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A-821-816
Inquiry
Public Document
MEMORANDUM FOR: Faryar Shirzad
Assistant Secretary
Import Administration
THROUGH: Jeff May
Director, Office of Policy
FROM: Albert Hsu
Senior Economist
Barbara Mayer
Policy Analyst
Christopher Smith
Analyst
DATE: June 6, 2002
SUBJECT: Inquiry into the Status of the Russian Federation as a
Non-Market Economy Country Under the U.S. Antidumping Law
_________________________________________________________________________
SUMMARY
The Novolipetsk Iron and Steel Corporation and JSC Severstal, with the
support of the Russian Government, have requested graduation of the
Russian Federation to market economy country status. Our analysis
indicates that Russia has made the transition to a market economy.
Specifically, in accordance with the statutory criteria (1) governing this
decision, the Russian ruble is convertible for investment purposes, fully
convertible for trade purposes, and the exchange rate is market-based.
Though Russian workers on the whole are paid relatively low wages, wages
nevertheless are market-based. Foreign investment is permitted and
encouraged, although Russia's tax system (until recently) and business
registration and licensing requirements have kept investment levels
relatively low. Prices for the vast majority of goods and services are not
subject to price controls and respond to the forces of market supply and
demand. Russian privatization has been comprehensive and has placed the
great majority of industry, property, and assets in the hands of the
private sector.
As the discussion below elaborates, some problems within the Russian
economy remain. For example, the pace of industrial restructuring has been
slow recently, banking reforms have lagged, and regulated energy prices in
Russia remain a significant concern in the economy. These remaining
difficulties do not, however, take away from the fact that Russia's
economy overall has become market-based. Based on the evidence on Russian
economic reforms to date, analyzed as required under section 771(18)(B) of
the Act, we recommend that the Department of Commerce revoke Russia's non-
market economy (NME) status.
We have determined that the effective date for the consideration of
Russia as a market economy is April 1, 2002. Therefore, Russian producers
and exporters will be subject to the antidumping rules applicable to
market economies with respect to the analysis of transactions occurring
after April 1, 2002. Accordingly, the Department will examine prices and
costs within Russia, utilizing them for the determination of normal value
when appropriate or disregarding them when they are not. In this regard,
the Department retains its authority to disregard particular prices or
costs when the prices are not in the ordinary course of trade, the costs
are not in accordance with generally accepted accounting principles, the
costs do not reasonably reflect the costs associated with the production
and sale of the merchandise, or in other situations provided for in the
Act or the Department's regulations. In addition, the U.S. countervailing
duty law will now apply where the proceeding at issue will involve an
adequate period of investigation after this effective date. Under the
Department's practice, this period would normally be one year.
There will necessarily be a period of time during which antidumping duty
rates, based on the non-market economy calculation methodology, will
remain in effect. For existing antidumping duty orders, the non-market
economy-based rates will remain in effect until they are changed as a
result of a review, pursuant to section 751 of the Act, of a sufficient
period of time after April 1, 2002. For on-going investigations, because
the period of investigation pre-dates the effective date of this
determination, the Department will continue to utilize non-market economy
methodologies in those investigations. Again, any antidumping duty rates
established pursuant to these investigations will remain in effect until
they are changed as a result of a review, pursuant to section 751 of the
Act, of a sufficient period of time after April 1, 2002. In instances in
which the Department would normally examine a period that falls both
before and after the effective date, the Department will determine the
appropriate approach to follow on a case-by-case basis. In making that
determination, the Department must ensure that sufficient market economy
data is available before examining transactions on a market economy basis.
BACKGROUND
On July 26, 2001, the Department of Commerce (the Department) received a
letter from Novolipetsk Iron & Steel Corporation (NLMK) requesting a
review of the status of Russia as a NME country in the context of the
suspension agreement on hot-rolled flat-rolled carbon-quality steel
products from the Russian Federation (A-821-813). On August 3, 2001,
NLMK's request was put on the record of that proceeding. On September 7,
2001, JSC Severstal submitted, also in the context of the Russian hot-
rolled steel suspension agreement, a formal request that the Department
revoke the Russian Federation's status as a NME country. In response to
these requests, the Department initiated a separate proceeding and formal
inquiry into the Russian Federation's status as a NME country, pursuant to
section 771(18)(C)(ii) of the Act. The Department invited public comment
on Russian reforms to be submitted no later than December 10, 2001, and
rebuttal comments no later than January 24, 2002 (see 66 FR 54197, October
26, 2001). The deadline for rebuttal comments was subsequently extended to
February 7, 2002. The Department has posted on its Internet site all
comments and rebuttal comments received. On March 15, 2002, the Department
published notice of a public hearing that was held on March 27, 2002. Post-
hearing briefs were due no later than April 8, 2002.
The Department has treated Russia as a nonmarket economy country in all
past antidumping duty investigations and administrative reviews. See,
e.g., Notice of Final Determination of Sales at Less Than Fair Value: Hot-
Rolled Flat-Rolled Carbon-Quality Steel Products from the Russian
Federation, 64 FR 38626 (July 19, 1999); Titanium Sponge from the Russian
Federation: Final Results of Antidumping Administrative Review, 64 FR 1599
(Jan. 11, 1999); Notice of Final Determination of Sales at Less Than Fair
Value: Certain Cut-to-Length Carbon Steel Plate from the Russian
Federation,
62 FR 61787 (Nov. 19, 1997).
In 1995, the Department reviewed Russia's market reforms in response to a
request from the Russian government and respondents in an antidumping duty
investigation. See Notice of Final Determinations of Sales at Less Than
Fair Value: Pure Magnesium and Alloy Magnesium From the Russian Federation
(60 FR 16440, March 30, 1995). In that proceeding, the Department
determined that although Russia had implemented numerous economic reforms,
Russia had not yet made the transition to a market economy. Under section
771(18)(C)(i) of the Act, a designation as a NME country remains in effect
until it is revoked by the Department.
SUMMARY OF COMMENTS AND REBUTTAL COMMENTS FROM PARTIES
Parties Who Support Revoking Russia's NME Status
The Russian government and a number of Russian and U.S. businesses have
expressed support for giving Russia market economy status, including the
following: the American Chamber of Commerce in Russia; the U.S.-Russia
Business Council; Lockheed Martin Corporation; JCS Severstal; Novolipetsk
Iron & Steel Corporation; Magnetigorsk Steel; and the Ministry of Economic
Development and Trade of the Russian Federation. These parties each
submitted the comments and rebuttal comments summarized below.
- The Department should conduct its analysis within the framework of the
six factors specified in the statue and refrain from citing irrelevant
information that falls outside that scope.
- The phrasing in the statute indicates that there is no absolute threshold
that must be met to certify an economy as "market," e.g., the statute
refers to "the extent" to which the currency is convertible.
- In general, the Russian economy is more similar to those of recently
graduated NMEs.
- Russian currency restrictions are in place due to legitimate concerns
regarding capital flight and are no more restrictive than those found in
other market economies.
- Russia has accepted obligations under Article VIII of the International
Monetary Fund (IMF).
- Russia does not have a wage rate tariff system.
- Collective contracts are concluded by labor and management for a
particular enterprise, or on a national or regional basis.
- The decreasing frequency of strikes is due to successful negotiations on
wages and benefits and a substantial reduction of wage arrears.
- Russia is open to all forms of foreign investment and ownership. Foreign
investors are guaranteed the same protection as domestic investors.
- The new Corporate Governance Law of December 2001 addresses previous
concerns over the protection of minority shareholders.
- The right to rent a plot of land may be acquired by a commercial
organization with foreign investments if the Russian legislation does not
stipulate otherwise.
- Private enterprises in 2000 constituted 75 percent of Russian GDP. The
remaining state property was concentrated in the defense, education,
health, and public utilities sectors, much as in other countries that are
considered market-oriented.
- Government ownership of the natural monopolies is consistent with other
countries' involvement with natural resources; for example, Mexico,
Venezuela, Norway, and many nations in the Middle East retain control of
important natural resources within their countries.
- The list of goods and services still subject to price controls by the
government is included in the 1995 Measures to Improve State Regulation of
Prices (tariffs). State regulation covers products and services which
correspond to approximately 15 percent of GDP.
- The areas where the government controls prices, e.g., energy and public
transportation systems, are similar to those controlled by other market
economies in the West.
- The level of corruption is not a relevant factor to consider.
- Russia's commitment to a market economy is evidenced by its move toward
integration into the world economy through cooperation with North Atlantic
Treaty Organization (NATO), the World Trade Organization (WTO), and the
Organization for Economic Cooperation and Development (OECD).
Parties Who Oppose Revoking Russia's NME status
Several U.S. businesses have expressed opposition to giving Russia market
economy status, including the following: Films by Jove; Bethlehem Steel;
National Steel Corp; United States Steel Corp.; The AD Hoc Committee of
Domestic Nitrogen Producers; Nucor Corporation and the Committee for Fair
Beam Imports; Gallatin Steel Co; IPSCO; Steel Dynamics; Weirton Steel
Corp.; Elkem Metals; and Globe Metallurigical, Inc. These parties each
submitted the comments and rebuttal comments summarized below.
- The lack of Soviet-style planning is not enough to graduate Russia to
market economy status; Russia needs functioning markets and a sound
institutional base.
- The revocation process should be handled through Russia's WTO accession
negotiations, as was done with respect to China.
- Legislation that was recently adopted, although impressive in intent, has
not been adequately tested for enforcement.
- There are numerous regulatory requirements on currency transactions that
make it difficult to freely convert earnings and make investments.
- Russia frequently violates labor laws in spite of Russia's membership in
the International Labor Organization (ILO).
- Worker mobility is severely restricted due to residency permit
requirements and housing shortages, as evidenced by significant wage
arrears.
- Although the right to unionize and strike is guaranteed by law,
collective actions for non-payment of wages are not recognized as strikes,
and the workers taking such actions are not protected from termination.
- Foreign direct investment is very low, indicating that investors feel
that the environment is not conducive for business.
- There is a lack of corporate governance and rule of law, in addition to
poor accounting practices, excessive barter, and confusing presidential
decrees and legislation.
- There are significant restrictions on investment in the banking,
insurance, natural gas, electricity, telecom, and aerospace industries.
- Foreign industries are targeted more frequently for inspection, and there
is concern that Russia's commitment to "national treatment" is nullified
by wide latitude afforded to the government in investment legislation.
- The 70 percent private share of GDP figure comes from unsubstantiated
government sources.
- Many "privatizations" have been "de-privatized" by regional governments.
