The Russian Economy in May 1999

Russian Economic Survey March 2009 Keith Bush Research Director U.S.-Russia Business Council Russian Economic Survey, March 2009 2 Russian Economic Survey, March 2009 Contents Executive Summary 3 Highlights ............................................................................................................................ 5 Nine Years of Sustained Growth…………………………………………………………. 7 Sixteen Years of Transition (Table)..................................................................................... 8 Inflation ................................................................................................................................ 9 The Federal Budget for 2009 ............................................................................................... 9 Earnings, Incomes, Pensions, Poverty ................................................................................. 9 Unemployment and Bankruptcy ........................................................................................ 10 Foreign Trade ..................................................................................................................... 15 MerchandiseTrade of Russia, 1995-2007 (Table) ............................................................. 15 WTO Accession ................................................................................................................. 17 Exchange Rate ................................................................................................................... 22 External Debts and Credits ................................................................................................ 22 The Banking Sector ........................................................................................................... 23 International Monetary Fund (IMF) ................................................................................... 23 World Bank ........................................................................................................................ 23 The Duma .......................................................................................................................... 24 Limits to Economic Growth .............................................................................................. 24 Notes .................................................................................................................................. 28 3 Russian Economic Survey, March 2009 Executive Summary  During the past 9 years, Russian economic growth has been substantial, with GDP increases of 6.4, 10, 5.1, 4.7, 7.3, 7.2, 6.4 percent, 7.4 percent, 8.1, and an estimated 6.0 percent in 1999-2008 respectively. This has been largely attributable to the high world prices for Russia‘s export commodities; the remaining impact of import substitution after the 1998 devaluation; the fruits of Putin's economic restructuring; sound fiscal and monetary policies; and to the recovery in private consumption and investment. As to prospects for growth, the good news is that Russia is enjoying relative political and economic stability after the Yeltsin years of turmoil. The Duma that was elected in December 2007 has three pro-Kremlin parties making a combined bloc of 392 seats or 87 percent of the votes. Capital investment and personal consumption are up. Barter is down. With huge foreign trade and current account surpluses, and with record reserves, the economy is less vulnerable to external shocks than in past years. There exist several constraints on growth. In the wake of the global economic downturn and credit crunch, the economy may turn in a negative growth in 2009. The competitive advantage gained from the August 1998 devaluation has eroded. The core manufacturing sector constitutes a gigantic industrial rust belt. Much of it is located in inhospitable and economically nonviable regions. The infrastructure is obsolete. The investment ratio is just about two-thirds of what is considered necessary for sustained high growth. Deterred by a hostile environment, foreign direct investment (FDI) and portfolio investment have been small, although FDI in 2005-2007 registered a sharp increase. WTO accession seems likely only in 2010 at the earliest. The banking sector still provides little intermediation. The share of small- and medium-sized enterprises in total output is inadequate. Demographic trends indicate that the workforce started to shrink from 2007, while the appalling and deteriorating health situation augurs lower productivity. The bloated bureaucracy resists change. Corruption is rife at all levels of society. The rule of law has yet to be widely introduced. An independent judiciary still does not universally exist. In the light of the above, we believe that average annual growth in the medium-term will remain modest, 5-6 percent, say, unless world oil prices climb substantially further and remain high. In the wake of the global financial crisis, the GDP in 2009 is expected to grow by not more than 3 percent and may even register a decline. However, since Russian assets and equities are undervalued, we expect strong growth in both FDI and portfolio investment once the credit crisis is over.   4 Russian Economic Survey, March 2009 The Russian Economy in March 2009 Highlights  The gross domestic product (GDP) grew by 6.4, 10.0, 5.1, 4.7, 7.3, 7.2, 6.4, 7.4, 8.1, and an estimated 5.6 percent in 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, and 2008. This recovery, after more than a decade of virtually uninterrupted decline, was primarily attributable to the high world prices for Russia‘s oil, gas, and other commodity exports; the import substitution effect after the devaluation of August 1998; market-oriented restructuring; and sound fiscal and monetary policies. Economic growth projections for 2009 range from +3 percent to -5 percent. The GDP in 2007 grew by 8.1 percent to 32,987 billion rubles, i.e., $1,288.6 billion, while the GDP in 2008 was estimated at 41,540 billion rubles ($1,670 billion). The GDP at PPP in 2007 was estimated to be $2,076 billion. The preliminary federal budget for 2009 envisages revenues of 6,349.7 billion rubles or 15.7 percent of GDP, expenditures of 9,583.3 billion rubles or 23.7 percent of GDP, leaving a deficit of 3,233.6 billion or 8.0 percent of GDP. The average annual price of oil is projected at $41 per barrel. Inflation rates of 18.6 percent, 15.1 percent, 12 percent, and 11.7 percent were recorded in 2001-2004 The CPI rose by 10.9 percent in 2005, by 9.1 percent in 2006, by 11.9 percent in 2007, and by 13.3 percent in 2008. By March 10, the CPI had risen by 4.5 percent. The exchange rate was 33.81 rubles/dollar on March 27. The average exchange rates in 2001, 2002, 2003, 2004, 2005, 2006, and 2007 were 29.2, 31.45, 30.68, 28.81, 28.30, 27.18, and 25.57 rubles/dollar. The real effective exchange rate against the dollar grew by about 12 percent in 2001, 8 percent in 2002, 13.6 percent in 2003, 6.1 percent in 2004, 3.9 percent in 2005, 9.6 percent in 2006, and by 5.7 percent in 2007. Real disposable incomes rose by 9 percent in 2000, 8.5 percent in 2001, 9 percent in 2002, 15.2 percent in 2003, 7.8 percent during 2004, by 8.8 percent in 2005, by 10.0 percent in 2006, and by 10.4 percent in 2007. In the third quarter of 2007, 21 million Russians were living below the poverty line of 3,879 rubles ($158) a month. The average monthly calculated nominal wage due in February 2009 was 17,580 rubles ($488). In 2008, 29,100 man-days were lost in strikes. Merchandise trade surpluses of $20.3 billion, $22.5 billion, $17 billion, $16.9 billion, $36 billion, $60.2 billion, $47.9 billion, $46.2 billion, $60.5 billion, $87.1 billion, $139.3 billion, and $132 billion were registered in 1995-2007, and an estimated $176.5 billion in 2008. The current account surpluses were $2.0 billion, $0.7 billion, $24.7 billion, $46.4 billion, $34.6 billion, $29 billion, $35.4 billion, $60.1 billion, $83.3 billion, $94.4 billion in 19972006, $78.3 billion in 2007, and $98.9 billion in 2008. 5         Russian Economic Survey, March 2009     The Central Bank‘s reserves on March 13 were $376.1 billion, including about $14.5 billion in gold. Some 45 percent of currency reserves were in US dollars. On January 1, 2009, Russia‘s sovereign external debt amounted to $37.4 billion, or about 3.7 percent of GDP. Its total foreign debt amounted on October 1, 2008, to $540 billion. The most probable date for Russia‘s accession to the WTO appears to be 2010 at the earliest. Annual net capital outflow was $8 billion in 2002, $2.9 billion in 2003, and $7.8 billion in 2004, but reversed into an inflow of $300 million in 2005 and to an estimated $41.6 billion in 2006. Capital inflow during 2007 was $82.3 billion, while capital outflow in the first quarter of 2008 was $22.6 billion. After a decade of continuous decline, gross capital investment in 1999 rose by 5.3 percent to 670 billion rubles ($28 billion) or 15 percent of GDP, and then grew by nearly 18 percent in 2000, and by 8.7 percent in 2001 (to about 16 percent of GDP). Fixed capital investment growth in 2002 appears to have slowed to 2.6 percent, with some 60 percent going to the fuel, energy and raw materials sectors, but surged by 12.5 percent in 2003, by 10.9 percent in 2004, by 10.5 percent in 2005, by 17.5 percent in 2006, and by an estimated 20.8 percent in 2007 to a total of $251 billion. The gross fixed capital formation:GDP ratio in 2007 was 21.1 percent.1 Cumulative foreign direct investment (FDI) since 1991 in Russia by May 30, 2008, amounted to $221 billion, compared with over $350 billion in China through April 1, 2004. FDI in Russia in 2000 amounted to $4.4 billion out of a global total of $1,400 billion. It declined to $3.98 billion in 2001, rose to $4 billion in 2002 (compared with $52.7 billion of FDI into China), and to $6.8 billion in 2003 out of a global total of $653 billion. Gross FDI rose sharply from $9.4 billion in 2004 to $13.1 billion in 2005, to $13.75 billion in 2006, and to an estimated $27.8 billion in 2007. The average age of Russian manufacturing plant and equipment in 2004 was 21.2 years. To update or replace it and the infrastructure will take trillions of dollars. This will not be available solely from domestic sources. FDI is expected to grow fast, but will remain much lower than is needed until Russia cleans up its corporate governance act and creates a welcoming environment. Much of industry is located unfavorably. Demographic trends and Russia‘s appalling health indicators will apply downward pressure on productivity and performance. All of which suggests that the average annual rate of Russian economic growth in the medium term will remain modest. This growth rate remains susceptible to the world prices of oil, gas, metals, and other Russian export commodities. (3/30/2009)      (This survey is frequently updated. Members may obtain the latest version at any time from (bush@usrbc.org) 6 Russian Economic Survey, March 2009 The Russian Economy in March 2009 Nine Years of Sustained Growth Starting in 1989, the GDP of the RSFSR, and successor Russian Federation, declined continuously until 1997, when a rise of 1.4 percent was recorded. The drop in output by century end was about 42 percent—a far steeper fall than was recorded during the Great Depression in the United States in the early 1930s. After a decrease of 5.3 percent in the crisis year of 1998, GDP growth resumed in 1999-2007 with increases of 6.4, 10.0, 5.1, 4.7, 7.3, 7.2, 6.4, 6.7, and 8.1 percent respectively. Industrial output grew by 11.0, 11.9, 2.9, 3.1, 8.9, 7.3, 4.0, 3.9, and 7.4 percent in 1999-2007 respectively. This recovery is attributed primarily to the high world prices for oil, gas, and other export commodities, the import substitution effect after the ruble devaluation of August 1998; economic restructuring; and tight fiscal policy. The Ministry of Economic Development and Trade (MEDT) has estimated growth rates of 5.4 percent for 2008 and -2.2 percent in 2009, with average prices of Urals Medium projected at $41 per bbl. Official Rosstat statistics for the years 1998 through 2000 were revised upward in mid-2001 and again in February 2002. This was said to be attributable to the use of a different base year— 1999 instead of 1995—and to a higher ―guesstimate‖ for the contribution