I.

MACRO ECONOMIC PRESPECTIVE

Economic reforms and growth History of economic reforms
The economic reform in Russia that started in 1991 aimed to bring about macroeconomic stability. The drive for industrialization was initiated and a consumer market started to develop slowly. However, the history of Russian economic reforms can be depicted through several periods after 1990.

A. Credit Expansion:
In the year 1991-92, the Russian government tried to usurp the credit expansion by building arrears between the different enterprises. The domestic credit was increased a lot by the end of 1992. The state enterprises faced a financial crisis, for the price control was not there, which lowered the demand of their products. The government also stopped financing the state enterprises. Therefore, these enterprises then had to take loans from other enterprises to run. In the middle of 1992, the outstanding amount of loan taken by those enterprises were 3.2 trillion rubles. Then the government helped them by giving 181 billion rubles but in the form of credit.
.

B. Monetary Policy Reform and Macroeconomic Stabilization:
In 1993, macroeconomic stability was the main aim of the economic policies. So some macroeconomic measures were taken such as, reduction of subsidy and increasing the revenue. Monetary policies were set in such a way to control inflation. The government started to control the credit and money emissions by issuing several government bonds and terminating the incompetent state enterprises. Wages for the state enterprises had also been decreased to control the budget deficit. Therefore the rate of unemployment increased.

Reform in the Mid Nineties:

The main focus of the economic policies didn't change in the mid nineties, that is, macroeconomic stability again got the same focus. But the Central bank did not help to accelerate the stabilization process, for they allowed credit at a subsidized rate to the enterprises

Economic Reform in Russia: was started to achieve macroeconomic stability
and to restructure the country's economy. So the effects of economic reform in Russia can be described by focusing on those areas.

Macroeconomic Stability:
In the early nineties the Russian economic structure was very poor and the output was decreasing. The main reasons for that were: A huge amount of productions that was not able to fulfill the demands of real market. Therefore, the rate of inflation increased. Usages of market instruments went low for the dominance of the communist regime.,The number of skilled labors decreased.

After the currency crisis in 1994, the Russian government applied some new method for macroeconomic stabilization. As a result, like the other post communist countries, the contribution to the gross domestic product by the Russia's service sectors increased. It can be depicted through a table given below.

Years 1989 1992 1995 1998

Industry's

Agriculture's

Service Sectors' contribution(%) to GDP 33 51.6 52.9 58.4

contribution(%) to GDP contribution(%) to GDP 50.2 41.3 39.2 36.2 16.8 7.1 7.9 5.4

From the above table it is very clear that the contribution by the industries and agricultural sectors get decreased over the years while the service sectors' contribution to GDP increased. Therefore it can be understood that Russia was inching towards a developed economy from the developing one and that is only because of the economic reform. The net capital outflow of the non financial private sectors was substantial due to the corruptions in reporting the payments of the imported and exported goods and transfer of illegal assets. But through economic reform the net capital outflow had decreased over the years. This is shown in the table below.

In this table the year wise amount of net capital outflow is given. 1994 1997 2000 2003

$12.4 billions $25.9 billions $22.8 billions $12.2 billions

Moreover, the macroeconomic stability helped Russia to go for further reform both in terms of economic and political.

which helped to build a good society. consumption and distribution of goods and services which was a hindrance for economic freedom.8 So from the above table it was clear that the employment issues had been improved. Through economic reform the rate of unemployment decreased as well. like social transfer. But in Russia.0 Unemployment Rate (%) 4. were increased by 7% of the Federal Budget. Year 1992 1994 1996 1998 2000 2002 7. The new private enterprises' share in employment was 40% in 2002. the private sector's total production was 70% of GDP in comparison with the pre-reform period which was only 5%. Other Effects: The economic reform in Russia summoned the structural and institutional reforms. social transfers and pensions regularly. After the crisis in 1998. Privatization was done rapidly. expenditures for social policies.8 9. It is depicted here in a tabular form. The small private businesses grew rapidly through the period of economic reform and their share increased by 13%.3 8.6 13. wages and incomes decreased continually because the government was not paying for wages. In 1999. the real disposable income also decreased a lot. electoral process. The need for civil society. Russia's social conditions were not good because of the decreasing real registered incomes and as well as the inequality in incomes of the citizens.3 9. the government continued to intervene into the production. independent media and economic . In addition to that. Not only that. After the economic reform. So the living standard of the Russian citizens improved. pension etc. but also the income policies were improved which lowered the inequality in incomes.Social Effects:Before economic reform.

Values are based upon GDP in national currency and the exchange rate projections provided by country economists for the group of other emerging market and developing countries. National Currency) for russia in year 2010 is 3.liberalization was still there.17 Billion. 6. the base year is country-specific.03 Billion. Exchanges rates for advanced economies are established in the WEO assumptions.610.474 (Index.688.79 . Please note: Data are expressed in the base year of each country's national accounts.669.13 . GDP Per Capita (Constant Prices.GDP (Current Prices. 2. dollars per person. for without these things economic freedom can't be achieved. 8. Base Year as per country's accounts = 100). US Dollars) for Russia in year 2010 is US$ 1.521.GDP Growth (Constant Prices. 7. National Currency) for russia in year 2010 is RUB 39.966 %. GDP is expressed in current U. Real GDP is expressed in billions of national currency units. GDP is expressed in billions of national currency units. National Currency) for russia in year 2010 is RUB 45. Annual percentages of constant price GDP are year-on-year changes. Data are derived by dividing constant price GDP by total population.91 Billion. GDP is expressed in current national currency per person. GDP Deflator for Russia in year 2010 is 113. corruption had been restricted to some extent Key Economic indicator 1. Data are derived by dividing current price GDP by total population. GDP (Current Prices. National Currency) for Russia in year 2010 is RUB 282. GDP Per Capita (Current Prices.476. . 5. 4.S. However. dollars and then dividing it by total population. US Dollars) for Russia in year 2010 is US$ 10. The GDP deflator is derived by dividing current price GDP by constant price GDP and is considered to be an alternate measure of inflation.S.GDP Per Capita (Current Prices.GDP (Constant Prices.014. the base year is country-specific.35 . GDP is expressed in constant national currency per person. 3. National Currency) for Russia in year 2010 is RUB 320. Data are derived by first converting GDP in national currency to U.

