COUNTRY COMMERCIAL GUIDE--RUSSIAN FEDERATION
FISCAL YEAR 2000
TRADE REGULATIONS AND INVESTMENT CLIMATE
VI. TRADE REGULATIONS AND STANDARDS
Trade Barriers
Since 1996, Russia’s import duties (on a trade-weighted basis) have averaged around 14 percent. A three-percentage point tariff surcharge on all imports dating from July 1998 was revoked effective March 1, 1999. Products for which Russian import duties are particular obstacles include automobiles (where calculation based on engine displacement disadvantages many larger U.S. vehicles) and aircraft.
Besides tariffs, there are two other types of charges applied to imports: excise tax and value-added-tax (VAT). Excise tax applies to a number of luxury goods, alcohol, cigarettes and autos, and varies from 20 percent to 570 percent on a price- exclusive basis. The VAT rate is now 20 percent, with the exception of foodstuffs (for which VAT is 10 percent), and is applied to the import price plus tariff plus excise tax.
Customs Valuation
Customs duties are payable on the customs value of goods in hard currency or rubles at the current exchange rate. The customs value is generally considered to be the CIF price of the goods imported. A customs processing fee of 0.15 percent of the goods’ actual cost is also levied. According to customs regulations, customs processing should take no longer than one month. If goods are refused by Russian Customs, regulations call for their return to the country of origin.
Import Licenses
Import licenses are required for importation of various goods, including ethyl alcohol and vodka, 14-, 21- and 25-inch color TVs, combat and sporting weapons, self-defense articles, explosives, military and ciphering equipment, radioactive materials and waste including uranium, strong poisons and narcotics, and precious metals, alloys and stones. Import licenses are issued by the Russian Ministry of Trade or its regional branches, and controlled by the State Customs Committee. Licenses for sporting weapons and self-defense articles are issued by the Interior Ministry.
Russian Export Controls
Weapons, military equipment and dual-use materials and technology continue to require Russian export licenses if sold from Russia. Oil exports are controlled through the Ministry of Fuels and Energy's granting of access to export pipelines.
United States Export Controls
Certain high-technology or dual-use (civilian and military) products, such as weapons, high-speed computers and other goods, are subject to United States Government export restrictions, possibly including requirements for pre-license checks and/or post-shipment verifications. In the United States has banned U.S. exports to ten Russian enterprises suspected of collaboration with Iran in development of ballistic missile and/or nuclear weapons capabilities. Exporters with questions are advised to contact the Export Counselling Division of the U.S. Department of Commerce’s Bureau of Export Administration (see Chapter XI for contact information) for guidance.
Import/Export Documentation
Importers are required to complete a Russian customs freight declaration for every item imported. Certificates of origin and conformity (see "Product Standards" below) should also be presented at customs. Exporters are required to complete an export declaration and, if necessary, present the appropriate export license at customs. In addition, currency control authorities require issuance of a "passport" for both exports and imports to ensure that hard currency earnings are remitted to Russia and transfers of hard currency payments for imports are for goods actually received and properly valued.
Temporary Entry
Temporary imports by foreign companies which are accredited with Russian government authorities are exempt from customs duties. This applies to goods imported only for company use and for one year only. Companies not accredited with Russian government authorities are charged 3 percent of the total cost of the product on a monthly basis. In this case, total cost equals original product price plus all import taxes.
Product Standards
Many products imported for sale into the Russian Federation are required to have a certificate of conformity issued by the Russian State Standards Committee (Gosstandart). GOSSTANDART tests and certifies products according to Russian Government standards, rather than other widely-accepted international standards (e.g., the ISO-9000 system). GOSSTANDART and its authorized agents are the chief sources for certification in Russia. However, other agencies are involved in certification of certain products, including the Ministry of Agriculture (food products), the Ministry of Health (medical devices and pharmaceuticals), the State Communications Committee (telecommunications equipment and services), the State Mining and Industrial Inspectorate GOSGORTECHNADZOR (equipment for the mining, oil and gas industries) and others.
