of energy
resources lagged behind those on the world trade markets in terms of rates of
increase. The outcome was a worsening balance between contract and world
prices.

An important role in
development of the international trade is played by the GATT/WTO which for 48
years tried to work out the fundamentals of a future world trade basing on
principles of observance of the Agreement’s general regulations aimed to keep
up non-discrimination of individual states and to a gradual elimination of
barriers slowing down mutual exchange of commodities. Since 1950 the world
trade turnover has increased by 13 times and eight rounds of multilateral trade
negotiations held under the GATT’s auspices have led to a ten-fold cut of
average customs duties. At present it makes a bit less than 4 percent.

Russia’s accession to the
WTO will make it possible to tap all measures existing within the framework of
this organization in order to protect Russia’s economic interests. At present
direct or concealed discrimination of Russian producers and traders on markets
of certain countries is among factors affecting Russian exports dynamics. Thus,
only the ban on Russian uranium exports to the USA has led to losses for
Russia, as estimated by some experts, at $170 million a year. The total number
of anti-dumping procedures imposed upon Russia has reached 41. More than a half
of them (22) are qualified as openly discriminatory cases or unjustified claims
by the Ministry of Foreign Economic Relations.

In the summer of 1995 the
first round of negotiations between the Russian delegation and the WTO’s
Working Group on Russia took place in Geneva. Members of the Working Group
apprised information on foreign trade regulations stated in the Russian
Memorandum as exhaustive enough.

An outcome of the second
round taking place from December 4 to 7 of 1995 was the completion of
discussion of the Russian Memorandum on the foreign trade regime as concerns
trade in goods. Besides, the first discussion on special annexes to the
Memorandum embracing protection of intellectual property rights, trade in
services and trade-related investment measures was held. At the same time, the
WTO member countries have reserved the right to revert to a detailed discussion
on three key issues: if state-owned trade organizations exist in Russia (Moscow
denies this); import licensing; subsidizing of external operations. However,
even now they agree in principle that the Russian legislation is in accordance
with the WTO’s rules and norms in these areas of the foreign trade regulation.

There are no apparent
opponents to Russia’s accession to the WTO, since the world trade, especially
in the area of trade in raw materials, cannot be regulated without
participation of Russia. However, the admission of Russia may be surrounded by
a number of additional obligations not directly following from the WTO
requirements. Bilateral consultations held in Geneva have shown that Russia
will face some complications in the course of tariff negotiations.

On the whole, the outcome
of the second round of Geneva talks has been successful for Russia.

2. Regulation of External Economic
Activities

In 1995 certain changes
were introduced to the mechanism of the state regulation of the foreign trade.
In the first half of 1995 the state regulation of oil exports was substantially
amended: quotas and licenses in oil exports were abolished alongside with
preferences (with exclusion of supply pursuant to intergovernmental agreements)
while export duties on oil and oil products were significantly reduced; certain
oil products were excluded from the list of strategically important
commodities. Producers’ access to channels allowing transportation of oil to
other countries (pipelines and terminals in sea ports) became a natural
restraint on exports.

The list of strategically
important raw commodities was shortened and the institution of special
exporters was abolished altogether. The system of contracts’ registration
became the main instrument of control over exports. Individual preferences
granted to participants of external economic activities were abolished,
excluding those issued in accordance with the laws of the Russian Federation.

The law "On State
Regulation of Foreign Trade" adopted in July came into force in October.
The law stipulated what authority in this area shall be with the President, the
Government and the Ministry of Foreign Economic Relations. The exclusiveness of
the MFER’s position was emphasized by the fact that only it was vested with the
right to license import and export transactions subject to quantitative
restrictions or to approval procedures.

As pursuant to the law,
the Russian Government shall submit a program of foreign trade development
together with a draft of the Federal budget for the Parliament’s approval.
Alongside with other provisions this program shall embrace customs tariff rates
planned for the year in question as well as the band of their possible
fluctuation, thus making the foreign trade more predictable. The Government has
the right to introduce export and import quantitative restrictions on national
security grounds, to comply with international agreements or to protect the
domestic market, however, these measures shall be announced not less than 3
months prior to their actual introduction. The law envisages a possibility to
introduce state monopoly for trade in certain products. In this case a special
procedure of licensing import and export operations exclusively to state-owned
enterprises shall be applied.