WEO weights have been created from primary sources and are used solely for purposes of generating country group composites. These data form the basis for the country weights used to generate the World Economic Outlook country group composites for the domestic economy.88 . 12. WEO weights have been created from primary sources and are used solely for purposes of generating country group composites.018 %. . Implied PPP Conversion Rate for Russia in year 2010 is 20. These data form the basis for the country weights used to generate the World Economic Outlook country group composites for the domestic economy. GDP (PPP).288 . 11. WEO weights have been created from primary sources and are used solely for purposes of generating country group composites.76 Billion.9. Gross domestic product based on purchasing-power-parity (PPP) share of world total. Gross domestic product based on purchasing-power-parity (PPP) per capita GDP. Gross domestic product based on purchasing-power-parity (PPP) valuation of country GDP. Please note: The IMF is not a primary source for purchasing power parity (PPP) data. Please note: The IMF is not a primary source for purchasing power parity (PPP) data. 10. These data form the basis for the country weights used to generate the World Economic Outlook country group composites for the domestic economy.218. These data form the basis for the country weights used to generate the World Economic Outlook country group composites for the domestic economy. US Dollars for Russia in year 2010 is US$ 2. WEO weights have been created from primary sources and are used solely for purposes of generating country group composites.GDP Share of World Total (PPP) for Russia in year 2010 is 3. GDP Per Capita (PPP). Please note: The IMF is not a primary source for purchasing power parity (PPP) data. US Dollars for Russia in year 2010 is US$ 15.806. Please note: The IMF is not a primary source for purchasing power parity (PPP) data.

44 Billions.88 3.556. US Dollars GDP Share of World Total (PPP) Implied PPP Conversion Rate Inflation. 39. National Currency) GDP (Current Prices.521.91 Billions.5 % 140.Economic Indicator Listing For russia in year 2010 GDP Growth (Constant Prices.79 US$ 2.35 Billions. -4.784 % RUB -1.075 % RUB 45. National Currency) GDP Per Capita (Current Prices. US Dollars) GDP Deflator GDP Per Capita (Constant Prices.806.985. US$ 1.157 (Index.828 Billion Indicator Value . End of Year (Indexed to Year 2000) Inflation (End of Year Change %) Unemployment Rate (% of Labour Force) Population General government revenue (National Currency) General government revenue (% of GDP) General government total expenditure (National Currency) General government total expenditure (% of GDP) Total Government Net Lending/ Borrowing (National Currency) Total Government Net Lending/ Borrowing (% of GDP) General Government Balance (National Currency) General Government Balance (% of GDP) Total Government Gross Debt (National Currency) Total Government Gross Debt (% of GDP) Fiscal Year Gross Domestic Product.272 % RUB 4.13 .610.367 Million RUB 15.555 (Index. 11.710.218.03 Billions. -4.476. National Currency) GDP (Current Prices. 34. US$ 10.559 % 926.153. Base Year 2000 = 100) 7.018 % 20.56 % RUB 17.923.91 Billion 113.014. Base Year as per country's accounts = 100) RUB 282.014.5 % 7.35 . Base Year 2000 = 100) 6. Current Prices Current Account Balance (US Dollars) 3.288 928. Average Consumer Prices (Indexed to Year 2000) Inflation (Average Consumer Price Change %) Inflation.474 (Index.688. US Dollars GDP Per Capita (PPP).344 % RUB -2.76 Billion US$ 15.966 % RUB 45.34 Billion. US Dollars) GDP (PPP). RUB 320.03 Billion. National Currency) GDP Per Capita (Current Prices.17 Billion. US$ 69.

714 $15. Since the beginning of the 1990s. and nearly . and for the first time in its modern history is becoming a serious factor in the global economy. Russia became a new ground for foreign direct investment. production.886 -$12.151 $55.053 $9. much will have to change. technology. Russia is re-emerging as an active player on the world scene.the privatization of the state-owned enterprises and the rapid development of the privatesector opened many opportunities for foreign investors as well as for Russian entrepreneurs. From the late 1920s to the late 1980s.629 $12. There are increasingly positive signals in this direction. 1994 2009 FDI Inward 2000 2004 2005 2006 2007 2008 Q1 $690 $2. a large. skilled workforce.Investment Synario Foreign investment is the second major element of Russia's reform strategy to strengthen international economic links.782 Russia looms on the horizon as an immense opportunity for investors. the Soviet government prohibited foreign investment because it would have undermined the state's decision-making prerogatives on investment. Russia is a vast country stretching across Europe and Asia.444 $12. domestic and foreign alike .073 -$45.916 - $73.767 $29.The transformation from a government-centralized economy to a marketoriented one. possessing spectacular wealth in the form of exploitable natural resources.993 FDI Outward -$281 $52.701 -$23. ³After a decade of a spectacular retreat.but for actual investments to flow and capital flight to be reversed.177 -$13.893 -$3. following the collapse of the USSR and the transitionto the open market economy. and consumption.

811 $17. It is a country whose goals are to move towards a market system based on private capital investment and enterprise and to integrate rapidly into the world economy Total inward investments come from few partner countries 2010 Cyprus Netherlands Luxemburg United Kingdom Germany Ireland France USA Virgin islands(UK) Japan Us $ $ 77.662 $9.2 $1.346 $34.902 $46.542 $8.6 .150 million consumers whose needs are endless.402 $30.425 $9.254 $56.

6 0.Russia is an active outward investor. GDP . industry. Russia¶s international outward investment position has been fast growing since the 2000s RUSSIA INVESTMENT Netherlands Cyprus United States United Kingdom Belarus Germany Ukraine Switzerland Virgin Island Others 100% 51. and services to total GDP. Following the breakup of the Soviet Union in 1991. large State farms had to contend with the sudden loss of heavy government subsidies.4 Composition of economy This composition of economy gives the percentage contribution in agriculture.6 0.2% industry: 33.composition by sector (2010): agriculture: 4.8% services: 62% Agriculture sector The Russian agricultural sector is struggling to rebuild as it transforms itself from a command economy to a more market-oriented system.7 1.5 8. .9 0.9 13.1 4.9 0.3 13.

Sunflowerseed is Russia's chief oilseed crop. The use of mineral fertilizer and other costly inputs plummeted. although an expanding brewing industry has boosted the demand for malting barley. Corn-for-grain area can fluctuate from year to year depending on the weather. Barley is used chiefly as a feed grain. and growing demand. driving yields downward. or milling quality. Winter wheat comprises about one-third of total wheat area but half of total production because of higher yield. Because of a combination of high price. Russia plants millions of hectares of corn.000 tons of malting barley against brewers' demand of about 1. oats. pulling down demand for feed grains. sunflowers have become one of the most consistently . Barley is Russia's second major grain with average production of about 16 million tons from 10 million hectares. and 30 percent as feed-grade. (The USDA does not estimate area and production of silage corn. After about ten years of decline. The area of silage corn declined by about 60 percent during the 1990's.6 and 0. Russian agriculture began to show signs of modest improvement.Livestock inventories declined. The remainder is chopped for silage. Official USDA estimates corn are for corn-for-grain only. low cost of production relative to wheat. Roughly 70 percent of Russia¶s wheat is classified as foodgrade. Most farms could no longer afford to purchase new machinery and other capital investments. Spring barley accounts for 95 percent of barley area and 90 percent of production. and the area planted to grains dropped by 25 percent in less than ten years. usually in August. The combination of reduced feed demand and several bumper crops since 2001 has led to sharply increased wheat exports and lower imports. buckwheat. Russia produces roughly 500.) Minor grains include rye.8 million hectares. from around 10 million hectares to less than 4 million.2 million tons per year. with lower area during dry years. but less than 20 percent is harvested for grain. Wheat accounts for over half of Russia's grain production with average annual output of about 40 million tons. Planted area typically ranges from 23 to 26 million hectares. but typically ranges between 0. and millet. and Russia is one of the world's top producers.