Testing protocols from the IECEE (electrical equipment) and the IECQ (electrical components), both of which fall under the International Electrotechnical Commission, from Underwriters Laboratories, and from other bodies are accepted by GOSSTANDART and help to expedite certification by the Russian agency. The certificate of conformity is valid for 3 years and must accompany every shipment. Copies of the certificate are acceptable if original seals of the U.S. company holding the original certificate accompany the copy. Russian retailers are obliged to have on hand certificates for all imported products sold in their stores; violation of this requirement can bring penalties of up to the equivalent of $10,000.
New regulations on labeling for non-food products came into force on July 1, 1998, augmenting food labelling requirements which took effect previously. Companies are advised to check their compliance with these requirements before shipping products. Regulations can be obtained from Gosstandart (see contact information in Chapter XI).
Free Trade Zones/Warehouses
There are no actual free trade zones in Russia. There are some free economic zones designed to encourage investments in specific areas, as well as free customs zones and free warehouses. Federal legislation on the development of free economic zones (FEZs) is no longer a Russian priority, despite the periodic resurfacing of draft bills. In 1997, a bill attempting to unify tax holidays and other concessions for FEZs across Russia passed parliament only to be vetoed by the president. Previously-established FEZs, including the high profile Kaliningrad FEZ, have generated little new investment.
More recently, with the onset of the financial crisis and the government's emphasis on improving revenue collection, the concept of FEZs has been criticized as a threat to federal budget revenues. The government has turned to the model of smaller-scale, more controlled, "free customs warehouses" as a possible alternative, as in the case of the 1998 Automobile Industry Decree (#135). Customs duties do not apply in free customs zones and free warehouses. Some production and wholesale transactions can take place within these zones, but not retail sales. The storage period is not limited. Free customs zones and free warehouses are located in customs areas (airports, seaports, railway and truck terminals) and, according to Decree 135, selected automobile factories.
Membership in Free Trade Arrangements
Russia currently participates in a free trade arrangement with the CIS. Russia has an association agreement with the European Union (effective December 1997), proposes to join the World Trade Organization, and currently receives MFN treatment and GSP status from the United States. A customs union with Belarus, Kazakhstan, Kyrgyzstan and Tajikistan has been formed on paper, but is not currently operational.
VII. INVESTMENT CLIMATE
While there has been a gradual revival in economic activity since 1998, and some new foreign investment initiatives in key industrial sectors, most foreign direct investors are concentrating on consolidating their positions to limit their losses in the near term. In this environment, the Russian government faces great challenges in fashioning its investment policy. Nevertheless, the government continues to work toward creation of a more favorable investment climate.
Throughout the 1990s, the Russian Government has placed high priority on the attraction of foreign direct investment, and 45 regions have also developed laws and programs to attract it. To date, these efforts have focused on tax incentives for large investment projects, a new Russian development bank, and guarantees for new investments, all of which are hamstrung by lack of funds. Investment promotion is hampered most by several factors affecting the commercial climate. First, many legal underpinnings of a modern market economy remain to be firmly established. New laws and revisions of existing laws that affect costs and conditions continue to be introduced frequently. Second, relatively high incidences of unfair or non-transparent business and tax practices dissuade investors. Third, it is ulikely that most investments will show strong profits in the short term, given the current weakness of Russia’s economy. Finally, financing remains scarce.
The 1991 investment code guarantees foreign investors rights equal to those enjoyed by Russian investors. This law was amended by new legislation effective July 9, 1999, and includes a grandfather clause protecting certain investments from unfavorable changes in tax and other laws for up to seven years. However, it also widens somewhat the legal criteria for restricting foreign investment in some sectors.
There have been relatively few explicit restrictions on foreign direct investment in Russia, but domestic pressures for restrictions in specific sectors are growing. A 1998 law on the aerospace industry limits foreign ownership to 25 percent of an enterprise. Foreign ownership in the natural gas monopoly Gazprom is technically limited to twenty percent, although use of joint ventures to purchase additional shares has allowed Gazprom to pursue its strategic partnership with the German company Ruhrgas without legal problem. Foreign investors are limited to a 49 percent share in insurance companies, and a proposed law would limit overall foreign capital in the insurance industry to 15 percent. A 1998 law limits foreign investment in the electric power giant Unified Energy Systems to 25 percent or less; however, it has not been enforced to date, and foreign holdings in UES are believed to exceed 28 percent. The Russian parliament has also been discussing a law which would explicitly restrict or prohibit investment in a number of sectors (it would follow passage of the revisions to the foreign investment law).
