Trade in Russia

Russia

Formal Name: Russian Federation.
Short Form: Russia.
Term for Citizen(s): Russian(s).
Capital: Moscow.
Flag: Three equal-sized horizontal bands of white (top), red, and blue.

Beautiful Russia

RUSSIA IS THE LARGEST of the fifteen geopolitical entities that emerged in 1991 from the Soviet Union. Covering more than 17 million square kilometers in Europe and Asia, Russia succeeded the Soviet Union as the largest country in the world. As was the case in the Soviet and tsarist eras, the center of Russia's population and economic activity is the European sector, which occupies about one-quarter of the country's territory. Vast tracts of land in Asian Russia are virtually unoccupied. Although numerous Soviet programs had attempted to populate and exploit resources in Siberia and the Arctic regions of the Russian Republic, the population of Russia's remote areas decreased in the 1990s. Thirty-nine percent of Russia's territory but only 6 percent of its population in 1996 was located east of Lake Baikal, the geographical landmark in south-central Siberia. The territorial extent of the country constitutes a major economic and political problem for Russian governments lacking the far-reaching authoritarian clout of their Soviet predecessors.

Geography

Russia map

 

Size: 17,075,200 square kilometers.
Topography: Broad plain with low hills west of Urals in European Russia and vast coniferous forests and tundra east of Urals in Siberia. Uplands and mountains along southern border regions in Caucasus Mountains. About 10 percent of land area swampland, about 45 percent covered by forest.
Climate: Ranges from temperate to Arctic continental. Winter weather varies from short-term and cold along Black Sea to long-term and frigid in Siberia. Summer conditions vary from warm on steppes to cool along Arctic coast. Much of Russia covered by snow six months of year. Weather usually harsh and unpredictable. Average annual temperature of European Russia 0°C, lower in Siberia. Precipitation low to moderate in most areas; highest amounts in northwest, North Caucasus, and Pacific coast.
Land Boundaries: Land borders extend 20,139 kilometers: Azerbaijan 284 kilometers, Belarus 959 kilometers, China 3,645 kilometers, Estonia 290 kilometers, Finland 1,313 kilometers, Georgia 723 kilometers, Kazakstan 6,846 kilometers, Democratic People's Republic of Korea 19 kilometers, Latvia 217 kilometers, Lithuania 227 kilometers, Mongolia 3,441 kilometers, Norway 167 kilometers, Poland 432 kilometers, and Ukraine 1,576 kilometers.
Water boundaries: Coastline makes up 37,653 kilometers of border. Arctic, Atlantic, and Pacific oceans touch shores.
Land Use: 10 percent arable, 45 percent forest, 5 percent meadows and pasture, and 40 percent other, including tundra.

Economy

Business area of Russia

 

Salient Features: After years of double-digit declines, gross domestic product (GDP) shrank by only 4 percent in 1995. GDP per capita in 1995 US$4,224. Unemployment rising steadily, to estimated 8.5 percent in 1996; official Russian numbers about half that amount. Inflation, very high in 1994, under much better control under new government policy in 1995-96; April 1997 rate 1.2 percent. Economy increasingly dependent on foreign investment, multilateral loan agencies, and rescheduling of foreign debt. Privatization nearly complete but meeting political opposition to transformation of large state firms. Most prices determined by market. Role of organized crime significant, and much economic activity officially unaccounted for.
Agriculture: 6.3 percent of GDP in 1994. Major products grain, sugar beets, sunflower seeds, vegetables, fruits, meat, and milk.
Manufacturing: 28.3 percent of GDP in 1994. Principal products machine tools, rolling mills, high-performance aircraft, space vehicles, ships, road and rail transportation equipment, communications equipment, agricultural machinery, tractors and construction equipment, electric-power generating and transmitting equipment, medical and scientific instruments, and consumer durables.
Services: 50 percent of GDP in 1994. Tourism important source of foreign currency. Expansion of financial, communications, and information enterprises contributes to growth. Shipping services also major foreign-exchange earner.
Mining: Considerable mineral wealth, especially iron ore, copper, phosphates, manganese, chromium, nickel, platinum, diamonds, and gold. Production declined steadily 1990-95.
Energy: Russia self-sufficient in fuels and energy production. Natural gas and oil main fuels exploited, coal production declining but still significant; long-distance fuel transportation a significant problem. Main electricity sources: coal 18 percent, nuclear 13 percent, hydroelectric 19 percent, and natural gas 42 percent. Industry consumes 61 percent of energy production. Generation capacity 188 gigawatts. Energy exports most important source of foreign exchange.
Foreign Trade: Trade liberalization ongoing, abolishing export duties, restructuring import tariffs, and ending export registration in 1996. Main trading partners Germany, Italy, the Netherlands, Switzerland, Britain, the United States, Ukraine, Kazakstan, Belarus, China, and Japan. Exports for 1995 estimated at US$77.8 billion, imports US$57.9 billion. Balance of payments US$13.1 billion in 1995. Capital flight expected to drop to US$1 billion in 1996. Foreign investment strongly encouraged in some sectors, but unpredictable commercial conditions hinder growth. Outstanding Soviet-era debt by Third World countries, between US$100 and US$170 billion, could make Russia creditor country on balance.

