Russia: Economic Overview
Russia still suffers frequent near-crises as the government continues its adaptation to Western economic standards.The questionable health of President Boris Yeltsin, reelected in June 1996, has added to the power struggles between conservative and more liberal forces in the country. Nonetheless, Russia remains one of the potentially most attractive countries in the emerging markets, given its population, broad industrial base, and extensive natural resources.
The Yeltsin administration and the central bank in February 1996 announced a three-year economic stabilization program that is extending the tight fiscal policy, restrictive monetary policy, and trade and energy sector liberalization initiatives begun in 1995. This program formed the basis for a three-year, $10.2 billion facility from the International Monetary Fund.
Because of poor revenue-raising performance by the government in 1996, domestic and foreign borrowing increased. Now the pressure is on the state privatization agency to help bridge the fiscal gap.The decision in November to merge Russia's two main telecommunications companies has helped assure potential investors of the stability and relative risks of the sector.
FOREIGN INVESTMENT CLIMATE
Although there are no significant legal barriers to doing business in Russia, the absence of sufficiently developed civil, commercial, and criminal codes is a major constraint. In addition, high and unstable taxation, rise in violent crime, capital flight, and a lag in the development of local long-term capital sources are problems for foreign and Russian business.
Foreign investment regulations regarding permissible activities, as well as prior authorization and notification requirements, are confusing and contradictory. The Ministry of Finance, local authorities, and various central government bodies all register foreign investments.
Prior approval is required for investment in new enterprises using assets of existing Russian enterprises; foreign investment in defense industries (which may be prohibited in some cases); investment in the exploitation of natural resources; all investments of more than 50 million rubles; investment ventures in which foreign ownership exceeds 50%; and investment to take over incomplete housing and construction projects.Additional registration requirements exist for investments exceeding 100 million rubles.
Projects of foreign enterprises may also be subject to expert examination for ecological considerations or if they involve large-scale construction or modernization.
Despite the apparent pitfalls to foreign investment, Russia has made great strides in its privatization effort. According to the government, almost 120,000 enter prises have been sold, in whole or in part, in smallscale, voucher, and cash privatizations.This represents 75% of manufacturing enterprises and 85% of manufacturing production. More than 80% of Russia's industrial workers now work in privatized or quasi-privatized companies. The federal government's portion of the cash privatization program, under which it is selling retained holdings in privatized companies as well as enterprises not yet been privatized, began in late 1995 after substantial delays. The controversial loans-for-shares portion of the program was under review in 1996.
In April 1996 the Paris Club of official creditors agreed to reschedule Russia's outstanding debt of more than $40 billion, including debt inherited from the Soviet Union, for a term of 25 years. The agreement is subject to periodic reviews tied to performance under an IMF program. In May 1996 the London Club of commercial bank creditors reached an agreement in principle with the Russian government to reschedule $32.5 billion in debt. The deal calls for principal to be repaid over 25 years, with a seven-year grace period.
Following the collapse of the Soviet Union, the division of state-owned banks led to the creation of more than 2,500 banks in Russia before insolvencies reduced the number to about 2,300 in January 1996. Further consolidation is likely, according to analysts.
Russian banks remain small by world standards. The state-owned Sberbank, by far the largest with a capital base of $1.3 billion in 1996, ranks below the world's top 500 banks. Most Russian banks are much smaller. About 80% have capital of just $1 million or less, and only 4% have capital greater than $5 million.
Persistent high real interest rates mean that borrowing costs remain high, and little lending takes place on terms of more than 30 days. Interbank lending rates rose sharply following an August 1995 interbank liquidity crisis and reached 120% in June 1996.
Commercial lending is still a small share of business, and long-term lending-in Russia meaning anything over one year-accounts for less than 10% of all credits. Most business is concentrated in project and trade finance, trading in various types of securities, and foreign exchange dealing. Almost 800 banks have a license to deal in foreign exchange, including 270 that have a general license.
The new commercial banking law, effective in January 1996,explicitly permits foreign banks to establish full-service subsidiaries in Russia, though it allows the country's central bank to use reciprocity as a criterion for granting approval. Republic National Bank of New York took advantage of the new law to obtain a license and begin full-service operations in September 1996.
On May 16 1996 the central bank and the administration announced that the ruble exchange band, which since January 1996 had been set between 4,550 and 5,150 rubles per dollar, would be replaced with a crawling-peg mechanism, with parameters that would shift gradually from 5,000 to 5,600 rubles per dollar on July 1 and then to 5,500 to 6,100 rubles per dollar by the end of 1996.
