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1998 Country Report on Economic Policy
and Trade Practices: Russia
RUSSIA
Key Economic Indicators
(Billions of U.S. Dollars unless otherwise noted)
1996 1997 1998 1/ Income, Production and Employment: Nominal GDP 2/ 2,200 2,586 1881 Real GDP Growth (pct) -6.0 0.6 -9.9 3/ Per Capita Personal Income (US$) 778 922 888 4/ Labor Force (000s) 73,000 72,000 72,000 Unemployment Rate (pct) 9.3 9.2 11.5 4/ Money and Prices (annual percent growth): Money Supply Growth (M2) 34 30.6 18 5/ Consumer Price Index (percent increase) 22 11 56.4 Exchange Rate (Ruble/US$ annual average) 5.124 5.785 14.7 Balance of Payments and Trade: Total Exports (FOB) 85.1 85.0 34.8 6/ Exports to U.S. 4.8 4.5 4.8 7/ Total Imports (CIF) 46.0 52.9 26.0 6/ Imports from U.S. 2.9 4.1 3.2 7/ Trade Balance 39.1 32.1 8.7 6/ Balance with U.S. 1.9 0.4 1.6 7/ Current Account 2 0 -4.3 External Public Debt 125.0 123.5 147 Debt Service Payments/GDP (pct) 2.1 1.4 3.7 Fiscal Deficit/GDP (pct) 8.0 6.8 7.5 Gold and Foreign Exchange 17.1 17.8 12.1 Aid from U.S. (US$ millions) 8/ 182 99 141 Aid from All Other Sources N/A N/A N/A1/ Due to the large ruble devaluation in August and September 1998, and the abrupt change in direction of many indicators of economic activity, estimates for end of year 1998 would be unreliable and misleading. 1998 data has been provided for the last available period (9/98) unless otherwise noted. The Russian Ruble was redenominated on January 1, 1998 by dropping three zeros off the value of the currency. All data in ruble terms have been adjusted to "new rubles" for comparability.
2/ Billions of Russian Rubles.
3/ Nine months ending September 1998.
4/ Data for January-August 1998.
5/ Data for January-July 1998.
6/ Data for the period January-June 1998.
7/ U.S. Commerce Department data for the period January-October 1998.
8/ USAID, total obligations for the year. 51 million was temporarily delayed from FY1997 to the beginning of FY 1998.
Sources: Russian Statistics Committee (Goskomstat), Russian State Customs Committee, International Monetary Fund, USAID and embassy estimates.1. General Policy Framework
Russia's fragile economic stabilization, the result of three years of tight monetary policy, was shattered by recent global economic instability and falling oil prices. Market turmoil in Asia led to a pullback from emerging markets, which served to highlight Russia's persistent budget deficits. The benchmark interest rate soared from 28 percent in December 1997 to 150 percent in May 1998 as the Central Bank of Russia sought to defend the hard-won stability of the ruble. Gross foreign currency reserves dropped from a high of $24.9 billion in June 1997 to $14.6 billion in May 1998 following the dismissal of the Chernomyrdin government and the protracted political battle over a successor, stalling efforts to implement fiscal reform and improve tax collection.
In June 1998, the newly installed Kiriyenko government announced an ambitious reform program, which cleared the way for a $22.5 billion IMF-led package in July. Markets, however, were not convinced, particularly after the Duma failed to enact necessary revenue measures. Faced with a wholesale loss of confidence, the government announced a series of emergency measures on August 17, 1998. These measures included: a 90-day moratorium on certain payments, including financial credits with maturities over 180 days; a rescheduling of domestic securities; and a widening of the central bank's targeted exchange rate corridor from R6.2/US$ to R9.5/US$.
The exchange rate subsequently plunged to more than R16/US$ by the end of September, and the central bank abandoned its exchange rate corridor altogether. Russia's commercial banking and payments system collapsed. These factors, in turn, contributed to a sharp decline in imports, a fall in tax payments and a rise in government arrears. Inflation, which had fallen to an annualized rate of 5.5 percent in July 1998, reached 70 percent (year-on-year) by October 1, 1998. GDP contracted 9.9 percent for the nine months ending September 1998.