Current law limits foreign bank capital to 12 percent of total banking capital. Last year's financial crisis devastated Russian banking capital and, as a consequence, foreign capital approached the 12 percent ceiling in mid-1999. In response, Central Bank Chairman Viktor Gershchenko has indicated that the government is exploring the introduction of legislation that would raise the ceiling or otherwise facilitate additional foreign capital inflow into Russian banks.
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 (currently about $2 million), 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. In sectors which require licensing (e.g., banking, mining and telecommunications), procedures often can be lengthy and non-transparent. 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.
During large-scale and case-by-case privatization from 1994-1997, foreign investment was a contentious issue. The Russian government failed to establish clear and consistent laws in this regard. The high profile loans-for-shares privatization program of 1995-1996 banned foreign investors from auctions in the oil, gas and precious metals sectors. Although foreign investors have participated in Russian privatization sales, stakes are limited and problems often arise with respect to minority shareholder rights and corporate governance. In 1998, privatization slowed significantly, first due to the government's decision to take a gradual approach, then as both foreign and domestic investors lost interest in unrestructured enterprises that appeared unprofitable. Since foreigners are virtually the sole source of capital in Russia's current privatization climate, there have been several announcements that future sales will be open to foreign investors. One recent sale of government shares in Gazprom went to a foreign investor which already held shares in the company.
The question of foreign investment via future privatizations is not clear, and for the short term, controlling stakes in large state firms of potential interest generally are not up for sale. Nonetheless, small-scale privatization continues at local, regional and federal levels and may present some good buys for some investors (for example, the Russian government periodically sells off incrementally some of the shares it owns in large enterpises). Potential foreign investors are advised to work directly and closely with local, regional and federal officials that exercise ownership and other authority over companies whose shares they may want to acquire.
Foreign investment has been hindered by the impact of the financial crisis which began in August 1998. A majority of firms suffered from inaccessible funds in banks, breakdowns in distribution, significant decline in demand for goods and products and nonpayment of receivables. Of these problems, reduced demand appears to be the most lasting effect, with many companies reporting revenues down by 20-50 percent even a year later. This economic context has made it more difficult for investment projects to secure financing, as private Western banks have all but ceased accepting Russian risk.
Rule of law and respect for property rights, though improving, remain key concerns for foreign investors. Many large U.S. firms are reluctant to pursue a strategy of growth through acquisition in Russia due to potential liabilities associated with existing facilities (e.g., tax debts and environmental cleanup liabilities), political pressures which would hinder economic restructuring, hidden financial liabilities and weak protection of minority shareholder rights.
The Energy Industry
Accounting for half of Russia’s export revenues and comprising a major share of the world’s undeveloped energy resources, Russia’s oil and gas sector holds tremendous potential for foreign as well as domestic investment. After a long delay, new production sharing agreement (PSA) legislation was adopted at the beginning of 1999. The Russian government is now drafting normative acts which will facilitate investment in the energy sector through PSAs. Disagreement between the licensing agency, the Ministry of Natural Resources, and the technical agency, the Ministry of Fuels and Energy, has delayed progress in the past. Passage of PSA legislation was an important step toward a transparent, stable investment regime, and though not adequate in itself, is a precondition for major Western energy investment here.
The Russian government has been unable to deliver on promises of a stable environment for oilproducing joint ventures, which have operated outside the PSA context. One U.S. joint venture partner withdrew from Russia in May 1998, citing the adverse effect of the imposition of more than 40 new taxes by the Russian government since 1991. Ruble devaluation following the August 1998 crash has given joint ventures some breathing space, as has the recent rebound in world oil prices. Access to export pipelines remains problematic for these ventures.
Changes in the ownership structure of the Russian oil industry have resulted in more market-oriented potential partners for U.S. firms. However, the sector remains characterized by a lack of transparency and extensive influence by Russian oil and gas firms over the government and other economic actors.