- The Russian government interferes with pricing and ownership of natural
monopolies, particularly in the energy sector, thereby significantly
distorting the economy.
- The federal government, as well as the local authorities, play a
significant role in setting prices, e.g., those of gas, electricity,
transport and fuel products. Fifteen percent of prices are set by the
government.
- Compared with other transition economies, small and medium-sized
enterprise development has been slow in Russia.
- The banking sector in Russia does not function adequately as an
intermediary between savers and investors. Banking is largely government-
controlled, with politically-based capital allocation and interest rates
based largely on political rather than economic considerations. Domestic
equity markets and foreign direct investment (FDI) are not available in
sufficient quantity as an alternative source of financing.
- There is too much barter in the economy for there to be market-based
pricing.
ANALYTICAL APPROACH
In reviewing a country's NME status under section 771(18)(A) of the Act,
section 771(18)(B) of the Act requires that the Department take into
account the following six factors:
1. The extent to which the currency of the foreign country is convertible
into the currency of other countries.
2. The extent to which wage rates in the foreign country are determined by
free bargaining between labor and management.
3. The extent to which joint ventures or other investments by firms of
other
foreign countries are permitted in the foreign country.
4. The extent of government ownership or control of the means of
production.
5. The extent of government control over the allocation of resources and
over the price and output decisions of enterprises.
6. Such other factors as the administering authority considers
appropriate.
In evaluating the six factors listed above, the Department has recognized
that it is not sufficient that a country's economy is no longer controlled
by the state to treat the country as a market economy. See Notice of Final
Determinations of Sales at Less Than Fair Value: Pure Magnesium and Alloy
Magnesium From the Russian Federation (60 FR 16440, 16443, March 30,
1995). Rather, the Department considers whether the facts, as applied to
the statutory factors, demonstrate that the economy is generally operating
under market principles. To this end, Congress has provided the above
listed factors which the Department must evaluate to determine whether, in
the judgment of the Department, market forces in the country are
sufficiently developed to permit the use of prices and costs in that
country for purposes of the Department's dumping analysis.
Prices and costs are central to the Department's dumping analysis and
calculation of normal value. Therefore, the prices and costs that the
Department uses must be meaningful measures of value. NME prices are not,
as a general rule, meaningful measures of value because they do not
sufficiently reflect demand conditions or the relative scarcity of
resources used in production. The problem with NMEs is not one of
distorted prices, per se, since few, if any, market economy prices are
perfect measures of value, free of all distortions (e.g., taxes,
subsidies, or other government regulatory measures). The problem, instead,
is the price generation process in NMEs (i.e., the absence of the demand
and supply elements that individually and collectively make a market-based
price system work).
The Department's evaluation of the statutory criteria does not require
that countries be judged against a theoretical model or a perfectly
competitive laissez-faire economy. Instead, the Department's determination
is based on comparing the economic characteristics of the country in
question to how other market economies operate, recognizing that market
economies around the world have many different forms and features.
Although it is not necessary that the country fully meet every statutory
factor relative to other market economies, the Department must determine
that the factors, taken together, indicate that reforms have reached a
threshold level such that the country can be considered to have a
functioning market economy.
The Department also has carefully considered the facts and arguments
presented by all of the parties who made submissions during this
proceeding. In addition, consistent with the Department's practice in
addressing prior market economy determinations, the Department has relied
upon the expert evaluations of third parties such as the World Bank, the
International Monetary Fund, the European Bank for Reconstruction and
Development, and the Organization for Economic Cooperation and
Development. These organizations have published significant analyses of
numerous aspects of the Russian economy and, as cited throughout this
memorandum, the Department has utilized their analyses in evaluating and
applying the statutory criteria.
OVERVIEW OF ECONOMIC REFORMS
Russia began economic reforms in 1992, with one of the stated goals being
to establish a full-fledged market economy. (2) The government liberalized
prices and trading rights, initiated a comprehensive national
privatization program to transfer the means of production into private
hands, opened all sectors of the economy to private sector participation,
opened up the economy to foreign investors, including wholly foreign-owned
companies and joint ventures, and left monetary and exchange rate policies
to an independent central bank. The government also began the task of
building the necessary legal and institutional infrastructure of a market
economy, passing laws on (private) property, business companies, free
enterprise, the Central Bank, currency exchange, and trade and foreign
investment. (3)
Management of the reform process during the initial period of transition
was difficult. The government initiated reforms at a time when the
dissolution of the Soviet Union and partial reforms initiated under
President Gorbachev were contributing to economic and political disorder.
(4) The government nevertheless continued reforms, liberalizing trade,
making the ruble convertible on the current account, further liberalizing
regulated transport, energy and utility prices, and continuing the process
of large-scale privatization. At the same time, Russia successfully
achieved price stabilization in 1995, using tight monetary policy and a
narrow exchange rate band. (5) However, tax administration and enterprise
liquidity problems resulted in growing government budget deficits that
were financed, in large part, by foreign lending. This led to a financial
crisis in 1998. (6)
The financial crisis, however, had little effect on Russian firms, due to
the low level of financial intermediation by commercial banks in Russia.
Since then, Russian firms in increasing numbers have been focused on
investing and producing for profit, allocating resources in response to
increasing demand for their goods and services at home and abroad, and
working around financing and labor resource constraints, to such an extent
that the Russian economy began growing in 1999 for the first time since
the beginning of reforms. (7)
The Russian government also has worked to improve the institutional
environment and fix structural problems. In particular, the government
implemented a new bankruptcy law in 1998 and a new foreign investment law
in 1999 and, beginning in 1999, increased the clarity and uniformity of
tax administration and enforcement. More recently, the government
simplified business licensing and the registration process and updated the
labor code to give workers additional protections and employers greater
flexibility in staffing their operations. The law on joint stock companies
was amended to increase the protection of minority shareholders' rights,
and a new corporate governance code was passed, following European norms.
The new land code represents a significant step toward the establishment
of clear, consistent, and comprehensive rules defining private land
ownership rights, the scope for their transfer and use, and the
protections and guarantees afforded their owners.
Notably, since the Department last evaluated it seven years ago, a wide-
range of changes have occurred in the Russian economy. Since that time,
the Russian government has continued to withdraw from the economy and has
taken significant steps to strengthen market-supporting laws and
institutions. These steps, along with the independent actions of firms and
individuals, have had a dramatic effect, such that market forces are now
driving Russia's economy.
The following section discusses the legal framework and economic
conditions in Russia as they relate to each of the six statutory factors
that the Department must consider in determining whether Russia's NME-
country status should be revoked at this time.
ANALYSIS OF SECTION 771(18)(B) FACTORS
The extent to which the currency of the foreign country is convertible
into the currency of other countries.
A country's integration into world markets is highly dependent upon the
convertibility of its currency. The greater the extent of currency
convertibility, for both trade and investment purposes, the greater are
the supply and demand forces linking domestic market prices in the country
to world market prices. The greater this linkage, the more market-based
domestic prices tend to be.
Legal Framework
The Russian government took early action to establish the prerequisites
for a convertible currency that would form the basis for a market-based
exchange rate. A presidential decree of November 1991 liberalizing foreign
economic activity for Russian enterprises established a market-based
exchange rate, determined on the basis of supply and demand at foreign
currency auctions, exchanges, and the inter-bank market. (8) To establish
the supply and demand that determines Russia's market-based exchange rate,
the 1992 Law on Currency Regulation and Currency Control, as amended,
guarantees residents (individuals and companies) the right to hold, own
and sell foreign currency, maintain foreign exchange accounts at
authorized banks, and engage freely in current account transactions. The
1990 Law on the Central Bank, as amended, separates the functions and
obligations of the state and the Central Bank of Russia (CBR). It gives
the CBR primary responsibility for maintaining stability of the ruble,
strengthening and developing the banking and settlement systems, managing
the money supply, serving as creditor of last resort for banks, and
setting currency and accounting regulations.
Developments in the Economy
The ruble has been fully convertible for current account purposes since
1996, when Russia agreed to assume IMF Article VIII obligations. (9)
Domestic and foreign companies and individuals are free to acquire, hold
and sell foreign exchange, and foreign companies are free to repatriate
capital and remit profits. The ruble is also convertible for capital
account purposes. The exchange rate is subject to a managed float with no
pre-announced path and is based on an average of the daily market rates
prevailing on several currency exchanges, the largest of which is the
Moscow Interbank Currency Exchange (MICEX). (10)
Because of Russia's progress on currency convertibility, capital flight,
and, to a lesser extent, dollarization, has been a concern of the Russian
government. For this reason, the government has imposed certain currency
controls, the scope and extent of which have varied over time. For
example, in trade-related matters, importers making advance foreign
exchange (FOREX) payments for imports must deposit a ruble equivalent of
the FOREX payment with an authorized bank, which is returned only after
the imported goods clear customs. To limit the under-invoicing of exports
and the over-invoicing of imports, import- and export-related transactions
must be screened and processed by government-authorized banks acting as
currency control agents. Exporters must repatriate their foreign exchange
earnings and must surrender 50 percent (recently reduced from 75 percent)
to the CBR in exchange for rubles. (11) Capital account transactions, as a
general rule, are subject to licensing requirements. Controls on capital
account transactions, tightened after the 1998 financial crisis, are being
gradually relaxed. (12) Russia's currency controls as a whole are no
different in nature than those of many developing countries, e.g., Chile,
Thailand and Turkey. (13)
Assessment of Factor
The ruble is convertible into foreign currencies for trade and investment
purposes, giving rise to supply and demand on currency markets that
determine the exchange rate. Limited currency controls remain to combat
capital flight and are similar in nature to those maintained by other
market economy countries. Moreover, while these controls, such as the
surrender requirement, may affect the supply or demand for foreign
exchange, the underlying convertibility of the ruble and, therefore, the
resultant market-based nature of the exchange rate, remains fundamentally
unchanged.
The extent to which wage rates in the foreign country are determined by
free bargaining between labor and management.
This factor focuses on the manner in which wages are set because they are
an important component of a producers' costs and prices and, in turn, are
an important indicator of a country's overall approach to setting prices
and costs in the economy. The reference to "free bargaining between labor
and management" reflects concerns about the extent to which wages are
market-based, i.e., about the existence of a market for labor in which
workers and employers are free to bargain over the terms and conditions of
employment.