of the ―second‖ or ―shadow‖ economy, as well as more comprehensive inclusion of the output of small- and medium-sized enterprises. A further upward revision for the GDP in the years 1995-2000 was announced in May 2003: this was attributable primarily to higher figures for investment growth. Yet another slight upward revision for the GDP in the years 2001 and 2002 was announced in January 2004. Rosstat recalculated industrial statistics at the end of 2004.The GDP in 2007 was declared to have reached the level of the 1990 GDP. The most disturbing factors in respect to growth prospects are that most industrial plant, equipment, and infrastructure are obsolete or obsolescent—the average age of industrial plant and equipment was 21.2 years in 20042 and that investment dropped by nearly 80 percent during the period 1991-98. However, for the first time in a decade, investment grew in 1999 by 4.5 percent to 660 billion rubles ($28 billion) or 15 percent of GDP.3 Investment in 2000 leapt by nearly 18 percent,4 mostly retained profits, although the rate slowed to 8.7 percent in 2001, and only 2.6 percent in 2002 (although alternative estimates of up to 9 percent have been offered5), with 60 percent of investment going to the raw materials sectors. This slowdown has been attributed in part to the abolition of the fixed investment tax reduction effective January 1, 2002. A recovery in investment was evident in 2003, growing by 12.5 percent, by 10.8 percent during 2004, by 10.5 percent in 2005, by 13.7 percent in 2006, and by 21.1 percent in 2007. The gross capital formation ratio of 21.1 percent of GDP in 2007 was lower then the rate in China (42 percent) or India (34 percent) and still too low to underpin a high and sustained rate of growth. For this, many prescribe an investment ratio of closer to 30 percent. For Russia, the IMF has recommended a similar level, i.e., a gross investment figure of 20-25 percent of GDP for private investment and 3-6 percent for public investment.6 Other factors contributing to renewed growth were increases in private consumption, a substantial increase in the share of cash transactions in the economy, and the allocation of 130 billion rubles for priority national projects in the first nine months of 2006.7 7 Russian Economic Survey, March 2009 Sixteen Years of Transition Annual percentage change Gross domestic product Industrial production Agricultural production Consumer Prices Real disposable income 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -14.5 -8.7 -12.7 -4.2 -3.6 1.4 -5.3 6.4 10.0 5.1 4.7 7.3 7.2 6.4 7.4 8.1 -18.8 -9.0 2,650 -14.6 -4.0 940 -20.6 -12.0 320 -3.0 -8.0 131 -3.5 -5.1 22 1.9 0.1 11 -6.6 -12.3 85 11.0 2.4 37 11.9 3.0 21 2.9 11.0 19 3.1 2.0 15 8.9 1.5 12 8.3 1.6 12 4.0 1.1 11 6.3 1.7 9 6.3 .3.3. 11.9 -41.0 14.0 -8.0 -13.0 5.0 2.5 -13.8 -15.1 9.0 8.5 8.8 14.5 10.4 9.3 10.2 11.5 Life expectancy at birth, years Men Women 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 62 74 59 72 58 71 58 72 60 72 59 71 61 71 60 72 60 72 59 72 59 72 59 72 59 72 59 72 61 74 60 73 Federal budget, % GDP Revenues Expenditures 1992 16.6 27.7 1993 14.5 15.9 1994 14.1 18.1 1995 13.7 16.6 1996 12.5 20.9 1997 13.3 20.9 1998 11.4 17.4 1999 12.6 16.8 2000 15.4 14.6 2001 17.8 14.8 2002 20.3 19.0 2003 19.5 17.8 2004 20.1 15.8 2005 23.7 16.3 2006 23.4 16.0 2007 23.6 18.1 Balance 11.1 --1.4 -4.0 -2.9 -8.4 -7.7 -6.0 -4.2 0.8 3.0 1.4 1.7 4.4 7.5 7.4 5.4 Sources: Derived from Goskomstat and IMF reports; Russian Economic Trends, quarterly and monthly updates; Bank of Finland, The Russian Economy: The Month in Review and The Russian Economy: The Week in Review, various issues; UFG; Troika Dialog. The exceptionally low rate of investment throughout most of the 1990s is attributable to a variety of factors. These included the low rate of private savings; the budget deficit that absorbed too many investible resources; disincentives provided by the onerous and opaque tax code and legal system; capital flight; and the understandable reluctance of banks to invest in the real economy when they could earn over 100 percent on an annualized basis from government bonds. 8 Russian Economic Survey, March 2009 Much of the decline of the 1990s might be welcomed because it marked the overdue restructuring of the Russian economy toward producing goods and services that met consumers‘ demands rather than planners‘ preferences. Moreover, in contrast to the command economy where managers had an incentive to overstate their output data to over-fulfill plan targets and win bonuses, executives are motivated now to understate production totals to evade the tax inspector and the mafia. Official data are also suspect. Rosstat was set up to monitor manufacturing output but may not fully capture the activity of the service sector and the black and gray economies. The share of the unofficial economy in the gross domestic product is estimated at around 25 percent.8 In June 2007, the Tax Service reported that up to 40 percent of wages were not declared.9 This share is expected to decline as greater transparency is introduced and as a result of simplified and lower tax rates. Inflation After most wholesale and retail prices were freed on January 2, 1992, consumer prices increased by 2,509 percent that year. The monetary overhang disappeared overnight, as did lines and the value of people‘s savings. Tight monetary and fiscal policies brought annual inflation down from 840 percent in 1993; to 215 percent in 1994; to 131 percent in 1995; to 22 percent in 1996; and to 11 percent in 1997. With the economic meltdown of August 1998, inflation rebounded to an annual rate of 84.4 percent, then subsided to 36.5 percent in 1999. Consumer price inflation was 20.2 percent in 2000, 18.6 percent in 2001, 15.1 percent in 2002, 12.0 percent in 2003, 11.7 percent in 2004, 10.9 percent in 2005, 9.1 percent in 2006, by 11.9 percent in 2007, and by 4.5 percent by March 10. The Federal Budget for 2009 The preliminary federal budget for 2009 projects revenues at 6,349.7 billion rubles or 15.7 percent of GDP, expenditures at 9,583.3 billion rubles or 23.7 percent of GDP, with a deficit of 3,233.6 billion rubles or 8.0 percent of GDP. The annual average price of Urals Crude is foreseen at $41 per barrel. Earnings, Incomes, Pensions, Poverty The average monthly calculated nominal wage due in February 2009 was 17,850 rubles or about $488 at the official rate of exchange. Real disposable incomes grew by 8.5 percent in 2001, 8.8 percent in 2002, 15.2 percent in 2003, 8 percent in 2004, 9.3 percent in 2005, 13.3 percent in 2006, 10.4 percent in 2007, and by 6.9 percent by October 2008. The average nominal monthly pension in the third quarter of 2008 was 4,188 rubles ($164). The minimum wage has been raised in stages from 132 rubles a month effective July 1, 2000, to 2,000 rubles ($74) a month effective January, 1, 2007, to 2,300 rubles ($88) per month on September 1, 2007. On October 7, 2003, the State Duma approved a bill to raise the minimum wage to the subsistence level by 2007.10 (The problem is that these desirable increases would have cost 22.5 trillion rubles, or $70-83 billion, a sum approaching total annual federal budget expenditure).11 The Labor Code had also stipulated that the minimum wage should be raised within two years, i.e., by 2003, to at least the subsistence level. Gref promised this for 20089.12 In December 2007, a tripartite commission agreed that the minimum wage should be raised to the subsistence level by December 1, 2008.13 Prime Minister Putin expressed the intention of raising the minimum wage to 4,330 rubles on January 1, 2009,14and this was passed into law on 9 Russian Economic Survey, March 2009 June 11, 2008.15 Dmitry Medvedev had earlie promised to raise the minimum wage to the subsistence level by 2010.16 The figure has been critical because many salaries, transfer payments, fines, etc. are set in terms of multiples of the minimum wage. The old technical minimum wage of 83.5 rubles was used as a basis until the end of 2000. Thereafter, a technical minimum of 100 rubles a month has been used as a basis of calculation for stipends, allowances, fines, taxes, and levies.17 The minimum pension effective 2006 has been 2,731 rubles or $117 at the official rate of exchange. It should be noted that money wages and salaries by July 2006 accounted for 43 percent of GDP. By March 1, 2009, wage arrears had risen to 8,087 million rubles ($225 million), including 536 million rubles owed by state organs. Disparities in income grew until 1996, then leveled off, but have apparently increased again. Incomes of the top 10 percent (39,000 rubles per month) of earners in early 2008 were reported to be approaching 16.3 times higher than those of the lowest 10 percent (2,400 rubles per month) of earners.18 In the fourth quarter of 2007, 18.9 million people (13.4 percent of the population) lived below the minimum subsistence level of 4,330 rubles ($185) a month.19 By March 1, 2007, ruble household deposits in commercial banks totaled about 3,913 billion rubles ($152 billion),20 while the total value of US dollars stuffed under mattresses as at July 1, 2008, was reported to be $800 million.21 About 50 percent of the population in March 2008 were said to have no savings.22 Unemployment and Bankruptcy The economically active population on March 1, 2009, was put at 75.6 million, including an estimated 9 million in the gray economy. The official number of registered unemployed on March 1 was reported to be 2.0 million or 2.7 percent of the workforce. For a variety of reasons, the registered numbers are misleadingly low, and the March 1, 2009, estimate of unemployment using the International Labor Organization‘s definition23 was 6.4 million or 8.5 percent of the economically active population. These figures could be higher if the residual over-employment factor is taken into account: over-employment prior to the transition had been estimated to exceed 20 percent. Enterprises keep surplus workers on their books to avoid redundancy payments, and because labor is a relatively cheap input.24 The Ministry of Labor and Social Development estimated in 2002 that the proportion of the wage fund in the prime cost of finished output in Russian enterprises was just 12 percent, compared with over 60 percent in OECD countries.25 Goskomstat reported that total wage expenditures had increased to 44.8 percent of GDP in 2007.26 The minimum unemployment benefit rose effective January 1, 2009, to 850 rubles ($31) a month and the maximum benefit to 3,400 rubles ($124) a month.27 In 2006, the share of loss-making enterprises comprised 29.7 percent. Since most Russian enterprises use primarily retained earnings for their capital investment, low profits augur low investment. Wholesale closure or restructuring of loss-making firms has been hampered by the need to have a court order before management can be replaced, and it can take up to 18 months to push bankruptcy proceedings through the arbitration court. The 1998 Bankruptcy Law allowed creditors to force enterprises to declare insolvency for a host of minor infractions to conduct bargain buyouts. Enterprises declared themselves bankrupt in order to avoid paying taxes. And the 1998 law was deemed to give excessive powers to arbitration courts. Amendments to this law were signed by the president on October 29, 2002, after he had vetoed a previous version in July 2002. They provide for major changes in bankruptcy procedures 10 Russian Economic Survey, March 2009 aimed at the financial rehabilitation of insolvent companies and boosting shareholder value, and making it more difficult for creditors to push through bankruptcy for small debts and for unscrupulous shareholders to take over companies on spurious grounds.28 By July 2003, some 105,000 bankruptcy cases had been heard under the new law that came into effect in December 2002. Three-quarters of these involved missing debtors, where the debts were left for the state to make good.29 Bankruptcy proceedings have been delayed or annulled because of the political risk of closing hundreds, perhaps thousands, of enterprises—without an adequate social safety net in place—in what are often one-factory towns.30 In October 1999, there were said to be 940 single-factory towns with some 24 million inhabitants.31 In most of these, the single factory, also known as ‗city-forming