As the above mentioned
law was effectuated, the Commission of the RF Government on Safeguard Measures
in Foreign Trade became fully legitimate and in December it received
"Procedures of Investigation Prior to Application of Safeguard Measures"
approved by the MFER (Russ.abbr. MVES). A possibility to apply safeguard
measures against competitive imported products complies with usual practices
applicable in the world trade. In this area Russia is late in working out and
application of such measures, especially taking into account that Russian
exports are often and in most cases unjustifiably subject to discrimination on
foreign markets. So, the RF import regime loses its exceptional liberalism
which has been characteristic of it until recently.

Tariff regulation. From September through
December export duties levels were gradually lowered until their complete
abolition since January 1, 1996, with an exception of a small group of goods
including oil, natural gas and some other raw commodities.

In June and in October,
1996 import duty rates were changed. On the whole, changes were made in
direction of an increase in tariffs. Earlier goods taxable at 1 percent have
constituted a rather significant part of the list, at present this rate is only
applicable to certain goods within Group 10 of the External Economic Activity
commodity nomenclature (grain) and 1701 (cane sugar, beet firm sugar and
sucrose). A 10 percent tariff is now applied to medicines which earlier have
been exempt from duties while fish and fish products are subject to a double
rise of duties (from 5 to 10 percent) and duties on vegetables were tripled
(from 5 to 15 percent). For foodstuffs earlier exempted from duties new tariffs
made 5 percent on bananas and citrus fruits, 10 percent on tee and coffee, 15
percent on fresh cucumbers, however, rates of import duties in Russia still
remain considerably lower than in the EU countries (16 percent against 21
percent). There were effectuated provisions stipulating a 30 percent duty on goods
such as luxuries, tobacco products, alcoholic beverages and weapons.

Tax regulation. As before, close
attention was paid to products subject to excise taxation. In July and in
December, 1996 a price difference between excise stamps and special stamps designated
for imported tobacco and alcohol products were adjusted. There were created
equal conditions for importers of these products both from countries within and
outside of the former Soviet Union (ECU 0.1 per unit of an alcohol beverage and
ECU 0.01 per unit of a tobacco product). In December the rate of excise tax on
tobacco products was increased from ECU 1.2 to ECU 2 per 1000 pieces.

In June the list of products
subject to a preferential 10 percent value added tax was shortened; it was
again examined in detail in November and some new products were added to it. In
December works and services, both produced domestically and purchased, being
exported to countries outside the CIS alongside with services concerning the
transit of foreign cargo through Russian territory were exempted from the value
added tax.

Preferences in External
Economic Activities
. In October, 1996 the Government abolished previously
applicable preferential taxation of alcoholic beverages imported from abroad by
certain legal entities which were exempt from customs duties (for instance, the
National Fund of Sports and the All-Russian Society of Invalids). Since
December, pursuant to the Presidential Decree "On Customs
Preferences" of November 30, 1995, it is inadmissible for Federal agencies
to adopt decisions which would provide prolongation of preferences in terms of
customs duty exempts and receipts of additional compensations.

In August, 1996 the
control mechanism over incoming export proceeds denominated in foreign exchange
was adjusted. All proceeds in foreign currencies shall be entered into accounts
with authorized banks—that became a requirement of the customs regime. Customs
service now enjoys the right to control all capital flows and apply relevant
sanctions if necessary.

In September, 1996 the
control over exports and imports of military-purposed products, works and
services, subject to licensing, was tightened.

In December the set of
instruments of the state control mechanism over imports was supplemented. The
system of foreign exchange control over imports introduced on January 1, 1996,
is basing on the same principles as the export control existing since 1994 and
envisages the same chain of relations: an importer—an authorized
bank—customs. The key document fundamental for the whole control system is a
registration certificate for import transactions.

3. Foreign Trade Pattern

In 1995 Russian foreign
trade was influenced by differently directed factors. A favorable state of the
world market and the governmental policy of stimulating exports via regular
lowering of export duties provided for a further increase in volumes of trade
with countries outside the former Soviet Union and a stable active balance of
the foreign trade.

Estimating Russian
foreign trade the following adverse factors shall be taken into account: a
decline in production, small amounts of investment, rather high inflation
rates, insufficient level of state assistance for development of the country’s
export potential, poor competitiveness of many Russian-made manufactured
products, especially of machines and equipment, lack of positive shifts in
development of Russia’s external relations with countries of the former CMEA,
huge external debt, discriminatory barriers banning a number of Russian-made
products from external markets. In connection with accession of Finland, Sweden
and Austria to the EU Russia automatically became subject to anti-dumping and
quantitative restrictions concerning trade with these countries in steel,
textiles, mineral fertilizers, uranium.