Legal Framework
Russia has in place several laws establishing the rights, obligations and
guarantees of workers and employers that form the basis for free
bargaining over wages and other terms and conditions of employment. The
1992 Labor Code of the Russian Federation, as amended, was, until very
recently, the basic law governing work and employment issues. (14) Under
the 1992 code, the inflexible terms under which employers could hire
workers made it difficult to fire or transfer workers. The 1992 code gave
workers the right to join trade unions, (15) and the 1992 Law on
Collective Contracts and Agreements establishes the right of workers to
engage in collective bargaining. (16)
The new labor code entered into force on February 1, 2002. It supplants
completely the old code, increasing the flexibility of current workplace
and employment rules to make them more responsive to employers concerned
about labor costs and productivity. For example, the scope for unilateral
terminations and fixed-term employment contracts is now broader, and
workers may be hired on a probationary basis. (17)
Developments in the Economy
Wage Formation. The wage formation process in Russia falls into two broad
categories. Much like the government sector in many market economies, the
(government-set) Uniform (wage) Tariff Scale (UTS), established in 1992,
applies to workers in enterprises covered by the state budget, e.g.,
schools, healthcare, road service companies, and a declining number of
state-owned industrial enterprises. UTS provides for 18 wage grades, the
lowest grade representing the minimum wage established by law. (18) Wages
paid to workers in the budgetary sector tend to be lowest for all Russian
workers and the least responsive to changes in economic conditions. The
budgetary sector now accounts for only a small share of total, economy-
wide wage payments.
Wages outside the government sector, as a general rule, are determined on
the basis of individual employment contracts (19) and, to a much lesser
extent, collective bargaining agreements. In a few industries such as
coal, union membership is significant and collective bargaining generates
wages that are twice the industrial average. On the whole, though,
membership in Russian trade unions is trending downward and is virtually
non-existent in the private sector. (20) This, in large part, reflects an
apparent lack of confidence in the effectiveness of unions, rather than
any legal restrictions on the ability of workers to organize.
For a number of reasons, wages tend to vary geographically and across
industrial sectors. For example, foreign-invested enterprises and
producers in new, rapid-growth sectors such as consumer goods and services
and trade (predominantly new private enterprises) tend to be more
profitable than many state-owned enterprises and privatized state-owned
enterprises. These producers therefore tend to pay higher wages. (21) In
addition, wage variations to a large extent reflect the relative
bargaining power of various groups of workers (e.g., skilled vs.
unskilled, workers living near economic growth centers vs. those living in
more remote locations). Russian workers on the whole are paid relatively
low wages. (22)
Nonetheless, while workers are free to bargain for wages in the private
sector, there are several basic features of the Russian economy that are
commonly cited as raising concerns about the degree to which this actually
is occurring. These include: (1) restricted labor mobility, (2)
termination rights, and (3) wage arrears.
Labor Mobility. Inter-regional labor mobility in Russia is relatively low
because of underdeveloped housing and mortgage loan markets, an inadequate
social safety net, and the sheer geographical size of Russia (and the
underdeveloped transportation network (23)), which make relocation
prohibitively costly for many workers. (24) The need to relocate over
relatively large geographic distances to explore alternative employment
opportunities results in large part from the skewed geographic
distribution of industrial firms inherited from the Soviet era. (25) The
large size and relatively small number of Russia's industrial firms also
means that employer concentration is relatively high, (26) which limits
employment opportunities and further reduces the incentive for workers to
move.
In addition to these natural and structural barriers to inter-regional
labor mobility, individuals are subject to residency registration
requirements. Under federal law, the registration system is notification-,
not permit-based. It is not designed to limit labor mobility, but rather
to facilitate the collection of data for census and tax administration
purposes, like systems in Western Europe. (27) However, some regional and
city governments, such as in Moscow, implement federal law with a
restrictive, permit-based system involving taxes and fees and other
conditions. (28) Despite these regional and city government residency
permit requirements, observers of Russia's labor market believe that the
natural and structural impediments discussed above remain the greatest
constraints on inter-regional labor mobility in Russia. (29)
Termination Rights. Both foreign and domestic employers argued before the
new labor code went into effect this year that guarantees and allowances
in the 1992 labor code made it difficult to transfer or fire workers and
assemble an efficient, productive, and flexible workforce. The new labor
code goes a long way in addressing employers' concerns. For example, the
scope for unilateral terminations and fixed-term employment contracts is
now broader, and workers may be hired on a probationary basis. The new
code also strengthens existing provisions protecting workers from being
forced to work or perform duties outside the scope of the employment
contracts, and employers now must pay interest on deferred wages. (30)
Wage Arrears. After growing steadily throughout the 1990s, the stock of
wage arrears have trended downward from a high of roughly 90 billion
rubles at the end of September 1998 to roughly 30 billion rubles at the
end of 2001, with the budget arrears accounting for approximately 4
billion rubles and enterprise arrears the remainder. Total nominal wage
arrears are also shrinking rapidly as a share of total nominal monthly
wages due. As a share of GDP, wage arrears fell from 2.8 percent in 1998
to 0.3 percent at the end of 2001. (31) This steep and steady decline in
wage arrears is attributable to the government's improved fiscal position
and the increased liquidity and profitability of the enterprise sector.
Russia's wage arrears problem developed for a number of reasons related
to economic conditions that made companies unable or unwilling to pay full
wages on time and that caused workers to tolerate late payment or non-
payment. On the workers' side, many workers in large, well-established
firms in heavy and basic industries, e.g., coal, appeared to have stayed
on because they had limited or no employment opportunities elsewhere,
expected wage payments in the future, or received non-wage benefits,
(e.g., housing, medical and health care, pensions, company-paid vacations,
summer camps for children, on-site day care or kindergartens) that
exceeded the very meager unemployment benefits for which they would
qualify, if they quit. (32) On the company side, financial distress or
poor cash flow made it difficult or impossible for some enterprises to
meet their wage bills on time. Local governments in many cases were
reluctant for social welfare reasons to bankrupt large industrial
enterprises that in some cases were the sole employer in the region. The
net effect was that enterprise managers adjusted to workers that they did
not necessarily need by paying wages late or making payment in kind. (33)
Assessment of Factor
Wage rates are market-based. Although institutional weaknesses and
geographic and structural constraints on inter-regional labor mobility
have so far prevented the formation of a national labor market, which is
contributing to significant inter-regional variation in wage and
employment rates, wages in each region reflect bargaining between labor
and management. Individually negotiated employment contracts are the norm
and reflect the relative bargaining positions of labor and management,
which depend on local market conditions and the industry in question. Wage
arrears, a significant problem in the past, have declined dramatically
and, in any event, do not indicate an absence of bargaining power on the
part of labor to negotiate wages.
3. The extent to which joint ventures or other investments by firms of
other foreign countries are permitted in the foreign country.
Opening an economy to foreign investment tends to expose domestic
industry to competition from market-based suppliers and the management,
production and sales practices that they bring. It also tends to limit the
scope and extent of government control over the market, since foreign
investors, as a general rule, demand a certain degree of autonomous
control over their investments.
Legal Framework
The basis for foreign investment in Russia is the 1999 Law on Foreign
Investment (which does not cover banking and insurance). It is an update
of a 1991 law and establishes the status of a foreign investor as a legal
entity under Russian law, guarantees equal treatment of domestic and
foreign investors with respect to investment activities and profits
earned, protects foreign investors from future adverse changes in the
investment regime, permits foreign investments in all forms, e.g., wholly-
foreign owned companies and joint ventures, and protects foreign
investment from expropriation not in accordance with federal law and
provides for compensation in the event that expropriation occurs. (34)
To reinforce the right of foreign (as well as domestic) investors to
engage in free enterprise and protection of their private property rights,
the government passed the 1999 Law on Investment Activity in the Form of
Capital Investment, as a general measure to encourage investment in Russia
from all sources. (35) This law creates a standardized regime for capital
investments and provides guarantees for capital investors regarding the
pursuit of corporate interests and the protection of property. The law
establishes the right of investors to (1) pursue investment activities,
(2) independently determine the amounts and directions of capital
investments, (3) own, use, and dispose of the objects of capital
investments, (4) transfer the rights acquired through capital investments,
(5) exercise control over the use of resources channeled for capital
investments, (6) pool resources with other investors, and (7) exercise all
rights stipulated by agreements. Investors are guaranteed protection of
these rights regardless of the type or form of investment.
The government has also promulgated some new laws, and amended others,
some very recently, which are not technically investment laws, but do
relate to matters of concern to investors, both foreign and domestic. The
staged implementation of Russia's new, fundamentally reformed tax code
began in 1999, the Law on Joint Stock Companies was amended in 2001, and a
new corporate governance code was introduced this year. In addition, two
new laws on enterprise registration and business licensing passed in 2001
that greatly reduce the administrative hurdles that currently frustrate
new entry into Russia's markets.
Developments in the Economy
Russia has been open to foreign investment since the beginning of
economic reforms in 1992. Foreign investors are free to repatriate profits
and capital, are protected for the most part from nationalization or
expropriation (except where it follows legislative action and is deemed in
the national interest) and are not, as a general rule, subject to
performance requirements. (36)
Nevertheless, FDI inflows have been relatively low, amounting to $2.6,
$4.9, $2.8, $3.3, and $2.7 billion for the years 1996-2000, respectively.
A variety of factors have been commonly cited to explain this, including a
maze of costly and time-consuming business registration and licensing
requirements and inadequate protection from rapid, ongoing and often
conflicting changes in the regulatory regime. Commenters have also
identified corruption and crime as concerns, along with weak protection of
minority shareholders' rights and ineffective dispute resolution. (37)
Most importantly, in the past, many foreign investors indicated that the
tax system was the single largest obstacle to overcome. (38) The federal,
regional and local governments together collected anywhere between 50 and
100 taxes, (39) at relatively high and varying rates, and were able, by
law, to apply changes in tax rates or taxes on a retroactive basis. (40)
To compound matters, enterprises essentially were taxed on a revenue
basis, due to the fact that most business expenses were not deductible
from income or not deductible in full. As a result, many businesses found
it difficult to pay taxes and turn a profit. Numerous and often large tax
exemptions and reductions reduced the effective tax burden for some
producers, but the benefits were far from certain, given the negotiated,
case-by-case nature of the exemptions/reductions.