Foreign Economic Relations

Integrating the Russian economy with the rest of the world through commerce and expanded foreign investment has been a high priority of Russian economic reform. Russia has joined the IMF and the World Bank and has applied to join the World Trade Organization (WTO--see Glossary) and the OECD. It also has been included in some functions of the Group of Seven (G-7; see Glossary).

Foreign exchange is easy

Foreign Trade

By the end of 1993, the Russian government had liberalized much of its import regime. It eliminated nontariff customs barriers on most imports, although it still requires some licenses for health and safety reasons. In mid-1992 the government took control of imports of some critical goods, including industrial equipment and food items, which it sold to end users at subsidized prices. In the early 1990s, government-controlled imports constituted about 40 percent of total Russian imports, but by 1996 most such controls had been phased out.
Russia also established a two-column tariff regime in harmony with the United States and other members of the General Agreement on Tariffs and Trade (GATT), which in January 1995 became the WTO. Russia differentiates between those trade partners that receive most-favored-nation trade treatment and, therefore, relatively low tariffs, and those that do not.
Although Russia has eliminated many nontariff import barriers, it still maintains high tariffs and other duties on imports of goods to raise revenue and protect domestic producers. All imports are subject to a 3 percent special tax in addition to import tariffs that vary with the category of goods. Some of the high tariffs include those of 40 to 50 percent on automobiles and aircraft and 100 percent on alcoholic beverages. Excise taxes ranging between 35 and 250 percent are applied to certain luxury goods that include automobiles, jewelry, alcohol, and cigarettes.

