Russia: A Country Study, edited by Glenn E. Curtis

Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 3:26 am

Economic Conditions in Mid-1996

As of mid-1996, four and one-half years after the launching of Russia's post-Soviet economic reform, experts found the results promising but mixed. The Russian economy has passed through a long and wrenching depression. Official Russian economic statistics indicate that from 1990 to the end of 1995, Russian GDP declined by roughly 50 percent, far greater than the decline that the United States experienced during the Great Depression. (However, alternative estimates by Western analysts described a much less severe decline, taking into account the upward bias of Soviet-era economic data and the downward bias of post-Soviet data.) Such a decline, however, was to be expected in an economy going through the transition from central planning to a market structure. Much of the decline in production has occurred in the military-industrial complex and other heavy industries that benefited most from the skewed economic priorities of Soviet planners but have much less robust demand in a freer market.

But other major sectors such as agriculture, energy, and light industry also suffered from the transition. To enable these sectors to function in a market system, inefficient enterprises had to be closed and workers laid off, with resulting short-term declines in output and consumption. Analysts had expected that Russia's GDP would begin to rise in 1996, but data for the first six months of the year showed a continuing decline, and some Russian experts predicted a new phase of economic crisis in the second half of the year.

The pain of the restructuring has been assuaged somewhat by the emergence of a new private sector. Western experts believe that Russian data overstate the dimensions of Russia's economic collapse by failing to reflect a large portion of the country's private-sector activity. The Russian services sector, especially retail sales, is playing an increasingly vital role in the economy, accounting for nearly half of GDP in 1995. The services sector's activities have not been adequately measured. Data on sector performance are skewed by the underreporting or nonreporting of output that Russia's tax laws encourage. According to Western analysts, by the end of 1995 more than half of GDP and more than 60 percent of the labor force were based in the private sector.

An important but unconventional service in Russia's economy is "shuttle trading"--the transport and sale of consumer goods by individual entrepreneurs, of whom 5 to 10 million were estimated to be active in 1996. Traders buy goods in foreign countries such as China, Turkey, and the United Arab Emirates and in Russian cities, then sell them on the domestic market where demand is highest. Yevgeniy Yasin, minister of economics, estimated that in 1995 some US$11 billion worth of goods entered Russia in this way. Shuttle traders have been vital in maintaining the standard of living of Russians who cannot afford consumer goods on the conventional market. However, domestic industries such as textiles suffer from this infusion of competing merchandise, whose movement is unmonitored, untaxed, and often mafiya [mafia]-controlled.

The geographical distribution of Russia's wealth has been skewed at least as severely as it was in Soviet times. By the mid-1990s, economic power was being concentrated in Moscow at an even faster rate than the federal government was losing political power in the rest of the country. In Moscow an economic oligarchy, composed of politicians, banks, businesspeople, security forces, and city agencies, controlled a huge percentage of Russia's financial assets under the rule of Moscow's energetic and popular mayor, Yuriy Luzhkov. Unfortunately, organized crime also has played a strong role in the growth of the city (see The Crime Wave of the 1990s, ch. 10). Opposed by a weak police force, Moscow's rate of protection rackets, contract murders, kickbacks, and bribes--all intimately connected with the economic infrastructure--has remained among the highest in Russia. Most businesses have not been able to function without paying for some form of mafiya [mafia] protection, informally called a krysha (the Russian word for roof).

Luzhkov, who has close ties to all legitimate power centers in the city, has overseen the construction of sports stadiums, shopping malls, monuments to Moscow's history, and the ornate Christ the Savior Cathedral. In 1994 Yeltsin gave Luzhkov full control over all state property in Moscow. In the first half of 1996, the city privatized state enterprises at the rate of US$1 billion per year, a faster rate than the entire national privatization process in the same period. Under Luzhkov's leadership, the city government also acquired full or major interests in a wide variety of enterprises--from banking, hotels, and construction to bakeries and beauty salons. Such ownership has allowed Luzhkov's planners to manipulate resources efficiently and with little or no competition. Meanwhile, Moscow also became the center of foreign investment in Russia, often to the exclusion of other regions. For example, the McDonald's fast-food chain, which began operations in Moscow in 1990, enjoyed immediate success but expanded only in Moscow. The concentration of Russia's banking industry in Moscow gave the city a huge advantage in competing for foreign commercial activity.


In mid-1996 the national government appeared to have achieved some degree of macroeconomic stability. However, longer-term stability depends on the ability of policy makers to withstand the inflationary pressures of demands for state subsidies and easier credits for failing enterprises and other special interests. (Chubays estimated that spending promises made during Yeltsin's campaign amounted to US$250 per voter, which if actually spent would approximately double the national budget deficit; most of Yeltsin's pledges seemingly were forgotten shortly after his reelection.)

By 1996 the structure of Russian economic output had shifted far enough that it more closely resembled that of a developed market economy than the distorted Soviet central-planning model. With the decline in demand for defense industry goods, overall production has shifted from heavy industry to consumer production (see The Defense Industry, ch. 9). However, in the mid-1990s the low quality of most domestically produced consumer goods continued to limit enterprises' profits and therefore their ability to modernize production operations. On the other side of the "vicious circle," reliance on an outmoded production system guaranteed that product quality would remain low and uncompetitive.

Most prices are left to the market, although local and regional governments control the prices of some staples. Energy prices remain controlled, but the Government has been shifting these prices upward to close the gap with world market prices.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 3:44 am

Natural Resources

Russia is the largest country in the world; it covers a vast amount of topographically varied territory, including much that is inaccessible by conventional modes of transportation. The traditional centers of economic activity are almost exclusively located in the more hospitable European part of Russia, which once offered considerable coal and natural gas to drive heavy industry (see fig. 7). But the European fuel base was largely depleted by the 1980s, forcing Russia to rely on Siberian deposits much farther from the industrial heartland.

Russia is one of the world's richest countries in raw materials, many of which are significant inputs for an industrial economy. Russia accounts for around 20 percent of the world's production of oil and natural gas and possesses large reserves of both fuels. This abundance has made Russia virtually self-sufficient in energy and a large-scale exporter of fuels. Oil and gas were primary hard-currency earners for the Soviet Union, and they remain so for the Russian Federation. Russia also is self-sufficient in nearly all major industrial raw materials and has at least some reserves of every industrially valuable nonfuel mineral--even after the productive mines of Ukraine, Kazakstan, and Uzbekistan no longer were directly accessible. Tin, tungsten, bauxite, and mercury were among the few natural materials imported in the Soviet period. Russia possesses rich reserves of iron ore, manganese, chromium, nickel, platinum, titanium, copper, tin, lead, tungsten, diamonds, phosphates, and gold, and the forests of Siberia contain an estimated one-fifth of the world's timber, mainly conifers (see fig. 8; Environmental Conditions, ch. 3).

The iron ore deposits of the Kursk Magnetic Anomaly, close to the Ukrainian border in the southwest, are believed to contain one-sixth of the world's total reserves. Intensive exploitation began there in the 1950s. Other large iron ore deposits are located in the Kola Peninsula, Karelia, south-central Siberia, and the Far East. The largest copper deposits are located in the Kola Peninsula and the Urals, and lead and zinc are found in North Ossetia.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 3:55 am

Agriculture

Climatic and geographic factors limit Russia's agricultural activity to about 10 percent of the country's total land area. Of that amount, about 60 percent is used for crops, the remainder for pasture and meadow (see table 15, Appendix). In the European part of Russia, the most productive land is in the Central Chernozem Economic Region and the Volga Economic Region, which occupy the grasslands between Ukraine and Kazakstan. More than 65 percent of the land in those regions is devoted to agriculture. In Siberia and the Far East, the most productive areas are the southernmost regions. Fodder crops dominate in the colder regions, and intensity of cultivation generally is higher in European Russia. The last expansion of cultivated land occurred in the late 1950s and early 1960s, when the Virgin Lands program of Nikita Khrushchev opened land in southwestern Siberia (and neighboring Kazakstan) for cultivation. In the mid-1990s, about 15 percent of the working population was occupied in agriculture, with the proportion dropping slowly as the younger population left rural areas to seek economic opportunities elsewhere (see Rural Life, ch. 5).

Crops

Grains are among Russia's most important crops, occupying more than 50 percent of cropland. Wheat is dominant in most grain-producing areas. Winter wheat is cultivated in the North Caucasus and spring wheat in the Don Basin, in the middle Volga region, and in southwestern Siberia. Although Khrushchev expanded the cultivation of corn for livestock feed, that crop is only suitable for growth in the North Caucasus, and production levels have remained low compared with other grains. Barley, second to wheat in gross yield, is grown mainly for animal feed and beer production in colder regions as far north as 65° north latitude (the latitude of Arkhangel'sk) and well into the highlands of southern Siberia. Production of oats, which once ranked third among Russia's grains, has declined as machines have replaced horses in farming operations.

Legumes became a common crop in state farms in the 1980s. Potatoes, a vital crop for food and for the production of vodka, are grown in colder regions between 50° and 60° north latitude. Sugar beet production has expanded in recent years; the beets are grown mainly in the rich black-earth districts of European Russia. Flax, also a plant tolerant of cold and poor soils, is Russia's most important raw material for textiles, and the country produced about half the world's flax crop in the 1980s. Flax also yields linseed oil, which together with sunflowers (in the North Caucasus) and soybeans (in the Far East) is an important source of vegetable oil. Production of fruits and vegetables increased as private farms began to expand around 1990. In the mid-1990s, the largest yields in that category were in cabbages, apples, tomatoes, and carrots.

Increased production of fodder crops and expansion of pastureland have supported Russia's livestock industry, although economic conditions have caused cutbacks in animal holdings. Cattle are the most common form of livestock except in the drier areas, where sheep and goats dominate. The third-largest category is pigs, which are raised in areas of European Russia and the Pacific coast that offer grain, potatoes, or sugar beets as fodder. Only very small numbers of chickens are kept, and frozen chicken has become one of Russia's largest import items.

Agricultural Policy

Agricultural reform has proved to be a tough challenge for Russia during its transition to a market economy. The challenge comes from the legacy of the Soviet period and from deeply imbedded cultural biases against individualism. Because of agriculture's vital economic role, large-scale agricultural reform is necessary for success in other sectors. In the mid-1990s, however, private initiative was not rewarded, and inefficient input distribution and marketing structures failed to take advantage of agricultural assets.