In recent years, the government has been actively improving tax
administration, most notably through its revised tax code. General
provisions of the new tax code that entered into force on January 1, 1999,
reduce uncertainties about the tax collection process by establishing
definitions, principles and procedures for the tax system, imposing notice
requirements and other procedural rules for audits, prohibiting the
retroactive application of tax changes, and making the tax code the final
regulating statute on taxes to reduce the scope for indiscriminate and
arbitrary taxation. (41) Provisions of the new code concerning operative
taxes entered into force on January 1, 2001, which established a flat
individual income tax rate of 13 percent, eliminated many exemptions,
reduced and consolidated into a single social tax employer contributions
previously collected to fund various pension and social and medical
insurance funds, reduced turnover taxes (which are slated for elimination
by 2003), and moved Russian Value-Added-Tax (VAT) closer to European Union
norms by eliminating many VAT exemptions. (42) The profit tax provisions
of the new code, which entered into force on January 1, 2002, reduced the
corporate tax rate from 35 percent to 24 percent, permitted full deduction
of most normal business expenses (effectively making profits, not revenue,
the basis for calculating a company's tax liability and removing one of
the big obstacles to paying taxes and turning a profit in Russia), and
eliminated most exemptions. (43)
In addition to the new tax code, the government has been working to
improve the FDI environment. The Law on Joint Stock Companies was amended
in 2001 to increase protection of minority shareholder's rights, and a new
code on corporate governance, although voluntary, is designed to increase
pressure on companies to comply with new rules on information disclosure,
management accountability, and shareholder protection. (44) Two new laws
on enterprise registration and business licensing will greatly reduce the
"red tape" that currently stymies new entry into Russia's markets. A
simplified procedure will also be used to register companies, and the
number of business activities requiring a license has been slashed from
over 2,000 to just over 100. (45)
While these new laws are still being implemented, they have nevertheless
addressed a number of key issues affecting investor confidence and the
investment climate. These laws, particularly the new tax code, constitute
significant steps on the part of the government to bring about fundamental
and systematic change, which some observers believe has given rise to a
new mood of business optimism. (46) For example, in 2001, General Motors
agreed to a $330 million joint venture with the Russian automaker,
AutoVaz, to produce a utility vehicle, and IKEA, a Swedish furniture
producer, continued to expand its sales operations, with planned near-term
investments in excess of $300 million. (47) And an international
consortium led by Exxon-Mobil announced a $4 billion investment to begin
the commercial production phase of its offshore oil and gas project near
Sakhalin Island, with a total investment of $12 billion over the life of
the project. (48)
In the area of commercial dispute settlement, Russia's arbitrazh
(commercial) court system has gained popularity in recent years as a
method of contract enforcement and commercial dispute resolution.
Observers have noted a large increase in the number of cases in the
arbitrazh court system involving nonpayment and claims against the state.
(49) In the year 1997 alone, cases under review in arbitrazh courts
against the government rose by 93.2 percent over the previous year. (50) A
1998 survey of arbitrazh court decisions found that foreign participants
were as likely to prevail in local arbitrazh courts as their Russian
counterparts, and that many Western lawyers now advise clients doing
business in Russia to resolve commercial disputes in the Russian arbitrazh
court system rather than through costly international arbitration. (51)
Recent data show that 70 percent to 80 percent of cases against tax
authorities were decided in favor of taxpayers, due largely to the
recently streamlined tax code and strengthened taxpayer rights. However,
despite this progress, some observers note what appear to be uneven court
rulings and enforcement of court judgements. (52)
Assessment of Factor
Russia permits all forms of foreign investment, e.g., joint ventures and
wholly foreign-owned companies, in all sectors of the economy. Foreign
investors may remit their profits and repatriate their capital, and their
investments are protected from expropriation. Recently, fundamental
changes to Russia's tax code, which had been the number one concern of
foreign investors, and other structural reforms have had a positive effect
on investor confidence and the investment climate in Russia. This positive
effect on investor confidence and the investment climate demonstrates the
government's concrete steps to open up the Russian economy to foreign
investment and overcome investor concerns about the operating and
regulatory environment that have limited FDI inflows to date.
4. The extent of government ownership or control of the means of
production.
The right to own private property is fundamental to the operation of a
market economy, and the scope and extent of private sector involvement in
the economy often is an indicator of the extent to which the economy is
market-driven.
Legal Framework
The two key elements under this factor for Russia are (1) privatization
of industrial enterprises and (2) land ownership.
Enterprise Privatization. The first formal stage of privatization in
Russia commenced in 1992, with the implementation of the 1991 Law On
Privatization of State and Municipal Enterprises, which established the
legal and organizational basis for the sale of small-scale firms and
businesses, as well as the mass privatization of medium-sized enterprises.
(53) Mass privatization was assigned to the State Property Committee (GKI)
(responsible for policy formulation and implementation) and the Federal
Property Fund (responsible for actual share sales).
As a result of the difficulties encountered during the first stage of
privatization, the second stage began with a 1994 Presidential Decree, On
the Basic Provisions of the State Program of Privatization of State-Owned
and Municipal Enterprises in the Russian Federation After July 1, 1994.
(54) Large state-owned enterprises were privatized by means of tenders and
auctions, but the government received little revenue for these sales and
insider control increased as a result. (55)
In 1997, the government passed the Law on Privatization of State Property
and on the Principals of Privatization of Municipal Property in the
Russian Federation. This law provided a legal framework for a third stage
of privatization, aiming to fill the regulatory and legislative gaps that
characterized the first two stages. The 1997 law provided the State Duma
with new oversight powers by including the government's privatization
plans in the Duma's annual review of the government's budget, reducing
most insider privatization privileges, and containing provisions intended
to increase transparency of the privatization process and generate more
accurate company valuations. (56)
To expedite the privatization process, which slowed considerably after
1997, the government passed a new Law on Privatization in 2001, which
limits Duma oversight to privatization of natural monopolies (i.e.,
energy, utilities, transport, communications) and is designed to
streamline the process of divesting the State's residual shareholdings.
(57)
Land Privatization. The land privatizations that have occurred were
provided for, in part, by a 1992 presidential decree, On the Sale of Land
Sites to Individuals and Legal Entities in the Course of Privatization of
State and Municipal Enterprises, (58) and the 1994 presidential decree on
privatization (see above). The right to private land ownership is also
explicitly recognized by the 1993 Russian constitution. (59) In 2001, the
government adopted chapter 17 of the Civil Code and passed a new land code
that for the first time sets clear and well-defined rules on land
privatization and transfers.
Developments in the Economy
Enterprise Privatization. Comprehensive and systematic privatization of
Russian industry, covering small, medium, and large firms, was the primary
goal of reforms that officially began in 1992. (60) By the end of 1994,
over 80 percent of small firms, more than two-thirds of medium-sized
firms, and a substantial number of large firms were privatized through
vouchers. (61) Russia had managed to privatize some 90,000-100,000 firms
in the span of less than three years, shifting approximately 80 percent of
the industrial workforce and over 50 percent of the total workforce into
the private sector. (62) However, what voucher privatization gained in
speed, it lost in effect: it did not significantly improve corporate
governance or promote industrial restructuring, it generated little
foreign investment, and it produced no revenue for the government.
After 1994, the government shifted from vouchers to tenders and auctions
to promote transparency of the privatization process, increase foreign
participation, and increase budgetary revenues. The resulting
privatizations did not meet these objectives, (63) which led to new
privatization legislation in 1997 and 2001.
While the privatization process in Russia has not met all of the
government's goals, it has successfully resulted in the de-nationalization
of Russia's economy. Every sector of Russia's economy, with the exception
of defense and transport, has experienced significant privatization. The
European Bank for Reconstruction and Development (EBRD) reports that in
2000, the private sector accounted for approximately 70 percent of GDP,
which compares favorably with 80 percent in Hungary, 65 percent in Latvia,
and 80 percent in the Czech Republic. (64) The state retains shareholdings
in the energy (electricity and gas), transport, banking, telecom,
insurance and defense, as well as in public service companies (mostly
small and mostly at the municipal government level).
Land Privatization. The limited ownership and sale of urban land during
most of the reform period has been governed by a patchwork of presidential
decrees and local government rules and regulations, none individually or
collectively providing clear, consistent, or comprehensive rules defining
private land ownership rights, the scope for their transfer and use, or
the protections and guarantees afforded their owners. Russia has taken a
significant step in establishing such rules with the adoption of Chapter
17 of the Russian Civil Code (which covers land sales) and the new land
code. Chapter 17 states that only Russian law can restrict land
circulation and use and that otherwise the landowner enjoys all rights and
protections afforded property owners regarding possession, use and
disposal. (65) The new land code enshrines the principle of private land
ownership and broadly establishes procedures for the purchase of non-
agricultural land. (66)
Assessment of Factor
Russia's privatization program has succeeded in largely de-nationalizing
the economy. The state retains shareholdings in the energy (electricity
and gas), transport, banking, telecom, insurance and defense industries,
as well as in public service companies (mostly small and mostly at the
municipal government level), but these are sectors where many market
economies retain residual (sometimes complete) state ownership. Land
privatization has been occurring on a limited, piecemeal and ad hoc basis
since the beginning of reforms, but without the benefit of clear rules on
acquisition, ownership, and transfer rights. The new land code and recent
changes to the civil code address these deficiencies and are expected to
facilitate further land privatization.
The extent of government control over the allocation of resources and
over the price and output decisions of enterprises.
Decentralized economic decision-making is a hallmark of market economies,
where the independent investment, input-sourcing, output and pricing
actions of individuals and firms in pursuit of private gain collectively
ensure that economic resources are allocated to their best (most
efficient) use. Prices in such economies tend to reflect both demand
conditions and the relative scarcity of the resources used in production.
Legal Framework
With respect to Russia, the three key elements under this factor are (1)
price liberalization; (2) banking sector reforms; and (3) (non-capital)
resource allocations.