defense.3 to 0.3 million tons.4 million tons of soybean meal and imports an additional 0. such as mining. (See Sunflowerseed Production in Ukraine and Russia. Russia produces 0. communication. Industry sector Russian industry sectors encompass a wide range of sectors. the Russian economy was showing reasonable to strong resilience in all of its sectors. consumer durables.) Few soybeans are grown in Russia. energy. construction equipment and textiles. construction. . Russia¶s industrial production growth rate was estimated at 8. About half of Russian soybeans are grown in Amur oblast in the Far Eastern district.4 million tons.profitable crops.3% in 2010. with planted area of roughly 0. automotive. By the start of 2011. having drop -11% in 2009.5 million hectares and production of 0.

32% of supply. but that program appears to have had little impact. its share of demand is forecast at 67.92% of the Central and Eastern European (CEE) regional oil demand by 2014. Car sales in Russia fell by 49% to 1. with the country accounting for 73. Russia will witness a surge in oil production of 8. Government funding is expected to cover research and development initiatives to modernize the industrial base. but growth is yet to kick in. with output rising steadily from 10. while providing 69.6 billion as investments spread over 10 years.8% between 2009 and 2019. as part of a 10 year plan whose total worth is $40.04 in the sector. Russia¶s share of gas consumption was 70.900. Gas output in Russia is expected to rise from 590bcm in 2009 to an estimated 685bcm by 2014. Gas consumption is expected to be up from 415bcm to 503bcm by 2019.01 million b/d in 2009 to 10. By 2014.43% in 2009. the Russian government has planned to infuse $6 billion cash into its auto industry.45 million units in year 2008.400 and 46% to 35.500 units.100 and the production of domestic-brand cars plummeted by 64% to 316.89 million b/d by 2019. Truck and bus assembly fell by 64% to 91. with exports peaking at 262 bcm in 2018. The drop has stopped. and Daimler and Kamaz.5 million units from 2.33%.89 million b/d in 2016. Exports are expected to peak at 7.96%. Flash estimates for 2010 show that it is flatlining against 2009. while its production was 76. Russia¶s auto production fell drastically to 597. respectively.9 million units in year 2008. while the government plans to invest $6. Domestic automakers are expected to provide $19. The output of foreign-branded cars dropped 51% to 281. Fiat and Sollers.3 billion. The investment program is also expected to launch the projects of major auto alliances such as Renault and AvtoVAZ.Russia will account for 50.000 units in 2009 from 1.17% of supply. . It has also introduced a scrappage scheme to encourage Russian owners of older cars to upgrade.

Almaz-Antey's revenue that year was $3. The most popular types of weaponry bought from Russia are Sukhoi andMiG fighters. accounting for 20% of all manufacturing jobs. and it had a work force of 81. including 15 civilian models.857 people. The production and value of the military aircraft branch far outstrips other defense industry sectors. It is one of the most science-intensive hi-tech sectors and employs the largest number of skilled personnel.5 ± 3 million people. helicopters. air defense systems. followed by aircraft-maker Sukhoi. while new projects such as the Sukhoi Superjet 100are hoped to revive the fortunes of the civilian aircraft segment. and aircraft products make up more than half of the country's arms exports. the industry produced over 141 helicopters. employing around 355. battle tanks.Defense industry Russia's defense industry employs 2. companies belonging to the United Aircraft Corporationdelivered 95 new fixedwing aircraft to its customers.122 billion.300 people. The research organization Centre for Analysis of Strategies and Technologies ranked the air defense system producer Almaz-Antey as the industry's most successful company in 2007. The Russian aircraft industry offers a portfolio of internationally competitive military aircraft such as MiG-29 and Su-30. In 2009. . Russia is the world's second largest conventional arms exporter after the United States. armored personnel carriers and infantry fighting vehicles. In addition. Aircraft industry Aircraft manufacturing is an important industry sector in Russia.

INDUSTRIAL GROWTH IN RUSSIA .

and function as both operators and agencies. both in terms of total revenue and numbers of employees. The number of Russian tourists traveling to foreign countries dropped off sharply and the number of foreign tourists visiting Russia also declined. and sales. In the old USSR domestic tourism was one of the largest industries. tourism. The number of tourist companies has grown from several state tourist organizations in 1991 to several hundred in the larger Russian cities today. tourist bases. Foreign and domestic tourism was centrally managed during the Soviet Union. The number of Americans visiting Russia also fell considerably between 1998 (216.120). offering travel services within Russia either for foreigners or for domestic travelers.660) and 1999 (95.976) and 1999 (177. advertising. according to the CIA World Fact book. Important service industries include financial services. During the . Operators are those firms that develop their own tourist routes. Providing services for Russians traveling abroad is a smaller but more lucrative market. Most travel transactions involve the domestic market. the number of Russians visiting the United States in 1999 fell by nearly half between 1998 (175. and retail trade TOURISM. Large enterprise and labor unions provided people with inexpensive package tours. manufacturing and industrial sectors. The August 1998 financial crisis in Russia had a major impact upon the tourist industry. Tourist agencies market the existing routes established by operators. In 1991 the tourism industry was reorganized and today is one of the most important branches of the service sector. Most tourist firms are small. employing fewer than 15 people. and summer camps for children. recreational centers. marketing. The service sector employed 55 percent of the workforce and contributed 59 percent of GDP in 1999.SERVICE SECTOR TOURISM SECTOR Russia's previously underdeveloped services sector has played an important role in containing the social calamity of the collapse of the USSR. According to the Russian Statistical Committee. There were many resorts.280).