Russian agriculture is grossly undercapitalized, and foreign investors remain reluctant to invest in Russian farming for several reasons. Most Russian farm operators seek only minority partners, and few operations are available to be wholly-owned by foreigners because of Russian fears over possible loss of control of domestic production. Some regional governments have added uncertainty by imposing embargoes on movement of agricultural products out of the region after harvests, in order to ensure repayment of debts or local supply. Collective farms have undergone largely cosmetic reform -- many are now referred to as joint stock companies, but still operate much as in Soviet times, carrying social welfare responsibilities such as providing schools, healthcare and employment to local villages. Phase-out of subsidies has left many agricultural enterprises underfunded, and production is often a fraction of previous capacity. In the absence of land reform, it is difficult to obtain clear title to land and illegal to use land as collateral for loans.
Experience has shown that one of the most important factors determining success or failure of a foreign investment project in agriculture is the degree to which the local administration supports the project, is willing to clear obstacles when necessary and otherwise not interfere. Most administrations officially invite investment into their regions, but fewer are prepared to allow business to operate in a relatively open market without state interference with respect to issues such as pricing inputs and output, and with whom businesses may contract for services. Many local administrations still view foreign investors as sources of cash for the support of local government and favored businesses.
The Regional Investment Initiative, announced in 1997, is a collaborative effort between the U.S. and Russian governments and regional authorities. In each of three selected regions, U.S. Government agencies work with Russian regional and federal officials to set priorities for attracting investment. These priorities then serve as the framework for a package of technical cooperation, financing, and partnership activities, aimed at boosting prospects for investment and economic growth in the given region. This initiative is currently being implemented in Novgorod, the Russian Far East (with a focus on Khabarovsk and Sakhalin), and Samara.
Conversion and Transfer Policies
The Central Bank of Russia (CBR) has substantially altered its exchange rate policy and tightened its currency controls since the August 1998 financial crisis. Tighter controls have helped reduce capital outflows, thereby supporting the ruble. These include the obligatory sale of 75 percent of foreign currency export earnings (up from the previous requirement of 50 percent) for rubles on authorized currency exchanges, a 100 percent prior deposit requirement for the advanced purchase of imports, and limitations on the purchase of foreign exchange using ruble in correspondent accounts; and increased bank reporting requirements.
The ruble is the only legal tender in Russia. There are two types of foreign currency operations under Russian law: (1) current operations (e.g., import/export contracts and loans not exceeding 180 days); and (2) capital operations (investments, financial loans exceeding 180 days, and deferred import/export payments of over 90 days). Current operations have no limitations while capital operations generally require prior approval of the CBR. The CBR has sought to streamline the approval process for direct investment inflows.
Non-residents can open ruble accounts at authorized resident banks. "T-accounts" are for servicing import and export operations, "I-accounts" are used for investment activities (e.g., paid-in capital, profit repatriation), and "S-accounts" for investments in government T-bills. "S-account" holders of rescheduled T-bills are not permitted to repatriate their proceeds into foreign currency other than through special limited auctions conducted by the CBR. Non-residents may open correspondent ruble accounts to service trade operations, as well as ordinary ruble accounts. Residents may open foreign exchange accounts.
Expropriation and Compensation
The 1991 investment code prohibits the nationalization of foreign investments except following legislative action and where deemed to be in the national interest. By law, such nationalizations may be appealed to the courts of the Russian Federation, and are to be paid with prompt, adequate and effective compensation.
Russia’s current leadership is unlikely to nationalize or expropriate foreign holdings. However, local government interference, or lack of enforcement of court rulings protecting investors, in several cases has been a problem. The United States Embassy is tracking a small number of cases in which foreign companies are seeking compensation for the loss of their investment or property due to regional government action or inaction. Arbitration or legal proceedings are pending in some of these cases. To date, no award payments have been made in these cases.
Dispute settlement
Russia has a body of conflicting, overlapping and rapidly changing laws, decrees and regulations which has resulted in an ad hoc and unpredictable approach to doing business. Independent dispute resolution in Russia can be difficult to obtain; the judicial system is still developing. Regional and local courts are often subject to political pressure.
Many Western attorneys refer their Western clients who have investment or trade disputes in Russia to international arbitration (e.g., in Stockholm) or to courts abroad. A 1997 law now allows foreign arbitration awards to be enforced in Russia, even if there is no reciprocal treaty between Russia and the country where the order was made. Russia is a member of the International Center for Settlement of Investment Disputes and accepts binding international arbitration. However, the enforcement of international arbitral awards still ultimately requires action from Russian courts and follow-up by court officers through a nascent marshal system that has not yet proved itself.