enterprise,‘ provided not only employment, but also supplied housing, schools, clinics, stores, canteens, market gardens, and even free or heavily subsidized vacation resorts. The local authorities where these often value-subtracting enterprises are located have understandably been reluctant to press bankruptcy proceedings. For instance, Sverdlovsk governor Eduard Rossel vowed to prevent the bankruptcy or privatization of the Uralvagonzavod plant employing 25,000 workers.32 Chelyabinsk governor Petr Sumin announced on April 16, 1999, that he would grant 200 of the oblast‘s leading firms political protection from bankruptcy. When insolvent state-owned enterprises are sold, the government channels 60 percent of the proceeds to social infrastructure, which has until now been largely the responsibility of the factories themselves. Strike action was down from a high of 6,001,000 man-days lost in 1997 to 1,790,000 mandays lost in 1999, to just 236,000 in 2000:33 of that latter total, 97 percent were accounted for by the educational establishments, where teachers were protesting low wages and wage arrears.34 In 2001, only 25,900 man-days were lost in strikes, 29,000 man-days in 2002, and 29,500 man-days in 2003. The figure for 2004 rose sharply, with 210,800 man-days lost, then declined to 85,900 man-days lost in 2005, to 9,800 in 2006, rose to 20,500 man-days lost in 2007, and increased to 29,100 man-days in 2008. Rosstat records only strikes that are legal. The level of work stoppages has been insignificant by the standards of many OECD nations. Foreign Direct Investment and Portfolio Investment Foreign direct investment (FDI) in Russia has risen sharply after many years at a low level. The totals for incoming FDI in 1997-2000 were $4.9 billion, $2.8 billion, $4.3 billion, and $4.4 billion respectively. FDI in 2001 declined to $3.98 billion (Rosstat), or $2.4 billion (CBR), then rose to $4 billion (Rosstat) or $3.5 billion (CBR) in 2002, and to $6.8 billion (Rosstat) or $7.9 billion (CBR) in 2003, the difference that year appears to be attributable to how to account for the TNK/BP merger. In 2004, FDI was reported to be $9.4 billion, (Rosstat) or $15.4 billion (CBR), and in 2005, FDI rose to $13.1 billion (Rosstat) or $12.9 billion (CBR). Gross FDI in 2006 was reported to total $13.75 billion (Rosstat) or $32.4 billion (CBR). Rosstat reported that FDI in 2007 amounted to $27.8 billion, while the CBR total was $52.5 billion. Rosstat data reported a total of $19.2 billion for the first nine months of 2008. In 2007, there were 25 IPOs in Russia for a total of about $23.6 billion.35 The CBR data cover all sectors of the economy, while the Rosstat figures exclude the financial sector. The CBR figures are net, i.e., including re-investment of profits and adjusted 11 Russian Economic Survey, March 2009 for the repatriation of profits and redemption of capital, whereas Rosstat provides only gross figures on FDI inflows. The CBR collects data from banks, while Rosstat collects data from non-financial direct investment enterprises. The CBR includes reinvested profits of foreign subsidiaries in its FDI data, while Rosstat records as long-term loans from abroad components that the CBR considers as FDI and portfolio investments.36 The cumulative figure for total foreign investment in Russia from 1991 through May 30, 2008, has been given as $221 billion, with total FDI at $103.0 billion,37 or only about 10 percent of domestic fixed capital formation. These totals may be compared with FDI in China of $70 billion in 2006 alone, over $177 billion registered for the US in 2006, and global totals of $1,090 billion of FDI in 1999, $1,318 billion in 2000, $823 billion in 2001, $655 billion in 2002, $635 billion in 2003, $648 billion in 2004, $916 billion in 2005, and an estimated $1.2 trillion in 2006. In cumulative terms, the largest investors in Russia by January 1, 2008, were Cyprus ($49.6 billion); the Netherlands ($39.1 billion); the UK ($29.2 billion); Luxembourg ($29.2 billion); Germany ($11.8 billion); and France ($6.7 billion).38 The prominence of Cyprus indicated returning flight capital. Most of the FDI went to the fuel, food, trade, catering, and transport sectors. Russian companies attracted $17.7 billion in IPOs in 2006.39 The stock of Russian investment abroad was $157 billion at the end of 2006.40 Increasingly there have been reports of Russian companies buying into Western assets, notably Russian oil majors looking for downstream acquisitions. In early 2004, Norilsk Nickel purchased Gold Fields for $1.16 billion. Severstal completed the takeover of Rouge Industries for $286 million, invested nearly $1 billion in the SeverCorr facility in Mississipi, and bought Esmark of West Virginia. Some of the principal reasons for Russia‘s meager share of global FDI include political instability during the Yeltsin era; a capricious, changing, and exorbitant tax regime; unpredictability and lack of coordination of government policies; pervasive corruption, especially in the bureaucracy; appalling corporate governance; exclusion of foreign interests from some privatization auctions; lack of bilateral investment treaties; lack of the rule of law; absence of contract law; lack of commercial infrastructure; limits on foreign banks; constant changes in legislation affecting foreign investors; no clear property rights; capital dilution; transfer pricing; absence of International Accounting Standards; inability of foreigners to own land; high interest rates; and the predations of organized crime. There can be little doubt that Russian industry needs massive re-equipment: the average service life of the active portion of fixed capital is more than three times longer than in OECD countries.41 Put differently, about 45 percent of production capital on the balance sheets of industrial enterprises is over 20 years old.42 The Ministry of Economic Development and Trade estimated that Russia would need some $2 trillion in investment during the next 15-20 years. At least half of this amount would be spent on infrastructure: the Soviet infrastructure has worn out and needs to be replaced. Meanwhile, Russia has stayed near the bottom of the investment league. In the 2007 Global Competitiveness Report, produced by the World Economic Forum, Russia came 58th out of 131 in the growth competitiveness index.43 Transparency International placed Russia at 143 out of 160 countries in its Corruption Perceptions Index for 2008.44 Moscow has been placed 50th out of 50 in the 2007 MasterCard rating of which cities are desirable places in which to do 12 Russian Economic Survey, March 2009 business.45 But in 2005, A.T. Kearney placed Russia in sixth place in its rating of attractiveness for investors. Russia‘s country risk ranking, according to Euromoney in March 2005, moved up to 61 out of 185 countries surveyed, while Institutional Investor for the same month placed Russia at 58 out of 173 countries.46 In its 2006 corporate governance ratings, the World Bank placed Russia at 151 out of 208 countries, behind Zambia, Uganda, and Swaziland,47 while its Doing Business 2008 put Russia at 106 out of 178 countries.48 In the Transparency International‘s Bribe Payers Index for 2006, Russia was placed 28th out of 30 countries.49 And in the 2007 International Property Rights ranking, Russia came in at 63rd out of 70 countries.50 Receptivity toward foreign direct investment varies greatly between regions. According to a World Bank working paper of 2001, nearly 60 percent of FDI went to four regions in the west of the country--Moscow City, Moscow Oblast, St. Petersburg, and Leningrad Oblast51--whereas Sverdlovsk Oblast was accused of exhibiting a particularly unwelcoming environment for FDI.52 To that date, the city of Moscow had attracted some one-third of total FDI stock. Investor sentiment in Russia received a boost on February 11, 2003, when BP and TNK announced their decision to merge practically all of their assets in Russia to form the country‘s third-largest oil company, to be called TNK-BP, with reserves of between 5.2 billion and 8.6 billion barrels and production of about 1.2 mbd. This represented the single largest item of FDI to date in Russia, and an acknowledgement that the investment climate had improved greatly. It signaled that the Russian government was willing to allow the transfer of a sizeable chunk of the country‘s natural resources to foreign ownership. By mid-2008, however, it appeared that the TNK-BP alliance was about to come apart. By February 2005, Russia's credit ratings had finally reached investment grade. On October 6, 2003, Moody‘s raised Russia‘s country ceiling for foreign currency bonds and notes from Ba2 to Baa3, a medium investment grade rating, followed by a further upgrading to Baa2 on October 25, 2005. On July 25, 2006, Fitch upgraded its long-term Russian foreign- and localcurrency ratings to an investment grade of BBB+. On March 11, 2008, S & P upgraded Russia‘s sovereign outlook from ―stable‖ to ―positive.‖ But, in the wake of the global financial crisis, Moody‘s lowered Russia‘s rating outlook from ‗positive‘ to ‗stable.‘ It was thee last of the three major rating agencies to downgrade Russia‘s rating. Nevertheless, until recent years, FDI in Russia remained very low and had a long way to go before it made a substantial contribution to Russia‘s long-term growth prospects. FDI can bring not only capital but also better management, technology, and corporate governance. Priority must clearly be given to the universal adoption of International Accounting Standards, so that foreign investors will understand where they are putting their money. Potential investors will also be watching for progress in upholding contractual agreements and the strengthening of the judiciary. Two aspects of corporate governance are showing a gradual improvement: outsiders have been voted to the boards of Sberbank, Aeroflot, and Gazprom, among others,53 Generally speaking, it seems that many Russian enterprises with external exposure are improving their corporate governance, although horrors of governance and settlements still occur. On May 2, 2008, then President Putin signed the Strategic Sector Law. The law stipulates that foreign companies must obtain approval from a special commission led by the prime minister before investing if their acquisition involves more than 50 percent of a company in any of 42 strategic sectors or even a 10-percent stake in a mineral extraction industry. If the foreign company is state-owned, the percentages are 25 percent and 5 percent.54 13 Russian Economic Survey, March 2009 Russia‘s stock market has given portfolio investors an exciting ride. The RTS index was launched in September 1995 at 100 points, then rose by over 300 percent to 571.6 points on October 6, 1997, then plunged to 39 points by October 5, 1998. After some pronounced ups and downs, the RTS index peaked at 781 on April 12, 2004, then fell considerably, then rose to 2,487 on May 20, 2008, but closed at 737 on March 23, 2009. Despite this occasionally stellar performance—the RTS index was up by 98 percent in 2001, 34 percent in 2002, by 57 percent in 2003, by 6 percent in 2004, by 83 percent in 2005 and by 71 percent in 2006 in dollar terms, while it dropped by 72.70 percent in 2008--and despite the market trading at about 4 times prospective 2008 earnings, many potential foreign investors remain wary about Russian equities as long as corporate governance is spotty and minority shareholders abused. In 2007, portfolio investment rose to an estimated $13 billion. By mid-2008, market capitalization was around $1.5 trillion, with the energy sector accounting for some two-thirds. As an illustration of the under-valuation of some Russian equities, Gazprom‘s market capitalization per barrel of oil equivalent was estimated in January 2007 to be one-eighth of that of Exxon Mobil.55 (By March 31 2008, Gazprom‘s market capitalization was estimated at $300 billion56). In another illustration, a megawatt of generating capacity at UES was worth $52,000 (market capitalization, plus debt, minus cash on hand, divided by megawatts owned), while the comparable figure for Duke Energy was $3 million.57 This substantial under-valuation suggests that portfolio investment into Russia may remain a star performer in the coming months, despite the known risks, in an otherwise relatively