specifying procedures for starting and terminating commercial bank activities. and lack of local marketing know-how has limited attractiveness of travel to Russia for many foreigners. and the United States²a popular tourist destination for young people. establishing procedures for forming statutory capital. China. domestic tourism declined sharply. A legacy of Soviet-era infrastructure neglect. involves complicated regulations and is often a hindrance. in recent years the country's natural environment has attracted a growing proportion of foreign travelers. Over 80 percent of foreign tourists come to Russia with the intention of visiting Moscow and/or St. however. Italy. FINANCIAL SERVICES The Russian government has put considerable emphasis in recent years on restructuring and stabilizing the banking system and the financial services industry. restaurant. oppressive paperwork. the United States. the countries of the Mediterranean. new hotel. Petersburg. At the same time. primarily because of its cultural attractions. Russia is a popular destination for foreign tourists. Russia may one day become a popular destination for eco-travel. and recreational equipment and expertise have become more widely available. new programs have been instituted that provide training in hotel and restaurant management services. Local foreign language schools often offer English language training in the United States to teenagers and young people. the Russian travel industry continues to be hindered by the lack of accommodations and travel-related services that are in accordance with international standards. high costs. Travel to Russia is particularly wellrepresented by travelers from Germany. However. and Israel. In addition. . Poland. but has regained ground since then. Japan. Despite improvements in the first decade since the Soviet breakup. A legal framework was adopted. Recent years have witnessed improvements in the quality of services. Russian tourists travel abroad to Europe.first years after the breakup of the Soviet Union. attracting adventure travelers and tourists looking for something out of the ordinary. Turkey. Obtaining visas to travel to the United States.

signaling an attempt to lower lending rates. The main contributing factors were the devaluation of the ruble. grain. Russia sells a broad range of commodities and manufactures including petroleum and petroleum products. Banks do not have the resources. INTERNATIONAL TRADE AND MAJOR TRADE PATNERS Russia's foreign trade consisted of US$75 billion in exports and imports of US$48. or the population's trust to attract substantial savings and channel them to productive investments. medicines. metals. meat. Russia's largest trading partners for exports are Ukraine. rights of claim under credit agreements. to 33 percent. Germany. United States.procedures of issuing and recalling licenses for bank audits. establishing procedures for bank bankruptcies. The Russian Central Bank announced that it was developing a procedure to finance banks for promissory notes. and a wide variety of civilian and military manufactures. the Netherlands.1 billion in exports and US$44. and semi-finished metal products. and mortgages. the United States. However. Russia's largest trading partners for imports are Germany. consumer goods. and some banks were inexperienced at assessing credit risk. Real GDP growth in Russia in 1999 was over 3 percent. Belarus. natural gas. loans remained at the pre-crisis level of 30 percent of total bank assets. sugar. high commodity prices on international markets. wood and wood products. and China. low inflation and a consensus that inflation . Russia imports machinery and equipment. particularly oil (while domestic costs were substantially lower).2 billion in 1999 and then to US$105. The Russian Central Bank reduced its refinancing rate 3 times in 2000. While ruble lending doubled in the 2 years following the August 1998 financial crisis.2 billion in imports by 2000. and establishing procedures for the operation of non-banking financial organizations that offer financial services and were licensed and regulated by the National Bank. Kazakhstan. capability. which made Russian products competitive abroad and at home. chemicals. Belarus. banks still perceived commercial lending as risky. Ukraine. But the Russian banking system is still in a state of transition. and Italy.

and export of oil from the Caspian Sea. and a wide variety of civilian and military manufactures. Russian oil companies have been rushing to export their oil (resulting in a windfall of hard currency coming into the country) to such an extent that Russian officials have set export quotas in order to maintain an adequate domestic supply of oil. Russia is maneuvering to become a major player in the exploration. and a relatively healthy fiscal situation based on strict government budget discipline. and aluminum up 10 percent. The company's focus has been on building new pipelines rather than repairing the old.must be controlled.2 billion. natural gas. medicines.3 million metric barrels a day (MMBD). The chief export of Russia are: Petroleum and petroleum products. a serious problem facing exporters is the lack of export routes. net exports ballooned to US$33. Many of these pipelines are in a poor state of repair. metals.6 percent. Higher oil prices had a major effect on export performance. more than double the previous year's level. forestry products up 38 percent. particularly in the latter half of the year. prices jumped 46 percent.3 billion while imports slumped by 30 percent to US$41. fertilizer exports were up 16. The Russian Fuel and Energy Ministry notes that almost 5 percent of crude oil produced in Russia is lost through pipeline leaks.1 billion. Exports rose to US$74. Russia has a number of new oil and gas pipelines planned or already under construction. consumer goods. Even though volumes of crude oil exports (to non-CIS countries) were down by 3 percent. meat. wood and wood products. Other exports performed better in 1999. chemicals. semi-finished metal products. The major contributor to growth was trade performance. sugar. . As a result. copper up 17. Transneft is the parastatal responsible for Russia's extensive oil pipeline system. Fuels and energy comprise 42 percent of Russian exports.7 percent. In 2000. development. In addition to export quotas and higher taxes levied on oil exports. The chief imports of Russia are: Machinery and equipment. Russian net oil exports totaled 4. grain. In addition to those in the Caspian Sea Region. Transneft lacks the funding to repair or upgrade many of these malfunctioning pipes.

and defense equipment. to a large extent. the state of Russia's balance of trade. Since the majority of Russia's exports are energy-related. metals and timber. metals. wood. The next chart shows a breakdown of Russia¶s primary export partners. With rising prices in 2010.Russia Trade: Exports and Imports Russia¶s primary export commodities include petroleum and petroleum-based products. Russia uses these reserves to secure both its economic and political interests.6 billion less than the $476 billion recorded in 2008 but more than the $295. Initial flash estimates put the exports figure at $395. 80% of Russia¶s exports constitute oil. Although exports dropped during the Financial Crisis. chemicals. there should be robust growthRussia boats the largest natural gas reserves in the world.6 billion exported in 2009. All these resources constitute a major portion of Russia¶s exports. All data are in percentages . natural gas. growth was once again registered in 2010. In fact. wood products. energy prices determine. natural gas. the second largest coal reserves and the eighth largest oil reserves.

3% Russia¶s currency is Ruble (RUB). US (4. iron and steel. China (13.Meanwhile. Japan (6. According to Russian trade experts. construction and agriculture are expected to be the prime trading sectors for 2010 and beyond.4 billion in 2009. Ukraine (6%). plastics. medicines. steel production. Russia¶s primary import commodities include vehicles.5% of imports). Russia¶s trade relationship with Australia improved in 2010 after a rocky 2008 and 2009. consumer goods. bilateral trade with India has risen over the past couple of years due to large volume of high-tech exports. Its primary import partners are Germany (13. industrial machinery. and meat. Manufacturing.2%). up from $8. Russia¶s trade with India reached $10 billion in 2010. . Commodities like beef are expected to be the prime trading component between the two countries.5%) and Italy 4. Agricultural products also are expected to dominate much of Russia¶s imports from Australia. energy.5%). The strength of the Ruble is influenced by energy prices.