Prices. A 1995 Presidential Decree, On Measures to Improve the State
Regulation of Prices (Tariffs), and a 1995 government decision, On
Measures to Streamline the State Regulation of Prices (Tariffs), together
limit state regulation of prices to goods and services produced by natural
monopolies, including oil and gas, electricity, heat, health care, and
public services. (67) A 1995 Law on Natural Monopolies mandates that
government regulatory policies balance the interests of consumers and
economic agents where natural monopolies exist and establishes a statutory
list of natural monopolies: the gas and oil industries, electrical
production and distribution, transportation, and postal and communication
services. (68) A 1999 government resolution, "On Ensuring of Economically
Based Principles of Formation of Prices on Products
and Services of Natural Monopolies," establishes parameters for regulated
prices, including cost recovery. (69)
Banking Sector. An important measure of government control over resource
allocations is the degree to which the government allocates
capital/credit. Since banks typically are the primary allocators of
capital, where capital markets are underdeveloped, as in Russia, it is
particularly relevant to determine whether the government controls the
banks. The primary law that removes government control over banks is the
1990 Law on the Central Bank (CBR), as amended, which separated the
government from the CBR and, by extension, the commercial banking sector,
which the CBR regulates. In particular, an amendment to the law in 1995
further confirmed the CBR's independence and ended direct CBR financing of
the government's budget deficit. (70) The 1999 Law on Bankruptcy of Credit
Institutions allows for the liquidation of large credit institutions,
which previous legislation did not allow, and effectively gives the
Central Bank control over bankruptcies and thus the scope and pace of bank
restructuring. (71)
Resource Allocations. Russia's 1993 Constitution guarantees individuals
the freedom of economic activity and the right to use one's abilities and
property for entrepreneurial activities. (72)
The 1994 Civil Code of the Russian Federation further lays out the basic
protections afforded a person, his property and his dealings with others,
in both commercial and civil activities. The code prohibits governmental
interference in the private/commercial sphere, establishes the basic
tenets of private property rights, equality under the law of state and non-
state economic agents, and the right of citizens and legal entities to
enter into legal contracts. (73) The 1998 Law on Bankruptcies (covering
non-financial institutions) encourages bankruptcies by setting a low
threshold for initiating bankruptcy proceedings, i.e., a three-month delay
in a payment or obligation. The law provides for protection similar to
Chapter 11 bankruptcies in the United States, and contains safeguards to
ensure that such protection is not abused (e.g., a mandatory change-in-
management requirement). (74)
Developments in the Economy
Prices. On January 1, 1992, the government deregulated approximately 80
percent of wholesale and 90 percent of retail prices. (75) "Natural
monopoly" prices (e.g., electricity and gas production, transport
services) (76) remain subject to government regulation. The government is
liberalizing these regulated prices over time, balancing the need for
economic stability and order, on the one hand, and the long-term viability
of the utility, on the other. (77) However, despite repeated double-digit
annual percentage increases, most regulated prices, particularly those for
gas and electricity (43 percent of the generation of which is gas-based),
(78) remain well below world-market levels and may not even cover the cost
of production. (79) Thus, as is the case in some market economy countries
(e.g., Venezuela in the late 1980s and early 1990s and Hungary and
Indonesia now), (80) regulated energy prices in Russia remain a
significant distortion in the economy, as they encourage the wasteful use
(mis-allocation) of Russia's energy resources and slow the adoption of
more efficient production methods. (81) Therefore, while the process of
price liberalization overall is essentially complete, it is not an
unqualified success. (82)
Banking Sector. There has been limited reform and restructuring of the
banking sector. (83) Russia's more than 1,300 banks do not play a
significant role as financial intermediaries between savers and investors.
Although banks are more liquid as a result of Russia's economic recovery,
and lending to the enterprise sector has increased, commercial bank
lending to the enterprise sector accounted for less than11 percent of GDP
in 2000. (84) In contrast, bank lending in the Czech Republic is 43
percent and in Slovakia, 37 percent, while in developed western market
economies, it can be 80-120 percent or more. (85)
Although the banks are not serving as the main capital allocation
mechanism in Russia, (86) it is important to note that the State is not
allocating capital/credit in Russia either. Instead, enterprise working
capital needs and investments in fixed assets are, for the most part, self-
financed or financed through foreign capital markets. (87) Russians do
not, as a general rule, place much of their savings in banks, due to the
hyperinflation, multiple currency crises, and two banking crises Russia
experienced in the span of ten years. (88) Thus, much of the domestic
savings that is available for long-term investment purposes essentially
bypasses the banking sector and is allocated by savers for own use. There
is therefore no mechanism to ensure that capital is allocated efficiently
across sectors of Russia's economy or even within sectors.
Resource Allocations. Russian firms and individuals, in pursuit of profit
and higher wages, have increasingly been allocating resources to the
country's new industries and markets, e.g., services, consumer goods
(particularly food processing), trade, computer software, and information
technology. (89) The computer software, insurance, and food processing
industry provide good examples of how these resource allocations are re-
shaping Russia's economy and providing the force behind Russia's first
sustained economic recovery since the beginning of reforms. (90)
Market-based resource allocations have not been limited to domestic
transactions, but extend to international trade transactions as well. With
the collapse of the Council of Mutual Economic Assistance (CMEA) in 1991,
the collapse of the Soviet Union and the (Soviet) ruble in 1992-1993,
Russian trade shifted decidedly to the west. (91) This reflects the
collective response of Russian industry and consumers to market-based
pressures and opportunities that markets in the west provide and the
growing impact of trade with the west on resource allocations and output
in Russia.
Similarly, the allocation of resources to Russia's virtually all-private,
small- and medium-sized enterprise (SME) sector (92) has been significant,
and experts believe that the SME sector is larger than what is indicated
by official statistics (12 percent of GDP, approximately 13 percent of the
labor force (93)). Despite these positive trends, it is not yet a dominant
part of Russia's economy, as it is in many other countries, due to capital
scarcity, conditions associated with locating and renting a workplace, and
business licensing and registration requirements. Nevertheless, the fact
that Russia's SME sector is relatively small and underdeveloped is not due
to explicit government policies or actions designed to limit SME sector
growth. (94)
With respect to industrial restructuring overall, the pace of such
restructuring has been slow, as significant labor and resources remain
tied up in unprofitable medium- and large-sized enterprises that have, to
varying degrees and at varying times relied upon government support,
payment arrears, barter, and other non-cash settlements to function. (95)
While these enterprises have shed a considerable amount of labor, much of
it through voluntary separations, these enterprises remain overstaffed. A
number of factors explain the slow pace of industrial restructuring in
Russia, such as the lack of affordable financing, costly business
licensing and registration requirements, (96) outmoded resources
(machinery and equipment), and misuse of the bankruptcy process. (97)
Assessment of Factor
The State no longer controls resource allocations or prices, with the
notable exception of energy prices, which remain a significant distortion
in the economy, as they encourage the wasteful use (mis-allocation) of
Russia's energy resources and slow the adoption of more efficient
production methods. The pace of industrial restructuring also remains
slow. Overall, however, it is clear that Russian firms and individuals are
allocating resources and engaging in value-adding investment and
production activities based on private decision-making, and this is being
done to such an extent that Russia's economy is now experiencing sustained
growth for the first time since the beginning of economic reforms.
The problems with Russia's banking sector are not relevant to the issue
of the extent of government control over credit allocation because so
little investment is financed through the banking sector, i.e., the bulk
of investment in Russia is self-financed. Thus, a market-based resource
allocation mechanism exists, albeit a rudimentary and inefficient one.
While some market distortions and resource mis-allocations characterize
most market economies, energy is of such significance to the Russian
economy that continuation of the Russian government's current energy price
regulatory policies may warrant careful consideration of energy price data
in future trade remedy cases.
Such other factors as the administering authority considers appropriate.
Legal framework and implementation of reforms
Under this factor, the Department can address any additional issues
relevant to its consideration of market economy status. A number of
Russian economic reform issues raised by the commenters do not readily fit
into any of the preceding five factors and are therefore discussed in this
section. These issues include corruption, barter, Russia's bid to join the
WTO, and capital flight.
Corruption. Some commenters view corruption as so extensive and pervasive
in Russia that it completely undermines Russia's claim that it has a
market economy. The Department recognizes that corruption is a serious
issue. Although reports indicate that the level of corruption in Russia is
substantial, this does not alter the fact that prices and costs in Russia
are market-based or indicate state control of the economy. While the level
of corruption in Russia is high, it is no higher than levels in some other
market economies. (98) Moreover, business survey results indicate that
taxes have been cited as a greater concern for investors than corruption.
(99)
Barter. If the incidence of barter is sufficiently high, it can undermine
confidence that prices reflect the true market value for goods and
services. Although barter is not specifically a factor in a market economy
analysis, this confidence problem and the potential impact on the
availability of prices for a dumping analysis make barter an important
factor to consider. Barter, other types of non-cash settlements, and
payment arrears (which often give rise to barter) were widespread in
Russia throughout most of the 1990s. (100) While barter was nothing new in
Russia, (101) the scale and sectoral concentration of non-cash settlements
and payment arrears had become substantial by the end of 1998, when
payment arrears peaked at almost 40 percent of GDP and non-cash
settlements increased to between 50-70 percent of industrial output. (102)
In some industries, such as machinery, steel, coal mining, chemicals,
utilities and gas, non-cash settlements exceeded 75 percent of sales,
(103) with barter accounting for the majority of these transactions in the
gas, utilities, and steel industries. (104)
Concerns about payment arrears, barter and other non-cash settlements
that may have existed before do not have the same resonance today.
Management turnover, recent reforms in tax administration, the lower
ruble, higher oil prices, and growing consumer demand (at home) all have
spurred a dramatic fall in payment arrears, barter, and non-cash
settlements and a rise in cash transactions. (105) Significantly, this
recent decline in payment arrears, barter, and non-cash settlements
suggests that a new orientation of Russia's firms and managers has
developed, consistent with the assessment of observers that adverse market
conditions, institutional constraints, and distorted incentives, much more
so than a non-market orientation of Russian firms, explain Russia's past
barter problem. (106)
WTO Accession. Russia has undertaken several specific actions aimed at
WTO membership. The number of tariff rate categories has been reduced from
seven to four (5 percent, 10 percent, 15 percent, and 20 percent),
effective January 1, 2002, and the government is working to bring a long
list of Russian laws, including those pertaining to taxes, foreign
exchange regulations, the Customs Code, and import licensing and
certification, (107) into compliance by mid-2002. While there still is
significant work to be done in the negotiations, e.g., in the areas of
banking and insurance market access, trade in other services, and
intellectual property, Russia's accession negotiations will accelerate its
institutional and economic reforms.
Capital Flight. Capital flight from Russia, (108) which can only be
roughly estimated, has averaged about $20 billion a year since 1994, or
$150 per capita. Unlike the countries of Central and Eastern Europe that
experienced capital flight on the order of $15 per capita in the early
years of transition and a reversal on the order of $75 per capita (of
capital inflows) in later years, as reforms took hold and output growth
resumed, Russia has not experienced a reversal in capital flight. While
capital flight comparable to Russia's experience in the 1990s was seen in
some Latin American countries in the 1980s, sustained capital flight on
such a scale has not been seen since. (109)
Although capital flight has been a longstanding concern in Russia, there
has been positive movement on this front recently. The fact that capital
flight as a percentage of the current account surplus appears to be
dropping (i.e., capital flight's share of the pie is getting smaller
because the pie is getting bigger) suggests an increasing propensity for
Russians to reinvest their money at home. (110) This may be signaling a
new mood of business and investor optimism.
ASSESSMENT
Although section 771(18)(B) of the Act enumerates six factors that the
Department must consider in determining whether a country operates on
market principles, the statute provides no direction or guidance with
respect to the relative weight that should be placed on each factor
in assessing the overall state of the economy. As discussed above in the
"Analytical approach" section, the Department considers whether the facts,
as applied to the statutory factors, demonstrate that the economy is
generally operating under market principles.