Real GDP trends have been buoyed in the past years by a steady growth in trade and services-sectors that were underdeveloped in the centrally planned Soviet economy. Although real industrial output slumped in the first four months of 1996, falling 3% in comparison with the same period of 1995, there were signs of improvement by April. A flat industrial production trend was suggested for the first half of 1996, with positive growth rates in the second half.
The retail/wholesale trade and service sectors, which together made up 55% of GDP in 1995, are thriving. Ever more sophisticated trading establishments have emerged all over Russia's major cities, replacing, in part, the system of kiosks that grew up after the Soviet breakup. The service sector, long underdeveloped under the Soviet system, is also burgeoning. Along with the introduction of big Western accounting and legal firms to Russia came small service providers that with informal traders now make up most of the cash or underground economy. Unemployment increased slowly in 1995 and the first part of 1996, reaching 8.6% of the labor force by the end of April. Rates vary by region, with virtually no unemployment in Moscow and almost double the national average in the Ivanovo, Pskov, Vladimir, and Yaroslav regions, among others. Experts estimate the number of unemployed and underemployed together has remained 12-13% of the labor force since 1995.
Regulations that ban the use of foreign currency in cash transactions went into effect in January 1994. Under these regulations, businesses in Russia may not accept cash payments in dollars or other hard currency. Noncash transactions such as credit cards and checks are not affected, so establishments that accepted payment via credit cards continue to do so. In an effort to limit the outflow of capital, the central bank introduced a computerized export control system to monitor the flow of goods out of Russia and the flow of hard currency in.The system, which unites for the first time banking and export controls, requires exporters to obtain a so-called passport from a commercial bank, which enters the trade in a computer database. Customs agents register the actual export of the goods in the database, and the bank completes the cycle by entering the payment. Strategic exports, including energy and several types of metals, were subject to the new regime in January 1994.The system took effect for all other types of goods in March 1994.
Effective January 1996, the central bank, in an effort to disrupt the use of illegitimate contracts for imports into Russia and the resulting capital flight from Russia, also instituted an import passport system.The new system requires issuance of a passport by the importer's bank for payment against a specific import contract.The importer has 180 days either to document the entry of the goods with the Russian customs service or return the hard currency issued in payment. Failure to comply with this regulation may make the importer liable for a hard currency penalty in the amount of the payment.
Capital flight still plagues the Russian economy, although official data suggest that it has slowed significantly since its peak in 1992. Opinions vary, but a realistic assessment would place total capital flight since the transition at $45-50 billion. Little of this appears to be related to criminal activity but rather represents a desire for safe havens abroad for foreign exchange earnings.
The tax system is a major complaint of foreign investors. According to the US Commerce Department, the number of taxes, the instability in the regulatory environment, and poorly structured taxes have contributed to foreign investors' sense that the Russian tax system is an almost insurmountable obstacle.
American Chamber of Commerce
Peter Charow, Executive Director
Kosmodamianskaya Nab 52, Building 1, 8th floor Moscow
Phone: 7-95-961-2141 Fax: 7-095-961-2142
Ministry of Finance Vladimir G. Panskov, Minister Ulitsa Ilyinka 9, Entrance 1 Moscow
Phone: 7-095-2989130 Fax: 7-095-925-0889 State Investment Corporation Yuri V Petrov, Chairman 35 Myasnitskaya UI Moscow 103685 Phone: 7-095-925-796 Fax: 7-095-207-6936
Ministry of Foreign Economic Relations: Oleg D. Davydov, Co-chair of US-Russia Intergovernmental Business Development Committee
Krasnopresnenskaya Nab 2, Moscow
Phone: 7-095-2054595 Fax: 7-095-205-6541 Russian Chamber of Commerce & Industry Stanislav A. Smirnov, President Department 6 Ul Kuybysheva 6 Moscow 103684 Phone: 7-95-929-0286 or 929-0260
People's Insurance Company of Russia
25 Protopopovsky Pereulok Moscow 129010 Phone: 7-095-288-4427 Fax: 7-095-28-2700
Russian Bank for Reconstruction & Development 1/13 Bldg 8
Sredny Kislovsky per Moscow 103009 Fax: 7-095-229-0553 Foreign Investment Promotion Center
Sergei Tsakunov Gerneral Director
Bid Smolensky 315 Moscow 119898 Phone: 7-095-245-2171 Fax: 7-095-246-9439…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Russia: Economic Overview. Contributors: Not available. Magazine title: Global Finance. Volume: 11. Issue: 1 Publication date: January 1997. Page number: 136+. © Global Finance Media Inc. Feb 2009. Provided by ProQuest LLC. All Rights Reserved.
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