2. MARKET CHALLENGES .

with virtually all transportation channels of economic significance emanating from Moscow. Rostov.210 miles) of broad gauge rail. Among Russia's most important ports are Arkhangelsk. Novorossiysk.761 miles). The Russian merchant .000 kilometers (589. making it one of the most extensive railway systems in the world.061 miles) is in "common carrier" service. Moscow. TRANSPORT AND TELECOMMUNICATION The transportation infrastructure in Russia is underdeveloped.000 kilometers (62. and Vyborg.087 miles) of road including 416. Total navigable routes in general use by the Russian River Fleet amount to 101. The Russian waterways system is an important component of the transportation infrastructure. Following decades of insufficient investment in maintenance and capital improvement. Sochi.000 kilometers (258. The Russian railway system includes a total of 150. of this total only 87. About 30 percent of freight cars. and nearly half the locomotives are of such poor quality that they should be replaced immediately. Krasnoyarsk. The remaining 63. St. The transport system is heavily Moscow-centered. Murmansk. Volgograd.000 kilometers (39. Of the total road system. Kaliningrad. The Russian trucking industry is only minimally developed.000 kilometers (54.790 miles) are paved. Petersburg. Commercial transportation relies heavily on rail. Kazan.502 miles) that serve specific industries or farms and are not maintained by governmental highway maintenance departments. 40 percent of passenger cars. and roads are not designed to carry heavy and long-distance truck traffic.148 miles) serve specific industries or are dedicated railways lines and are not available for common carrier use. However. Roughly 90 percent of commercial haulage is rail-based and insufficiently integrated into world transport systems. only 336. the railway infrastructure has badly deteriorated.000 kilometers (93. The Russian highway system includes a total of 948. Vladivostok.POWER.000 kilometers (208. Russia's great territorial expanses and rugged terrain have hindered the development of a nation-wide highway .

water. The country also has an extensive oil and gas pipeline system. as well as some commercial transportation systems such as river and lake navigation.8 billion kWh was imported.71 billion kWh. sectors that should be able to pay their own way through user fees rather than through central government subsidies or direct administration.000 kilometers (86. 20 percent resulted from hydroelectric generation. 50 of which are capable of accommodating international flights. and electricity. while 21 billion kWh was exported and 5. Due to its financial unattractiveness but also due to the lack of an appropriate legal and regulatory framework to facilitate private sector participation. cash collection rates stood at less than 20 percent in 2000. The problem has been exacerbated by low rates of cash collection. and 140. and roughly 13 percent was produced at commercial atomic generating stations. These include public utilities (called "natural monopolies" in Russia) such as public transportation. Of this amount. with the ratio even worse in distribution to households. There are serious capital and operating inefficiencies and poor financial performance in what should be cost-recovery sectors. Electricity consumption amounted to 702. There has been some separation of publicly-owned service providers . infrastructure services are generally provided by state and local government-owned entities.000 kilometers (9. Effective wholesale gas and electricity tariffs have been at only around one-tenth of the Western European level for the past decade. 15.000 kilometers (29. with some 48.marine includes some 700 ocean-going vessels.94 billion kilowatt hours (kWh). but its fleet is twice as old as the global average. Russia has some 630 improved airport facilities.996 miles) designed for shipment of natural gas. some 69 percent was produced through burning fossil fuel. In the power sector. gas. that is. Progress in the corporatization (turning utility systems into corporate entities) and commercialization of infrastructure has been poor.321 miles) designed for shipment of refined petroleum products.827 miles) of pipelines for crude petroleum. Transportation tariffs (user fees) have not kept pace with inflation. Russia's overall electricity production (1998) was 771.

Russia's telecommunications system is in the midst of the global telecommunications revolution. The RF Supreme Court is a higher judicial body dealing with civil. Internet and e-mail services are now widespread and rapidly improving. there continues to be a high degree of government (federal. okrug courts. implying that decisions and sentences which did not come into force can be appealed only once and only at the immediately superior court. transforming them into legally autonomous corporate entities. autonomous region courts. regional.JUDICIAL AND REGULATORY FRAMEWORK The Russian judicial system consists of: the RF Supreme Court. courts of appeal and higher courts. Higher courts¶ decisions and sentences cannot be appealed or protested. In a few short years. administrative and other cases considered to be within their authority by general jurisdiction courts supervising their activity. Special courts ² the Constitutional Court. republic supreme courts. In civil and criminal cases there are courts of primary jurisdiction. criminal. there were over 1.000 companies licensed to offer communication services. LEGAL. Russia made significant progress toward building the telecommunications infrastructure necessary for a market economy. Moscow and St. whose authorities are defined by the Constitution. and the Higher Court of Arbitration ² play a particular role in the exercising of judicial power in Russia. 98²99% of all civil and criminal cases are judged by general courts at the lowest levels. autonomous okrug courts. district (city) courts and military courts. complaints about unlawfulness and unfounded arrests and implement courts¶ decisions concerning property . regional courts. which arbitrate lower courts sentences and decisions already in force. By 2000. They also judge administrative offenses. called people¶s (district and city) courts.from government. The judicial system in Russia is structured according to two basic principles. The country's phone system has undergone significant changes since the breakup of the state phone monopoly in 1990. During this period access to digital lines has improved. However. and local) interference in their management and financial operations.Petersburg city courts. particularly in urban centers.

It serves eac h city district or rural district.800 judges constitute the next link of general courts. taken on at their own initiative. As trial courts of general jurisdiction.confiscation etc. In 1993 these cour ts handled. professional judge and two lay judges called "people 's assessors.454 public (district or city) courts in Russia with 13. and republic) with a staff of 2. Only a limited category of cases involving the most serious crimes fails di rectly under the original jurisdiction of the next level of courts--the oblast (region.) Whenever there is a dispute between business entities." or by a panel of three professional judges. The sys tem of these courts is on two levels topped by the High Court of Arbitration. the arbitration co urt system with the High Court of Arbitration on top. But if a party to a civil cas e is a private citizen. not involved in business activities. the re are no courts of special jurisdiction in Russia like those handling domestic relations or probate disputes. There are 2. or by a single . T here are eighty-two courts of arbitration with some two-thousand judges handlin g about three hundred thousand disputes annually. The major link in the regular court system is the people's court. Cases are tried by one of several methods: a case ca n be tried by a presiding. and the Constitutional Co urt as a single body with no courts under it. cases where death sentences may be given. province) courts. The Judicial System The judiciary in Russia is not a single whole.000 judges. The vast majori ty of litigation in Russia is heard by these regular courts. it is split into three branches: the regular court system with the Supreme Court at the top. krai. They judge the most difficult cases. They also regulate the lawfulness and validity of sentences and other public court decisions which did not come into force. 85 courts of the RF (region. for instance. one million eight hundred thousand civil cases. the pe ople's district courts handle over ninety percent of all civil and criminal cas es. (The Supreme Court and Constituti onal Court were discussed above. Throughout Russia there are about fourteen thousand judges in some two thousand five hundred courts of general jurisdiction on various levels. the case is taken for tr ial by the courts of arbitration (business or economic courts in fact). the dispute has to be handled by a court of general jurisdiction. Apart from the arbitration court system.