As for legal avenues available in Russia through Russian arbitration, one is the Arbitration Court of the Russian Federation, which is part of the court system. It has special procedures for seizure of property before trial, so property cannot be disposed of before the court has heard the claim, as well as for the enforcement of financial awards through the banks. Additionally, the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry will hear claims if both parties agree to refer disputes there. Applications can be made by parties to foreign trade agreements and by companies with foreign investments. A similar arbitral court has been established in St. Petersburg.
As with international arbitral procedures, the weakness in the system is in Russian enforcement of decisions. In one case, for example, after three years of successful Russian litigation with repeated favorable decisions and court orders for financial restitution, a foreign investor continues to await compensation from its former joint venture partner. The best strategy, therefore, is to make a conscious effort from the outset of a business relationship to avoid court disputes, and to ensure that contracts include legal (under Russian law) mechanisms for resolving them to mutual satisfaction.
Performance Requirements and Incentives
The provision of investment incentives has been problematic in Russia, as the Russian government’s interest in attracting investment has been tempered by its precarious financial situation, concern over privileges given to foreign investors, and interest in complying with rules of the WTO and other international economic institutions which generally frown on such incentives. Many investment incentives set out in the 1991 investment law, including certain tax benefits, have never been implemented, or have been largely eliminated or superseded by subsequent laws and decrees.
The current production sharing agreement legislation, as amended in late 1998, requires 70 percent local content. The Russian Automobile Decree, signed in early 1998, allows tariff breaks for large investments in the auto industry (where investment projects attain 50 percent domestic content levels within five years). There are also proposals (including in the Duma’s draft foreign investment law amendments) to grant exemptions from customs duties for certain foreign investments exceeding $100 million. However, in the face of severe fiscal shortfalls, Russia’s government is under strong pressure to curtail existing incentives and to avoid offering new ones.
Performance requirements are not generally imposed by Russian law, and are not widely included as part of private contracts. They have appeared in the agreements of large multinational companies investing in natural resources development. A government resolution adopted in July 1998 requires Russian airlines to purchase domestically produced aircraft in order to receive waivers of customs duties for certain imported aircraft, potentially impacting the export of American aircraft to the Russian market.
Right to Private Ownership and Establishment
Both foreign and domestic legal entities may establish, purchase and dispose of businesses in Russia. Investment in those sectors affecting national security (insurance, banking, natural resources, communication, transportation, and defense related industries) may be limited.
Protection of Property Rights
The constitution and a presidential decree issued in 1993 give Russian citizens general rights to own, inherit, lease, mortgage, and sell real property (usually not including the land on which it stands). However, legislative gaps and ambiguities impede the exercise of these rights. Russia does not yet have a land code to regulate land use and ownership. The 1993 presidential decree gave joint ventures with foreign participants the right to own real property, and a privatization decree issued in the summer of 1994 permitted foreign owners of privatized companies to receive title to enterprise land; however, such rights have not been codified. The right of Russian citizens to own and sell residential, recreational and garden plots is clearly established, with over 40 million such properties under private ownership.
Although a spring 1996 presidential decree permits ownership and sale of land, including agricultural land, the Duma maintains that the decree is not constitutional. Uncertainty about more general rights to land title and mineral rights will persist until the Duma and president agree upon clear and comprehensive legislation to regulate land use and ownership. Meanwhile, some regional legislatures have tried to fill in the gap. In 1997 and 1998, Saratov and Samara oblasts approved laws allowing free trade of land in their regions. In mid-1999, proposals were floated to ban sale of land to foreigners (citing concerns over potential Chinese investors’ assumption of control over border lands in Russia’s Far East). While the Stepashin government has publicly distanced itself from such proposals, their active discussion contributes to lack of certainty over future Russian land ownership policy.
Intellectual Property
Since 1992, Russia has enacted laws strengthening protection of patents, trademarks and appellations of origin, and copyright of semiconductors, computer programs, literary, artistic and scientific works, and audio/visual recordings.
The patent law, which accords with norms of the World Intellectual Property Organization, 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 10 years, and utility models for five years. The law on trademarks and appellations of origin introduces for the first time in Russia protection of appellations of origin and provides for automatic recognition of Soviet trademarks upon presentation of the Soviet certificate of registration.