Busy road in Russia

The Government has used licensing and quotas to restrict the export of certain key commodities, such as oil and oil products, to ease the effect of price differentials between controlled domestic prices and world market prices. Without such restrictions, Russian policy makers have argued, the domestic market would experience shortages of critical materials. The government finally eliminated quotas on oil exports in 1995 and export taxes on oil in 1996. In addition to customs restrictions, the government imposes other costs on exporters. It charges a 20 percent VAT on most cash-transaction exports and a 30 percent VAT on barter transactions. It applies additional tariffs on the exports of industrial raw materials. By the mid-1990s, much of Russia's foreign trade, even that with the former communist countries of Central Europe, was conducted on the basis of market-determined prices. Immediately after the dissolution of the Soviet-dominated Comecon in 1991, the Soviet Union sought to maintain commercial relations in Central Europe through bilateral agreements. But as market economies developed in those countries, their governments lost control over trade flows. Since 1993 Russian trade with former Comecon member countries has been at world prices and in hard currencies.
In the mid-1990s, Russia still maintained hybrid trade regimes with the other former Soviet states, reflecting the web of economic interdependence that had dominated commercial relations within the Soviet Union. The sharp decrease in central economic control that occurred just before and after the breakup of the Soviet Union virtually destroyed distribution channels between suppliers and producers and between producers and consumers throughout the region. Many of the non-Russian republics were dependent on Russian oil and natural gas, timber, and other raw materials. Russia bought food and other consumer goods from some of the other Soviet republics. To ease the effects of the transition, Russia concluded bilateral agreements with the other former Soviet states to maintain the flow of goods. But, as in the case of the Central European agreements, such arrangements proved impractical; by the mid-1990s, they covered only a small range of goods. Russia now conducts trade with former Soviet states under various regimes, including free-trade arrangements and most-favored-nation trading status.
The volume of Russia's foreign trade has generally declined since the beginning of the economic transition. Trade volume peaked in 1990 and then declined sharply in 1991 and 1992. Between 1992 and 1995, however, exports rose from US$39.7 billion to US$77.8 billion, and imports rose from US$34.7 billion to US$57.9 billion. Many factors contributed to the decline of the early 1990s: the collapse of Comecon and trade relations with Eastern/Central Europe; the rapid decline of the domestic demand for imports; contraction in foreign currency reserves; a decline in the real exchange value of the ruble; the Government's imposition of high tariffs, VATs, and excess taxes on imports; and the reduction of state subsidies on some key imports. Russia's declining production of crude oil, a key export, also has contributed significantly. Until 1994 Russia's arms exports declined sharply because the military-industrial complex's production fell and international sanctions were placed on large-scale customers such as Iraq and Libya (see Foreign Arms Sales, ch. 9).
The geographical distribution of Russian foreign trade changed radically in the first half of the 1990s (see table 21; table 22, Appendix). In 1985 some 55 percent of Soviet exports and 54 percent of Soviet imports were with the Comecon countries. By contrast, 26 percent of Soviet exports and 28 percent of Soviet imports were with the fully developed market economies of Western Europe, Japan, the United States, and Canada. By the end of 1991, Russia and its former allies of Central Europe were actively seeking new markets. In 1991 only 23 percent of Russian exports and 24 percent of Russian imports were with the former Comecon member states. In 1994 some 27 percent of Russian imports and 22 percent of exports involved partners from Central Europe, with Poland, Hungary, and the Czech Republic generating the largest volume in both directions. Western Europe's share of Russian trade continued to grow, and in 1994 some 35 percent of Russia's imports and 36 percent of its exports were with countries in that region. Germany was by far the West European leader in exports and imports, and Switzerland and Britain were other large export customers. In 1994 the United States accounted for US$2.1 billion (5.3 percent) of imports and US$3.7 billion (5.9 percent) of exports; however, United States purchases of Russian goods had increased by more than 500 percent between 1992 and 1994. The total value of trade with the United States in 1995 was US$7 billion; trade for the first half of 1996 proceeded at virtually the same rate (see table 23, Appendix).
Russian trade with the so-called near abroad--the other former Soviet states--has greatly deteriorated. This trend began before the final collapse of the Soviet Union as Russian producers sought hard-currency markets for raw materials and other exportables. As Russia raised fuel prices closer to world market levels, the other republics found it increasingly difficult to pay for Russian oil and natural gas. The RCB extended credits to these countries to permit some shipments, but eventually the accumulation of large arrearages forced the Russian government to curtail shipments. At the end of 1995, Russian trade with the near abroad accounted for 17 percent of total Russian trade, down from 59 percent in 1991. Belarus, Kazakstan, and Ukraine remained Russia's largest partners, as they had been in the Soviet era. The failure to restore inter-republic trade was an important factor in the economic collapse that gripped the region around 1990.
Raw materials, especially oil, natural gas, metals, and minerals, have dominated Russia's exports, accounting for 65 percent of total exports in 1993. Exports as a whole are heavily concentrated in a few product categories. In 1995 ten commodities, all of which are raw materials, accounted for 70 percent of Russian exports. By contrast, for the United States the top ten export commodities account for only 37 percent of its exports.
The lack of diversity in Russian exports is a legacy of the Soviet period, when the central planning regime called for production of manufactured goods for domestic consumption with little consideration for the export market. Given this priority, most of the Soviet Union's consumer goods were of low quality by world standards. Post-Soviet concentration of Russian exportables in a few categories restricts Russia's potential sources of foreign currency to a few markets. And the frequent price fluctuations typical of world raw materials markets also make Russia's export revenues vulnerable to unforeseen change.
Manufactured goods dominate Russian imports, accounting for 68 percent of total imports in 1992. The largest categories of imported manufactured goods are machinery and equipment (29 percent of the total); foods, 16 percent; and textiles and shoes, 13 percent.