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Russia and the international economy

Russia and the international economy


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


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


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


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


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


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


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


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


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


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


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$


Source: Ministry of Economy of RF.

| |1992 |1993 |1994 |1995 |

| |$ |In % |$ |In % |$ |In % |$ |In % |

| |billio|to |billio|to |billio|to |billio|to |

| |n |previo|n |previo|n |previo|n |previo|

| | |us | |us | |us | |us |

| | |year | |year | |year | |year |

|Foreign trade|79.4 |83.2 |71.1 |89.5 |79.8 |112.2 |97.6 |122.3 |

|turnover | | | | | | | | |

|Exports |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


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


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


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


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.


Russian Economic Academy “Plekhanov”

Faculty: IBS

Group: 845

Student’s name: Suprun Diana




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