In the case of Russia, there are many positive developments that support
the conclusion that Russia has a market economy. The exchange rate is no
longer set on an administrative basis. Although currency controls are in
place to limit capital flight and dollarization of the economy, and the
CBR actively intervenes in FOREX markets to smooth the exchange rate, this
is something that many central banks do around the world. These government
actions do not alter the fact that the ruble is fully convertible on the
current account. Wages are market-based and reflect the relative
bargaining power of labor and management, which vary with local market
conditions and the industry sector in question. Russia is open to foreign
investment, and although FDI inflows have been low, recent government
actions to address structural problems, particularly tax administration,
and strengthen institutions appear to be turning the tide. The government
no longer controls the vast majority of prices, and markets now allocate
resources and determine output in Russia. And while the privatization
process was not successful in re-capitalizing Russian companies and
improving corporate governance, it did result in denationalization of the
vast bulk of Russian enterprises and private control of their assets.
Trade has been fully liberalized and Russian markets and prices are linked
with world markets and prices. Russian trade has been re-oriented to the
West and markets, not the government, determine the pattern and
composition of both import and export trade.
Despite these positive changes, there are areas where the Russian
government is continuing to address weaknesses in the economy,
particularly with respect to regulation of energy sector pricing, the slow
pace of industrial restructuring, SME sector development, and banking
sector reforms. Capital flight and corruption also are serious concerns
from the standpoint of Russia's future economic development. However, as
discussed in the preceding sections, these ongoing efforts do not take
away from the fact that markets - private capital, private property,
private initiative, and increasingly clear, stable and well-defined rules -
now control resource allocations and Russia's economy, much more so than
when the Department evaluated the market economy treatment of Russia in
1995. Since that time, with the benefit of relative economic stability and
greater market certainty, market-supporting laws and institutions have
been gradually strengthening, and increasing numbers of firms and
individuals are seeing the benefits of a rules-based system. (111) Russian
firms are engaged in investment and production activities to such an
extent that a broad range of Russian economic indicators are now positive
for the first time since the beginning of reforms in 1992, (112) and it is
the larger industrial firms that have been the source of much of Russia's
recent economic growth. (113) Thus, market forces within Russia have
developed sufficiently that, in general, the Department may use prices and
costs within Russia for purposes of its antidumping analysis.
RECOMMENDATION
Based on our analysis of the economic reforms in Russia to date, examined
in light of the factors identified in section 771(18)(B) of the Act, the
Department should determine that revocation of Russia's non-market economy
status under section 771(18)(A) is warranted, and that such revocation be
made effective April 1, 2002.
Agree________ Disagree________
__________________
Faryar Shirzad
Assistant Secretary for Import Administration
___________________
Date
__________________________________________________________________________
__
footnotes:
1. 771(18)(B) of the Tariff Act of 1930, as amended.
2. The Former Soviet Union in Transition (Washington, D.C.: Joint
Economic Committee of the U.S. Congress, 1993), 48, which refers to
government reform plans that have a market economy as a goal.
3. Ibid., 72.
4. Ibid., 45-6.
5. Economic Surveys: Russian Federation 1997 (Paris: OECD, 1997), 46.
6. Economic Surveys: Russian Federation 1999-2000 (Paris: OECD, 2000), 35-
7.
7. Ibid., 46.
8. Russian Decree on Enterprise Creation and Activity of 10/91 and
Decree on Foreign Economic Activity of 11/91, U.S. Department of Commerce,
National Technical Information Service, 1992.
9. Annual Report on Exchange Arrangements and Exchange Restrictions
(Washington, D.C.: International Monetary Fund, 2001), 759.
10. The CBR intervenes in the market to smooth out short-term
fluctuations in the exchange rate.
11. Country Commerce: Russia (London: EIU, 2001), 36; "Russia: FOREX
Regulations," Economist Intelligence Unit Views Wire, 14 December 2001.
12. For example, CBR Regulation No. 527, "On the procedures to be
Followed by Russian Residents in Drawing and Repaying Foreign-Currency
Credits and Loans with a term Exceeding 180 Days From/To Non-Residents,"
lapsed on September 30, 2001. Effective October 1, 2001, resident legal
entities seeking foreign-currency loans from non-residents for a term
longer than 180 days are no longer required to obtain a permit from the
CBR. CBR Instruction No. 100-I, "On Accounts of Resident Individuals with
Banks Outside the Russian Federation," permits resident individuals to
open accounts with non-resident banks, provided that the account balance
not exceed $75,000, the account not be used for commercial purposes, and
the opening and closing of such accounts be notified to the Russian tax
authorities. See "Russia Regulations: Central Bank Regulations Loosen
Currency Controls," EIU Views Wire, 18 January 2002.
13. Annual Report on Exchange Arrangements and Exchange Restrictions
(Washington, D.C.: IMF, 2001), Appendix II, 1038.
14. Country Commerce: Russia (London: EIU, 2001), 52.
15. 1995 Country Reports On Economic Policy and Trade Practices:
Russia, U.S. Department of State.
16. Russian Law on Collective Contracts and Agreements of 3/92, U.S.
Department of Commerce, National Technical Information Service, 1992.
17. "Russia Economy: Good in Part," EIU Views Wire, 23 July 2001.
18. The President or Parliament fixed the statutory minimum wage,
which they would change from time to time. In 1993 a presidential decree
established that the Government had the right to set the minimum wage rate
for the UTS higher, but not lower, than the statutory minimum. This
established two wages rates: the UTS minimum applied to wages paid
directly from the budget, and the statutory minimum wage rate applied to
all other sectors of the economy.
19. Workers and employers normally negotiate indefinite-term
contracts, unless the conditions or nature of the work make an indefinite-
term contract impractical or such a contract is contrary to the interests
of the worker. If a fixed-term contract is negotiated, and employment
continues after the contract expires, the contract automatically extends
for an indefinite term. The contracts are detailed. They must include a
job description and must specify salary, benefits, working hours,
holidays, and means of dispute resolution. Employees must be notified two
months in advance of changes in their duties and otherwise cannot be asked
to perform duties outside their job description. Workers must give two
weeks notice and can only be fired for cause and only with substantial
documentation. See EIU Country Commerce: Russia (London: EIU, 2000), 45.
20. Wage Formation During the Period of Economic Restructuring in the
Russian Federation (Paris: OECD, 1995), 14; and Country Commerce: Russia
(London: EIU, 2000), 46.
21. Wage Formation During the Period of Economic Restructuring in the
Russian Federation (Paris: OECD, 1995), 5, 10.
22. Country Commerce: Russia (London: EIU, 2001), 54.
23. Country Profile: Russia (London: EIU, 2001), 16-7.
24. IMF Staff Country Report No. 00/150: Russian Federation Selected
Issues (Washington, D.C.: IMF, 2000), 27.
25. Soviet planners located production plants for national security
and defense purposes, not for economic reasons, and constructed huge
plants to realize the full benefits of economies of scale. Employment was
therefore concentrated in a relatively small number of firms dispersed
unevenly across a large geographical area. See Harry Broadman and
Francesca Recanatini, Is Russia Restructuring? (Washington, D.C.: World
Bank, 2000), 11.
26. Guido Friebol and Sergei Guriev, "Should I Stay or Can I Go?
Worker Attachment in Russian," (London: CEPR, November 2000), 18-9.
27. Noah Rubins, "Recent Development: The Demise and Resurrection of
the Propiska: Freedom of Movement in the Russian Federation," Harvard
International Law Journal, Spring 1998.
28. Ibid.
29. World Bank Transition Newsletter, "Research on Labor Mobility in
Russia Receives Global Development Network Award: An Interview with
Winners Guido Friebel and Sergei Guriev," February/March 2001. Also see
Rubins, "Recent Development," Spring 1998.
30. "Russia Regulations: The New Labor Code - Highlights" EIU Views
Wire, 1 February 2002.
31. "Russian Economic Trends (Monthly)," Russian-European Center for
Economic Policy, February, 2002, pp. 6-7 and Tables 3 and 6, and October
2000, 10.
32. IMF Staff Country Report No. 00/150: Russian Federation Selected
Issues, (Washington, D.C.: IMF, 2000), 27. Government budgetary
constraints have limited the benefit pay-outs to Russia's unemployed. In
1999, only 1.2 million out of an estimated 8.7 million unemployed received
benefits, the total of which represented just 0.3 percent of GDP. Forty
percent of the 1.2 million received the minimum benefit, which is the
minimum wage, and in mid-2000, the average benefit equaled about 30
percent of the average wage. See IMF Staff Country Report No. 00/150:
Russian Federation Selected Issues (Washington D.C.: IMF, 2000), 76, 77.
33. Economic Surveys: Russian Federation 1999-2000 (Paris: OECD,
2000), 106.
34. Country Commerce: Russia (London: EIU, 2001), 11-12, 14. On
expropriation, See Ernst and Young, http://www.tax.eycis.com, Russia's
1999 Foreign Investment Law.
35. Ernst and Young, http://www.tax.eycis.com, Russia's Law on
Investment Activity in the Form of Capital Investment.
36. Country Commerce: Russia (London, EIU, 2001), 38-9; and "U.S.
Foreign Commercial Service and U.S. Department of State FY 2002 Country
Commercial Guide: Russia," Chapter 7, 2001.
37. Some commenters have also noted that enforcement of non-
discrimination provisions of the foreign investment law have been less
than perfect, particularly at the local and regional level, where foreign
investors tend to be subject to more interference from local authorities.
See EIU Country Commerce: Russia (London: EIU, November 2001), 15.
Although regional and local government interference may contribute to the
extreme geographic concentration of FDI, the geographic concentration of
profitable market and investment opportunities most likely plays a larger
role. Russian company financial and accounting statements and investment
caps on foreign investment in certain sectors of Russia's economy, e.g.,
electricity and natural gas, transportation, banking, aerospace, also tend
to limit FDI inflows.
38. "Russia Finance: FDI Trends," EIU Views Wire, 24 July 2001.
39. IMF Staff Country Report No. 00/150: Russian Federation Selected
Issues, (Washington, D.C.: IMF, 2000), 66.
40. EIU Country Commerce: Russia (London: EIU, November 2000), 34.
41. EIU Country Commerce: Russia, (London: EIU, November 2001), 41.
42. "Russia Regulations: Moving Towards the EU VAT System," EIU Views
Wire, 23 April 2001; and See Economic Surveys: Russian Federation 2001-
2002 (Paris: OECD, 2002), 46.