There are now more and more American-type law firms in Russia functioning separately from colleges of advocates. Acting upon this appeal the chairperson of a higher court or the procurat or of the corresponding level exercise their supervisory powers and bring their own complaint (called "protest") against the lower court's decision. Law provides the right of citizens to appeal to higher courts even when the time limits prescribed for cassational review h ave expired. but by anyone who wants to proceed on behalf of such pe rson. The presidium headed by the chairperson is the executive board of each college. regions (oblasts). A jury trial is only available in serious crimes--those where jurisdiction originates in the oblast courts. which render all regular legal assistance to citizens: advocates counsel people. Republics or autonomous entities.judge . The Legal Profession Lawyers in private practice in Russia work mostly within colleges of advocates--selfmanaged. It should also be noted that all higher cou rts have discretionary trial jurisdiction. Decisions of the lower trial courts can be appealed through intermediate courts up to the Supreme Court of Russia. In its territory any college is represented by law firms or legal aid offices. represent plaintiffs or defendants in civil litigation. Colleges of advocates are formed in accordance with territorial subdivisions--in the cities. draft legal documents. . cooperative-type organizations There are about nineteen thousand advocates in more than one hundred colleges. and provide defense in criminal proceedings. This right can be exercised not only by a person duly convicted an d serving the sentence. and especially involved in representing private businesses. The highest body of advocates' selfmanagement is the general meeting of a college. Direct appeal to a higher court (in the Russian legal system the appellate proc edure is called "cassational review") is not the only way for a party to compla in against a trial court decision. The presidium is elected by the general meeting for a term of three years. In 1993 Russia started to experiment with jury trials (panels of twelve juror s).

There are also separate research centers in law. In this respect. It is an executive agency that provides administrative support for the courts with t he formally stated purpose of improving the administration of justice and making judicial administration more efficient. and henceforth from the Ministry. forensic centers and laboratories.Many lawyers are employed by the law offices of enterprises. its functions are similar to those of the Federal Judicial Center and the Administrative Office of the US Courts. New private l aw schools are popping up. Legal Agencies of the Executive Branch The Ministry of Justice of Russia exercises important coordinating functions in the legal field. This organization promulgates draft legislation and reviews the drafts of other . It is called the State Legal Department of the President. the most prominent of which is the Institute of State and Law under the Academy of Sciences of Russia. many in the legal profession teach or do academic research work. In occasional competition with the Ministry is an extra-constitutional body established approximately three years ago that functions as advisor to the President on legal policy. and in view of the economic reform this body is growing. It directs the activities of notari al and official registry offices. There is now a move afoot from the courts to make themselves more independent from the executive branch. The Ministry promotes the development of legal science. but it is not a law enforcement agency like the US Department of Justice. These lawyers have all powers of an attorney. Th ere are about twenty thousand of them in Russia. abbreviated in Russ ian GPU. In Russia there are forty institutions of higher education in law (either a law school attached to a university or a separate entity called a "juridical institute"). but they represent their single and permanent "client"--their respective organization. The Ministry is directly involved in systemization and codification of the laws. The Ministry trains legal personnel for courts and runs courses of continuing legal education for judges. ministries and agencies as in-house counsel (juriconsult). Of course.

5 million rubles in a country of 70 million people. agricultural laborers who were tied to the land and had few personal freedoms. by the Ministry of Internal Affairs with subordinate agencies. Growth was particularly rapid in the 1880s. COMMERCIAL BANKING SYSTEM History Prior to 1861. when the central offices at the Central Bank were supplemented by regional offices at local treasuries . Since its formation it has become very active in issues involving reform of the judiciary and crimina l law. there were only 140. investigates crimes and prosecutes criminals. and it also investigates (jointly with other agencies or separately) organized crime and terrorist acts.000 deposit accounts totaling 8. It was an instrumental player in the reintroduction of jury trials that was discussed earlier in this memo. and performs some administrative functions. The only people likely to take advantage of personal savings accounts came from a small class of urban merchants and craftsmen. After the abolition of serfdom in 1861. In 1862.organizations in order to make recommendations to the President. The Federal Counterintelligence Se rvice is responsible for counterintelligence work. and by the Federal Counterintelligence Service (form er sized down counterintelligence department of the dismembered KGB). the growth of private savings was limited by the fact that the majority of Russia's population was composed of serfs. savings accounts became more widespread. but this ministry also runs correctional institutions and fire forces. The Ministry of Internal Affairs is the headquarters of all police agencies (called "militia" in Russia). The Procurator's office supervises the legality in the activities of all law enforcement agencies. Law enforcement functions are performed by the Procurator General's Office (procuratura) with subordinate agencies in cities and provinces.

A large portion of them are financially linked to companies and act exclusively as conduits of subsidized credits to these enterprises. and . However. the creation of the Russian foreign exchange market began. While business accounts were confiscated. the Bolsheviks had succeeded in nationalizing all commercial banks. Their staff received salaries but were instructed not to perform any banking functions in the hope that economic paralysis would bring down the Bolshevik regime. Savings offices opened in rural villages as well as urban centers. the Central Bank of Russia established the procedure for the issue of securities by commercial banks. by the end of the year. And on April 9. However. his efforts to maintain the private savings system failed during the period of Revolution from 1918 to 1921. banks were an important framework for the building of a socialist society. private savings accounts were respected. In this way. Russian banks gained an outlet to the stock market. 1991 the "Regulations for Buying and Selling (Transferring) Currency Exports Abroad through Citizens' Personal Funds" approved by the State Bank of the USSR entered into force. banking activities ground to a halt in the chaos of the years immediately following the revolution. nearly all money was withdrawn from the economy. Commissar of Finance V. Menzhinsky ordered the re-establishment of the Department of Savings Offices. and the exchange of goods operated on a barter system. The financial health of such institutions is highly questionable. 1991.and telegraph stations. On April 2. From that time.000 branches and two million individual accounts in 1895. Russia had nearly 3. Throughout those years. He believed the ready-made big banks of capitalism could be converted into an effective apparatus for state control of the economy. sending armed detachments to occupy their offices in Petrograd. Ten commercial banks and one financial organization took part. the first auctions on the State Bank's currency exchange were held. All commercial banks closed down in October 1917. On March 22. By the end of 1995.000 commercial banks. farm and consumer goods were requisitioned. However. most of these banks were small and had little capitalization. In Vladimir Lenin's view. leading to a total of 4. Nevertheless.