Soviet Policy

Under Stalin the government socialized agriculture and created a massive bureaucracy to administer policy. Stalin's campaign of forced collectivization, which began in 1929, confiscated the land, machinery, livestock, and grain stores of the peasantry. By 1937 the government had organized approximately 99 percent of the Soviet countryside into state-run collective farms. Under this grossly inefficient system, agricultural yields declined rather than increased. The situation persisted into the 1980s, when Soviet farmers averaged about 10 percent of the output of their counterparts in the United States.

During Stalin's regime, the government assigned virtually all farmland to one of two basic agricultural production organizations--state farms and collective farms. The state farm was conceived in 1918 as the ideal model for socialist agriculture. It was to be a large, modern enterprise directed and financed by the government. The work force of the state farm received wages and social benefits comparable to those enjoyed by industrial workers. By contrast, the collective farm was a self-financed producer cooperative that farmed parcels of land that the state granted to it rent-free and that paid its members according to their contribution of work.

In their early stages, the two types of organization also functioned differently in the distribution of agricultural goods. State farms delivered their entire output to state procurement agencies in response to state production quotas. Collective farms also received quotas, but they were free to sell excess output in collective-farm markets where prices were determined by supply and demand. The distinction between the two types of farms gradually narrowed, and the government converted many collective farms to state farms, where the state had more control.

Private plots also played a role in the Soviet agricultural system. The government allotted small plots to individual farming households to produce food for their own use and for sale as an income supplement. Throughout the Soviet period, the productivity rates of private plots far exceeded their size. With only 3 percent of total sown area in the 1980s, they produced over a quarter of agricultural output.

A number of factors made the Soviet collectivized system inefficient throughout its history. Because farmers were paid the same wages regardless of productivity, there was no incentive to work harder and more efficiently. Administrators who were unaware of the needs and capabilities of the individual farms decided input allocation and output levels, and the high degree of subsidization eliminated incentives to adopt more efficient production methods.

The Gorbachev Reforms

The Gorbachev agricultural reform program aimed to improve production incentives. Gorbachev sought to increase agricultural labor productivity by forming contract brigades consisting of ten to thirty farmworkers who managed a piece of land leased from a state or collective farm. The brigades were responsible for the yield of the land, which in turn determined their remuneration. After 1987 the government legalized family contract brigades and long-term leasing of land, removing the restrictions on the size of private agricultural plots and cutting into the state's holdings of arable land.

Although Gorbachev's reforms increased output in the agricultural sector in 1986, they failed to address fundamental problems of the system, such as the government's continued control over the prices of agricultural commodities, the distribution of agricultural inputs, and production and investment decisions. In the contract brigade system, farmers still had no real vested interest in the farms on which they worked, and production suffered accordingly. In the 1980s, the Soviet Union went from being self-sufficient in food production to becoming a net food importer.

Yeltsin's Agricultural Policies

The Yeltsin regime has attempted to address some of the fundamental reform issues of Russian agriculture. But agricultural reform has moved very slowly, causing output to decline steadily through the mid-1990s. Reform began in Russia shortly before the final collapse of the Soviet Union. In December 1990, the Congress of People's Deputies of the Russian Republic enacted a number of laws that were designed to restructure the agricultural sector and make it more commercially viable. The Law on Peasant Farms legalized private farms and allowed them to operate alongside state and collective farms, to hire labor, and to sell produce without state supervision. The same session of the congress passed the Law on Land Reform, which permitted land to be bequeathed as an inheritance from one generation to the next, but not to be bought or sold. The government also established the State Committee for Agrarian Reform, whose responsibility was to oversee the transfer of available land to private farming.

The main thrust of Yeltsin's agricultural reform has been toward reorganizing state and collective farms into more efficient, market-oriented units. A decree of December 1991 and its subsequent amendments provided several options to state and collective farmers for the future structure of their farms. The decree required that farmers choose either to reorganize into joint-stock companies, cooperatives, or individual private farms, or to maintain their existing structure. Under the first two arrangements, workers would hold shares in the farms and be responsible for managing the enterprises. An individual farmer could later decide to break from the larger unit and establish private ownership of his or her share of the land, as determined by an established procedure.

This restructuring program has progressed slowly. Although 95 percent of the state and collective farms underwent some form of reorganization, about one-third of them retained essentially their earlier structure. Most of the others, fearing the unstable conditions of market supply and demand that faced individual entrepreneurs, chose a form of collective ownership, either as joint-stock companies or as cooperatives. The conservatism of Russia's farmers prompted them to preserve as much as possible of the inefficient but secure Soviet-era controlled relationships of supply and output.

As of 1996, individual private farming had not assumed the significance in Russian agriculture that reformers and Western supporters had envisioned. Although the number of private farms increased considerably following the reforms of 1990, by the early 1990s the growth of farms had stalled, and by the mid-1990s the number of private farms actually may have dropped as some individuals opted to return to a form of cooperative enterprise or left farming entirely. By the end of 1995, Russia's 280,000 private farms accounted for only 5 percent of the arable land in Russia.

A number of factors have contributed to the slow progress of agricultural reform. Until the mid-1990s, the state government continued to act as the chief marketing agent for the food sector by establishing fixed orders for goods, thus guaranteeing farmers a market. The government also subsidized farms through guaranteed prices, which reduced the incentive of farmers to become efficient producers.

Perhaps most important, effective land reform has not been accomplished in Russia. The original land reform law and subsequent decrees did not provide a clear definition of private property, and they did not prescribe landholders' rights and protections. The nebulous status of private landholders under the new legislation made farmers reluctant to take the risk of proprietorship. In March 1996, President Yeltsin issued a decree that allows farmers to buy and sell land. However, in April 1996 the State Duma, heavily influenced by the antireform KPRF and its ally, the Agrarian Party of Russia (representing the still formidable vested interests of collective and state farms), passed a draft law that prohibits land sales by anyone but the state. Recent opposition to the new notion of private landownership is based in a strong traditional Russian view that land must be held as collective rather than individual property.

However, in 1996 several factors were exerting pressure on the agricultural sector to become commercially viable. The federal government has retreated from its role as a guaranteed purchaser and marketer, although some regional governments are stepping in to fill the role. And private markets are emerging slowly. Increasingly, Russian agricultural production must compete with imported goods as the gap between domestic prices and world prices narrows. In addition, the fiscal position of the federal government has forced it to reduce subsidies to many sectors of the economy, including agriculture. Subsidies are among the targets of major budget cuts to comply with the standards of the IMF and other Western lenders and achieve macroeconomic stabilization.


Agricultural Production

Like the rest of the economy, the Russian agricultural sector has experienced a long, severe recession in the 1990s. Even before the dissolution of the Soviet Union, the output of grains and other crops began to decline, and it decreased steadily through 1996 because of the unavailability of fertilizers and other inputs, bad weather, and major readjustments during the period of transition. In 1995 overall agricultural production declined 8 percent, including a drop of 5 percent in crop production and 11 percent in livestock production. That year Russia suffered its worst grain harvest since 1963, with a yield of 63.5 million tons.

The most dramatic declines occurred in livestock production. Farmers reduced their holdings of animals as the price of grains and other inputs increased. As meat prices rose, the composition of the average consumer's diet included less meat and more starches and vegetables. Reduced demand in turn exacerbated the decline in livestock production.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 4:16 am

Energy

Energy plays a central role in the Russian economy because it drives all the other elements of the system--the industrial, agricultural, commercial, and government sectors. In addition, energy, particularly petroleum and natural gas, is the most important export and source of foreign exchange for the Russian economy. Experts forecast that the energy sector will continue to occupy this central position until Russian manufacturing reaches a level competitive with the West.

Exploitation and Consumption

Russia's self-sufficiency in fuels and power generation puts the country in a good position for future economic growth and development. But Russia is also one of the most energy-dependent countries. The International Energy Agency of the Organisation for Economic Co-operation and Development (OECD--see Glossary) estimated that in 1993 it took 4.46 tons of oil equivalent (TOE) to produce US$1,000 of Russia's GDP, compared with an average of 0.23 TOE to produce US$1,000 of GDP for the OECD member countries.

Russia's excessive consumption of energy results from the Soviet system, which artificially priced energy far below the level of world market prices and thus subsidized it. Soviet energy-pricing policies disregarded resource utilization in the quest for higher output volumes and discouraged the adoption of conservation measures. Soviet planners also skewed resources toward the defense-related and heavy industries, which consume energy more intensively than other sectors of the economy. Until the 1980s, the national economy managed to survive under such policies because of the Soviet Union's rich endowment of natural resources.

The problems that plagued the Russian energy sector in the last decades of the Soviet Union were exacerbated during the transition period. Since 1991 the output of all types of fuel and energy has declined, partly because of plummeting demand for energy during a time of general economic contraction. But the energy sectors also have suffered from the intrinsic structural defects of the central planning system: poor management of resources, underinvestment, and outdated technology and equipment.

The structure of energy and fuel production began to change dramatically in the 1980s with the exploitation of large natural gas deposits. In the mid-1990s, natural gas accounted for more than half of Russia's energy consumption, a share that is expected to increase in the next decades. Oil accounts for another 20 percent, a proportion that is expected to remain approximately constant. Coal and other solid fuels, water power, and nuclear energy account for smaller shares that experts predict likely will decline after 2000. Despite the waste of fuel in the Russian economy, Russia manages to produce a surplus of energy for export. Exports, particularly of natural gas and oil, have accounted for 30 percent of Russian energy production, and this share is expected to hold steady.

Russia's drive to become a market economy should help to alleviate some of the problems of the energy sector. Russian energy pricing policies have changed. Since January 1992, energy has been gradually deregulated, closing the gap between world market prices and domestic prices and forcing consumers to conserve. Russia is also adopting Western technology and more efficient management techniques that will improve productivity in the sector.

Oil

Russia ranks third in the world in oil production, after Saudi Arabia and the United States. Estimates place proven and potential oil reserves at 8 to 11 billion tons. Russia's oil production peaked in 1987, then began a decline that continued through 1995. In the latter year, the yield was 741 million barrels, 13 million barrels less than the previous year. Output for the first quarter of 1996 was 182 million barrels.