Introduction of the
"ruble corridor (fluctuation band)" alongside with a relatively high
internal price dynamics caused deterioration of export transactions’
effectiveness. However, due to liberalization of energy resources exports, the
export sector reacted to the introduction of the "corridor" slower
and not so sharply as critics of a fixed exchange rate had believed. At the
same time, stabilization of ruble exchange rate created a sufficiently
favorable transaction climate for importers allowing them to compensate a part
of the loss inflicted by an increase in import tariffs.

Goskomstat reports that
the Russian foreign trade turnover, unorganized trade including, made $ 135.7
billion in 1995, or by 16 percent more in comparison with 1994 figures. Exports
were at $ 77.8 billion (a 18 percent increase) and imports at $ 57.9 billion
(by 15 percent more).

The results of external
economic activities in 1992 through 1995 are indicative of the fact that Russia
re-oriented its trade towards industrialized countries and that the share of
countries outside the former Soviet Union in the total foreign trade turnover
has grown. In 1995 countries outside the former USSR accounted for 78 percent
of it. In 1992 through 1995 exports to these countries increased at a record
rate in the last 20 years with exports showing a 25 percent growth ($ 64.3
billion) and imports (together with unorganized trade) increasing by 12 percent
($ 41.6 billion).

In 1995 growth rates
slowed down considerably. Thus, while in the first quarter exports grew by 45
percent as compared with the same period in the last year, in the second
quarter it made only 29 percent and showed a modest 15 percent increase in the
third quarter. Undoubtedly, export growth rates were affected by the "currency
corridor (fluctuation band)" introduced in the second half of the year.

As before, the bulk of
Russian exports consists of raw materials. Fuel and energy resources account
for the biggest share (41 percent) of exports, while the Fuel-and-Energy
Complex production (oil, natural gas, oil products) becomes more and more
oriented towards external markets.

In 1995 a decline in
export growth rates in real terms was observed as natural gas exports increased
by 11 percent (14 percent in 1994), oil products grew by 8 percent (11
percent), oil—by only 1 percent (11 percent).

Growth of exports as
calculated in value terms was primarily caused by a favorable situation on the
world market. Average contract oil prices of exports in the countries outside
the former Soviet Union increased by about 7 percent as compared with 1994
figures, natural gas exports grew by 10 percent while oil products showed a 6.6
percent increase.

Metal exports accounted
for a 20 percent share in the Russian exports. Nickel and ferrous metals exports
grew most rapidly at 37 and 26 percent accordingly. Average export prices of
key metals surged, thus, price of nickel increased by 33.1 percent, of
aluminum—by 36.9 percent, of copper—by 24.2 percent, of ferrous alloys—by
24.7 percent, of pig iron—by 14.6 percent. The pattern of metal exports has
somewhat changed. Customs statistics reveal a growing number of contracts on
export of finished metal articles, however, their share in the total export
volumes is still insignificant. These articles are being made according to
designs of foreign companies (mostly in aircraft and engineering industries)
under a binding condition that they shall be manufactured in accordance with
the West European standards and certified by a foreign firm. It is too early to
suggest the end of an age of raw exports conducted in their most primitive
form, however, the Russian metal industry is given an opportunity to
participate in the international division of labor on equal basis and to reach
a qualitatively new level of production.

The share of chemicals
made 9.6 percent. Mineral fertilizers still remain a key export item in the
industry. Export volumes of mineral fertilizers increased by 14 percent in
comparison with 1994 figures. Simultaneously, average contract prices also grew
(by 24 percent).

Export patterns within
the forestry and paper industry tended to be oriented towards raw materials in
recent years affecting the structure of currency proceeds accordingly. A third
of foreign exchange proceeds was derived from raw timber (logs) exports while
semi-finished timber (lumber) accounted for 25 percent of proceeds and
processing-intensive products brought only 32 percent.

A considerable increase
in physical volumes of exports in the countries outside the former Soviet Union
as compared with the previous year figures was reported for logs (37 percent)
and cellulose (38 percent). At the same time, average export prices of logs
grew by 2.8 percent and of cellulose — by 96.6 percent.

One of the ways to
increase export revenues is an expansion of sales markets for Russian-made
weapons and military equipment. Export volumes of military production made $
2.6 billion in 1995, that being by 1.7 times more than in 1994.

The share of machines and equipment
in Russian exports to countries outside the former Soviet Union contracted to
3.8 percent as compared with 5.3 percent in 1994. Development of new
competitive and technologically-intensive products relevant to modern level of
requirements on external markets demands large investment and is
time-consuming.

Table 5.2 Volumes of
Russian Foreign Trade with Countries Outside Former Soviet Union in Value Terms
(without unorganized trade, US$ billions)

Source: Ministry of
Economy of RF.