In early September 1998, a new government headed by former Foreign Minister Yevgeniy Primakov was installed. The new government, as of November 1998, has a number of pressing issues to address, including: renegotiating Russia's IMF program; rescheduling R386 billion in outstanding GKOs (Russian Treasury bills) covered by the August restructuring; restructuring Russia's commercial banking system; formulating a new foreign exchange policy; and implementing realistic budgets for end of year 1998 and 1999, including service of external debt. Payments on that debt are estimated at 17.5 billion for 1999. Some cautious steps have been taken to restart the payments system through a series of extraordinary clearing operations and provision of additional liquidity to the commercial banking sector.
2. Exchange Rate Policy
At the outset of 1998 the central bank scrapped its crawling band exchange mechanism used in recent years in favor of a more flexible medium-term regime. The average target ruble exchange rate for 1998 was set at 6.0-6.2. The program permitted the ruble to float 15 percent in either direction from its target peg, giving the government increased flexibility to deal with short-term pressures.However, Russia's continued fiscal imbalance generated persistent pressure on the ruble that was not alleviated by increases in interest rates, causing foreign currency reserves to decline. Following the decision to widen the ruble band, the ruble fell from R6.3/US$ on August 17, 1998 to R17.5/US$ by October 1998. By the end of the year, the ruble/dollar rate had drifted down to more than R20/US$.
The government also began to enforce existing regulations requiring exporters to repatriate all export proceeds and, in a new regulation, requiring 50 percent of these proceeds to be sold on the Moscow Interbank Currency Exchange (MICEX). MICEX trading was divided into two sessions: a morning session limited to importers, exporters and the central bank and an afternoon session for "speculative" traders. Banks buying foreign exchange on behalf of importers or exporters in the morning session are required to have an import or export contract. Beginning November 1, 1998, banks were not allowed to keep the proceeds acquired for these transactions on account for more than seven days.
3. Structural Policies
By the end of 1997, approximately 70 percent of GDP was produced by companies in the private sector. Extensive structural reforms were still needed in order to create a functioning market economy, instill efficient management, eliminate barter and non-payments problems from the economy, and improve the investment climate. Key areas were considered to be: tax reform, reform of natural monopolies and bankruptcy law, better protection of shareholder rights, and a market-oriented, case-by-case privatization process.
However, structural reforms floundered under the effects of the myriad economic and political crises of 1998. During the first half of the year, the Chernomyrdin and Kiriyenko governments emphasized the restructuring of natural monopolies in the electricity, rail and gas sectors. They managed to achieve notable, albeit spotty progress, particularly in the electricity sector, on reducing tariffs and eliciting more cash payments for services rendered. New commitments were made to open, fair and competitive privatization but declining oil prices and an unsettled economic environment made individual privatizations less attractive. The Duma passed and the President signed the general part of a new tax code, but legislative action on specific taxes and their rates is still pending.
The Primakov government came to power in September 1998 intending to strengthen the role of the state in the economy in order to stabilize the chaotic financial markets, better manage firms where the government still has a nominal controlling interest, and to create conditions of growth for the manufacturing sector.
The government only presented its new economic strategy to the Duma in mid November. The ideas under consideration propose to increase state intervention in the economy. The plan includes some price and supply controls, foreign currency controls, wage indexation, state support for industry, clearing arrears accrued among companies, public works programs and higher social benefits for the needy, and a privatization program that would focus more on raising enterprise efficiency and less on meeting financial objectives. The plan also calls for more rigorous antimonopoly policy, a bank restructuring plan, improvements to fiscal policy and tax policy, and measures to attract foreign investment. The draft plan, however, does not adequately address the Russian Government's perennial budget deficits or pending foreign debt service payments and does not specify sources of revenue for new government spending programs. The only solid action taken to date to increase tax revenues has been the move to strengthen state control over the production and sale of alcohol.