Wasteful Soviet oil exploration and extraction techniques depleted wells, which often fell far below their potential capacity. Soviet technology was not capable of exploring and extracting as deeply and efficiently as Western technology. These handicaps have been instrumental in Russia's plummeting oil production during the last two decades. In 1994 the number of oil wells drilled was only one-quarter the number drilled in 1983. About two-thirds of Russia's oil comes from Siberia, mostly from huge fields in the northwest part of the region. The main European oil and gas fields are located in the Volga-Ural region, the North Caucasus, and the far north of the Republic of Komi (see fig. 9).

Russian oil companies are vertically integrated units that control the entire production process from exploration to transmission. The largest company is Lukoil, which, according to some measurements, is the largest oil company in the world. The dominance of a few large companies has made all stages of petroleum exploitation and sale extremely inefficient. National and local government policies have discouraged individual retailers from establishing independent gasoline storage facilities and stations; therefore, retail gasoline likely will continue to be in very short supply (only 8,900 stations were operating in Russia in 1995). Until January 1995, government policy applied quotas to oil exports, and until July 1996 tariffs were applied to oil exports. Both policies, resulting from the gap between controlled domestic prices and world market prices, aimed at ensuring a sufficient supply of oil to meet domestic demand; both were lifted as the gap narrowed.

The search for new oil deposits has been a primary force in Russia's foreign policy toward states to the south. Russia has staked its claim to the Caspian oil reserves that Western companies are exploring in conjunction with Azerbaijani, Turkmenistani, and Kazakstani state companies. The presence of Western interests and the strong role being played by Iran and Turkey, Russia's traditional regional rivals, have complicated this policy, which aims to achieve maximum benefit from Russia's position on the shore of the north Caspian. Also a source of international controversy is Russia's insistence that Caspian oil flow northward through Russian pipelines rather than westward via new lines built through Georgia and Turkey (see Foreign Investment in Oil and Gas, this ch.).

Natural Gas

Russia is also one of the world's largest natural gas producers. Its proven reserves have been estimated at 49 billion cubic meters, or roughly 35 percent of the world's total. Natural gas has also been one of the most successful parts of the Russian economy. In the early 1980s, it replaced oil as the Soviet "growth fuel," offering cheaper extraction and transportation. Although output has dropped in the 1990s, the decline has not been as severe as that for other energy sources or the rest of the economy. Natural gas production peaked in 1991 at 727 million cubic meters, then dropped throughout the early 1990s. But 1995 production, 596 million cubic meters, was an increase from the previous year. After European gas fields in the Volga-Ural region dominated the industry through the 1970s, production shifted to giant fields in Siberia. The Urengoy and Yamburg fields in the West Siberia region are among the most productive; the former is the largest field in the world. Soviet plans called for rapid development of new reserves in the Yamal Peninsula in the Arctic Ocean north of Urengoy, but environmental problems and infrastructure costs slowed development. Hasty construction and poor maintenance have caused chronic breakdowns and accidents in the long pipelines of Russia's natural gas delivery system (see Transportation, this ch.).

The State Natural Gas Company (Gazprom) has a virtual monopoly over Russia's gas production and transmission. A vertically organized enterprise, the company has been reorganized into a joint-stock company, in which 40 percent of the shares remain under state control. Company employees hold another 15 percent, managers of the company hold 10 percent, and the remaining 35 percent were sold at public auction. Gazprom controls a network of regional production associations. Its management, which once was headed by Prime Minister Viktor Chernomyrdin, has been accused of corruption and tax evasion.

Coal

For more than 150 years, coal was the dominant fuel supporting Russia's industries, and many industrial centers were located near coal deposits. In the 1960s, oil and natural gas overtook coal when plentiful reserves of those fuels became available and the coal shafts of the European Soviet Union (located primarily in what is today Ukraine) were being exhausted. Russian coal reserves are estimated at 200 billion tons, an amount that experts say is more than ample for current usage trends. Siberia and the Far East produce about three-quarters of Russia's coal, with the European contributions coming largely from the Vorkuta field (Pechora Basin) in Komi, the Urals, the eastern Donets Basin in the southwest, and the Moscow Basin. Largely untapped coal fields lie in the Siberian Tunguska and Lena basins. Productive fields in Siberia are located along the Trans-Siberian Railroad, making their exploitation more economical. The largest operational sources in that region are the Kuznetsk, Kansk-Achinsk, and Cheremkhovo fields. Coal is one of the less important sources of energy because its labor-intensive extraction makes production much more costly than other fuels. Rossugol', the Russian coal company, controls coal production through regional associations that are organized as joint-stock companies. Russian coal production has declined markedly over the last decade, and the coal industry has suffered a long series of strikes. Coal miners, among the best paid industrial workers of the Soviet period, have organized strikes that have gained national attention to protest the industry's long delays in paying wages. Experts predict that coal output will continue to dwindle as its relative usefulness in industry and domestic applications is reduced. In 1994 Russia produced 249 million tons of coal, and in 1995 the total rose to 255 million tons. Production for the first quarter of 1996 was 71 million tons.

Nuclear Energy

In 1996 some twenty-nine nuclear reactors were operating at nine sites: Balakovo on the northwest border of Kazakstan, Beloyarsk in the southern Urals, Bilibino in northeastern Siberia (the only station east of the Urals), Kola in the far northwest, Kursk near the Ukrainian border, Novovoronezh on the Don River, St. Petersburg, Smolensk west of Moscow, and Tver' northwest of Moscow. Altogether these facilities accounted for 10 percent of Russia's energy generating capacity in 1994. The plants are operated by regional joint-stock companies in which the Ministry of Atomic Energy (Minatom) controls 51 percent of the shares. The nuclear energy sector has undergone financial problems because of government funding reductions. The industry has turned to selling goods related to nuclear energy--equipment and instruments, nuclear fuel, medical isotopes, and fertilizers.

The industry's financial problems, along with the disaster that occurred at the Chernobyl' plant in Ukraine in 1986, have raised questions about nuclear safety. Western countries have provided financial assistance in some cases because of their concern about Russia's lax standards of handling nuclear materials and the continued use of outmoded equipment. Russia's piecemeal environmental laws have led to indiscriminate dumping and burial of radioactive wastes, which are creating severe environmental problems. The theft of nuclear materials has become another source of danger emanating from Russia's nuclear energy program (see Environmental Conditions, ch. 3; The Crime Wave of the 1990s, ch. 10).

Nevertheless, experts predict that nuclear energy probably will play an important role in the Russian economy if enough investment is available to expand existing capacity. In 1992 Minatom announced plans to double nuclear energy capacity by 2010, but ensuing financial problems have caused a reduction of that goal, and no new capacity has been added since the breakup of the Soviet Union. The International Atomic Energy Agency (IAEA) projects that construction of new capacity will not begin until after 2005, even if the investment climate is favorable.

Conventional Power Generation

Much of the conventional fuel produced in Russia is burned to produce electric power. The Unified Electric Power System operates Russia's electric power plants through seventy-two regional power distribution companies. The power system consists of 600 thermal generating systems, more than 100 hydroelectric plants, and Russia's nine nuclear plants. Of the total rated generating capacity of 205 gigawatts, only about 188 gigawatts were available as of 1996. In 1995 Russia's power plants generated a total of 846 million kilowatt-hours, compared with 859 million kilowatt-hours in 1994. Generation for the first quarter of 1996 (normally the peak demand period of the year) was 268 million kilowatt-hours.

In 1993 natural gas provided 42 percent of electricity production; hydroelectric plants, 19 percent; coal, 18 percent; nuclear power, 13 percent; and other sources such as solar and geothermal plants, 8 percent. Natural gas and coal are burned at thermoelectric plants, which produce only electricity, and at cogeneration plants, which produce electricity and heat for urban centers. The largest hydroelectric plants are located on the Volga, Kama, Ob', Yenisey, and Angara rivers, where large reservoirs were built in massive Soviet energy projects. Thermoelectric and hydroelectric plants--located in Siberia because of available fuels and water power--send power to European Russia through a system of high-voltage transmission lines.

Consumption of electric power divides into the following categories: industrial, 61 percent; residential, 11 percent; the services sector, 11 percent; transportation, 9 percent; and agriculture, 8 percent. Regional energy commissions control the price of electricity.

Foreign Investment in Oil and Gas

In the mid-1990s, many analysts consider the oil and gas industries to be the best targets for foreign investment in Russia. The record of foreign investment in that period illustrates both the potentials and the pitfalls of such ventures. Experts have concluded that the Russian oil and gas sector will require large amounts of foreign capital to improve output. According to some estimates, the oil sector will require US$30 to US$50 billion in new investment just to maintain the mid-1990s level of production. To return production to its peak levels will require an estimated US$70 to US$130 billion in new investments, which clearly would have to come from foreign sources. The Russian oil and gas sector also would benefit from infusions of Western technology and expertise. However, according to a 1995 report by Cambridge Energy Research Associates, key figures in the oil industry, most of whom were schooled in the isolated Soviet-era approach to commerce, have been indifferent or hostile to Western management methods.

By the end of 1994, the oil and gas sector accounted for about 38 percent of total foreign direct investment in Russia, but the total input was only about US$1.4 billion. Although Western companies are poised to commit large amounts of capital for exploration, as of 1996 most foreign investment had gone to repairing and maintaining current facilities. Some analysts have estimated that foreign investment in the oil and gas sector could reach US$70 billion by the year 2000.

Among several United States oil companies active in Russia, Texaco heads a consortium in the largest project, the development of oil fields in the Timan-Pechora section of the Komi region north of the Arctic Circle. The project, under negotiation since 1989, has an estimated potential of US$45 billion in investment over the next fifty years. Conoco, a subsidiary of the DuPont de Nemours chemical firm, leads a consortium of United States and European firms and a Russian firm in the Polar Lights project to explore Siberian oil fields. Two United States companies, Marathon Oil and McDermott, along with the Japanese companies Mitsui and Mitsubishi and Britain's Royal Dutch Shell, are engaged in one of several projects to explore for oil off Sakhalin Island on the Pacific coast. The last two projects each could bring in as much as US$10 billion.