subdued world equities market. Some analysts estimated IPO sales of over $20 billion in 2006. In January 2006, the head of the Federal Markets Service unveiled a proposal to place at least 30 percent of primary issues in the domestic market.58 Foreign Trade Foreign trade recovered quickly after the abrupt severing of ties with the other former Soviet republics and with Comecon, growing strongly for several years while GDP declined. Merchandise trade surpluses have been huge (see table below), culminating in surpluses for 2001-2007 of $47.9 billion, $46.2 billion, $60.5 billion, $87.1 billion, $118.4 billion, $140.7 billion, and $128.7 billion. The surplus for 2008 was an estimated $176.5 billion. Capital flight continued until 2005 although estimates of its scale have varied greatly. A consensus of the best Western estimates of cumulative capital flight is around $100 billion, although Finance Ministry‘s estimates put the capital outflow aggregate during 1986 through 2004 at $430 billion.59 Much or most of this capital is legal and could rapidly return to Russia once its owners feel that they can trust the government and the banking system. The reasons for the massive scale of capital flight included political instability under Yeltsin, loss of confidence in the ruble as a store of value after the high inflation of 1992, the desire to avoid excessive and arbitrary taxes, and the continuing poor protection of property rights. The annual net capital outflow was $8 billion in 2002, $2.9 billion in 2003, $8 billion in 2004, but reversed into a capital inflow of $300 million in 2005 and jumped to a gross inflow of $41.6 billion in 2006.60 Direct investment inflow during 2007 was $47.1 billion,61 while net private capital inflows reached $82.3 billion. Net capital inflows during the first eight months of 2008 have been estimated at $14 billion.62 In late 2006, the Bank for International Settlements reported that Russian citizens were holding $219.6 billion in bank accounts abroad.63 The law on capital flight amnesty came into force on March 1, 2007, and expired on January 1, 2008. The main 14 Russian Economic Survey, March 2009 requirement for such income to be legalized was that 13 percent of the previous unpaid earnings be transferred to the account of Russia‘s state treasury.64 After the deadline had expired, it was announced that only 3.7 billion rubles ($150 million) had been legalized.65 Russia had been placed on the priority watch list of the G7‘s Financial Action Task Force (FATF) in June 2000 as a source of organized financial crime and money laundering. After the Duma passed several anti-money-laundering laws during the subsequent two years, the FATF finally removed Russia from its black list on October 11, 2002, and Russia joined FATF as a full member on June 19, 2003. Crude, petroleum products, and natural gas are Russia‘s principal export commodities, accounting for 78.6 percent of the total value of exports in 2006. Oil output grew faster than domestic consumption throughout the 1990s. In 2006, crude production rose to 480.5 million tons (9.6 mbpd), and total crude exports rose to an estimated 255 million tons (5.1 mbpd). Export earnings, budget revenues, and overall economic growth are greatly affected by the world price of oil. All other things being equal, each $10 increase or decrease in the average annual price of Urals Blend is estimated to increase or decrease GDP growth by about 2 percent.66 It has been calculated that if the price of crude were to rise to $100 per bbl., Russia would earn about $800 million a day from its oil and gas exports.67 ING has suggested some key variables affecting Russia in the oil price matrix. The Russian economy is expected to register zero growth at $12 p/bbl for Urals crude, the Russian oil sector is expected to record a profit at $13 p/bbl, and the federal budget is expected to record a surplus at $18 p/bbl.68 The IMF calculated that the oil price at which the federal budget was in balance would increase from $22 per barrel in 2004 to at least $31 per barrel in 2006.69 The world price of oil has remained high, with an average annual price for Brent of $28.50 p/bbl in 2003, $38.10 p/bbl in 2004, $55.10 p/bbl in 2005, $66.20 p/bbl in 2006, $72.70 p/bbl in 2007, while the average price of Urals Crude rose to $95.1 per barrel. Russia's current account recorded surpluses of $11.7 billion, $2.0 billion, $0.7 billion, $24.7 billion, $46.4 billion, $34.6 billion, $32.8 billion, $35.8 billion, and $60.1 billion, $86.6 billion, $94.4 billion, $76.6 billion, and $98.9 billion in 1997-2008 respectively. By March 6, the reserves of the CBR were $380.5 billion, including some $14.5 billion in gold, i.e., nearly two years of imports and easily exceeding Russia‘s sovereign external debt. By December 2008, some 45 percent of the reserves were in dollars, 44 percent in euros, 10 percent in British pounds, and 1 percent in yen.70 Arms sales have accounted for a moderate share of Russia‘s exports: values for 1995-2007 are estimated at $3.0 billion, $3.4 billion, $2.6 billion,71 $2 billion, $2.8 billion, $3.8 billion,72 $3.7 billion,73 $4.8 billion, $5.2 billion,74 $5.5 billion,75 $6.1 billion, $6.4 billion,76 and an estimated $7.4 billion77 respectively. 15 Russian Economic Survey, March 2009 The Merchandise Trade of Russia, 1995-2007 ($ billions in current prices, including shuttle trade) 1995 Exports incl. crude oil incl. natural gas Imports incl. machinery & eqpt. Trade Balance 82.4 12.4 10.8 1996 89.7 15.6 15.8 1997 86.9 14.3 16.4 1998 74.4 10.3 13.3 1999 74.6 14.1 11.4 2000 105.0 25.3 16.6 2001 101.6 24.4 18.6 2002 107.2 28.1 16.7 2003 135.9 36.3 20.1 2004 183.2 79.0 22.0 2005 243.8 83 32 2006 303.6 201.6* 37.2 2007E 354.0 126.0 44.0 62.6 15.8 68.1 14.9 72.0 18.6 58.0 15.8 39.5 10.6 44.9 10.9 53.8 14.3 61.0 16.7 75.4 27.9 97.4 39.4 125.4 43 164.3 72.1 225.3 .. 19.8 21.6 14.9 16.4 36.0 60.2 47.9 46.2 60.5 85.8 118.4 139.3 128.7 Sources: Russian Economic Trends, September 2002; CBR reports; Troika Dialog; BEA, Obzor ekonomiki Rossii, July 2003, Table 13; BOFIT reports; Deutsche UFG * The figure for crude oil exports in 2006 refers to all mineral products. WTO Accession History. Russia applied to join the General Agreement on Tariffs and Trades (GATT) in June 1993, and its successor, the World Trade Organization (WTO), in December 1995. The formal Memorandum on the Foreign Trade Regime was submitted in 1994 and the Question and Answer phase was initiated in 1995. Progress during the Yeltsin era was slow. This was attributable in part to the huge task of building new institutions, the resistance of the sluggish and sometimes venal bureaucracy, the autarky of Russia‘s regions, and the lack of political commitment from the top. Former President Vladimir Putin accorded far more urgency and priority to WTO accession than his predecessor. He repeatedly acknowledged the need for Russian economic managers to adhere to the rules-based disciplines of WTO and deplored the fact that Russia is the only major industrialized nation that is not yet a WTO member. Russia lacks access to what is virtually the only effective institution for binding arbitration in foreign trade disputes, and it is increasingly being faced with import quotas and tariffs, together with anti-dumping duties on steel, chemicals, and grain, imposed by the US and the EU. (At the beginning of 2008, there were said to be 84 restrictive measures taken by 39 countries against Russian goods: these included 48 anti-dumping measures, 7 protectionist measures, and 29 tariff, non-tariff, and administrative regulations.78) Effective January 2001, the number of basic rate bands of import tariffs dropped from 7 to 4 and the top tariff rate was reduced from 30 to 20 percent, except for automobiles, poultry, cigarettes, alcohol, and white sugar.79 By February 2003, it was estimated that some one hundred laws and a thousand ministerial regulations had been updated with WTO accession in mind.80 Working Party. The GATT Working Party on Russia‘s Accession was formed in 1993. Its WTO successor body currently consists of 58 WTO members, with the EU being considered 16 Russian Economic Survey, March 2009 as one country. The Working Party has met formally 30 times (in addition to numerous informal sessions) with the last meeting in March 2006. Further formal meetings of the Working Party have been delayed by Georgia and by Russia‘s failure to deliver information promised to other member states.81 The US had revoked Russia‘s non-market economy status effective April 1, 2002, and the EU had initiated moves to recognize Russia as a market economy that eventually took effect on November 8, 2002. (Cynics consider that what the EU granted with one hand was withdrawn by the other with the enactment of new anti-dumping and anti-subsidy provisions.) Import duties for some 3,500 items had been reduced and a new Customs Code, aimed at reducing red tape and arbitrary actions by customs officials, came into force on January 1, 2004. Maxim Medvedkov asserted that 20 out of 53 relevant laws, including legislation on dumping and import licensing and certification, had been passed by the Duma.82 In May 2003, the Ministry of Economic Development and Trade (MEDT) claimed that 95 percent of Russian legislation had been brought into line with WTO regulations.83 Accession Date. After the announcement on November 10, 2006, that the US and Russia had agreed in principle to Russia‘s accession, it was generally thought that, once Georgia had agreed, and provided that the multilateral negotiations proceeded smoothly, Russia‘s accession could be possible by 2010 at the earliest. Obligations. Former President Putin and other Russian officials have complained that requirements for Russia‘s accession have been raised higher than for previous applicants. This is certainly true since the completion of the Uruguay Round, but every accession is different and the unique conditions on each occasion are agreed between the interlocutors and the candidate country. Another problem is that Moscow‘s writ does not necessarily hold sway for some of its distant regions, which continue to apply their own regulations, maintain subsidies, and levy taxes that differ from the federal variety. In May 2008, the then U.S. Ambassador to Russia said that the Jackson-Vanik amendment would be canceled for Russia only after it joins the WTO.84 Dual Pricing. A major issue of contention between Russia and its EU interlocutors in the accession process had been the large differential between domestic tariffs for natural gas and the export prices. For 2008, the Federal Tariff Service approved a price for industrial users of 1,690 rubles ($69) per kcm, and for households of 1,290 rubles ($53) per kcm. During the last quarter of 2007, Gazprom charged $300 per kcm for non-FSU markets.85 In 2008, Western European customers were expected to pay $402 per kcm.86 Gazprom has reported that its losses from supplying gas to the domestic market in 2006 were 11 billion rubles.87 For 2007-2010, prices of $50.6, $63, $80.8, and $102.2 per kcm have been agreed for industrial users,88 and a price of $125 per kcm has been projected for January 1, 2011.89 This is expected to raise domestic prices to the export price excluding duties and transportation costs. (In May 2008, it was announced that domestic gas prices might not be liberalized on the basis of net-back parity with European levels until 2014-201590) In December 2007, the Federal Tariff Service approved a 25-percent increase in wholesale natural gas prices for 2008, implying a rate of $70 per km.91 The burden of the EU complaint was that these low domestic prices represent a huge subsidy for Russian enterprises—former European Trade Commissioner Pascal Lamy put their value at $5 billion a year,92 while other estimates went as high as $37.7 billion93even if energy technology is low and thus consumption per unit of output is relatively high, i.e., an 17 Russian Economic Survey, March 2009 estimated 3.1 times the European average.94 Gas constitutes about 66-80 percent of the production costs of ammonia. This led the US Department of Commerce to propose protective import duties of 138 percent and 233 percent on the import of carbamide-ammoniac mix from Russia.95 The Russian side has offered a wide range of justifications for its dual pricing policy: that the low