43. "Russia: Tax Regulations," EIU Views Wire, 14 December 2001.
44. "Russia Economy: Progress with Structural Reforms," EIU Views
Wire, 11 January 2002; and See "Russia Economy: Structural Reform Update,"
EIU Views Wire, 13 September 2001.
45. "Russia Economy: Structural Reform Update," EIU Views Wire, 13
September 2001.
46. Economic Surveys: Russian Federation 2001-2002 (Paris, OECD 2002),
13-14, 67. The European Bank for Reconstruction and Development (EBRD)
reports a significant increase in the effectiveness of commercial law in
2001. See Transition Report 2001: Energy in Transition (London: EBRD,
2001), 33.
47. EIU Country Commerce: Russia, (London: EIU, November 2001), 12,
which also states that Allianz, a German insurance company, announced its
intention to buy a 45 percent stake in Rosno, Russia's third-largest
insurance company; and that Metro Cash and Carry (Germany), AVA (Germany)
and Spar (Netherlands), are all beginning work on their first retail
establishments in Russia. Spar intends to construct a $50 million, 30-plus
store retail network throughout Russia in three years. In addition, Frito-
Lay announced that it would invest $40 million in its first Russian
factory to supply an existing distribution center. See "Russia: Hot
Potato," EIU Business Eastern Europe, 7 January 2002.
48. Energy Information Administration, U.S. Department of Energy,
"World Oil Market and Oil Price Chronologies: 1970-2001,"
http://www.eia.doe.gov/emeu/cabs/chron.html.
49. Kathryn Hendley, " 'Demand' for Law in Russia - A Mixed Picture,"
Eastern European Constitutional Review, Volume 10, Number 4.
50. N.G. Salischeva and N. I. Khamaneva, "Ispolnitel'naya I Sudebnaya
Vetvi Vlasti: Sootnosheniye I Vzaimodeistvie (Executive and Judiciary
Branches of Power: Correlation and Interaction)," Gosudarstvo I Pravo
(Government and Law), January 1, 2001: p. 11.
51. "Reasonable Doubt: Russian Commercial Courts are Looking More
Kindly on Western Firms These Days, At Least Some of the Time," EIU Views
Wire, 15 April 2002.
52. EIU Views Wire, 15 April 2002.
53. RSFSR Law on Privatization of State-Owned and Municipal
Enterprises of 7/91 and Law No. 2980-1 of 6/92 on Amending the 1991 Law on
Privatization, U.S. Department of Commerce, National Technical Information
Service, 1992.
54. Ernst and Young, http://www.tax.eycis.com, On the Basic Provisions
of the State Program of Privatization of State-Owned and Municipal
Enterprises in the Russian Federation After July 1, 1994.; also See The
Investment Environment in the Russian Federation: Laws, Politics, and
Institutions (Paris: OECD, 2001), 147-8.
55. Between State and Market: Studies of Economies in Transition 23
(Washington, D.C.: World Bank, 1997), 231.
56. The Investment Environment in the Russian Federation: Laws,
Politics, and Institutions (Paris: OECD, 2001), 150; Harry Broadman, ed.,
Case-by-Case Privatization in the Russian Federation (Washington, D.C.:
World Bank, 1998) Discussion Paper No. 385, p. 26; and
PriceWaterhouseCoopers, "Doing Business in the Russian Federation,"
(Moscow: PWC, 2002) 11.
57. O Privatizatsii Gosudarstvennogo I Munitsipa'nogo Imushchestva,
Rossiiskaya Federal'nii Zakon ot 21 Dekabrya 2001 g. I 178-FZ (On
Privatization of Federal and Municipal Property, Russian Federation Law of
21 December 2001, I 178-FZ) , Rossiiskaya Gazeta (Russian Gazette),
December 21, 2001.
58. Country Commerce: Russia (London: EIU, 2001), 17.
59. Id.
60. Between State and Market, 230.
61. Case-by-Case Privatization in the Russian Federation: Lessons from
International Experience, (Washington, D.C.: World Bank, 1998), Discussion
Paper No. 385, p. 23.
62. Ian Jeffries, A Guide to the Economies in Transition, (London:
Rutledge Press, 1996), 189, 192.
63. Unfortunately, residual share sales often were non-transparent,
foreign interest low remained low due, as some analysts believe, to the
insider-controlled nature of the companies, and little revenue was
generated for the government. Most significantly, the tender process
failed in many cases to do what mass privatization had failed to do, i.e.,
concentrate ownership in the hands of those who could improve the company.
Instead, the tender process simply resulted in insiders gaining further
control of their enterprises. As the government's budgetary financing
needs grew and prospects for further company sales grew dim in 1995, the
government used shares as collateral for loans from some of Russia's
largest banks (representing only a fraction of the shares' market value).
The loans have not been repaid, giving these banks large and controlling
shares in some of Russia's largest and most lucrative enterprises. The non-
transparent nature of these "loans-for-shares" deals, and the highly
questionable conditions under which competing bank loan offers were
collected and sorted, drew harsh criticism and quickly put an end to them.
See Between State and Market: Studies of Economies in Transition 23
(Washington, D.C.: World Bank, 1997), 231-2.
64. Transition Report 2001 (London: EBRD, 2001).
65. "Russia Regulations: Clarifying the Rules of Land Ownership," EIU
Views Wire, 23 October 2001.
66. Yevgenia Borisova, "Land Reform: The Race is On," The Moscow
Times, 4 February 2002; "Russia Industry: New Land Code May Revolutionize
Real-Estate Market," EIU Views Wire, 2 January 2002. Agricultural land
reform has not progressed as far, as private ownership rights do not yet
extend to agricultural land. See "Russia Economy: Progress with Structural
Reforms," EIU Views Wire, 11 January 2002.
67. Ernst and Young, http://www.tax.eycis.com, A 1995 presidential
decree, On Measures to Improve the State Regulation of Prices (Tariffs),
and a 1995 government decision, On Measures to Streamline the State
Regulation of Prices (Tariffs).
68. Ernst and Young, http://www.tax.eycis.com, Russia's 1995 Law on
Natural Monopolies.
69. Ob Obespechenii Soblyudeniya Ekonomicheski Obosnovannikh
Printsipov Formirovaniya Tsen Na Produktsiyu (Uslugi) Sub'ektov
Estestvennikh Monopolii, Postanovlenie Pravitel'stva RF ot 13 oktyabrya
1999 g. I 1158 (On Ensuring of Economically Based Principles of Formation
of Prices on Products and Services of Natural Monopolies, Government
Decision of the Russian Federation of 13 October 1999, I 1158), Chelovek I
Zakon (People and Law), October 13, 1999.
70. Juliet Johnson, "A Fistful of Rubles: The Rise and Fall of the
Russian Banking System" (Ithaca: Cornell University Press, 2000) , 67.
71. Stefanie Harter, Gerald Easter, eds., Shaping the Economic Space
in Russia: Decision Making Processes, Institutions and Adjustment to
change in the Eltsin Era, (Aldershot: Ashgate Press, 2000), 87-89; also
See "Russia Regulations: Bankruptcy Law Enters into Force," EIU Views
Wire, 7 June 1999.
72. Stefanie Harter, Gerald Easter, eds., Shaping the Economic Space
in Russia: Decision Making Processes, Institutions and Adjustment to
change in the Eltsin Era, (Aldershot: Ashgate Press, 2000), 37.
73. Russia's Civil Code, October 21, 1994.
74. "Russian Finance: Bankruptcy Petitions Soar," "Russia Regulations:
New Amendments to Crack Down on Bankruptcies," and "Russian Economy:
Oligarchs Take the Bankruptcy Route to Expansion," EIU Views Wire, 26
April 1999, 2 May 2001, and 25 July 2000.
75. Biswajit Banerjee et. al., Road Maps of the Transition, the
Baltics, the Czech Republic, Hungary and Russia (Washington, D.C.: IMF,
1995), Occasional Paper 127, p. 55, footnote 15.
76. In addition to gas and electricity, the government continues to
regulate the price of other energy products such as oil, furnace and
diesel fuel, and gasoline. To ensure adequate domestic supplies at the
regulated price to certain regions and sectors, the government relies on a
combination of export taxes, quantitative export restrictions, and
conditional access to (government controlled) oil export pipelines.
Although the Federal Energy Commission (FEC) determines wholesale gas
prices on the basis of a detailed analysis of costs, it also exempts fixed
capital investment costs, therefore, somewhat skewing the cost of
production of the natural gas. See Economic Surveys: Russian Federation
2001-2002 (Paris: OECD, 2002), 117.
77. UNCLAS Moscow 000439, State Department Cable 1/16/02 and UNCLAS
Moscow 001181, State Department Cable 1/30/02.
78. Economic Surveys: Russian Federation 2001-2002 (Paris: OECD,
2002), 114.
79. See Russia, Energy Information Administration (EIA), October 2001;
Russia Energy Survey 2002 (Paris: OECD/International Energy Agency, 2002),
24, 132; also See Economic Surveys: Russian Federation 2001-2002 (Paris:
OECD, 2002), Table 33, on p. 134; also See Alla Startseva, "Cabinet Caps
2002 Tariff Hikes at 35%," Moscow Times, 7 December 2001.
80. Venezuela: Efficiency Repricing of Energy, Report No. 13581-VE
(Washington, D.C.: World Bank, May, 5 1995), 4, 6 and 9; Indonesia:
Development Policy Review, The Imperative for Reform, Report No. 23341-IND
(Washington, D.C.: World Bank, December 2001), 40-41; Energy Policies of
IEA Countries: 1999 Review (Paris: OECD/IEA, 1999), 74.
81. Russia Energy Survey 2002 (Paris: OECD/International Energy
Agency, 2002), 24, 223-4, 226-7.
82. The government's actions undertaken to raise energy price controls
have been obscured somewhat by the recent and rapid depreciation of the
ruble and the higher dollar price of oil on world markets. The lower ruble
has reduced domestic energy prices in dollar terms and higher world oil
market prices have increased what a free market energy price in Russia
would be, making it appear the Russian government is doing nothing to
raise prices. One could argue that the lower ruble and higher world energy
prices should, if anything, have spurred the government to accelerate
price deregulation, but this would ignore the fact that from the
standpoint of wanting to avoid destabilizing shocks to the domestic
production base, it is the domestic price of energy in rubles, not
dollars, that matters.
83. The lack of bank restructuring is due, in part, to the weak
enforcement of bankruptcy provisions, in which the CBR plays a critical
role. Some observers believe that recent changes in CBR management signal
a push by the government for progress on banking sector reforms. See
"Russia Economy: Putin Picks new Central Bank Boss," EIU Views Wire, 18
March 2002.