In effect, the status of structural reforms in Russia is in an ambiguous period. While the Primakov government finalizes its plans, some regional attempts to implement price controls have been overcome by market forces. In addition, there are reports of continued structural progress at Unified Energy Systems (UES), Russia's electricity monopoly, which is still headed by economic reformer Anatoliy Chubays. The Bankruptcy Agency is reporting an increase in the proportion of enterprise liquidations, as compared to restructuring cases. The Russian Government has also announced the sale of a 2.5 percent share of Russian gas monopoly Gazprom, and specified that sale will be open to foreign investors.
4. Debt Management Policies
In 1996 and 1997, Russia finalized the rescheduling of its debt in the Paris and London Clubs. Russia then successfully returned to international capital markets in 1996-98, placing over $13 billion in dollar-denominated obligations, as well as DM3.25 billion of Eurobonds to date.However, the decisions of August 17, 1998 present the government with new debt management challenges. As of December 1998, the government had not yet reached a final agreement with foreign investors affected by the GKO restructuring. Russia has missed several Paris Club payments on rescheduled debt, and faces other debt service payments of around $20 billion by the end of 1999. The government has indicated that it will seek to reschedule some of these obligations. In addition, Russian private banks and firms owe large sums to Russian and foreign creditors. Many Russian banks are engaged in debt talks with Western creditors.
5. Significant Barriers to U.S. Exports
At the end of 1998, the most significant barriers to U.S. exports were not statutory but were instead results of the difficult economic situation in Russia: reduced purchasing power, reduced availability of trade finance, uncertainty about the future value of the ruble, and payment/clearance problems.Since 1995, Russian tariffs have generally ranged from five to thirty percent, with a trade-weighted average in the 13-15 percent range. In addition, excise and Value-Added Tax (VAT) is applied to selected imports. The VAT, which is applied on the import price plus tariff, is currently 20 percent with the exception of some food products. In July 1998, VAT rates were raised from 10 to 20 percent for many agricultural goods, and a temporary three-percentage point tariff surcharge on all goods was enacted in August 1998 as a balance of payment and revenue measure, to be effective from August 15 1998 until mid 1999. In addition, throughout 1997 and 1998, new combined customs duties (with minimum import tariffs) were introduced on various meat products, processed cheese, bottled water and miscellaneous manufactured goods.
However, with the onset of the economic crisis in August, imported products became scarce because of financial sector difficulties and the ruble devaluation. For agricultural products, it is estimated that the effective protection of the minimum duties increased by as much as 100 percent. Because of its dependence on imported food, Russia announced the following measures for staple food products and inputs used by the food processing industry: a cancellation of the three percent surcharge, a rollback of the VAT increase and cuts in customs duties.
Other Russian tariffs that have stood out as particular hindrances to U.S. exports to Russia include those on autos (where combined tariffs and engine displacement-weighted excise duties can raise prices of larger U.S.-made passenger cars and sport utility vehicles by over 70 percent); some semiconductor products; and aircraft and certain aircraft components (for which tariffs are set at 30 percent). A July 1998 Russian Government resolution makes waivers on aircraft import tariffs for purchases by Russian airlines contingent on those airlines' purchases of Russian-made aircraft.Import licenses are required for importation of various goods, including ethyl alcohol and vodka, color TVs, sugar, combat and sporting weapons, self-defense articles, explosives, military and ciphering equipment, encryption software and related equipment, radioactive materials and waste including uranium, strong poisons and narcotics, and precious metals, alloys and stones. Most import licenses are issued by the Russian Ministry of Foreign Economic Relations (MINFER) or its regional branches, and controlled by the State Customs Committee. Import licenses for sporting weapons and self-defense articles are issued by the Ministry of Internal Affairs.
In October 1998, the government announced its plan for tightening of control over the alcohol industry, including creation of a state monopoly over the production and sale of ethyl alcohol. The plan does not envisage a change in the import regime for alcohol and alcoholic beverages, but a draft law under consideration by the legislature has provisions establishing import quotas.