Nevertheless, Russia's generally poor investment climate and other obstacles such as special taxes have discouraged additional investment in gas and oil. As of mid-1996, a tax of about US$5 per barrel was imposed on oil exports, and a tax of about US$2.60 was levied per 1,000 cubic meters of natural gas exported. Foreign and domestic firms were also subject to royalty payments to the Government for the privilege of drilling for oil. Foreign investors have argued that reduced profit margins are a substantial obstacle to the support of some projects. Some major oil investors have received tax exemptions, but delays in rebate payments have created additional deterrents.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 4:17 am

Banking and Finance

Experts have agreed that establishing a viable financial sector is a vital requirement for Russia to have a successful market economy. In the first five years of the post-Soviet era, the development of Russia's financial sector as an efficient distributor of money and credit to other parts of the economic structure has mirrored the ups and downs of the rest of the economy. In 1996 some elements of the central planning system remained obstacles to further progress.

The Soviet Financial System

The financial system of the Soviet period was a rudimentary mechanism for state control of the economy. The government owned and managed the banking system. The State Bank (Go-sudarstvennyy bank--Gosbank) was the central bank and the only commercial bank. In its capacity as a central bank, Gosbank handled all significant banking transactions, including the issuance and control of currency and credit, the management of gold reserves, and the oversight of transactions among enterprises. Enterprises were issued money and credits in accordance with the government's planned allocation of wages and its management strategy for other expenses.

Wages were paid only in cash, and households used cash exclusively for making payments. Checkbooks, credit cards, and other alternative forms of payment were not available in the Soviet Union. Wage earners could keep savings deposits in the Savings Bank (Sberbank), where they earned low interest, and these funds were available to the government as a source of revenue. Two other banks also existed prior to 1987. The Construction Bank (Stroybank) provided investment credits to enterprises, and the Foreign Trade Bank (Vneshtorgbank) handled financial transactions pertaining to trade.

In 1987 and 1988, the Gorbachev regime separated commercial banking operations from Gosbank and replaced the two specialized banks with three banks to provide credit to designated sectors of the economy: the Agro-Industrial Bank (Agroprombank), the Industry and Construction Bank (Promstroy-bank), and the Social Investment Bank (Zhilsotsbank), which managed credits for the social welfare sector. The Soviet economy also had state-controlled insurance firms, but other forms of finance such as stocks and bonds did not exist.

The Financial Sector in the 1990s

In the 1990s, Russia's financial sector, particularly its banking system, has been one of the fastest changing elements of the economy. Although changes have moved clearly in the direction of market principles, in the mid-1990s much additional reform was necessary to achieve stability.

Reform of the Banking System

The Russian banking system has developed from the centralized system of the Soviet period into a two-tier system, including a central bank and commercial banks, that is the standard structure in market-based economies. The Russian Central Bank (RCB) assumed the functions of Gosbank in November 1991, and Gosbank was eliminated when the Soviet Union dissolved one month later. In its first years of existence, the RCB functioned under the guidelines of the 1977 Soviet constitution and Russian laws passed in 1990, which made the bank essentially an arm of the Russian parliament, whose members manipulated bank policy to help favored enterprises.

Russia's 1993 constitution gave the RCB more autonomy. However, the president has substantial influence on bank policies through his power to appoint the bank chairman, who in turn wields extensive authority over bank operations and policy. (The nomination is subject to the approval of the State Duma.)

Viktor Gerashchenko, a former Gosbank chairman, was the first chairman of the RCB. In late 1994, he resigned under pressure from President Yeltsin after the so-called Black Tuesday plunge of the ruble's value on exchange markets (see Monetary and Fiscal Policies, this ch.). Yeltsin named Tat'yana Paramonova to replace Gerashchenko, but she remained acting chairman throughout her tenure because the State Duma refused to approve her appointment. Powerful Duma members opposed Paramonova's policy of restricting credits to favored industrial sectors. In November 1995, the Duma approved Yeltsin's nomination of Sergey Dubinin to replace State Paramonova; Dubinin remained in that position through the end of Yeltsin's first term as president in mid-1996.

The Law on the Central Bank, enacted in April 1995, provides the statutory authority for the RCB. Under the law, the RCB is responsible for controlling the country's money supply, monitoring transactions among banks, implementing the federal budget and servicing Russia's foreign debt, monitoring the foreign-exchange rate of the ruble, implementing Russian exchange-rate policies, maintaining foreign currency reserves and gold reserves, licensing commercial banks, and regulating and supervising commercial banks.

The RCB has had the greatest impact on Russia's economy through its role in monetary policy. The RCB controls the money supply by lending funds to commercial banks and by establishing their reserve requirements. For several years after its establishment, the RCB issued direct credits to enterprises and to the agricultural sector at subsidized rates. Such credits were directed via commercial banks to politically influential sectors: agriculture, the industrial and energy enterprises of the northern regions, the energy sector in general, and other large, state-run enterprises.

In the early years, the RCB also financed state budget deficits by issuing credits to cover Government expenditures. The availability of such credits played a central role in the high inflation that the Russian economy endured between 1991 and 1994. In 1995 new legislation and regulations reduced this type of credit by prohibiting the use of credit to finance state budget deficits, and recent RCB chairmen have raised discount rates for RCB borrowing by commercial banks. Such restrictions have been heavily influenced by requirements of the IMF to maintain strict fiscal and monetary standards to be eligible for international financial assistance (see Foreign Debt, this ch.).

Initially, the RCB's regulation of commercial banks also was lax because the banking sector grew rapidly as the centralized economy collapsed and because Russia had no experience in establishing a market-based system. In the early and mid-1990s, the failure of regulation led to a plethora of new commercial banks, most of which were of dubious quality.

In the mid-1990s, the World Bank (see Glossary) assisted the Russian government in establishing a core of large banks, called international standard banks, that met the standards of the Bank for International Settlements (BIS--see Glossary). The new banks must conform to strict standards for the size and interest rates of loans; the size of a bank's capital base; the volume of loan reserves that banks must maintain; and the scrutiny under which banking activities will be monitored. The International Standard Bank program anticipates that the core of banks that meet its requirements will grow until the entire banking system conforms to the BIS criteria.

Meanwhile, plans called for the RCB to remain the foundation of the Russian banking system. Its success will depend greatly on its retaining as much independence as possible from both the executive and the legislative branches of government and on bank officials' ability to maintain credible monetary policies.

Commercial Banks

By the end of 1995, Russia had nearly 3,000 commercial banks. However, most of these banks were small and had little capitalization. A large portion of them are financially linked to companies and act exclusively as conduits of subsidized credits to these enterprises. The financial health of such institutions is highly questionable, and experts forecast that many of them will merge into larger, more viable institutions or go bankrupt as the RCB continues to tighten its requirements and as the role of cheap credits diminishes.

The commercial banking system has a core of large, viable banks that have attained financial credibility and that experts expect to remain in operation under any foreseeable economic conditions. The former state-controlled specialized banks of the Soviet system form the foundation of the current commercial banking system, including the six largest commercial banks in Russia. In 1991 three of the banks--the Agroprombank (subsequently renamed Rossel'bank), the Promstroybank, and the Zhilsotsbank (reorganized into Mosbusinessbank)--were reorganized into joint-stock companies and became independent commercial operations, forming the foundation of the commercial banking system.

The Soviet-era Savings Bank (Sberbank) was reorganized as the Sberbank of Russia, with the RCB holding controlling shares. In 1996 the Sberbank held between 60 and 70 percent of Russians' total household savings; that figure decreased from 90 percent in 1991 as other commercial banks began to provide competition. The Foreign Trade Bank (Rosvneshtorgbank) also remains state-controlled, and it continues to handle most foreign transactions, although by the mid-1990s it received competition from newer, privately owned banks. The Moscow International Bank handles business between the large Russian banks and Western banks. Sberbank and Rossel'bank have systems of nationwide branches.

The types and quality of services that the Russian banking system offers to the public are still rudimentary according to the standards of Western industrialized countries. They are unable to offer diverse and efficient customer services because the Soviet Union had no retail banking tradition and because Russia lacks the sophisticated infrastructure, especially high-speed telecommunications and trained staffs, on which modern Western financial institutions depend.

Most of the commercial banks offer their customers savings deposit accounts, and the more established banks provide foreign-exchange services, investment services, and corporate services. Bank checks are still rarely used in Russia because check clearance is a long process. Some banks offer debit cards that allow customers to have payments for goods and services deducted directly from their bank balances. Some banks also offer credit cards to customers with impeccable credit ratings. The continued predominance of cash transactions has slowed the rate of Russia's commerce.

Although foreign banks have played a larger role in the Russian economy in the mid-1990s, that role has met substantial resistance from nationalist factions. In early 1996, the State Duma passed a statute prohibiting the RCB from licensing foreign banks that did not have operations in Russia before November 1993. However, opponents of such a policy have pointed out that efforts to protect the fledgling domestic banking sector from foreign competition also deny access to Western financial techniques that eventually would improve the competitiveness of Russian banks.

Other Financial Institutions

A Russian securities market has evolved with the rest of the economy. When the first Russian stock market was established in 1991, few private companies existed to offer shares, so trading activity was quite low. The securities market got a large boost from the Russian government's privatization campaign. Shares in privatized firms were issued, and then a secondary market emerged for the privatization vouchers that the government issued to each citizen (see Privatization, this ch.). As the first phase of the privatization program ended and companies' capital requirements rose, an efficient securities market became increasingly important.

Russian laws and regulations of the stock market and other elements of the securities market have not kept pace with the growth in the industry, fostering irregularities in the market. Among the most infamous was the operation of the MMM investment company, which developed into a pyramid scheme guaranteeing investors very high returns on their investments. A number of Russian small investors, whose savings had been eroded severely by inflation, were attracted to the scheme and eventually lost large sums of money. The head of MMM, Sergey Mavrodi, was arrested and jailed on tax fraud, but the MMM case underlined the lack of Western-style commercial laws in the Russian legal system. The Russian securities market also lacks a modern communications infrastructure, so registration and reporting of financial transactions are very slow.

In 1993 the Government added a new element to the securities market by issuing treasury bonds to help finance its budget deficits. In addition, Russian citizens are able to buy and sell rubles for foreign currency at selected banks. The exchange rate is established through weekly auctions on the Moscow International Currency Exchange (MICEX).