1992

1993

1994

1995

$ billion

In % to previous year

$ billion

In % to previous year

$ billion

In % to previous year

$ billion

In % to previous year

Foreign trade turnover

79.4

83.2

71.1

89.5

79.8

112.2

97.6

122.3

42.4

83.3

44.3

104.5

51.5

116.1

64.3

125.1

Imports

37.0

83.1

26.8

72.4

28.3

105.7

33.3

117.4

Balance

5.4

87.1

17.5

324.0

23.2

132.0

31.0

133.0

An increase in internal
productional costs, first of all at the expense of energy and raw materials,
more expensive loans, growing transport expenses, aging production assets in
extractive and processing branches, deteriorating productional situation
contributed to diminishing effectiveness of export transactions. At present
only export of natural gas, oil, nickel, timber and lumber are profitable.
Export of oil products, ferrous and nonferrous metals, chemicals begins to
bring losses. However, due to worsening financial situation of Russian
enterprises and growing payment arrears exporters prefer to have hard
currencies even at declining or altogether negative profitability of exports.

The most dynamic and
growing market of the Russian Federation are industrialized Western countries.
The largest share of Russian exports goes to Germany (9.1 percent). The USA
account for 6.9 percent, Switzerland—for 5.8 percent, Italy—for 5.6 percent,
Japan—for 5.5 percent, Netherlands — for 4.9 percent, Great Britain — for
4.7 percent and Finland—for 4 percent of Russian exports.

The pattern of Russian
imports has not been changed considerably. As before, machines and equipment
were ranked first and accounted for a 38 percent share of the total imports
which grew by 23 percent in comparison with 1994. It was caused by a necessity
to provide key branches of the national economy with modern technologies and
equipment.

A decline in agriculture
followed by deteriorating provision of the populace with domestic-made
foodstuffs has led to an expansion of food imports. Such measures as a rise of
import duty rates, introduction of excises and of value added tax, abolition of
preferences concerning import tariffs, which have been taken lately,
contributed to an increase in internal prices of imported goods thus creating
prerequisites to restrain imports. However, stabilization of ruble somewhat
compensated for the negative impact of growing import duties and excises and
helped to increase imports.

In 1995 imports grew
considerably, especially of such products as sunflower oil (a 232 percent
increase), poultry (by 70 percent more), alcoholic and non-alcoholic beverages
(a 67 percent increase), butter (an increase by 65 percent), frozen meat (by 43
percent more).

In the nearest future
dynamics and pattern of the country’s foreign trade will be first of all
determined by the internal economic situation, i.e. whether it shows signs of
business revival or not, by changes in the structure of supply and solvent
demand on the domestic market, as well as by exchange rate policies. The
regulatory mechanism of the external economic activities may also change due to
political factors.

In 1996 exports grew
somewhat slower (at about 1—3 percent rates). It was expected that export of
major fuel and energy resources would remain at the same level while such
products as metals, chemicals, timber, pulp and paper would be exported in
increasing quantities.

Oil and natural gas
exports remained profitable because estimated rates of internal price growth
prevailed.

Imports pattern changed
impacted by a growth of the share of technological equipment and manufactured
consumer goods. Growing imports of key foodstuffs and non-food consumer goods led
to application of certain measures aimed to tighten protectionist regime in
order to safeguard domestic industries in 1996 (import quotas introduced).

In 1995 Russian foreign
trade turnover with the CIS countries made $ 29.8 billion, increasing by 5 percent
in comparison with 1994 figures, it is due, first of all, to a price rise
concerning fuel and energy products (14 — 28 percent on the average). Exports
made $ 13.5 billion, or by 9 percent less than in 1994 while imports reached $
16.3 billion (a 21 percent increase). The share of the CIS countries in the
Russian foreign trade turnover diminished by 2 percent as compared with the
previous year figures and made 22 percent.

For the first time in the
years of the CIS existence Russia had a negative trade balance with these
countries ($ -2.8 billion) while in 1994 it had a trade surplus of $ 1.2
billion. Starting from the end of the last year imports from the CIS grew at a
fast rate while exports gradually shrank.

The main reason
determining the import surplus is an unbalanced, owning to a crisis situation
existing in national economies, foreign trade within the CIS framework, that
rendering difficulties in settlement of the CIS countries debts, especially
those due for fuel and energy resources supply. According to current data,
these debts as of January 1, 1996, made Rb 15.6 trillion, or two times more
than in 1995. It is hardly justified to attribute Russian shrinking exports to
neighboring countries to introduction of the "currency corridor (fluctuation
band)" as their fall began as early as April while to the contrary in
October some increase in export operations was observed. On the other hand,
introduction of the "currency corridor (fluctuation band)" and
stabilization of ruble exchange rates enhanced effectiveness of operations of
exporters from countries within the former Soviet Union on the Russian market.