In spring 1998, Russia passed the Law on Protective Trade Measures, which provides the government authority to undertake antidumping, countervailing duty and safeguard investigations, under certain conditions. Producers of agricultural products have shown particular interest in petitioning for investigations under this law.
The June 1993 Customs Code standardized Russian customs procedures generally in accordance with international norms. However, customs regulations change frequently, (often without sufficient notice), are subject to arbitrary application, and can be quite burdensome. In addition, Russia's use of minimum customs values is not consistent with international norms.
U.S. companies continue to report that Russian procedures for certifying imported products and equipment are non-transparent, expensive and beset by redundancies. Russian regulatory bodies also generally refuse to accept foreign testing centers' data or certificates. U.S. firms active in Russia have complained of limited opportunity to comment on proposed changes in standards or certification requirements before the changes are implemented, although the Russian standards and certifications bodies have begun to work closely with the American Chamber of Commerce in Russia to provide additional information. Occasional jurisdictional overlap and disputes between different government regulatory bodies compound certification problems. In 1998, the government made operational its inquiry point for regulations covered by the Technical Barriers to Trade (TBT) agreement in the World Trade Organization (WTO). On July 31, 1998, a new law on product certification went into effect, which generally meets the requirements of the TBT agreement. Voluntary certification by manufacturers will be allowed for a limited number of products.
A January 1998 revision to State Tax Service Instruction #34, now being enforced, makes it more difficult for expatriate employees of U.S. entities to benefit from the bilateral treaty on avoidance of double-taxation. A wide range of U.S. companies selling goods and services in Russia, who formerly could receive advance exemptions from withholding taxes for salaries, are now required to apply for a refund of tax withheld. While this is not consistent with the terms of the treaty, it remains to be seen how quickly refunds will be made or whether the new approach will significantly increase the cost of expatriate salaries.
Although under current law little of Russia's legislation in the services sector is overtly protectionist, the domestic banking, securities and insurance industries have secured concessions in the form of Presidential Decrees. Foreign participation in banking, for example, is limited to 12 percent of total paid-in banking capital (but as of mid 1998 only accounted for around 4 percent of the total). In practice, foreign companies are often disadvantaged vis-à-vis Russian counterparts in obtaining contracts, approvals, licenses, registration, and certification, and in paying taxes and fees. In October 1998, the President vetoed legislation that would have limited market access for foreign investors in the tourism sector; in his comments, he cited the lack of justification for such a limitation on consumer choice in this area. As the legislature continues to consider regulatory measures for various services sectors, similar issues can be expected to arise.
Although there are no current, significant legal barriers to doing business in Russia, Russian foreign investment regulations and notification requirements can be confusing and contradictory. The Ministry of Finance, local authorities and/or various central government bodies all register foreign investments. Prior approval is required for investment in new enterprises using assets of existing Russian enterprises, foreign investment in defense industries (which may be prohibited in some cases), investment in the exploitation of natural resources, all investments over 50 million rubles, investment ventures in which the foreign share exceeds 50 percent, or investment to take over incomplete housing and construction projects. Additional registration requirements exist for investments exceeding 100 million rubles. Projects involving large scale construction or modernization may also be subject to expert examination for environmental considerations. Although the situation has improved over the past few years, foreigners encounter significant restrictions on ownership of real estate in some cities and regions in Russia.
The government maintains a monopoly on the sale of precious and several rare-earth metals, conducts centralized sales of diamonds, and conducts centralized purchases for export of military technology. In September and October, gold and diamond trading were liberalized slightly, but state control is still intact. In August 1997, a series of Presidential Decrees were enacted which established tighter control over military exports by the state enterprise Rosvooruzheniye, enabled two additional state firms to sell military goods and technology, and opened the door to future direct sales by arms manufacturers, if licensed and approved by the Ministry of Foreign Economic Relations. The current government is expected to continue to work toward this goal.