Insurance remains a small part of the Russian financial market. In 1996 approximately 200 insurance companies were operating in Russia, including the privatized versions of former Soviet state insurance companies. According to experts, Russia's relatively new financial institutions are likely to face a long period of adjustment as weaker banks close or merge with stronger banks, and a regulatory framework must be developed to ensure public confidence in the banking system and enable banks to offer reliable support in the development of private enterprise--a role that has expanded rapidly in the first five post-Soviet years. Other aspects of the financial system, such as securities markets, also lack the degree of standardized regulation required for large-scale domestic participation. However, as the private sector's role in the national economy grows and as Russia develops needed regulations and infrastructure, the securities markets and other nonbank financial institutions are expected to follow the banks as important elements of the economy.

Taxation

Throughout the first half of the 1990s, international financial institutions warned Russia that major adjustments were needed in the structure and the administration of the country's tax-collection system. However, in 1996 few meaningful changes had emerged. Tax reforms until that time had emphasized revenue from income, consumption, and trade, with the value-added tax (VAT--see Glossary), corporate profits taxes, and personal income taxes accounting for 60 to 70 percent of total revenue (see table 16, Appendix). Beginning in 1993, experts have pointed to changes in the bases and rates of the profit tax and the VAT as a major cause of declining revenues. Between 1993 and 1994, the ratio of taxes collected to GDP declined from 41 percent to 36 percent, although the percentage of GDP paid in taxes already was lower in Russia than in any of the Western market economies. In the first quarter of 1996, only 56 percent of planned tax revenue was realized.

The system in place in 1996 taxed the profits of enterprises heavily, especially in comparison with the tax burden of personal income. In 1993 business profit taxes were three to seven times higher than in Western economies, and personal income taxes were two to four times lower. That emphasis was not conducive to expanding investment, and many non-wage sources of income were not captured by personal income tax standards. According to a 1996 estimate, Russians kept US$30 billion to US$60 billion in foreign banks to avoid taxation.

The VAT, which is levied on imported and domestic goods, is set at 21.5 percent for most purchases and 10 percent for a specified list of foods. Administration of that tax is complicated by uneven compliance and accounting rules that do not define clearly the amounts to be classified as value added. Taxation on the extraction and sale of natural resources is a major revenue source, but the current system yields disproportionately little revenue from the energy sector, especially the natural gas industry. Excise taxes are levied on merchandise of both domestic and foreign origin. The tax on imported luxury items ranges from 10 to 400 percent, and the rate on imports has been kept higher than for domestic products in order to protect domestic industries.

Taxes on trade are a major revenue source. In the mid-1990s, export taxes became a more important source of revenue as other types of trade control were eliminated. Frequent changes in the tariff schedule for imported goods have led to confusion among importers. The average tariff rate in mid-1995 was 17 percent, but a reduction of maximum rates was announced for the medium term.

Russia's taxation agency is the State Taxation Service (STS), which was established to administer the new market-based tax system installed in 1991 and 1992. Although in the mid-1990s its staff of 162,000 employees was much larger than tax agencies in Western countries, the STS has been hampered by poor organization, inadequate automation, and an untrained staff. Training and reorganization programs were announced in 1995, and some streamlining has resulted in separating the roles of various levels of government, identification of tax-eligible individuals and corporations, and application of penalties for tax evasion and tax arrears.

Experts have identified the most serious defect of the tax administration system as the ad hoc granting of tax exemptions, which distorts the overall revenue system and undermines the authority of administrators. The most problematic examples of this practice are exemptions granted to agricultural producers and the oil and natural gas industries.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 4:18 am

The Labor Force

Literacy and education levels among the Russian population (148 million in 1996) are relatively high, largely because the Soviet system placed great emphasis on education (see The Soviet Heritage, ch. 5). Some 92 percent of the Russian people have completed at least secondary school, and 11 percent have completed some form of higher education (university and above). In 1995 about 57 percent of the Russian population was of working age, which the government defined as between the ages of sixteen and fifty-five for women and between the ages of sixteen and sixty for men, and 20 percent had passed working age. Women make up more than half the work force.

Although size, age, and education would seem to place the Russian labor force in a good position to participate in developing a modern, industrialized economy, it is not clear that the skills that Russian workers attained during the Soviet period are those required for a market economy. In 1994 the construction, industry, and agriculture sectors employed 53.5 percent of the work force, and the services sector employed 37 percent, a distribution typical of developing economies. By contrast, 67 percent of the United States labor force is in the services sector, and 22 percent is in agriculture, industry, and construction, a configuration typical of modern industrialized market economies. The Russian pattern reflects the emphasis that Soviet economic planners placed on the nonservice sectors. Even among the highly skilled labor force, the Soviet economy (and the national education system as a whole) skewed training toward the sciences, mathematics, and engineering and gave little attention to education in management and entrepreneurship. This pattern of work training and general education has continued in the 1990s; according to experts, its continued presence indicates that the economy may not be able to depend on younger workers to expand the fund of service-sector skills needed for a modern market economy. In any case, as the Russian economy progresses toward a market structure, middle-aged and older workers will increasingly find themselves playing a marginal role.

The living standards of Russia's workers have been eroded by two factors. First, the severe depression of the country's extended economic transition has left a large share of the work force either unemployed, underemployed, or receiving reduced wages. Second, labor lacks an effective organization to protect its interests. Neither trade unions from the Soviet era nor new, independent organizations have provided effective, united representation. As of mid-1996, negative conditions had not yielded the large-scale unrest that many experts had predicted in the working class.

Unemployment

The growth of unemployment has been the bane of many of the Central and East European countries in the transition from centrally planned to market economies. Russia's unemployment rate has been hard to measure accurately because many firms unofficially furlough workers but leave them on company rolls. This practice is a vestige of the paternalistic Soviet era, when the presence of workers in an enterprise often had no relation to that enterprise's actual production. Many of these furloughed workers find gainful employment in the private sector, where wages often go unreported. Such a system results in a haphazard, inefficient allocation of the labor force.

Western and Russian analysts have relied on International Labour Organisation measurements, which indicate that at the end of 1995, Russian unemployment had reached 8.2 percent (see table 17, Appendix). The Russian journal Ekonomika i zhizn' estimated the figure at 8.6 percent, or 6.3 million people, for the first quarter of 1996. Although the last figure still is below the unemployment rates of Poland and some other countries in transition, the full extent of unemployment has been masked by extended subsidies that delayed the shutdown of large Russian enterprises. In 1995 nearly half of plant directors surveyed said that they had more workers than they needed.

Unemployment varies considerably according to region. Moscow's unemployment rate, the lowest in Russia, was 0.6 percent in March 1996. The Republic of Ingushetia, which also has had the highest immigration rate because of its proximity to Chechnya, reported a rate of 23.5 percent in December 1995. In March 1996, Ivanovo, a textile center east of Moscow, had a rate of 13 percent, and the Republic of Udmurtia, a center of the struggling military-industrial complex, reported 9.4 percent (see The Defense Industry, ch. 9). At that time, women constituted 62 percent of Russia's officially unemployed, and 37 percent of the total were people below the age of thirty.

The Federal Employment Service (Federal'naya sluzhba zanyatosti--FSZ), the agency in charge of issuing unemployment benefits and placing unemployed workers, had only 3.7 percent of the working population registered for benefits in March 1996; many jobless workers do not register because benefits are so small (averaging US$22 per month in 1995) and because, after the guaranteed employment of the Soviet era, joblessness entails a significant stigma for many Russians. However, as the average term of unemployment grew from six to eight months between 1994 and 1995, more workers participated in FSZ programs. In 1995 the service placed an estimated 1.7 million workers in new jobs. That year, 9.8 million workers left positions and 8.7 million were hired, and the majority of those who left did so voluntarily--many because wages were not paid--rather than because of dismissal. Shortages exist in some types of skilled labor, and some companies actively recruit workers.

Wages

By 1995 delays in wage payment had become a chronic problem even in profitable Russian enterprises. In many cases, enterprises simply passed along the burden of late payments of state subsidies and customer debts. At the end of 1995, the Government owed a total of US$112 billion of subsidies, of which about 27 percent were more than three months overdue. Most of its debt was to the military and energy sectors. Through 1995 an average of 19 percent of wages were paid late, and in January 1996 a total of US$2.1 billion was overdue in agriculture, construction, industry, and transportation. The State Committee for Statistics (Goskomstat) began keeping separate statistics for wages formally paid and those actually delivered. The payment record of privatized enterprises was worse than that of state enterprises, and in many cases workers were paid in merchandise rather than in cash. In early 1996, the average rates of overdue payment were 62 percent in ferrous metallurgy, 86 percent in oil extraction, and 22 percent in food processing.

In his presidential campaign, Yeltsin promised to abolish state-sector wage arrears and to encourage improvement in the private sector. By squeezing the national budget, Yeltsin achieved temporary results in the state sector, but his promise had no effect on other enterprises. Officials proposed several programs to raise average wages and streamline the inefficient system by which wages are delivered, but no meaningful reform had been achieved by mid-1996. In July 1996, coal strikes in the Far East, southwestern Russia, southern Siberia, and the Urals threatened a nationwide shutdown in response to continued payment failures in that industry.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 4:18 am

Manufacturing

Beginning in 1921, Lenin's Soviet government made industrial modernization a priority. But it was under Stalin that the system of central planning was fully developed and the industrialization of the Russian Republic reached its peak. Throughout the Stalin period, investment resources were directed into heavy manufacturing at the expense of consumer or light industry.

During the later Soviet period, economic reformers such as Nikita Khrushchev attempted to shift some resources to the consumer industries, but the emphasis eventually shifted back to heavy and military industries. This emphasis was especially strong while the Soviet Union was building its military base during the Cold War. In the 1970s, manufacturing productivity declined. As part of his perestroika program in the late 1980s, Gorbachev redirected resources to consumer goods, but the effort proved insufficient to forestall the decay of the manufacturing sector.

In the 1990s, Russia urgently needed a revival of the manufacturing sector to provide employment and steer the restructuring of industrial priorities away from the impractical Soviet emphasis on subsidized heavy industry and the military-industrial complex (MIC). Although a substantial share of Russia's MIC enterprises underwent full or partial conversion to civilian production and most manufacturers were partially or fully privatized, manufacturing output continued a general decline in the mid-1990s (see table 18, Appendix). This trend had slowed by 1995, when the decrease in total industrial production was 4 percent compared with 1994; the 1994 total had been 23 percent below that of 1993.