domestic tariffs for gas reflect a ―natural competitive advantage;‖96 that dual pricing for energy exists in all countries and that Russia uses three times more energy per capita than the OECD;97 that there is no world price for natural gas;98 that ―making the internal and external prices closer is not in the competence of the WTO;‖99 that the domestic tariffs are uniform and not geared towards any particular industry;100 that up to 80 percent of the delivery price to EU consumers reflects the high costs of transportation over thousands of kilometers-a rule of thumb has been suggested that it costs $1 for each 100 kilometers of pipeline transportation101; and that raising the price of gas to industrial users would inevitably lead to higher prices for households. Tariffs. The average weighted customs tariff on a trade-weighted basis in 2005 was 14 percent102(compared with 4-5 percent for the US and the EU). The tariff for agricultural products was 18.6 percent and for industrial products it was 10 percent.103 In May, 2007, Gref forecast that the average weighted customs tariff rate will be 11 percent in 2008, 10.3 percent in 2009, and 9.9 percent in 2010.104 The November 10, 2006 agreement with the US specified that Russia would be cutting its tariffs on abroad range of manufactured goods to an average of 8 percent.105 Another source reported that key US industrial exports, including chemicals, aircraft, high technology, medical, construction, and agricultural equipment would enjoy tariffs averaging 6.5 percent after a transition period.106 Tariffs on wide-bodied civilian aircraft are to be reduced from 20 percent to 7.5 percent after a four-year transition period.107 In February 2008, there was talk of removing the 20-percent duty on aircraft seating 119-150 passengers with immediate effect.108(For nine months of 2008, custom duties for large aircraft seating more than 300 passengers will be lifted. This is seen as a favor to Transaero). On June 11, 2008, the import tax on aircraft seating less than 20 passengers was lifted.109 Import duties on automobiles will be cut to 15 percent after a seven-year transition period.110 Banking. In November 2002, the Russian Central Bank lifted the previous ceiling of 12 percent of the consolidated charter capital of Russian banks permitted for foreign ownership.111 By January 1, 2008, there were 62 banks with 100 percent foreign capital and 202 with foreign capital.112 Non-residents‘ share of the aggregate capital of the Russian banking sector had grown to 25 percent as of January 1, 2008.113 On November 10, 2006, the agreement in principle by the US and Russia apparently allowed 100 percent foreign ownership of banks subject to a 50-percent cap in the Russian sector excluding existing foreign investment after a transition period of nine years, but a ban on branches (i.e., not under Russian regulatory laws) of foreign banks remained. Russia agreed to review its position on the branching issue when it joins the OECD. Insurance. Until November 2003, the maximum share of foreign-owned companies in the combined charter capital of Russian insurance companies was limited to 15 percent,114 although this was raised to 25 percent by a bill passed on November 20, 2003. Its actual share in December, 2007, was said to be nearly 10 percent.115 On December 15, 2003, President Putin signed amendments to the Insurance Law passed in November to allow majority-owned Russian subsidiaries of insurers from the European Union to sell life insurance in Russia.116 18 Russian Economic Survey, March 2009 US-based companies could participate in the life and insurance markets only through EU subsidiaries. Total premiums in Russia in 2007 amounted to an estimated $30 billion.117 At present, Russia prohibits foreign insurance companies from underwriting and reinsuring mandatory forms of insurance, including motor vehicle, health, and insurance taken by government institutions (with the exception of AIG, Allianz, and Zurich, which began offering life insurance in Russia before restrictions on foreign companies were introduced in 1993118). The November 10, 2006, agreement in principle arrived at by the US and Russia apparently allows for branches of foreign insurance companies (apart from life insurance) in the Russian market after a 9-year transition period and subject to a 50-percent cap. Agriculture. The Russian position on domestic farm support has been unusual in that they have requested basing the total Aggregate Measurement of Support (AMS) upon a base period of 1993-1995, when agricultural subsidies were high, rather than the three-year prior to accession when trade-distorting subsidies have been very low, e.g., only $3.6-3.7 billion by 2006.119 This has been opposed, particularly by the Cairns Group countries. As late as April 2008, the Russian side was calling for a total AMS of $9.2 billion.120 For comparison, producer support given to EU farmers in 2006 amounted to $130 billion, while farm support in the US totaled $49.5 billion.121 At the Russia-EU summit of May 2004, the EU agreed to support Russia‘s position on agricultural subsidies. The November 10, 2006, agreement apparently confirmed that meat import quotas, providing for US exports of 1.2 million tons of poultry meat, 450,000 tons of beef, and 502,000 tons of pork per annum, were to be retained through 2009, with a framework for market access post-2009. The Russian side has been pressing for agricultural subsidies to be retained until 2013.122 Intellectual Property Rights (IPR). Little progress has been made in the area of IPR. As in many instances throughout the economy, it is a matter not so much of laws on the books but of implementation and enforcement. According to the Special 301 Report issued on April 29, 2005, by the USTR, citing the US copyright industry, piracy in Russia accounts for 66 percent of the recording industry, 80 percent of films, 87 percent of business software, and 71 percent of entertainment software.123 The Special 301 Report issued at the end of April 2006, stated that ―the United States continues to have serious concerns about the continued increase in optical disc pirate production in Russian plants and the growth of Internet piracy on Russian websites such as www.AllOfMP3.com.‖124 (In November 2006, Russia reportedly agreed to close this website,125but it reportedly did not go offline until late June 2007.126 It was replaced by a similar website, and then reappeared on August 28, 2007127). The Special 301 Report issued on April 30, 2007, said that Russia ―remains a focus of US trade policy in the area of intellectual property,‖ and Russia remained on the USTR‘s ―priority watch list.‖128 The Special Report for 2008 noted that large-scale production and distribution of IP-infringing optical media and internet piracy remain significant problems that require more enforcement action.129 In November 2006, it was reported that, after China, Russia was the world‘s top CD and DVD pirate, with an annual production capacity of 390 million discs, with legal sales of only 39 million.130 Losses for US producers owing to piracy on the Russian market amounted to an estimated $2.18 billion in 2006.131 Losses of Russian copyright holders from counterfeiting were reported in April 2006 to be worth $230 million a year.132 In April 2006, Putin called for the retail prices of legitimate products to be scaled down to counteract counterfeiting.133 This has happened, with the average retail price of a DVD being lowered to 150 rubles. But this is still some 50 rubles more than the average price of a pirate DVD.134 19 Russian Economic Survey, March 2009 In 2002, then US Ambassador to the Russian Federation Alexander Vershbow called on Press Minister Mikhail Lesin to crack down on CD piracy, listing some military-industrial plants as leading offenders. About 20 new plants producing pirate goods had opened during the preceding months, with some in the military-industrial sector. One of these was in the Russosobit group, whose board chairman was Oleg Gordiiko: he also chaired the Russian Chamber of Commerce and Industry‘s Committee on Intellectual Property.135 In 2006, it was reported that 42 million legitimately produced movie DVDs were produced, while the domestic market for pirated DVDs rose to 168 million DVDs.136 In January 2007, it was announced that authorities were prosecuting two IPR cases involving Microsoft products.137 In March 2007, a Moscow court ruled in favor of EMI against , an mp3 music service.138 In a crackdown on piracy in late 2005, nearly 6 million pirated products were seized.139 At the 24th Working Party session, Western interlocutors expressed concern that existing legislation allowed equipment used for producing pirated discs to be resold, and not destroyed, after it had been confiscated by the police.140 The new Part 4 of the Civil Code, which was approved in December 2006, was regarded by Western observers as a rollback of current provisions protecting IPR. In January 2006, Gref put the value of pirated products in Russia as $4-6 billion a year.141 In March 2006, the top US official dealing with international IPR enforcement stated that piracy of CDs and DVDs in Russia was still growing.142 In October 2006, it was estimated that a total of 45 optical disk pirate plants in Russia were in operation. In February 2007, the International Intellectual Property Alliance announced that Russia and China were again that year of the greatest concern to the copyright industries.143 The Alliance later estimated that trade losses due to copyright piracy cost Russia $1,430 million in 2007.144 On April 10, 2007, then President Putin signed into law a bill which stiffly increased penalties for infringement of the law on IPR.145 In May 2007, a new law was passed that banned the sale of DVDs, videocassettes, and music CDs from street markets and kiosks.146 In March 2008, police in the Moscow region seized more than 3.5 million pirated CDs.147The Interior Ministry claimed that copyright piracy in 2007 had dropped by 15 percent on 2006. Over 4,000 people were arrested in 2007 and more than 800 people were arrested in the first quarter of 2008 for breaching copyright laws.148 The agreement reached on November 10, 2006, between the US and Russia included a ―binding blueprint‖ for the protection and enforcement of IP rights embracing specific commitments by dates certain to enact laws to protect pharmaceutical data, fight copyright and internet piracy, ensure the closure of illegal plants, enact criminal penalties for IP crimes, and ensure that the legislative regime, including Part IV of the Civil Code, was fully TRIPS compliant.149 By the deadline of June 1, 2007, it appeared that Russia had failed to comply with several of its obligations to protect IP rights.150 Impact of Accession. In the leadup to accession, substantial improvements have been made in the business climate. These include better corporate governance; enhanced transparency; a new customs code; and the coordination of federal and regional legislation. A quantitative assessment of WTO accession‘s impact was offered by the World Bank in early 2005 which reckoned that accession would boost the GDP by over 3 percent (or $19 billion) within one or two years and by as much as 11 percent (or $64 billion a year) in the long term.151 In April 2006, Medvedkov estimated that Russia stood to gain $8 billion to $10 billion a year from WTO membership.152 In December 2006, German Gref estimated that accession would boost Russia‘s economic growth by up to 2 percent per year and an annual increase in the inflow of investment by 10 percentage points.153 That same month, ING calculated that WTO accession in 2007 might add 1.5 pp and 3.5 pp to GDP and investment growth 20 Russian Economic Survey, March 2009 respectively in 2009-2011.154 Russia‘s collection of customs duties may drop by between 40 billion and 150 billion rubles after WTO accession.155 In October 2007, the MEDT announced that 22 Russian regions would be adversely affected by WTO accession.156 Current Status. On November 10, 2006, the US and Russia announced that they had reached a bilateral agreement in principle on the terms of Russia‘s accession to the WTO. Part IV of its Civil Code came into effect on January 1, 2008, and foreign observers wanted to see how effective it would be in implementing IPR. An informal session of the Working Party met in mid-February 2008 to examine Russia‘s compliance with the TRIPS agreement and the opening up of its services market to foreign companies.157 Other issues under negotiation were the size of the agricultural subsidy, the import of alcohol and alcohol-containing products, timber export duties, the fees for overflights of Siberia,158 Ukrainian objections to Russia‘s pretensions on Crimea and the price of future gas supplies, Russian SPS controls on imported foodstuffs, technical barriers to trade, state-trading enterprises, and encryption. The weakness of the Russian legal system was also seen as a major obstacle, requiring a long time to correct, while the Duma has yet to pass a large amount of enabling legislation and technical regulations to back up the laws already passed. The Duma and the Federation Council will have to approve WTO membership, which could take some time. On July 14, 2006, Georgia announced that it was withdrawing its May 28, 2004, signature to the protocol with Russia ascribed, inter alia, to the legalization of checkpoints in Abkhazia and in Tskhinvali regions. By June 2008, it appeared that Georgia was still insisting that Moscow revoked its decision to step up ties with the two breakaway Georgian provinces.159 On April 20, a bilateral agreement was signed with the UAE. Saudi Arabia signed a protocol on the conclusion of bilateral talks with Russia on June 3. In May 2008, the head of the WTO committee steering talks with Russia, Stean Johannesson, said: ―There is enormous work ahead of us.