Russia and the international economy

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

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