The law on copyright and neighboring 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, and is compatible with the Bern Convention. 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.
Russia has acceded to the Universal Copyright Convention, the Paris Convention, the Bern Convention, the Patent Cooperation Treaty, the Geneva Phonogram Convention, and the Madrid Agreement. Under the U.S.-Russian Bilateral Investment Treaty, Russia has undertaken to protect investors' intellectual property rights, although prospects for ratification of the Treaty in the foreseeable future are slim. The U.S.-Russia Bilateral Trade Agreement mandates protection of the normal range of literary, scientific and artistic works through legislation and enforcement.
While the Russian government has successfully passed good laws on protection of intellectual property, enforcement of those laws has been a low priority. A new criminal code went into effect on January 1, 1997, which for the first time applied criminal penalties to intellectual property violations. However, there are shortcomings in this law that need to be addressed. In 1997, Russia was elevated to the “Priority Watch List” category under “Special 301” provisions of the U.S. Trade Act, primarily for failing to provide protection for pre-existing U.S. copyrighted works and sound recordings still under protection in the United States; and Russia has retained this designation in subsequent years.
Until legislative and judicial measures are taken to provide for effective intellectual property enforcement, there will continue to be widespread marketing of pirated foreign video-cassettes, recordings, books, computer software, clothes and toys. Annual losses to manufacturers, authors and others are estimated to be in the hundreds of millions of dollars.
Transparency of the Regulatory System
The legal system in Russia is still in a state of flux, with various parts of government struggling to create new laws on a broad array of topics. In this environment, negotiations and contracts for commercial transactions are complex and protracted. Russia has implemented only part of its new commercial code (contained within the civil code) and investors must carefully research all aspects of Russian law to ensure that each contract conforms with Russian law and embodies the basic provisions of the new, and where still valid, old codes. Contracts must seek to protect the foreign partner against contingencies that often arise. Keeping up with legislative changes, presidential decrees and government resolutions is a challenging task. Uneven implementation of laws creates further complications; various officials, branches of government and jurisdictions interpret and apply regulations with little consistency and the decisions of one may be overruled or contested by another. In addition, while a foreign investor may win a favorable decision from a Russian court, enforcement of judgments is problematic.
Legal requirements may be less burdensome than reaching final agreement with local political and economic authorities; registration can be a lengthy, bureaucratic process, particularly where natural resources or defense production are involved. Corruption is widespread and the fears of some Russian officials that foreigners will purchase Russian assets at below-market rates can impede bureaucratic approval. Environmental concerns are being raised more frequently now by Russian officials at federal and local levels as considerations in the approval process for investments.
Efficient Capital Markets and Portfolio Investment
Russia quickly established basic financial and capital markets, but both came under severe pressure in the wake of the 1998 financial crisis. According to the CBR, 22 percent of Russia’s 1,407 credit organizations (down from 2,500 in 1995) are insolvent, and at least another 35 percent are in trouble. Since August 1998, Russian banks' capital has shrunk by 60 percent and the share of bad loans jumped from 10 to 43 percent. A newly created Agency for Restructuring Credit Organizations (ARCO) is tasked with restructuring banks. Although ARCO has begun to operate, its legal status is not finally fixed in law, and it is undercapitalized. International financial institutions are expected to provide assistance to help with bank restructuring.
Russia's equity markets began a slow recovery after being in the doldrums during 1998 and the first quarter of 1999. By June 1999, market capitalization had increased to around $20 billion, up from September 1998's low of $8 billion but still a fraction of January 1998's high of $72 billion. By May 1999, daily volumes were picking up, propelling the Russian Trading System (RTS) index to its post-devaluation high of 147 in early July 1999, its highest level since August 4, 1998.
Regulatory measures have been introduced during the year designed to improve the integrity of securities markets and address problems of corporate governance. The Federal Commission on Securities Markets (FCSM) has intensified its review of the financial condition of professional market participants, limited the use of futures contracts, and initiated investigations on possible abuses of shareholders' rights using powers it received under a recently enacted law. A self-regulatory organization, the National Association of Market Participants (NAUFOR) has established a coordination center to gather information and provide a forum to protect investors' rights. In may, the OECD and World Bank announced the creation of a roundtable on corporate governance in Russia to identify priorities for policy attention.
