OUTLIINE

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

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

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

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

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 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.

PAGE 1

PAGE 11

Russian Economic Academy “Plekhanov”

Faculty: IBS

Group: 845

Student’s name: Suprun Diana

MOSCOW 1998

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