Ferrous Metallurgy

The Soviet Union's ferrous metallurgy industry was a showpiece of centralized planning of heavy industry. The fast-growing industry, vital in supplying other heavy industries with semifinished inputs, led the world in output in the 1970s and the 1980s. Beginning in the mid-1980s, however, ferrous metallurgy did not keep pace with the demands of domestic industry and foreign markets for more sophisticated and stronger metal materials. Many older plants with outmoded technology remained in full production; Soviet plans called for refitting the industry in the 1990s, but Russia's resources have not been sufficient for such a massive project.

In 1994 the ferrous and nonferrous metallurgical industries accounted for about 16 percent of industrial output. In 1996 more than 80 percent of Russia's steel output came from eight plants, although about 100 plants were in operation. Among the industry's most important products are pipe, pig iron, smelted steel, finished rolled metal, and shaped section steel. The four largest steel enterprises are the Novolipetsk and Cherepovets metallurgical plants, located southeast and north of Moscow, respectively, and the Magnitogorsk and Nizhniy Tagil metallurgical combines, located in the Ural industrial region. In 1995 the Cherepovets plant was re-formed as the Severstal' (Northern Steel) Joint-Stock Company. In the mid-1990s, more than half of Russia's steel production came from the outmoded open-hearth furnace process; the more modern continuous casting method accounted for only 24 percent of output.

In the first half of the 1990s, the steel industry was hit especially hard by Russia's overall economic decline, which caused domestic consumption to drop sharply; by 1996 only 50 to 60 percent of capacity was in use. Between 1991 and 1994, output of rolled steel dropped from 55.1 million tons to 35.8 millions tons. Foreign sales were especially important as the only source of hard currency for some enterprises, accounting for as much as 60 percent of output in some cases. In 1995 Russian exports increased by 30 percent, making Russia the second largest exporter of ferrous metals in the world. The profitability of such sales dropped substantially between 1994 and 1996, however. Much of the steel industry's domestic business was payment in kind to input suppliers and railroads. Production costs are raised by the prices of such domestic inputs as coal and iron ore and transportation, which averaged at or above world levels in 1996. Another major cost to the ferrous metallurgy sector is social support programs for workers. Those costs in turn raise domestic metal prices above international levels.

Nonferrous Metallurgy

The Noril'sk Nickel Joint-Stock Company dominates Russia's nonferrous metallurgy industries. It controls nearly all of the country's aluminum and nickel production and 60 percent of copper production. The largest operations in the industry are Noril'sk Nickel in northwestern Siberia and Bratsk Aluminum, Krasnoyarsk Aluminum, and Sayan Aluminum in south-central Siberia. More than 90 percent of Russia's aluminum comes from six smelters. Some smelters have been privatized and export their semifinished products. Inputs, especially alumina (of which Russia has little), became much more expensive in the mid-1990s, as did transportation and electricity costs. At the same time, export revenues fell.

The Automotive Industry

In 1993 Russia's automotive industry produced 956,000 passenger automobiles, a decrease from the 1991 figure of 1,030,000 automobiles. During the Soviet period, the industry had gained a reputation for extremely slow production of very unreliable vehicles. In the mid-1990s, the plant rated most efficient, the Volga Automotive Plant (Avtovaz) at Tol'yatti, required about thirty times as long to assemble an automobile as the leading plants in Japan. All Russian vehicle plants operated at far below capacity, with outmoded machinery and bloated work forces. Avtovaz, the most productive plant, operated at about 70 percent of capacity, and the Gor'kiy Automotive Plant (GAZ) in Nizhniy Novgorod was the only other major plant operating above 30 percent in 1995. The two main truck manufacturers, the Likhachev Automotive Plant (ZIL) in Moscow and the Kama Automotive Plant (KamAZ) in Naberezhnyye Chelny, have suffered especially from reductions in orders by their main customers--the armed forces and collective farms. GAZ has successfully marketed a light truck, of which it sold 75,000 in 1995, mainly to small businesses. The traditional Soviet truck was a heavy diesel model with limited service life.

Although demand for passenger automobiles has increased substantially in Russia over the last twenty-five years, output has not responded even in the post-Soviet period. In 1994 only eighty-four autos were registered per 1,000 people. In the mid-1990s, all automobile plants retained the Soviet style of organization, which is incapable of self-financing or effective marketing. The lack of post-Soviet government subsidies has placed most enterprises in danger of extinction. Some Russian enterprises have proposed joint ventures with Western firms, but in many cases the Russian partners lack funding for such ventures. Meanwhile, foreign imports further endanger the industry: in 1994 only 65,000 automobiles were imported legally, but another 250,000 to 500,000 entered Russia illegally. Therefore, most new cars in Russian cities are foreign. (In 1996 government vehicles were exclusively Audi, Mercedes-Benz, Saab, or Volvo). Exports of Russian passenger cars declined in the early 1990s.

Machine Building

In the Soviet period, the machine-building industry was at the center of the industrial modernization programs that required a steady supply of capital equipment to respond to new demands. However, the inefficient organization of industrial planning caused bottlenecks in crucial programs and generally unreliable performance. The industry is concentrated in the European part of Russia, with major facilities in Moscow, St. Petersburg, Nizhniy Novgorod, and the Ural industrial region. (Russian machine building includes the automotive, construction equipment, and aviation industries as well as the tractor, electrical equipment, instrument making, consumer appliance, and machine industries.)

Between 1985 and 1995, production of most categories of machines decreased significantly, mainly because of declining domestic orders. For example, by 1992 production of metal-cutting machines had dropped by 20 percent, washing machines by 47 percent, turbines by 36 percent, and tractors by 45 percent. In 1993 production of about one-third of sixty-two major categories of products declined by at least 50 percent. In 1995 production for the entire machine-building complex was about 4 percent below the 1994 level.

Light Industry

The most important branch of light industry is cotton textiles, which has production centers in Ivanovo, Kostroma, Yaroslavl', and about two dozen smaller cities between the Volga and Oka rivers east of Moscow. The economic slump of the 1990s had a dramatic effect on textile production and other light industries. In 1995 Russia's light industry suffered the sharpest drop in production of all economic sectors, slumping by an estimated 25 to 30 percent compared with the previous year. Prices for light-industry goods increased by an average of 2.9 times in 1995 after having increased by 5.6 times in 1994.

Unemployment in Russia's textile production centers has been among the highest in the country. In early 1996, an estimated 70 percent of workers in the industry were on furlough or working part-time. The chief cause is the Russian consumers' decline in personal income, hence in demand. In the mid-1990s, consumers purchased most of their textile products at flea markets, which offered both a wider variety of merchandise and cheaper prices than most stores. By the end of 1995, orders for all types of light-industrial production were 48 percent of the average for the previous years. Production declined by 20 percent in fabrics, 21 percent in leather shoes, and 44 percent in knitted goods, but stocks of finished products grew because demand decreased at a faster rate.

The high price of cotton also has hampered the textile industry, which had been accustomed to paying low prices for its raw material when the major suppliers in Central Asia were part of the Soviet economic system. Although their cotton is not of high quality, Central Asian sellers now charge world market prices. (Cotton from the "far abroad," outside the former Soviet Union, is even more expensive, however.) In 1996 industry experts expect some improvement because of expanding export markets in Europe and new investment in light industry by Russia's banks. They also expect an increase in domestic shoe manufacturing in the 1990s because the high import duties on foreign shoes make them twice as expensive as Russian shoes--although in 1996 some 65 percent of shoes sold in Russia were imported. The former member countries of the Council for Mutual Economic Assistance (Comecon--see Glossary) were the chief source of such goods.

Chemicals

The centers of the chemical industry traditionally have been areas where critical raw materials and allied industries were available. Before 1960 plants were near mineral deposits, potato farms, coking coal, and nonferrous metallurgy plants. When oil and natural gas became prime raw materials for chemical production, plants were built near the Volga-Ural and North Caucasus gas and oil fields or along pipelines. In the 1980s, major plants were built at Omsk, Tobol'sk, Urengoy, and Surgut in the western Siberia oil region and at Ufa and Nizhnekamsk in the Volga-Ural region. In the same period, the government gave strong investment and research support to chemical production because of its importance to the rest of heavy industry.

The major divisions of the chemical industry are paints and varnishes, rubber and asbestos products, synthetic tar and plastic products, mined chemical products, household chemicals and washing compounds, mineral fertilizers, chemical fibers and filaments, and paper and pulp. In the 1990s, output has decreased in all of those areas. Among representative products, between 1985 and the early 1990s production of mineral fertilizers dropped by 29 percent, agricultural pesticides by 74 percent, industrial carbon by 28 percent, sulfuric acid by 19 percent, synthetic tars and plastics by 16 percent, paints and varnishes by 43 percent, household soaps by 25 percent, and caustic soda by 15 percent.

Based on Russia's huge supply of timber, a substantial lumber-processing and pulp industry developed in the Soviet period as a subsidiary of the chemical industry. In 1996 Russia's largest pulp and paper enterprises were at Kondopoga near the Finnish border, Bratsk west of Lake Baikal, Syktyvkar in the Republic of Komi, and Kotlas southeast of Arkhangel'sk. Most pulp and paper companies do not own timber resources, but timber suppliers, who lease timberland from the state, generally sell raw materials at below world prices, giving Russian manufacturers a competitive advantage. Some mergers have occurred between suppliers and manufacturing operations.

In the early 1990s, production of raw timber dropped by about 25 percent, mainly because of equipment depletion, lack of credit, higher railroad transport fees, and a drop in construction of lumber roads. In 1993 production of raw timber was 450,000 cubic meters, 75 percent of the 1992 total; production of commercial cellulose was 79 percent of the previous year's total; and of cardboard, 73 percent.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 4:19 am

Transportation

The transportation system during the Soviet period was organized in the form of vertically integrated monopolies controlled by the central government. Thus, for example, the same administrative agency owned and operated the airports, airlines, and enterprises that manufactured aircraft. The infrastructure eroded seriously in the late Soviet period and requires much modernization and reform, for which Russia relies heavily on foreign investment and aid.

Roads

Roads were one of the least-used forms of transportation in the Soviet Union, a characteristic that has continued in the Russian Federation. Soviet industry placed little emphasis on the production of automobiles and other modes of personal transport, and the privately owned vehicle was a relatively rare phenomenon; therefore, the demand for road construction was small. The dominance of the railroads for cargo transport also constrained the demand for the construction of roads. In 1995 Russia had 934,000 kilometers of roads, compared with 6.3 million kilometers in the United States (see fig. 10). Of Russia's total, 209,000 kilometers were unpaved, and 445,000 kilometers were not available for public use because they served specific industries or farms.