As before, the fuel and
energy products accounted for the bulk of exports to the CIS member countries
(about 50 percent). Total volumes of oil exports diminished by 22 percent as
compared with the previous year while export of oil products shrank even more
considerably — by 60 percent, the fact caused not only by payment arrears in
reciprocal transactions, but by growing export prices of Russian oil which
increased by 28.3 percent in comparison with the last year figures and reached
$ 74.9 per metric ton (that making roughly 70 percent of prices under export
contracts with countries outside the former Soviet Union). However, now some
CIS countries try to reduce their dependence on Russian energy supply. For
instance, Moldavia has already signed an oil import agreement with Iran while
Ukraine relies upon cooperation with countries of the Persian Gulf. At the same
time, Russian oil exports to Byelorussia grew considerably as a result of
creation of the common customs area, that allowing Byelorussian oil processing
enterprises to purchase oil at prices quoted on the Russian domestic market.

The pattern of Russian
exports somewhat changed in 1995 as compared with 1994, for instance coal
exports grew by 32 percent, iron ore exports increased twofold and export of
ferrous metals also showed signs of growth.

As concerns import
operations, the role of the CIS member countries remains an important one in
terms of providing Russia with foodstuffs. Thus, the share of white sugar
imports from these countries reached 80 percent while their volumes increased
by more than two times since the last year. There was also observed an increase
in imports of grain, meat, butter. At the same time, a trend to purchase fewer
consumer goods in countries within the former Soviet Union in connection to
availability of cheaper similar products of quality made in the West manifests
itself.

The Customs Union of
Russia, Byelorussia and Kazakhstan which was established in 1995 and faces a
number of objective difficulties and contradictions caused in the first turn by
differences in levels of development and directions of reforms. The
Intergovernmental Economic Committee which at last started to perform its
functions in 1995 still lacks supranational authority; unsettled problems of
mutual payment arrears prevent activities of the Payment Union.

Prospects of foreign
trade developments within the CIS cannot be estimated in simple terms. The
Commonwealth’s objective orientation towards integration faces grave political
and economic problems. It is probable that in the beginning of next year a
negative trade balance with neighboring countries will remain, in particular
due to further decline in export of fuel and energy products.

On the whole, the
Commonwealth’s future, undoubtedly, will depend on the political situation in
Russia. However, the experience of the last few years demonstrates that
Russia’s partners within the CIS prefer to act according to their economic
interests rather than to political rhetorics. The CIS member countries are
interested in an economic cooperation with Russia exactly because it has
progressed relatively further on the way of reforms. That is why slackening
pace of the reform or a complete stop of the transformation may damage trends
towards integration to such extent that any political declarations on closer
unity and cooperation will be overweighed.

Balance of Payments

The balance of payments
reflecting Russian residents’ activities in the external sector reveals the
following key facts.

In 1995, the
strengthening ruble did not hold back the growth of trade surplus: exports
increased at a greater rate than imports.

As during previous
periods import of services exceeded their exports, that being primarily
attributed to developing tourism to countries outside the former Soviet Union.
Thus, import of tourist services exceeded imports by $ 5366 million. As a
result, current accounts balance was by 43 percent less than the balance of
foreign trade. Operations of governmental agencies prevailed in the capital
account. External debt grew due both to new borrowing and deferments and
arrears in debt servicing.

Non-state sector
operations were mostly represented by commercial loans, both in terms of
merchandise exports with deferred payments and advance payments. As concerns
direct and portfolio investment, they remained at an insignificant level.

Growing reliance of
residents on ruble was shown by somewhat decreasing amounts of cash foreign
exchange.

As a rule, commercial
structures accounted for loans granted to non-residents. The main form of such
loans was export loans of enterprises.

Non-repatriation of
export proceeds became an important factor destabilizing the financial sphere.
In January through September of 1995 it reached $ 5.6 billion, as the State
Customs Committee (GTK) reports. This figure is comparable to all foreign loans
drawn by the state in the same period.

The amount of payments
due to disburse the official external debt exerted more pressure on the Federal
budget as compared with the same period of the last year. While in 9 months of
1994 96 percent of actual payments to disburse the official external debt were
financed at the expense of external sources and only $ 134 million were
received from internal sources, in 9 months of 1995 the figures made 89.5
percent and $ 590 million accordingly.

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