In July 1998, the President vetoed a bill containing amendments to the Russian Law on Foreign Investments, noting that most aspects of foreign investment are already governed by other laws. The bill included provisions creating a program of investment incentives for large projects (which meet certain criteria such as export orientation or import substituting) and has registration requirements for foreign direct investments. Duma sponsor Adrian Puzanovsky has formed a conciliation committee to try to rework the law to respond to the President's concerns. A Presidential Decree signed in early 1998 provides investment incentives for large investments in the auto industry that meet local content requirements. Russia's production sharing agreement legislation for the oil and gas industry has local content requirements, and some proposed amendments to the law, if enacted, would raise the percentage of local content required.
Most of these issues are the subject of discussion, as Russia undertakes negotiation of its accession to the World Trade Organization (WTO). By the end of 1998, the government completed nine working party meetings. It provided its initial market access offers for goods in February 1998 and hopes to submit its offer on services in the first half of 1999. Russia is not yet a signatory of the WTO Government Procurement or Civil Aircraft codes.
6. Export Subsidies Policies
The government has not instituted export subsidies, although a 1996 executive decree allows for provision of soft credits for exporters and government guarantees for foreign loans. The government does provide some subsidies for the production of coal, but coal exports are minimal. Soft credits are at times provided to small enterprises for specific projects.7. Protection of U.S. Intellectual Property
Russia is in the process of accession to the World Trade Organization (WTO), and as a new member, it will be required to meet obligations under the WTO's Trade Related Aspects of Intellectual Property (TRIPs) immediately upon accession. Russia belongs to the World Intellectual Property Organization (WIPO), and has acceded to the obligations of the former Soviet Union under the Paris Convention for the protection of industrial property (patent, trademark and related industrial property), and the Madrid Agreement Concerning the International Registration of Marks, and the Patent Cooperation Treaty. Russia has also become a signatory to the Berne Convention for the protection of literary and artistic works (copyright) as well as the Geneva Phonograms Convention. In 1998, the U.S. Trade Representative retained Russia on the "Special 301" Priority Watch List for a second year due in large part to concerns over weak enforcement of Intellectual Property (IP) laws and regulations as well as lack of retroactive copyright protection for U.S. works in Russia.In 1992-93 Russia enacted laws strengthening the protection of patents, trademarks and appellations of origins, and copyright of semiconductors, computer programs, literary, artistic and scientific works, and audio/visual recordings. Legal enforcement of intellectual property rights (IPR) improved somewhat in 1998 with a series of raids on pirates and some seizures of CD's at the border by Russian Customs. A new Criminal Code took effect January 1, 1997, that contains considerably stronger penalties for IPR infringements. However, there are still disappointingly few cases in which these penalties have been applied. By Presidential Decree, a higher patent chamber has been established at the Russian Patent and Trademark Agency (Rospatent) which should bring greater expertise and efficiency to the resolution of patent and trademark disputes. Rospatent is also seeking to establish a Russian Trademark Owners Association to represent the concerns of trademark holders. Nevertheless, widespread sales of pirated U.S. video cassettes, recordings, books, computer software, clothes, toys, foods and beverages continue.
The Patent Law includes a grace period, procedures for deferred examination, protection for chemical and pharmaceutical products, and national treatment for foreign patent holders. Inventions are protected for 20 years, industrial designs for ten years, and utility models for five years. The Law on Trademarks and Appellation of Origins introduces for the first time in Russia protection of appellation of origins. The Law on Copyright and Associated Rights, enacted in August 1993, protects all forms of artistic creation, including audio/visual recordings and computer programs as literary works for the lifetime of the author plus 50 years. The September 1992 Law on Topography of Integrated Microcircuits, which also protects computer programs, protects semiconductor topographies for 10 years from the date of registration.
Under the U.S.- Russian Bilateral Investment Treaty (signed in 1992 but not yet ratified by the Russian Parliament), Russia has undertaken to protect investors' intellectual property rights. The bilateral trade agreement stipulates protection of the normal range of literary, scientific and artistic works through legislation and enforcement. An interagency IPR team from the U.S. met with various law enforcement agencies in July 1998 to discuss a wide-range of assistance and training programs, some of which have already begun to be implemented.