‖ On August 25, Prime Minister Vladimir Putin and First Deputy Prime Minister Igor Shuvalov warned that Russia might suspend a number of agreements reached during the accession process. They did not specify which agreements were meant, although it is thought that the agreement on meat import quotas was at least one of the agreements.160 The war in Georgia in August 2008 appeared to have delayed Russia‘s accession further. The earliest date for Russia‘s accession appears to be 2010. On November 13, 2006, a WTO spokeswoman noted that the process of obtaining a multilateral agreement, after all bilateral agreements had been resolved, had taken 20 months for China.161 Exchange Rate On March 23, the rate was 33.20 rubles/dollar. The ruble‘s real effective exchange rate against the dollar grew by 12 percent in 2001, 5.8 percent in 2002, 13.6 percent in 2003, 6.1 percent in 2004, 3.9 percent in 2005, by 9.2 percent in 2006, by 5.7 percent in 2007, and by 9.3 percent in the first seven months of 2008. The competitive advantage gained from the August 1998 devaluation had disappeared by January 2006. Starting in January 1999, exporters had been obliged to convert 75 percent of their export revenues on the market, but on July 20, 2001, the repatriation requirement was reduced to 50 percent within one week of receipt. A further reduction to 25 percent took effect on July 9, 2003,162 and to 10 percent effective November 26.163 On July 1, 2006, Russia liberalized its capital account. The average annual exchange 21 Russian Economic Survey, March 2009 rates were 28.135 rubles/dollar in 2000, 29.18 rubles/dollar in 2001, 31.40 rubles/dollar in 2002, 30.70 rubles/dollar in 2003, 28.81 rubles/dollar in 2004, 28.30 rubles/dollar in 2005, 27.20 rubles/dollar in 2006, 25.60 rubles/dollar in 2007, and 24.9 rubles/dollar in 2008. External Debts and Credits On July 1, 2008, Russia‘s sovereign external debt amounted to $38.9 billion,164 i.e., about 2.3 percent of GDP. Some one-third of Russia‘s foreign debt is denominated in euros: Gref estimated that a one-cent rise in the euro‘s exchange rate adds about $100 million to Russia‘s foreign debt.165 The stock of foreign debt at October 1 amounted to $540 billion.166 The debt service anticipated for 2005 was some $17.7 billion. In fact, in May of that year, Russia prepaid some $15 billion to the Paris Club of Creditor Nations and around $3 billion to the IMF. On August 18-21, 2005, Russia paid off most of its $23.7 billion debt to the Paris Club, with $3.1 billion outstanding on January 1, 2007. As of April 2005, Russia‘s indebtedness was offset—on paper at least—by the estimated $95 billion owed (half of it for military hardware) to the former Soviet Union, and hence to Russia, by former client states such as Cuba, Mongolia, Vietnam, Iraq, Afghanistan, Angola, North Korea, Mozambique, and Ethiopia, and by other states like India, Algeria, Libya, Syria, Yemen, and 43 other nations.167 This figure and earlier estimates of up to $149 billion appear to derive from an original aggregate of 96.4 billion transfer rubles converted at $1/0.63 rubles, and thus are subject to dispute. Most of these debtor nations are, in any case, either insolvent or unwilling to repay. Indeed, the head of Vnesheconombank, the government‘s debt agent, reported that Russia could realistically expect only $20–25 billion of this sum to be forthcoming.168 Now that Russia has joined the Paris Club as a creditor nation, those countries still owing money to Russia should not, in principle, be able to borrow new money from other members of the club. This excludes some of Russia‘s biggest debtors, like Cuba ($20 billion), Libya ($3–4 billion), and Vietnam ($1.5 billion). In his September 25, 2003, address to the UN General Assembly, Putin claimed that Russia had written off some $27.2 billion of debt during the preceding three years. In February 2006, Finance Minister Kudrin announced that Russia would write off $688 million in debt of 16 of the world‘s poorest nations.169 In August 2007, it was announced that Russia had written off more than $10 billion of Afghanistan‘s debt to Russia, leaving about $730 million to be repaid over 23 years.170 It is to be hoped that Russia will write off more Soviet-era debts of third-world countries. These surely qualify as ―odious debts,‖171 since many or most of them were incurred for deliveries of Soviet military hardware to regimes that have long since disappeared. These debts also go some way to explain why Russia retained close ties with such less than salubrious partners as Iraq, Syria, Libya, and North Korea. Assets abroad of the former USSR, now accruing to Russia, are valued at around $200 billion.172 The Banking Sector. The Russian banking sector is highly underdeveloped and financial intermediation is low, representing a major impediment to economic growth. Many of the 1,125 lending institutions registered on July 1, 2008 were ―pocket banks,‖ whose main function appeared to be money- 22 Russian Economic Survey, March 2009 laundering for their parent enterprise or corporation. In December 2005, there were 673 banks in Russia with equity below 5 million euros.173 Loans to the private sector and to nonfinancial public enterprises at the beginning of 2004 amounted to some 18 percent of GDP, compared with 80–120 percent in West European countries. Total assets of commercial banks on January 1, 2008, were 61.4 percent of GDP.174 Commercial banks have been reluctant to lend on a longterm basis or to small- and medium-sized enterprises. They financed only 10.5 percent of corporate investment in the first half of 2008. At its third reading by the Duma on November 28, 2003, the law on banking insurance provided for coverage up to 100,000 rubles ($3,400). Deposit insurance for approved banks has taken effect from January 1, 2007. In March 2007, the President signed off on a bill providing for full coverage for savings up to 100,000 rubles and 90 percent coverage for amounts in excess of that sum up to 400,000 rubles.175 International Accounting Standards were also to be introduced for all banks in 2007. By September 1, 2005, 927 banks had passed inspections by the Central Bank and had been admitted to the deposit insurance system, which covers 99 percent of all deposits in the banking system.176 The RCB has moved to make banks disclose their major shareholders, although an S & P study published in October 2005 stated that 30 of the country‘s largest and most transparent banks did not disclose the ownership of 84 percent of their private capital.177 By 2007 banks were obliged to have capital adequacy ratios (capital:assets) of over 10 percent. International Monetary Fund (IMF) As of January 2005, it was reported that Russia‘s debt to the IMF was down to $3.3 billion out of total of $22 billion lent since 1992. In 2003, $1.5 billion was repaid, and a further $1.7 billion was repaid in 2004. Finance Minister Kudrin announced that Russia had repaid all of its outstanding debt to the IMF on January 31, 2005.178 World Bank By June 2006, the World Bank had approved $13.5 billion for 62 projects in Russia, making up more than half of the Bank‘s total portfolio. Russia had by mid-2005 utilized some $8 billion.179 After negotiations lasting for four years, in April 2003 the Bank announced a loan of $150 million to Russia to combat the spread of HIV+ and TB.180 Loans amounting to nearly $600 million were approved for the fiscal year 2001: of this total, some $80 million was to be allocated for a Northern Out-Migration Pilot Project aimed at moving some 600,000 from the extreme north.181 This could be a precursor for an enormous relocation program, since more than 11 million now live in the North and there are 11 cities of more than 200,000 located above 60 degrees latitude where human habitation is economically hardly viable.182 On June 6, 2002, the Bank announced a loan of $400 million to improve efficiency in implementing Russia‘s federal budget. Other loans in the pipeline included $161 million for regenerating St. Petersburg, $30 million for health reform, $140 million for customs reform, $100 million for a second tax administration reform,183 and up to $300 million for supporting the creation of small- and medium-sized enterprises and the banking sector in Russia‘s regions.184 On June 13, 2006, the World Bank approved a $50-million loan to Russia to improve land and real estate registration. On September 19, 2006, Aleksei Kudrin reported that Russia and the World Bank had reduced cooperation temporarily because of Russia‘s strong balance of payments.185 On December 14, 2006, the World Bank announced a new three-year 23 Russian Economic Survey, March 2009 Country Partnership Strategy for Russia, marking a shift towards new ways of cooperation focused on knowledge sharing, increased technical advice and financing to the country‘s regions. At November 1, 2007, Russia‘s World Bank borrowings amounted to some $4.5 billion. There were indications that Russia would repay some $3 billion to the World Bank in June 2008.186 The Duma The official results of the December 2, 2007, election suggest that United Russia will have 314 seats, the Communist Party will get 57 sets, the LDPR 40 seats, and the Just Russia Party will obtain 38 seats.187 This would mean that the three pro-Kremlin parties would have a combined bloc of 392 seats or 87 percent of the votes. Limits to Economic Growth The Russian GDP grew by 6.4 percent, 10 percent, 5.1 percent, 4.7 percent, 7.3 percent, 7.2 percent, 6.4 percent, 7.4 percent, 8.1 percent, and 5.6 percent in 1999-2008. In January 2009, President Dmitry Medvedev scored an 75 percent approval rating, while Prime Minister Vladimir Putin registered an 83-percent approval rating.188 The past nine years have witnessed relative political and economic stability after the turmoil of the Yeltsin era. Unlike Yeltsin, the president had a compliant and constructive Duma in 1999-2007 that approved most of his proposed legislation. The new Duma, elected in December 2007, was expected to virtually rubber-stamp all of the president‘s proposals. During meetings with most of the leading oligarchs in 2000 and 2001, Putin appeared to reach a modus operandi with most of them, offering to halt legal proceedings and inquiries against them and promising no de-privatization on the understanding that they would pay their taxes, steal less, improve their behavior, and stay out of government. (Except for the exiled Vladimir Gusinsky and Boris Berezovsky, however, the remaining oligarchs have continued to wield great power in the economic and political spheres, with an estimated 70 percent of the GDP controlled by 20 conglomerates189). Mikhail Khodorkovsky‘s breach of that accord appears to have been a major factor in the ―Yukos Affair.