The World Bank has estimated that in twenty years the demands of Russia's new economy will increase the road system's share of transportation to 41 percent from its 1992 level of 13 percent. However, in 1992 some 38 percent of Russia's highway system required rehabilitation or reconstruction, and another 25 percent required repaving. Many major bridges also required large-scale repair in the mid-1990s.

Railroads

Railroads are the dominant mode of transportation. In 1995 Russia had some 154,000 kilometers of railroads, 26 percent of which were electrified, but 67,000 kilometers of that total served specific industries and were not available for general use (see fig. 11). The entire system is 1.52-meter gauge. In 1993 railroads accounted for 1,608 billion ton-kilometers of cargo traffic, compared with the 26 billion ton-kilometers provided by trucks. The prominence of railroads is the result of several factors: the vast distances that need to be covered; the penchant of Soviet economic planners for locating manufacturing facilities in politically expedient areas rather than where raw materials and other inputs were available; and the conditions for granting state fuel subsidies, which provided no incentives to break up cargo transportation into shorter-haul operations that could be covered by road. Cargo traffic is the predominant use of railroads, in contrast to the emphasis on passenger traffic in West European railroad systems (see table 19; table 20, Appendix). This pattern is a product of the Soviet emphasis on heavy industry and production rather than on consumers. In 1992 Russia's railroads accounted for 253,000 passenger-kilometers, and by 1994 the total had dropped to 227,000 passenger-kilometers.

Railroad traffic has plummeted since the beginning of Russian economic reform, reflecting a general decline in economic activity. Between 1992 and 1994, freight haulage dropped from 1.9 million ton-kilometers to 1.2 million ton-kilometers, and Russia's rolling stock and roadbeds deteriorated, mainly because of insufficient maintenance funding. In 1993 an estimated 8.5 percent of Russian rail lines were defective. As a market economy takes shape, experts forecast a smaller relative role for the railroads. The combination of fuel and material costs, substantially higher in the absence of government subsidies, and new alternative routing will likely prompt Russian manufacturers to find more efficient means of transporting goods. For shorter hauls, trucks will replace rail service, and intermodal transportation will receive greater emphasis as an outgrowth of marketization.

Air Transportation

Of the modest amount of passenger traffic in Russia, air service accounts for a relatively large portion, although the volume of traffic declined in the first half of the 1990s. In 1990 the monopoly service of Aeroflot, the Soviet Union's state-owned airline, accounted for 22 percent of the total distance passengers traveled, a proportion comparable with the proportion of travel on the airlines of the United States and Canada. However, the contribution of air service to total travel had dropped to 12.5 percent by 1993, and the number of passengers flying was less than half the 1990 total. Subsidized air fares and long-distance flights between cities accounted for much of the air activity in the early 1990s. In 1994 Russia had a total of 2,517 airports, of which fifty-four had runways longer than 3,000 meters, 202 had runways between 2,400 and 3,000 meters, and another 108 had runways between 1,500 and 2,400 meters.

As with the rest of the economy, air travel has declined substantially as prices have increased and travelers' incomes have declined. The airline industry also has undergone major adjustments in the 1990s. Aeroflot, since 1995 a joint-stock company with majority state ownership, remains the main Russian airline. However, more than 200 regional carriers have emerged in the former Soviet Union, and most of them are in Russia. With flights from so many carriers, direct service is now available between regions, including direct flights from the Russian Far East to Japan and Alaska, without the previously obligatory stop in Moscow or St. Petersburg.

At the same time that airlines decentralized, so did reservation systems and navigation control networks, making those aspects of airline travel less efficient. Experts predict that as market forces continue to work in the sector, higher fuel costs and declining passenger demand will force mergers and bankruptcies that eventually will lead to a more efficient system.

The airline industry also must deal with an aging capital stock. As of 1993, some 48 percent of the national system's aircraft were more than fifteen years old. To upgrade, Russian airline services have purchased aircraft from Western firms and demanded more modern aircraft from domestic manufacturers.

Water Transportation

Maritime transportation plays an important role in Russian transit, but the country's geography and climate limit the capacity of shipping. Many Russian rivers run from south to north rather than from east to west, constraining their use during the Russian winters.

Russia's major ports providing access to the Baltic Sea are St. Petersburg and Kaliningrad, and Novorossiysk and Sochi are the main Black Sea ports (see fig. 12). Vladivostok, Nakhodka, Magadan, and Petropavlovsk-Kamchatskiy account for the bulk of maritime transportation on the Pacific coast. The largest Arctic port, Murmansk, maintains an ice-free harbor despite its location on the northern shore of the Kola Peninsula. In 1995 Russia's merchant marine had about 800 ships with a gross tonnage of more than 1,000, of which half are standard cargo vessels, about 100 oil tankers, and eighty container ships. Russia also owns 235 ships that are over 1,000 tons and sail under foreign registry. In 1991 the merchant marine carried 464 million tons of cargo.

Navigable inland waterways extend 101,000 kilometers, of which 16,900 kilometers are man-made and 60,400 are navigable at night. Boats of the Russian River Fleet do most of the inland shipping, which accounted for 514 million tons of cargo in 1991. The Russian government has made efforts to decentralize control over water transportation and to separate control of liners from ports.

Public Transportation

Although the high price and scarcity of passenger automobiles required Soviet citizens to rely on public transportation, Soviet policy makers gave low priority to civilian transportation. Only six Russian cities have underground systems--Moscow, St. Petersburg, Yekaterinburg, Nizhniy Novgorod, Novosibirsk, and Samara. The extensive and decorative Moscow subway system, built in the 1930s as a showpiece of Stalinist engineering, remains the most reliable and inexpensive means of transportation in the nation's capital.

Elsewhere, buses are the main form of public transportation. In cities, tramways supplement bus service, accounting for one-third of the passenger-kilometers that buses travel. The Russian Federation continues the Soviet-era 70 percent state subsidy, which keeps fares artificially low. This subsidy has been a drain on the budget and has blunted the public's demand for alternative modes of transportation. The system's infrastructure and vehicle fleets require extensive repair and modernization.

Transportation Reform

In the first half of the 1990s, market forces shifted some of the demand among the various transportation services. Russian policy makers had not prescribed the proper role of the transportation sector in the new economy. However, officials indicated that Russia will follow the Western model of assuming government regulation of transportation systems while reducing state ownership of those systems.

Many state-owned transportation monopolies have been dissolved, but some monopolies such as public transportation are expected to remain in place. The role of government will be to ensure that the systems are commercially viable and allow private systems to emerge. The government also will continue to be responsible for maintaining the quality and availability of the road, air, and water infrastructure and for maintaining standards of transportation safety.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 4:20 am

Telecommunications

By various measures, Russia's telecommunications infrastructure is inferior to that of most developed industrialized countries. In 1991 only 33 percent of Russian households had telephones, compared with 94 percent in the United States. In 1995 Russia had seventeen telephone lines per 100 inhabitants, compared with thirty-six in Spain, forty-four in Belgium, and sixty-nine in Switzerland.

The Soviet Period

During the Soviet period, the state controlled all means of communications and used them primarily to convey decisions and to facilitate the execution of government directives affecting the economy, national security, and administrative governmental functions. The Ministry of Communications had responsibility for most nonmilitary communications, and the Ministry of Defense controlled military communications. Other ministries, including the Ministry of Culture, controlled specialized elements of the communications infrastructure.

Moscow maintained control over communications, and regional and local jurisdictions enjoyed little autonomy. This centralization forced the Soviet Union to acquire the means to deliver signals over a vast area and provided the impetus for the development of satellite communications, which began with the launching of the Molniya satellite communications system in 1965. Despite the success of the satellite system, Soviet technology was unable to meet the rapidly growing informational demands of the 1980s. In that period, the Soviet government began to import digital switching equipment from the West in an effort to modernize the national telephone system. The priority given to military and government applications skewed the distribution of new equipment, and officials dedicated relatively few telephone lines and communications facilities to commercial and residential use. In addition, most communications facilities remained concentrated in a few urban areas at the expense of smaller cities and rural regions.

Telecommunications in the 1990s

Since the breakup of the Soviet Union, Russia has been engaged in the reorganization and modernization of its communications systems. In this process, control over communications has been decentralized and in large part privatized. In domestic telephone and related communications, control devolved to regional and local enterprises, which were then reorganized into joint-stock companies. Long-distance and international service operations were grouped together into a new organization, Russian Telecommunications (Rostelekom), which itself became a joint-stock company. The federal government has retained control over the national satellite system, telecommunications research and development, and education systems through the Ministry of Communications. Despite ownership changes, in 1995 only about 14 percent of Russia's 24.4 million telephones were located outside urban areas, the waiting list for telephone installation included more than 10 million names, and only 34,100 pay telephones were available for long-distance calls.

By mid-1994 the Russian telephone communications system had been privatized through the voucher program. Employees of the reorganized companies received about 25 percent of company stock, the government retained some shares, and the remainder were sold at public auction. Telecommunications stocks reportedly have been among the most coveted items on the fledgling Russian stock market. Domestic and foreign investors have been especially attracted to stocks in major regional telephone enterprises such as the Moscow and St. Petersburg telephone systems and Rostelekom. But the state has not relinquished its remaining telecommunications shares, showing reluctance to cede full control to the private sector.

Development of the telecommunications infrastructure depends heavily on foreign funding and joint ventures. The Ministry of Communications expected foreign investment in telecommunications to increase by 24 percent in 1996 over 1995, matching domestic investment of US$520 million. In the mid-1990s, state subsidies continue to fall. According to Western experts, that investment level is far below the amount needed over a prolonged period to modernize Russian lines or even to upgrade existing equipment. However, Russia faces stiff competition for foreign capital because Western and Japanese companies already have made substantial commitments to telecommunications modernization and privatization projects in a number of other countries.

Russia's goals for 1996 were the laying of 1,815 kilometers of cable and the installation of 9,500 kilometers of wireless lines, 5,000 long-distance exchanges, and 1.5 million new private telephone lines in urban and rural areas. The latter addition would bring the national total to 26 million lines.