8. Worker Rights
a. The Right of Association: The law provides workers with the right to form and join trade unions, but practical limitations on the exercise of this right arise from governmental policy and the dominant position of the formerly governmental Federation of Independent Trade Unions of Russia (FNPR). The government has threatened several unions with decertification, drafted changes in the Law on Trade Unions which would make it more difficult for them to register, and proposed legislation which institutionalize labor collectives to compete with trade unions and complicate representation of worker rights. As the successor organization to the governmental trade unions of the Soviet period and claiming to represent 80 per cent of all workers, the FNPR occupies a privileged position which inhibits the formation of new unions.b. The Right to Organize and Bargain Collectively: Although the law recognizes collective bargaining, the effect of numerous governmental policies is to inhibit it. The new draft Labor Law would give precedence to annually renewable individual contracts over collective bargaining agreements. Court rulings have established the principle that non-payment of wages -- by far the predominant grievance -- is an individual dispute and cannot be addressed collectively by unions. As a result, a collective action based on non-payment of wages would not be recognized as a strike, and individuals would not be protected by the Labor Law's guarantees against being fired for participation. The right to strike is difficult to exercise. Most strikes are technically illegal, and courts have the right to order the confiscation of union property to settle damages and losses to an employer, if a strike is found to be illegal. Reprisals for strikes are common.
c. Prohibition of Forced or Compulsory Labor: The Labor Code prohibits forced or compulsory labor by adults and children. There are documented cases of soldiers being sent by their superior officers to perform work for private citizens or organizations. Such labor may violate military regulations and, if performed by conscripts, would be an apparent violation of ILO convention 29 on forced labor.
d. Minimum Age for Employment of Children: The Labor Code prohibits regular employment for children under the age of 16 and also regulates the working conditions of children under the age of 18, including banning dangerous, nighttime and overtime work. Children may, under certain specific conditions, work in apprenticeship or internship programs at the ages of 14 and 15. Accepted social prohibitions against the employment of children and the availability of adult workers at low wage rates combine to prevent widespread abuse of child labor legislation. The government prohibits forced and bonded labor by children, and there have been no reports that it occurred.
e. Acceptable Conditions of Work: The Labor Code provides for a standard workweek of 40 hours, with at least one 24-hour rest period. The law requires premium pay for overtime work or work on holidays. Workers have complained of being required to work well beyond the normal week, that is, 10 to 12-hour days, and of forced transfers. Total wage arrears reached 64 billion rubles in August 1998, up from 40 billion rubles a year earlier. Workers are economically constrained: their ruble savings have been destroyed by the rampant inflation of the early 1990's and the devaluation of August 1998; most have not been paid for periods of five to twenty-five months; and their freedom to move in search of new employment is virtually eliminated by the system of residency permits. The law establishes minimal conditions of workplace safety and worker health, but these standards are not effectively enforced.
f. Rights in Sectors with U.S. Investment: Observance of worker rights in sectors with significant U.S. investment (petroleum, telecommunications, food, aerospace, construction machinery, and pharmaceuticals) did not significantly differ from observance in other sectors. There are no export processing zones. Worker rights in the special economic zones/free trade zones are fully covered by the Labor Code.
Extent of U.S. Investment in Selected Industries -- U.S. Direct Investment Position Abroad on an Historical Cost Basis -- 1997
(Millions of U.S. Dollars)
Category Amount Petroleum 485 Total Manufacturing 322 Food & Kindred Products (1) Chemicals & Allied Products 39 Primary & Fabricated Metals (1) Industrial Machinery and Equipment 1 Electric & Electronic Equipment (2) Transportation Equipment 0 Other Manufacturing -4 Wholesale Trade -30 Banking 132 Finance/Insurance/Real Estate 809 Services -60 Other Industries 248 TOTAL ALL INDUSTRIES 1,906(1) Suppressed to avoid disclosing data of individual companies.
(2) Less than $500,000 (+/-).Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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