They are unable to offer diverse and efficient customer services because the Soviet Union had no retail banking tradition and because Russia lacks the sophisticated infrastructure. more viable institutions or go bankrupt as the RCB continues to tighten its requirements and as the role of cheap credits diminishes. Sberbank and Rossel'bank have systems of nationwide branches. on which modern Western financial institutions depend. The Soviet-era Savings Bank (Sberbank) was reorganized as the Sberbank of Russia. with the RCB holding controlling shares. The former state-controlled specialized banks of the Soviet system form the foundation of the current commercial banking system. although by the mid-1990s it received competition from newer. forming the foundation of the commercial banking system. In 1996 the Sberbank held between 60 and 70 percent of Russians' total household savings. . and the Zhilsotsbank (reorganized into Mosbusinessbank)--were reorganized into joint-stock companies and became independent commercial operations. The types and quality of services that the Russian banking system offers to the public are still rudimentary according to the standards of Western industrialized countries. that figure decreased from 90 percent in 1991 as other commercial banks began to provide competition. The Foreign Trade Bank (Rosvneshtorgbank) also remains state-controlled. especially high-speed telecommunications and trained staffs. including the six largest commercial banks in Russia.experts forecast that many of them will merge into larger. The Moscow International Bank handles business between the large Russian banks and Western banks. In 1991 three of the banks--the Agroprombank (subsequently renamed Rossel'bank). and it continues to handle most foreign transactions. viable banks that have attained financial credibility and that experts expect to remain in operation under any foreseeable economic conditions. the Promstroybank. privately owned banks. The commercial banking system has a core of large.

this ch. The securities market got a large boost from the Russian government's privatization campaign. The continued predominance of cash transactions has slowed the rate of Russia's commerce. the State Duma passed a statute prohibiting the RCB from licensing foreign banks that did not have operations in Russia before November 1993. fostering irregularities in the market. Although foreign banks have played a larger role in the Russian economy in the mid1990s. Among the most infamous was the operation of the MMM investment company. which developed into a pyramid scheme guaranteeing investors very high returns on their investments.Most of the commercial banks offer their customers savings deposit accounts. When the first Russian stock market was established in 1991. Shares in privatized firms were issued. Some banks also offer credit cards to customers with impeccable credit ratings. opponents of such a policy have pointed out that efforts to protect the fledgling domestic banking sector from foreign competition also deny access to Western financial techniques that eventually would improve the competitiveness of Russian banks. However. Bank checks are still rarely used in Russia because check clearance is a long process. whose savings had been . so trading activity was quite low. investment services. As the first phase of the privatization program ended and companies' capital requirements rose. In early 1996. Russian laws and regulations of the stock market and other elements of the securities market have not kept pace with the growth in the industry. Other Financial Institutions A Russian securities market has evolved with the rest of the economy.). Some banks offer debit cards that allow customers to have payments for goods and services deducted directly from their bank balances. and then a secondary market emerged for the privatization vouchers that the government issued to each citizen (see Privatization. that role has met substantial resistance from nationalist factions. and the more established banks provide foreign-exchange services. A number of Russian small investors. and corporate services. few private companies existed to offer shares. an efficient securities market became increasingly important.

eroded severely by inflation. Russia's relatively new financial institutions are likely to face a long period of adjustment as weaker banks close or merge with stronger banks. including the privatized versions of former Soviet state insurance companies. The Russian securities market also lacks a modern communications infrastructure. was arrested and jailed on tax fraud. Sergey Mavrodi. as the private sector's role in the national economy grows and as Russia develops needed regulations and infrastructure. The exchange rate is established through weekly auctions on the Moscow International Currency Exchange (MICEX). The head of MMM. the securities markets and other nonbank financial institutions are expected to follow the banks as important elements of the economy. According to experts. also lack the degree of standardized regulation required for large-scale domestic participation. However. were attracted to the scheme and eventually lost large sums of money. In 1993 the Government added a new element to the securities market by issuing treasury bonds to help finance its budget deficits. In 1996 approximately 200 insurance companies were operating in Russia. and a regulatory framework must be developed to ensure public confidence in the banking system and enable banks to offer reliable support in the development of private enterprise--a role that has expanded rapidly in the first five post-Soviet years. Other aspects of the financial system. Insurance remains a small part of the Russian financial market. so registration and reporting of financial transactions are very slow. Russian citizens are able to buy and sell rubles for foreign currency at selected banks. In addition. but the MMM case underlined the lack of Western-style commercial laws in the Russian legal system. . such as securities markets.

MARKET OPPORTUNITIES .3.

In 2009. manufacturing and services sectors. however because of the financial crisis Russia¶s GDP decreased by 7. During the 6 previous years. partnerships and technology to reach its full potential. it is one of the world¶s largest economies with a GDP of $1. which Russia has declared it is now seeking as a single customs bloc with Belarus and Kazakhstan. Russia's newly strong private sector will be a contributing factor. growing and rapidly maturing market-oriented economy. Russia's economy is expected to rebound with the global economic recovery. Russia has gone from a state-controlled command economy to a stable. the country enjoyed strong economic growth (ranging from 5.4 trillion. During this growth period per capita incomes were rising and its middle class has become a more significant force in the national economy. due to buoyant household demand and business investment driving output in the construction.1 percent annually). Russia In the span of 17 years. Moving forward. the country will need foreign capital.9%. in line with outlooks in commodity prices. Today. should provide better access for Canadian products and services as well as improved rules-based and transparent business climate.DEMAND FOR PRODUCT AND SERVICES Russia A Global Commerce Strategy Priority Market Moscow.6 to 8. Russia's future accession to the WTO. European and East Asian countries are increasingly viewing Russia as a key economic partner. with the government playing an assertive role through regulation and public corporations. As .

Russia proceeds with the modernization of its industrial and agricultural infrastructure, opportunities will abound in transportation, infrastructure development and industrial equipment. There are also excellent export and investment opportunities in agriculture and agri-food, mining, forestry, housing, and information and communication technologies. Canadian companies wishing to capitalize on the opportunities Russia presents face a number of challenges, however, including competition from other foreign companies and differences in cultural and business practices. Commercial Relations, 2009
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Canada¶s merchandise trade with Russia reached $2.5 billion in 2009. Since 2002, bilateral trade has more than quadrupled. Canadian exports to Russia delined by 40.7 percent to $888 million in 2009. Canadian merchandise exports have increased by 56.9 percent in the past five years. Canadian services exports to Russia were $281 million in 2007, while services imports were $487 million the same year. Canadian direct investment in Russia reached $725 million, while direct investment in Canada from Russia reached $358 million.