‖ On the international stage, Putin initially earned plaudits from just about all of the world‘s leaders. His mishandling of the Kursk disaster temporarily dented his approval ratings, but these recovered quickly. Putin‘s and Medvedev‘s overwhelming priority has been to restore Russia‘s position in the world as a major power. For this to happen, the Russian economy must grow at a sustained high rate which, in turn, requires a substantial increase in domestic and foreign direct investment. Putin repeatedly acknowledged that the investment environment hitherto has been poor, owing largely to the loss of confidence after the devaluation and defaults of August 1998 and the lack of corporate governance and viable PSA provisions, but he vowed to improve that climate substantially. The upturn of 1999-2008 has been attributable mainly to the higher than expected world prices for oil, gas, and other major Russian export commodities; the August 1998 devaluation and subsequent import substitution effect; the first fruits of Putin‘s restructuring, notably an appreciable lowering of non-cash settlements; higher capital utilization ratios; the statistical base effect; lower interest rates; higher tax collection rates; a boost in private consumption; and a recovery in domestic investment after a drop of around 80 percent in the early 1990s. The federal budget has registered healthy surpluses in 2000-2008. Russia was able to service its foreign debt from its own resources in 2005 and has made early repayments of 24 Russian Economic Survey, March 2009 some $15 billion in 2005 and $23.7 billion in 2006 to the Paris Club of sovereign lenders. During 2001-3, the Duma passed an unprecedented amount of legislation underpinning structural economic reform. By 2007, a start had been made to encourage the formation and operation of small- and medium-sized enterprises; the State Pension Fund was en route to channel modest funds into investment; the banking sector was, finally, undergoing restructuring; the electricity sector was undergoing reform; and new land, labor, and customs codes had been adopted. Yet against all of the above positive factors must be set the shrunken size of the Russian economy and the constraints on sustained and sizeable growth. The Russian GDP in 2008 amounted to an estimated $1,670 billion at the official exchange rate, about three times the pre-crisis capitalization of Exxon Mobil or General Electric. At purchasing power parity, Russia‘s GDP in 2007 was estimated at $2,076 billion, or roughly one-seventh of that of the United States. Now it is evident to any visitor to Moscow or any other Russian city that a great deal of economic activity goes unrecorded (and untaxed). The official Russian statistical authority, Roskomstat, is aware of this gray, black, or shadow economy, and factors in an additional 25– 30 percent of the value of the formal economy to cover its activity. Other estimates go as high as 50 percent. The Russian manufacturing industry now constitutes a gigantic rust belt. The average age of plant and equipment in 2004 was estimated at 21.2 years (i.e., over three times higher than the OECD average). Little has been done to renew this core manufacturing sector. The only major Russian manufactured products that are, generally speaking, competitive on the world market are military hardware, nuclear power plants, and space engineering. The domestic demand for these products is severely restricted by budgetary constraints, and the overseas market is limited. After decades of neglect, the infrastructure—roads, railways, pipelines, power lines, water supply, and sewers—must also be renewed. The entire urban infrastructure is said to be "at the edge of catastrophe," with the number of breakdowns per 100 kilometers of pipes and wiring having risen to 70, compared with under 10 in European countries.190 Another study put the number of breakdowns per kilometer of central heating pipelines at thirty times higher than in the West, resulting in the loss of 60 percent of heating.191 Over 40 percent of Russian fuel pipelines are more than 30 years old,192 and lose an estimated 15-20 million tons of oil into the ground and rivers each year.193 Of all major industrialized countries, Russia has perhaps the most severe climate, with 59 percent of its territory covered by permafrost.194 About 45 million people live and work east of the Urals where average January temperatures range between –15 and –40 degrees centigrade.195 Heating, construction, and transportation costs are very high. The cost of cold is difficult to quantify, but it is considerable. To update or replace the aged plant and equipment, and to renew the infrastructure, will require trillions of dollars. In a document prepared for the Earth Summit in Johannesburg of August 2002, the Ministry of Economic Development and Trade estimated that $2 trillion would be required in the following 20 years.196 The IEA reckoned that Russia will need to invest $550 to $700 billion in its energy infrastructure by 2020.197 It has been suggested that successors to UES alone will need $128 billion by 2010 simply to renovate their power stations to avoid power shortages.198 The EBRD has forecast that $225 billion will be required over the next ten years to develop Russia's share of Caspian oil.199 Investment in the transportation infrastructure for Moscow and the surrounding regions will require an estimated 5 trillion rubles ($212 billion) before 2015.200 Other claimants are Kaliningrad, requiring perhaps $36 25 Russian Economic Survey, March 2009 billion over the next decade,201 and the railways needing $28 billion over the next five years.202 (For comparison‘s sake, the American Society of Engineers has called for $1.3 trillion to be invested in America‘s infrastructure during the next five years.203) Russia registered a current account surplus of $98.9 billion in 2008. Much of the core manufacturing capacity is value-subtracting, and only 13-15 percent of the Russian GDP emanates from the 1.1 million small- and medium-sized enterprises,204 which have been the engines of growth in many transition economies. These SMEs, employing less than 100 people, account for some 20 percent of the workforce when self-employed and certain types of agricultural workers are included.205 Fixed capital investment in 2007 was an estimated $251 billion, mostly retained earnings, whereas up to an estimated $350 billion would be needed to maintain high output growth. Over one-half of that 2007 total went to the energy and transport sectors. Much of the investment capital required must come from abroad in the form of FDI. Until 2004, Russia had been attracting less than two percent of the world‘s FDI. In 2000, FDI in Russia amounted to $4.4 billion, out of a global total of $1,270 billion. (China drew some $46 billion). According to Rosstat, the FDI total rose to $7.9 billion in 2003, to $9.4 billion in 2004, to $13.1 billion in 2005, $13.8 billion in 2006, $47.1 billion in 2007, and $58.7 billion in 2008, while foreign loans to Russian enterprises grew from $3 billion in 2001 to $67 billion in 2005. The reasons for the low level of FDI are well known. They include capricious and exorbitant taxes, political instability, virtual absence of corporate governance, the lack of commercial infrastructure, corrupt customs, poor protection of property rights, pervasive corruption, and the depredations of organized crime. This hostile environment will take years to correct. FDI in Russian manufacturing capacity will undoubtedly grow in the near future, but will remain inadequate for many years. A state investment agency has been set up with the aim of attracting FDI.206 As in other economies, industry no longer provides the bulk of the nation‘s output (currently 20.4 percent of GDP). But Russia is also lagging in the provision of services. What is known about future demographic trends and the current and projected condition of the nation‘s health suggest further downward pressure on productivity and output. The salient findings of a United States Government study, Russia’s Physical and Social Infrastructure,207 make for sobering reading. The Russian population is expected to decline from 142 million in 2008 to about 135 million by 2015 and to perhaps 110 million by 2050. (By that date the U.S. population is projected to grow to about 400 million). In his state of the nation speech of July 2000, President Putin called the decline of the population by some 750,000 a year to be ―the gravest threat to Russia.‖ The total fertility rate in Russia, (i.e., the average number of children that a woman has over her lifetime), in 2007 was 1.3, whereas the replacement level is 2.33. The population of working age rose until 2006, then is expected to decline through at least 2026.208 A drop of 300,000 was expected in 2007.209 The workforce is expected to decline from 72.4 million in 2005 to 65.4 million by 2020.210 Thereafter, natural depletion of the workforce is expected to reach 1.2-1.4 million a year in 2010-2018.211 More than 12.5 percent of the population is more than 65 years of age, while a share of more than 7 percent is defined by the UN as ―aged.‖ Immigration has probably peaked at around 400,000 a year. The dependency ratio is currently 72 pensioners for every 100 workers: this is expected to rise to 85 pensioners per 100 workers by 2024 unless the retirement age is raised.212 The median age by 2015 will grow to over 40 years, which implies lower productivity. 26 Russian Economic Survey, March 2009 An authoritative picture of the nation‘s health, entitled Russia’s Population Meltdown,213 portrayed a disaster that has already arrived. Alcohol abuse is rampant. High rates of abortion (1.6 million abortions performed in 2006, compared with 1.5 million live births) have resulted in rising rates of infertility: 30 percent of women of child-bearing age are infertile. Only one in three births results in a healthy child. The officially registered cases of HIV on November 1, 2007, were reported to be 403,100,214 but estimates go as high as 2 million.215 Russia and Ukraine are said to have the highest rates of growth of HIV+ cases in the world. With per capita HIV/AIDS treatment costing between $5,500 and $15,000 a year, relatively few HIV cases could be treated on the 122 million rubles ($4 million) allocated for 2003.216 The federal budgetary allocation for HIV treatment was raised to $107 million in 2006 and $267 million for 2007.217 According to a recent World Bank study, the uninhibited spread of HIV+ could diminish the economy‘s long-term growth rate by half a percentage point by 2010 and a full percentage point by 2020.218 The WHO put Russia at 127 in terms of its population‘s health and 130 for its health care system.219 In 2005, nearly 32,000 died from TB (i.e., about 37 times the proportional U.S. rate). There are currently 82.6 new cases per 100,000 of population220 (i.e., about 20 times the U.S. rate). As many as 30,000 may have multi-drug-resistant TB. Cardiovascular diseases are more than twice the U.S. rate, accounting for some 60 percent of deaths; there is a high incidence of poisoning from heavy metals and other toxic materials; frequent industrial accidents (about 8,000 deaths and 360,000 injuries in 2002221); high rates of hepatitis B and C, measles, typhoid, and diphtheria; there are some 400,000 smoking-related deaths each year;222 over 18,000 people die in fires each year (four times higher than in the US); about 120,000 Russians died of alcohol abuse and drugs in 2007223; murder (34,000 in 2001224) and suicide rates at 32.2 per 100,000 inhabitants in 2005225 are well above the OECD averages. The death rate from ―intentional injuries‖ is reported to be the second highest in the world after Colombia.226 And, according to President Medvedev, 40 million Russian citizens live in substandard environmental conditions.227 Even leaving out the implications of the shocking demographic and health indicators, the scale of capital required for the massive re-equipping and replacement of Russia‘s manufacturing industry and infrastructure is not in sight. If the conventional weightings of the Cobb-Douglas function are applied to anticipated rates of growth of labor and capital in Russia, with no increase in joint factor productivity, then a decline in the GDP would result. A World Bank study has concluded that some 3 percentage points of the 7.2 percent growth in GDP recorded in the first half of 2003 were due to the direct and indirect effects of the oil price increase, and that growth rates of over 5 percent since the crisis of 1998 have been achieved only in conjunction with an increasing oil price.228 Another, more recent, study reckons that the direct and the indirect impact of higher world oil prices accounted for 4.4 percentage points of the 7.3 percent growth in GDP registered in 2003.229 With reasonable increases in joint factor productivity arising from restructuring, growth in the medium term is expected to be modest unless world oil prices continue to spiral upwards. What would such rates of growth imply? For Western businessmen and investors, the good news is that Russia‘s foreign trade turnover is expected to continue to grow, although the rate will depend greatly on world prices for oil and gas. Foreign direct investment and portfolio investment are also expected to increase substantially from their current low levels. And unless the OECD nations experience a prolonged economic recession, the gap between the size of the Russian economy and that of the developed nations could continue to grow, as would the difference in economic and defense potential between Russia and China. 