84. Economic Surveys: Russian Federation 2001-2002 (Paris: OECD,
2002), 53. Banks, in many cases, reportedly do not lend to enterprises,
due to transparency concerns, inadequate accounting standards, inadequate
protection of creditor rights, and collateral collection problems. As a
result, Russian banks typically deposit a large share of their assets with
the Central Bank, which earn little or no real interest, or with foreign
banks, leaving only a small share of working assets in the form of loans
to non-financial enterprises. Many of the loans Russian banks do make to
enterprises often are to "insiders" that own or control them and are not
of an arm's-length nature, as reflected by the relatively large share of
bad (i.e., non-performing) loans that they carry. To address the urgent
problem of inadequate financing of the enterprise sector's investment
needs, some officials in the Russian government have proposed that tax
incentives be used to induce banks to lend to enterprises, something that
would not be necessary if the government controlled the banks and could
direct credit. There are, of course, others urging a different course of
action, pointing out that inducing lending to un-credit worthy firms would
undermine efforts to strengthen the banking sector. See Stefanie
Harter,eds., Gerald Easter, Shaping the Economic Space in Russia: Decision
Making Processes, Institutions and Adjustment to change in the Eltsin Era,
(Aldershot: Ashgate Press, 2000), 67, 84.
85. Transition Report (London: EBRD, 2001), 136-192. Data for the
Czech and Slovak Republics are for 1999.
86. Interest rates are fully liberalized and market-based. See
Transition Report (London: EBRD, 2001), 188.
87. "Russia Economy: Putin Picks new Central Bank Boss," EIU Views
Wire, 18 March 2002.
88. Economic Surveys: Russian Federation 2001-2002 (Paris, OECD:
2002), 54.
89. Between 1991 and 1999, the share of service industries in total
employment (excluding construction, transport, and communication) nearly
doubled from 10.5 percent to 20.4 percent. The industry sector on the
other hand, contracted about 25 percent from 30.3 percent to 22.2 percent.
In industry, between 1996 and 1999, survey data on firm registrations and
average firm size (in terms of employees) suggests that individuals and
firms are actively allocating resources across sectors. While the
aggregate change is small the variation in sectoral change is high. For
example, the non-ferrous metal (15.8 percent), chemical (18.1 percent),
woodworking (27.7 percent), pulp and paper (31.9 percent), food (14
percent), meat and dairy (14.2 percent), fish (36.4 percent), and
information and computer services(11.8 percent), all experienced gains. In
all but food, average firm size dropped. On the other hand, the machine
tool and tool industry(-14.2 percent), electronics (-20.4 percent),
precision tools (-12.6 percent), textile (-14.5), clothing(-25.4 percent),
tanning, fur and shoe industry (-32.5 percent), and other light industries
all experienced losses. In all others but light industry average firm size
dropped. See IMF Staff Country Report No. 00/150: Russian Federation
Selected Issues (Washington, D.C.: IMF, 2000), Table 7; Is Russia
Restructuring? New Evidence of Job Creation and Destruction (Washington,
D.C.: World Bank, July 2001), Working Paper No. 2641, p. 20.
90. See "Russia Industry: Nizhny Novgorad, Russia's Software Center,"
EIU Views Wire, 14 August 2001. See also Economic Surveys: Russian
Federation 2001-2002 (Paris: OECD, 2002), 27, 69.
91. Between 1991-1995 trade with the newly independent states fell
from 74 percent to 21 percent as a share of total exports and fell 58
percent to 26 percent as a share of total imports. The share of trade with
the former CMEA countries also declined. In 2000, trade with the former
Soviet Union had dropped to 14.9 percent as a share of total exports and
had risen slightly to 27.7 percent of total imports. The composition of
Russia's trade, unlike the pattern, has not changed much. Foods and
beverage and machinery and transport equipment continue to be Russia's
main imports, and mineral fuels and metals continue to be Russia's main
exports. Imports are trending down as Russian industry produces more
import substitutes, with the benefit of the lower ruble, while exports
have increased and are more concentrated in mineral fuels, with the higher
price of pis and lower ruble. See Trade Policy and the Transition Process,
(Paris: OECD, 1996), 42; also See EIU Country Profile: Russia (London:
EIU, 2001).
92. Stefanie Harter,eds., Gerald Easter, Shaping the Economic Space in
Russia: Decision Making Processes, Institutions and Adjustment to change
in the Eltsin Era, (Aldershot: Ashgate Press, 2000), 165.
93. Russian Enterprise Reform: Policies to Further Transition
(Washington, D.C.: World Bank: 1999), Discussion Paper No. 400, 19; Simon
Clarke and Veronika Kabalina, "Employment in the New Private Sector in
Russia," Post-Communist Economics, Vol. 11, No. 4, 1999, pp. 429, 434,
439.
94. Economic Surveys: Russian Federation 2001-2002 (Paris, OECD:
2002), 81.
95. Strategy for the Russian Federation, (London: EBRD, 2000), 15.
96. Russian Enterprise Reform: Policies to Further Transition,
(Washington, D.C.: World Bank, 1999), Discussion Paper No. 400, p. 21.
97. Economic Surveys: Russian Federation 1997 (Paris: OECD, 1997), 37-
38, 120. The 1998 bankruptcy law may have succeeded to some limited extent
in promoting meaningful industrial restructuring, but the law has been
misused by enterprises to carry out hostile takeovers of viable firms.
Both the government and Russia's Constitutional Court have recognized the
shortcomings of the current law, and the government has proposed
amendments to the law intended to reduce the scope for abuse. See "Russia
Regulations: New Amendments to Crack Down on Bankruptcies," EIU Views
Wire, 2 May 2001; and "Russia Economy: Progress with Structural Reforms,"
EIU Views Wire, 11 January 2002.
98. The 2001 Corruption Perceptions Index (Berlin: Transparency
International, 2001), http://www.transparency.org.
99. "Russia Finance: FDI Trends," EIU Views Wire, 24 July 2001.
100. At the height of the problem, barter chains often linked many
firms, both vertically and horizontally, and involved a broad range of
goods and services. Although barter is nothing more than a primitive form
of market exchange and is therefore, prima facie evidence that firms, not
the government, allocate resources and determine prices, barter prices are
negotiated in a highly non-transparent manner, which can frustrate the
signaling role that prices are supposed to play in allocating resources.
The complex and extensive nature of the barter chains in Russia also
functioned as a barrier to entry to firms not part of a particular chain
and therefore reduced market competition. The reduction in market
competition, in turn, reduced pressures on firms to reorganize and become
more efficient, which tended to lock-in old business habits and ways. The
payment arrears problem represented a weakening of the budget constraint
that Russian firms faced, which delayed much needed industrial
restructuring and efficiency enhancing resource allocations. See Economic
Surveys: Russian Federation 1999-2000 (Paris: OECD, 2000), 86.
101. David Woodruff, Money Unmade: Barter and the Fate of Russian
Capitalism, (Cornell University Press: Ithaca, 1999), 62, 68-76.
102. Dismantling Russian's Non-Payments System, (Washington D.C.:
World Bank, 2000), Technical Paper No. 471, 1.
103. Ibid, 28.
104. Rose Brady, Kapitalizm: Russia's Struggle to Free Its Economy,
(New Haven: Yale University Press, 1999), 226, 255. The energy sector had
become the focal point of the non-payments problem. Russian firms were
either unable or unwilling to pay their gas and electricity bills, but
escaped market discipline because GAZPROM and UES were unable to cut
service or lower prices and bankruptcy laws were not enforced. See
Economic Surveys: Russian Federation 1999-2000, (Paris: OECD, 2000), 98-
100. This softening of the budget constraint for energy users translated
into a softening of the budget constraint for energy suppliers, as they
did not pay taxes owed to the government. The government's response was to
defer, write down, write off, or offset these taxes.
105. At the beginning of 2001, barter as a percentage of sales had
fallen to roughly 17 percent and, by the fall of 2001, had leveled off at
roughly 14 percent. See Economic Surveys: Russian Federation 2001-02,
(Paris: OECD, 2002), p. 70; "Russian and Baltic Economies: The Week in
Review," Bank of Finland (BOFIT), March 22, 2002. Industrial enterprises
reported conducting 75 percent of September 2001sales in cash, and
enterprise payment arrears (overdue liabilities) have essentially leveled
off, i.e., current debts are being paid-off on time. Although the stock of
payment arrears is still relatively large, it is shrinking as a share of
total liabilities. See "Russian Economic Trends (Monthly)," Russian-
European Center for Economic Policy, November, 2001, p. 12 and Table 7.
106. Determinants of Barter in Russia: An Empirical Analysis,
(Washington D.C.: IMF, October 2000), Working Paper No. 00/155, 5-6, 22;
Dismantling Russian's Non-Payments System, (Washington D.C.: World Bank,
2000), Technical Paper No. 471, 4-7.
107. In this regard, we note that Russia imposes product
certification requirements on approximately 80 percent of imported goods
and in 1999 re-introduced temporary export taxes on a range of products,
e.g., oil, aluminum and aluminum products, paper and paper board, and
ferrous scrap metal. Russia also maintains some
de facto export quotas, e.g., on oil.
108. Defined as net errors and omissions in the balance of payments,
plus net flows of non-FDI, non-portfolio assets and liabilities held by
entities other than the monetary authorities and the government.
109. Prakash Loungani and Paolo Mauro, "Capital Flight from Russia,"
IMF Policy Discussion Paper No. 00/6, pp. 3-7.
110. "Russia Economy: FDI Falls, Capital Flight Continues," EIU Views
Wire, 7 January 2002.
111. "Russia Economy: Good in Part," EIU Views Wire, July 23, 2001.
Even though the ruble was even weaker in real terms in 1994 than in 1999-
2000, Russian firms reacted by increasing payment discipline, reducing
arrears, and increasing investment in fixed assets. These reactions imply
that something other than more favorable terms of trade for Russian firms
are behind Russia's sustained economic recovery, possibly new producer and
investor confidence in the institutional infrastructure. See Economic
Surveys: Russian Federation 2001-2002 (Paris: OECD, 2002), pp. 62, 65-69.
112. IMF Staff Country Report No. 00/150: Russian Federation Selected
Issues (Washington, D.C.: IMF, 2000), 7-26; Economic Surveys: Russian
Federation 2001-2002, (Paris: OECD, 2002), 27-35. "Russia Economic
Report," World Bank Moscow Office, January 2002.
113. Economic Surveys: Russian Federation 2001-2002, (Paris: OECD,
2002), 62.