A corporate bond market is in the early stages of development. In May 1999, the FCSM registered the prospectus of a bond issue for Russian major oil company Lukoil. Other blue chip energy producers also have announced their intention to issue such bonds. A corporate bond market has become attractive in the absence of a government T-bill market and commercial bank lending. It is also of interest to investors seeking outlets for rescheduled T-bills that cannot be repatriated. Certain tax issues will need to be addressed to make this market attractive for short-term instruments and investors.
Crime and Corruption
Crime has become one of the most oft-cited concerns of foreign (and Russian) businesses. Those involved with large flows of cash and goods should take precautionary measures. While organized crime is not new to Russia, recent years have seen an increase in the range and frequency of criminal activity. Unfortunately, law enforcement has been hard-pressed to keep pace with criminal advances. U.S. firms have identified demands for grease money as a pervasive problem. Prime Minister Stepashin and his predecessor, Yevgeny Primakov, named the fight against corruption as a priority of their governments due to its economic costs (particularly in deterring foreign and domestic investment and encouragement of capital flight). Russia has laws and regulations against bribery and other forms of corruption, but penalties are often insufficient to act as a deterrent. Latest available crime statistics (for 1997) show a slight increase in reported crimes. The personal crime situation in Russia is discussed briefly in Chapter IX of this report.
New-to-market U.S. companies will do well do bear in mind that the provisions of the U.S. Foreign Corrupt Practices Act are extraterritorial and require adherence in overseas markets including Russia. The number of U.S. firms doing profitablse busines in Russia without ever becoming victims of crime and corruption is well into the hundreds.
Bilateral Investment Agreements
Russia inherited from the USSR 14 bilateral investment treaties (BITs), with Austria, Belgium and Luxembourg, Great Britain, Germany, Italy, Spain, Canada, the People's Republic of China, Korea, the Netherlands, Finland, France, and Switzerland. These were ratified in 1989-90 and came into force in 1991. Russia has since negotiated another 34 accords, of which 16 have been ratified - with Greece, Cuba, Romania, Denmark, Slovakia, the Czech Republic, Vietnam, Kuwait, India, Hungary, Albania, Norway, Yugoslavia, Italy, Lebanon, Macedonia and the Philippines. The U.S.-Russia Bilateral Investment Treaty, signed and ratified by the U.S. Senate in 1992, has since remained unratified by the Duma.
Labor
Russia’s labor market is fragmented, characterized by limited labor mobility across regions and consequent wage and employment differentials. In Moscow, unemployment is low, and monthly incomes are three times higher than the national average. Unemployment, as measured by International Labor Organization (ILO) standards, was 10.4 million in May 1999 for Russia as a whole, or 14.2 percent of the workforce. However, the figure reaches 40 percent in some depressed regions.
Labor mobility continues to be restricted by an under-developed housing and mortgage market, housing shortages in many cities (with the exception of Moscow), and difficulties in obtaining government-mandated residency permits or registrations. Costs for existing housing and utilities are disproportionately low relative to incomes, also making workers loathe to move. The lack of labor mobility across regions significantly impacts wages and employment. Labor mobility across professions within regions is more common as workers attempt to adapt to the needs of a market economy. Workers in Russia are generally skilled and well-educated.
Wage arrears reached around $10 billion in mid-1998 and represent the primary irritant in labor-management relations. The Russian government managed to reduce this figure to $2.9 billion by March 1, 1999, with help of the devaluation of the ruble. Even during periods of high wage debts, sometimes exceeding six months’ pay, strikes have become less frequent than in the mid-1990s. Workers have increasingly used methods other than strikes to call attention to their plight. Enterprises that pay wages in full and on time generally have smooth labor-management relations.
Russia’s union movement is dominated by the Federation of Independent Trade Unions of Russia, which inherited the property of its Soviet predecessors. Trade unions outside this confederation have found it harder to operate, as wage arrears constrain would-be members from paying union dues.
The Russian government generally adheres to ILO conventions protecting worker rights, though enforcement remains an issue. In addition to wage arrears, worker safety is a major concern, as enterprises are often unable or unwilling to invest in safer equipment or to enforce safety procedures.