27 Russian Economic Survey, March 2009 Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 World Bank, Russian Economic Report, No. 16, June 2008. Deutsche UFG, Russia Economics Monthly, March 2006, p. 10. BOFIT, Russian and Baltic Economies: The Week in Review, No. 24, 2000. Interfax, December 29, 2000. Financial Times, August 20, 2003: letter from Al Breach of Brunswick UBS. IMF press release of March 20, 2002, citing IMF Deputy Managing Director Anne Krueger. ITAR-TASS, November 29, 2006. Moscow Times, April 14, 2008. Moscow Times, June 22, 2007. ITAR-TASS, February 27, 2008, citing Dmitry Medvedev. Moscow Times, June 26, 2001. RBC, December 2, 2004, citing German Gref. Kommersant, December 21, 2007. Kommersant, May 15, 2008. Interfax, June 11, 2008. ITAR-TASS, February 27, 2008, citing Dmitry Medvedev. Moscow News, July 14, 2006. ITAR-TASS, April 25, 2008, citing Tatiana Golikova. Interfax, May 19, 2008, citing Rosstat. ITAR-TASS, May 3, 2007, citing Rosstat. ITAR-TASS, July 7, 2008. St. Petersburg Times, March 28, 2008. A person is deemed unemployed if he or she has no job in the preceding week and is available and looking for work. Financial Times, February 6, 1997. Rossiiskaya gazeta, February 25, 2000. American Chamber of Commerce in Russia, The Economic Situation and Investment Climate in Russia, 2008. Bloomberg, November 17, 2008. Moscow Times, September 30, 2002. REN-TV, July 21, 2003, citing the head of the Federal Service for Insolvency and Bankruptcy. Financial Times, February 24, 1995. Vremya MN, October 22, 1999. ITAR-TASS, June 16, 1998. Russian Economic Trends, February 2001. ITAR-TASS, March 16, 2001. American Chamber of Commerce in Russia, The Economic Situation and Investment Climate in Russia, 2008. BOFIT Weekly, March 23, 2007. RIA Novosti, June 2, 2008, citing Alexei Kudrin. Interfax, February 22, 2008, citing Rosstat. Vedomosti, January 25, 2007. BOFIT Weekly, November 16, 2007, citing UNCTAD. Interfax-FIA, October 27, 1998. BOFIT, Russia Review, July 16, 2004. RIA Novosti, October 31, 2007. Gazeta, June 30, 2008. Moscow Times, June 15, 2007. BOFIT Weekly. Russia, April 15, 2005. Moscow Times, September 18, 2006. Moscow Times, September 26, 2007. Moscow Times, October 5, 2006. Moscow Times, March 7, 2007. 28 Russian Economic Survey, March 2009 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 Harry G. Broadman and Francesca Recanatini, WP. 2640, ―Where Has All the Foreign Investment Gone?‖ July 17, 2001. Die Welt, July 6, 2001. Financial Times, August 3, 2000. BOFIT Weekly, March 28, 2008. Wall Street Journal, January 29, 2007. Financial Times Global 500. Forbes Magazine, October 1, 2001. UFG, Russia Morning Comment, January 18, 2006, citing Oleg Vyugin. Argumenty i fakty, August 16, 2006. Deutsche UFG, Russia Morning Comment, January 12, 2007. Deutsche UFG, Russia Morning Comment, January 14, 2008. Troika Dialog, Russian Economic Monthly, September 2008. Izvestia, December 15, 2006. Deutsche UFG, Global Markets Research, January 31, 2007. RIA Novosti, January 25, 2008. BOFIT Online, May 2007. UralSib, $100 Oil and Russia, November 26, 2007. ING, The 1998 Crisis in Retrospect, September 2003. Vremya novostei, October 24, 2005. Bloomberg, November 19, 2008, citing Sergei Ignatiev. Reuters, November 18, 1997; cf. Interfax, January 28, 1997; New York Times, August 20, 1996. Novoye vremya, June 1, 1999; Interfax, May 16, 2000, and January 15, 2001. Prime-TASS, November 19, 2002. Vremya novostei, November 11, 2004, citing Mikhail Dmitriyev. Rossiiskaya gazeta, May 4, 2005, citing Sergei Ivanov. Interfax-AVN, August 24, 2007. AVN, July 16, 2008. ITAR-TASS, February 8, 2008, citing the MEDT. See World Bank, Russian Trade Policy Reform for WTO Accession, January 1999, and Harry Broadman, Russia’s Prospects for WTO Accession, November 2001 (lecture). Buro Pravovoi Informatsii, February 17, 2003. Inside US Trade, May 25, 2007. AP, June 24, 2002. Gazeta.ru, May 21, 2003. Russia & CIS General Newswire, May 6, 2008. Troika Dialog, Russia Market Daily, February 20, 2008. Deutsch Bank, CompanyAlert: Gazprom, June 18, 2008. Deutsche UFG, Russia Morning Comment, March 2, 2007. ING, Russian Markets Weekly, December 5, 2006. Deutsche UFG, Russia Morning Comment, October 2, 2007. Troika Dialog, Market Daily, May 28, 2008, citing Andrei Klepach. Deutsche UFG, Russia Morning Comment, December 5, 2007. Politcom.ru, July 4, 2002. Korrespondent.net, December 7, 2003. OECD, Economic Survey of the Russian Federation, 2004. Federal Register, October 3, 2002. RIA-Novosti, June 10, 2002. The Russia Journal, November 1, 2002, citing Medvedkov. Prime-TASS, April 15, 2003, citing Yuri Yuzhanov. ITAR-TASS, July 9, 2002, citing Medvedkov. Politcom.ru, July 4, 2002. Vremya novostei, October 22, 2003, citing Valerii Yazev. 29 Russian Economic Survey, March 2009 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 David Tarr, Russian WTO Accession: What Has Been Accomplished, What Can Be Expected, World Bank, December 2007. RIA Novosti, May 3, 2007, citing German Gref. RIA Novosti, May 3, 2007, citing German Gref. USTR, Fact Sheet on US-Russian Bilateral Market Access Agreement, November 10, 2006. USRBC, Russia’s Bilateral WTO Accession Agreement with the US, November 10, 2006. Prime-Tass, November 21, 2006. Kommersant, February 1, 2008, citing Denis Manturov. ITAR-TASS, June 12, 2008, citing Elvira Nabiullina. RIA Novosti, November 22, 2007, citing Andrei Kushnirenko. Reuters, November 22, 2002. BOFIT Weekly, February 22, 2008. RBK Daily, August 7, 2007. Vedomosti, June 14, 2002. BOFIT Weekly, June 6, 2008. UFG, Russia Morning Comment, December 16, 2003. BOFIT Weekly, June 6, 2008. Moscow Times, October 29, 2002. ITAR-TASS, March 25, 2008, citing Maxim Medvedkov. Ukraine General Newswire, April 16, 2008. BOFIT Weekly, August 3, 2007. Kommersant, June 21, 2006. USTR, Special Report evaluating global IPR protection, issued April 29, 2005. USTR, Special Report evaluating global IPR protection, issued April 28, 2006. News.com, November 29, 2006. Moscow Times, July 2, 2007. Kommersant, August 28, 2007. USTR, Special 301 Report, April 30, 2007. USTR, Special 301 Report, April 25, 2008. BNA, International Trade Daily, November 27, 2006, citing Eric Schwartz of the IIPA. Reuters, May 17, 2007. ITAR-TASS, April 18, 2006, citing the Russian State Institute of Intellectual Property. ITAR-TASS, April 3, 2006. Moscow News, February 9, 2007. Moscow Times, August 2, 2002. Moscow News, February 9, 2007. Moscow Times, January 24, 2007. Moscow News, March 2, 2007. Washington Post, December 11, 2005. Moscow Times, July 19, 2004. Interfax, January 31, 2006. AP, March 1, 2006, citing Chris Israel. Kommersant, February 13, 2007. IIPA 2008 ―Special 301‖ Recommendations, Appendix A. Prime-TASS, April 10, 2007. Reuters, April 2, 2007. ITAR-TASS, March 18, 2008. RIA Novosti, April 17, 2008. USRBC, Russia’s Bilateral WTO Accession Agreement with the US, November 10, 2006. Inside US Trade, August 10, 2007. World Bank, Russian Economic Report, March 2005. Russia & CIS Business and Financial Newswire, April 24, 2006. Interfax, December 8, 2006. ING, Economic Monthly Overview, December 2006. Prime-TASS, February 19, 2007, citing Tatyana Golikova. 30 Russian Economic Survey, March 2009 156 157 RIA Novosti, October 31, 2007. Inside U.S. Trade, December 21, 2007. 158 RBC, April 19, 2007, citing Deputy Premier Sergei Naryshkin. 159 AP, May 26, 2008. 160 Deutsche Bank, Russia Morning Comment, August 26, 2008. 161 Reuters, November 13, 2006, citing Kate Rockwell. 162 Russian Central Bank Press Release, July 9, 2003. 163 BOFIT Weekly, Russia, December 3, 2004. 164 Interfax, April 1, 2008, citing the CBR. 165 RBC, July 2, 2002. 166 BOFIT Weekly, February 13, 2009. 167 Kommersant.com, April 18, 2005, citing Kudrin. 168 Interfax, March 3, 2000. 169 Moscow Times, February 9, 2006. 170 Moscow Times, August 7, 2007, citing Alexei Kudrin. 171 Odious debts are debts that are contracted contrary to the interests of the inhabitants (Harvard International Law Journal, Volume 42, No. 2, p. 408). 172 Sobesednik, No. 34, September 2007, citing the Auditing Chamber. 173 Deutsche UFG, Russia Morning Comment, March 20, 2006. 174 Deutsche UFG, Russia Morning Comment, January 23, 2008. 175 BOFIT Weekly, March 16, 2007. 176 ITAR-TASS, September 22, 2005. 177 Moscow Times, October 27, 2005. 178 UFG, Russia Morning Comment, February 2, 2005. 179 Moscow Times, October 21, 2005, citing Putin. 180 World Bank press release, April 4, 2003. 181 Interfax, June 7, 2001. 182 Christian Science Monitor, February 26, 2001. 183 Moscow Times, June 7, 2002. 184 RBC, April 11, 2003. 185 Polit.Ru, September 19, 2006. 186 Kommersant, April 14, 2008, citing Dmitry Pankin. 187 Deutsche UFG, Russia Morning Comment, December 10, 2007. 188 Reuters, January 23, 2009, citing the Levada Center. 189 Le Figaro, February 11, 2003, citing The Economist. 190 Argumenty i fakty, February 21, 2001. 191 St. Petersburg Times, June 17, 2003. 192 Moscow Times, November 3, 2006, citing Konstantin Pulikovsky 193 Kommersant, February 10, 2004. 194 Allen C. Lynch, ―Roots of Russia‘s Economic Dilemmas: Liberal Economics and Illiberal Geography,‖ Europe-Asia Studies, January 2002. 195 Clifford Gaddy and Fiona Hill, Brookings Policy Brief, No. 99, May 2002. 196 Vedomosti, No. 152, August 2002. 197 IEA, Russia Energy Survey 2002, Paris, 2002. 198 Economist, November 24, 2007. 199 Reuters, November 20, 2001. 200 Moscow Times, June 26, 2008, citing Igor Shuvalov. 201 Nezavisimaya gazeta, March 14, 2001. 202 ITAR-TASS, March 14, 2001. 203 Washington Times, March 9, 2001. 204 RBC, February 19, 2008, citing Dmitry Medvedev. 205 BOFIT Weekly, January 19, 2007. 206 ITAR-TASS, March 23, 2001. 207 National Intelligence Council and Department of State, Russia’s Physical and Social Infrastructure,: Implications for Future Development, CR 2000-06, Washington, DC, December 2000. 31 Russian Economic Survey, March 2009 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 AP, February 24, 2005, citing German Gref. RIA Novosti, April 7, 2006, citing Vladimir Mukomel. RBC, July 24, 2007, citing the MEDT. RIA Novosti, August 21, 2006, citing a Rostat projection RIA Novosti, April 6, 2004, citing Yevgeni Yasin. Murray Feshbach, ―Russia‘s Population Meltdown,‖ The Wilson Quarterly, Winter 2001. RIA-Novosti, November 21, 2007, citing Gennadi Onishchenko. Los Angeles Times, July 2, 2004. Interfax, May 21, 2003, citing Vadim Pokrovsky. AFP, November 29, 2005, citing Deputy Health Minister Vladimir Starodubov. The World Bank Group, The Economic Consequences of HIV in Russia, May 2002. RIA Novosti, April 4, 2008. ITAR-TASS, March 24, 2008, citing Rospotrebnadzor. Novaya gazeta, June 16, 2003. RIA Novosti, April 4, 2008. Interfax, November 12, 2007, citing the Federal Drug Control Service and Health Ministry. Moscow Times, October 9, 2002. Moscow Times, June 22, 2007, citing Rosstat. The Economist, October 5, 2002. kremlin.ru, June 3, 2008. World Bank, Russian Economic Report, August 2003. ING, Crude addiction? Economic dependence on oil prices remains high, May 5, 2004. 32