The regulatory framework for telecommunications in Russia remains weak, but it is maturing. The Law on Communications, enacted in 1995, is the chief statute, but the lines of regulatory authority have not been clearly defined. The Ministry of Communications is the chief regulatory agency for "civilian" communications, but military and national security authorities control their own communications networks outside the purview of the Law on Communications.

As Russia's telecommunications systems develop, the regulatory issues facing the Ministry of Communications include frequency assignments, standardization of equipment, levels of competition, and establishment of optimal user rates. The military and internal security agencies traditionally have had priority use of most wireless frequencies, but the newer and expanding commercial and individual users require more access to frequencies. Standardization is needed so that older equipment can operate with the new models on expanded systems. A uniform policy is needed for regulation of telecommunications competition, which varied in the early post-Soviet years. And the Ministry of Communications has not yet established telephone rates that are affordable to the users but provide enough profit for the company to operate and expand.

The government has promoted competition in some sectors. An example is the licensing of a number of companies to provide specialized, dedicated service networks. For cellular telephone lines, the government has encouraged competition in densely populated areas, such as Moscow and St. Petersburg, while developing single provider systems for small areas where demand is limited. For long-distance service, in the mid-1990s Rostelekom competed with local telephone companies for revenues in the potentially lucrative area of interzonal communications. In addition, Rostelekom is facing competition from newer companies that are able to provide long-distance service through their own cables and via satellite. Under these conditions, the shape and size of the Russian telephone system is changing rapidly and responding to the demands of the market.

Experts estimate that Russia must expand its telephone networks from around 24 million telephones to between 75 million and 80 million and provide the modern switching equipment with which they can operate. They further expect that Russia will require an investment of US$150 billion to bring its telephone system up to modern standards. Russia has imported Western equipment in the modernization effort, but this strategy has proved very costly. The Russian equipment industry is trying to revive itself and develop indigenous technology to fulfill its needs.

Foreign investors could be an important source of capital and technology in the Russian telecommunications sector, but in the mid-1990s Russian laws and regulations limited foreign participation to the supply of equipment and services that would not hurt domestic producers. The Law on Communications gives preference to domestically produced equipment, with the major exception of cellular phone production, where officials have welcomed foreign participation. Domestic telephone services are the domain of Russian companies, but foreign companies have established a presence in domestic and international long-distance service.

Russian radio and television are undergoing similar changes (see The Broadcast Media, ch. 7). The programming facilities and transmission operations are separate, as they were in the Soviet system when the central government controlled all of these facilities. After the breakup of the Soviet Union, Russian radio and television programming operations were decentralized at the regional and local levels.

In the mid-1990s, three major countrywide state-owned programming companies provide most programming for the country. They are Russian Public Television (Obshchestvennoye rossiyskoye televideniye--ORT), Russian State Television, and St. Petersburg Television, which primarily serves the St. Petersburg metropolitan area. In 1995 Russian State Television was partially privatized when 49 percent of its shares were sold to private companies, but the company remains under state control.

The privatization process moved large blocks of shares into the hands of banks and powerful entrepreneurs, who formed communications and newspaper empires and used close connections in the Government to lobby for the release of additional state shares in the broadcasting enterprises. In 1996 the two most powerful broadcast entrepreneurs were former banker Vladimir Gusinskiy, head of the Media-Most holding company including the Independent Television (Nezavisimoye televideniye--NTV) network and several prominent periodicals, and Boris Berezovskiy, an automobile entrepreneur whose organization, Logovaz, now controls ORT as well as banking, oil, aviation, and print media enterprises.

Privately owned and operated, independent programming companies are playing a growing role in Russian radio and television programming. As of 1995, some 800 companies were in existence. In 1996 the largest private television channels are TV-6, which reaches sixty cities in Russia and elsewhere with a potential audience of 600 million viewers, and NTV, which serves European Russia and has a potential audience of 100 million viewers. Both companies were founded in 1993.

Transmission facilities are state-owned, and programmers must pay fees to the transmission companies to have their material broadcast. The fee establishment mechanism remains an issue in Russian telecommunications policy. Control over transmission gives the government powerful leverage over the content of broadcasts. In 1996 independent companies were considering cable and direct satellite television services to get into the state-dominated market as transmission providers. In 1992 some 48.5 million radios and 54.9 million televisions were in use. See Satellite TV - DirecTV and Dish Network for information about DirecTV and Dish Network.

Because the Law on Communications does not address the question of airtime allocation, policy makers also must grapple with that issue. Subsidies for radio and television broadcasters, including state-owned operations, have been reduced drastically in the first half of the 1990s, meaning that programmers must rely on advertising revenues.
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Re: Russia: A Country Study, edited by Glenn E. Curtis

Postby admin » Mon Aug 27, 2018 4:22 am

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 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.

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.

Foreign Investment

Foreign investment is the second major element of Russia's reform strategy to strengthen international economic links. From the late 1920s to the late 1980s, the Soviet government prohibited foreign investment because it would have undermined the state's decision-making prerogatives on investment, production, and consumption.

The perestroika economic reforms of the late 1980s permitted limited foreign investment in the Soviet Union in the form of joint ventures. The first joint-venture law, which went into effect in June 1987, restricted foreign ownership to 49 percent of the venture and required that Soviet administrators fill the positions of chairman and general manager. By 1991, however, the Soviet government allowed foreign entities 100 percent ownership of subsidiaries in Russia.

Although limited in scope, the joint-venture law did open the door to direct foreign investment in the Soviet Union, which provided Russia's economy wider access to Western capital, technology, and management know-how. But the overall limitations of perestroika hampered the joint-venture program. The nonconvertibility of the Russian ruble was an impediment to repatriation of profits by foreign investors, private property was not recognized, government price controls remained in effect, and most of the Soviet economy remained under state control.

The Yeltsin government's commitment to foreign investment has been hampered in some cases by Russia's ongoing debates about the appropriate relationship with the West and about the amount of assistance that Russia should accept from the capitalist countries. Substantial political factions view the infusion of foreign capital as a device for Western governments to intrude on Russia's sovereignty and manipulate its economic condition, and they advocate a more independent course.

The Foreign Investment Law of 1991 provides the statutory foundation for the treatment of foreign investment. The law provides for "national treatment" of foreign investments; that is, foreign investors and investments are to be treated no less favorably than domestically based investments. The law also permits foreign investment in most sectors of the Russian economy and in all the forms available in the Russian economy: portfolios of government securities, stocks, and bonds, and direct investment in new businesses, in the acquisition of existing Russian-owned enterprises, in joint ventures, in property acquisition, and in leasing the rights to natural resources. Foreign investors are protected against nationalization or expropriation unless the government declares that such a procedure is necessary in the public interest. In such cases, foreign investors are to receive just compensation.

In response to demands by foreign oil investors for stronger legal guarantees before making large capital commitments, in July 1995 the State Duma passed the Law on Oil and Gas. It provides a basic framework for other laws and regulations pertaining to exploration, production, transportation, and security of oil and gas. In late 1995, the Duma passed the Production-Sharing Agreement bill, which provides for foreign investors to share output with domestic partners. Among other things, the bill lifts many of the financial impediments by removing excise and customs duties on the exportation of oil by joint ventures, and it requires contract sanctity for the life of the project. But in a clause that drew criticism from the United States business community, the bill requires State Duma approval of new joint-venture agreements on a case-by-case basis. As of mid-1996, the United States Department of Commerce considered the Duma's veto power over such agreements a key obstacle to expanded United States investment in Russia.

By the end of 1995, foreign investment in Russia since 1991 had totaled an estimated US$6 billion, a small amount considering the size of the Russian economy. Of that amount, US$3.2 billion had been invested between 1991 and 1993 and US$1 billion in 1994. Of the approximately US$2 billion invested in 1995, about 28 percent came from the United States, 13 percent from Germany, 9 percent from Switzerland, and 6 percent from Belgium. By sector, 15 percent of 1995 investments went to trade and catering; 13 percent to finance, insurance, and pensions; 10 percent to the fuel industries; and 8 percent to chemical industries. Telecommunications, food processing and agriculture, pharmaceuticals and medical equipment, and housing are in particular need of additional foreign investment.

Russia's overall investment climate has not been robust because of high inflation, a plunging GDP, an unstable exchange rate, an uncertain legal and political environment, and the capricious enactment and implementation of tax and regulatory regimes. Nevertheless, experts predict that improvement in those conditions will bring a strong increase in foreign activity.

Foreign Debt

Russia inherited a large foreign debt burden from the Soviet Union that clouds its economic situation. Throughout its history, the Soviet Union was a conservative borrower of foreign credits. Its ability to manage international accounts allowed the Soviet Union to obtain both government-guaranteed and commercial credits on favorable terms. But, by the end of the 1980s, the Soviet hard-currency debt had increased appreciably. At the end of 1991, the debt was estimated at US$65 billion, an increase of over 100 percent since the end of 1986.

By arrangement with the other former Soviet states and its creditors, Russia accepted responsibility for repayment of the Soviet Union's entire debt, in exchange for control of some of the overseas assets of the other republics. In January 1996, Russia's total foreign debt was US$120.4 billion, including US$103 billion of the Soviet Union's debt that Russia assumed. Russia has been hard pressed to service that amount.

In March 1996, the IMF approved a three-year loan of US$10.1 billion to Russia. At that point, Russia already had US$10.8 billion in outstanding IMF debts. The first loan payment of US$340 million was paid almost immediately, and it helped Russia to overcome a large budget deficit that it had been trying to cover by issuing securities. The IMF made the early monthly payments of the loan during Russia's 1996 presidential election campaign, despite Russia's failure to comply with several loan requirements. However, once Yeltsin had been reelected, the IMF withheld the July payment because Russia's hard-currency reserves had been severely depleted during the campaign and the tax collection system remained unsatisfactory.

In April 1996, the Paris Club of seventeen lending nations agreed to the largest debt rescheduling procedure in the history of the organization by postponing US$40 billion of Russian debt in order to assist Russia in meeting its international debt payments. The agreement followed the November 1995 provisional accord with the London Club of international commercial bank lenders (which spread repayment of US$32.5 billion over a twenty-five-year period) and the IMF loan of US$10.1 billion in March 1996. The new schedule gave Russia a six-year grace period for repayment on the principal it owes.
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