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Market Opportunities The Government of Canada has identified Russia as a GCS priority market²based on extensive consultation with government, academic and Canadian business and industry representatives²and has developed a comprehensive Market Plan that identifies the following key sectors as offering clear market opportunities well suited to Canadian capabilities and interests in Russia:
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Oil and Gas Equipment and Services: Russia is one of the world¶s leading producers of oil and gas. Canadian oil services companies are experiencing substantial growth in Russia and there is considerable potential for further growth in the development of offshore deposits off Russia¶s Arctic Shelf and in the Sakhalin region.

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Metals, Minerals and Related Equipment and Services: Canadian equipment and services providers have established an excellent reputation for providing reliable, leading-edge technologies and equipment. With a number of major Russian mining companies looking to expand and diversify, opportunities are arising in mining services (e.g. surveying and extraction plans for mineral deposits). Agriculture, Food and Beverages: Increasing per capita consumption of fish and seafood products and growing demand for greater variety and quality of food products including meat represent excellent opportunities for Canadian suppliers. A priority is to secure predictable market access for Canadian suppliers. Agriculture, Technology and Equipment: Russian demand for agricultural machinery and equipment is expected to increase sharply over the next few years. While Canadian machinery is frequently more expensive than Russian alternatives, Canada¶s strong reputation for high quality and reliability, comfort, labour-saving features and high productivity bodes well. Building Products and Construction: With demand for new housing expected to resume its growth with the economic recovery and to outstrip supply and growing interest in high-quality, less expensive wood frame alternatives to traditional brick and cement, growth opportunities for Canadian suppliers are tremendous. Opportunities are also emerging in large-scale construction projects related to the APEC 2012 Summit in Vladivostok and the 2014 Olympic Winter Games in Sochi. Canada-Russia Commercial Relations, 2005-2009 ($ Millions). Canada-Russia Commercial Relations, 2005-2009 ($ Millions)

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Government Leadership and Support
Recognizing the increased predictability, transparency and stability that WTO membership would bring to Russia, the Government of Canada has been supportive of its efforts to become a member and will continue to work closely with Russia and other members of the WTO to secure Russia¶s accession. As Russia offers huge and largely untapped scientific expertise and considerable procurement, investment and partnering opportunities, Canada is seeking to upgrade its Foreign Investment Promotion and Protection Agreement (FIPA) with the country to better reflect current investment conditions and lend assurances to Canadian investors pursuing projects in Russia. Trade commissioners in Moscow will continue to advance Canadian exporter, investor and innovation interests by reaching out to Russian officials and business community leaders to promote Canada as a ³top of mind´ partner, by helping to address market access barriers and by providing Canadian businesses with timely and relevant information about commercial opportunities and conditions in Russia. Trade Commissioners in Canada will continue to bolster Canadian company awareness of the considerable commercial opportunities that exist in Russia and its increasing global value chain role as a strategic bridge between the large markets of East Asia and Europe.

Market Access Canada has the following Trade Agreements with Russia: 1991-FIPA 1992-Trade and Commerce 1992-Capital Goods and Services Deliveries 1993-Economic Cooperation 1995-Double Taxation 2000-Air Services Recently, we have enhanced our bilateral relations with Russia through: 2006-Canada-Russia Business Summit (Ottawa) - Joint Leaders¶ Statement on Canada-Russia Economic Cooperation 2007
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Canada-Russia Joint Statement on Economic Cooperation Canada-Russia Memorandum of Understanding on Fisheries Cooperation Canada-Russia Joint Statement on Agricultural Cooperation Declaration of Intent to Cooperate on Food Safety, Animal and Plant Health Memorandum of Understanding on Arctic Cooperation Memorandum of Understanding on Nuclear Cooperation

2009
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Canada-Russia Business Summit (Moscow)

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creating opportunities for suppliers of construction equipment and materials. Although the global economic crisis slowed construction in Russia. retail and commercial building sectors leading the way. Residential and commercial construction in Russia was booming over much of the past decade.4. y y y Engineering construction. Non-residential construction Residential construction. growth in the construction sector is expected to rebound later in 20101. LEADING TRADE SECTORS CONSTRUCTION MATERIAL & OPPORTUNITIES IN CONSTRUCTION SECTOR Construction spending in Russia is expected to double over the next five years with the hotel. .

y . where stadiums and hotels are being built for the 2014 Winter Olympics. mechanical shovels. which is constructing and revamping buildings in preparation for the 2012 APEC Summit.S. construction equipment is recognized in Russia for its quality and reliability. the U. Although this is down from the peak of 64 million square meters in 2008. following a volume of approximately $126 billion in full-year 2009. the sector had previously grown an average of 14% per year between 2004 and 2008 to a high of $154 billion.2 Although the volume of construction in Russia still has not returned to pre-crisis levels. Petersburg. and in Sochi. Prior to the global recession. Beyond the traditionally busy construction markets of Moscow and St.Nearly $50 billion in construction spending was carried out in Russia in 1H 2010.5 In 1H 2010. marking growth of 290% over the same period in the previous year and surpassing the full-year 2009 level of $15 million. excavators and other machinery to Russia. machine tools and parts from the U. firms supplying these goods U. exported more than $26 million worth of bulldozers. 60 million square meters of residential space were built in Russia in 2009.S.S and accession will further strengthen market access for U. Russia imports a variety of construction equipment. large scale projects are underway in Vladivostok.S. new opportunities in residential construction are on the horizon as the Russian government seeks to increase ownership of single-family homes Major commercial construction projects across Russia are generating demand for construction equipment.

. exports to Russia of parts for construction machinery grew 25% over the same period in 2009 to total nearly $28 million. U.S. to an average of 8%. manufactured Goods including power generation and construction equipment. Petersburg.S. exports to Russia had grown more than 20% in 2008 to nearly $90 million.S. saw its sales in Russia grow 550% between 2004 and 2008. Prior to the recession. Russia has agreed to cut tariffs on U.such U. the world¶s leading manufacturer of construction machinery.9 ‡ As part of its WTO accession package. y Illinois-based Caterpillar. these exports to Russia totaled between $85 million and $89 million annually before jumping 30% in 2009 to a high of $115 million.7 The company has invested more than $80 million in its machinery assembly plant near St. y In 1H 2010.

Russian outward direct investment has expanded rapidly since the beginning of the decade and Russian corporations are challenging well-established multinationals. While Russian global corporate expansion is still limited to . INVESTMENT CLIMATE OPENESS TO FOREIGN INVESTMENT Russia has became the second largest foreign direct investor among emerging markets and is leading among the BRIC countries.5.

Russian ODI activities continued in developed markets and have more Recently also been carried forward to Africa.2% from 0. Russian outward investment in perspective against the background of high commodity prices. The expansion of Russian corporations started in the ³near abroad´ market due to Linkages established in Soviet times and a lack of foreign investors from Elsewhere. rose to 1. During the same period. the trend to invest abroad is gradually spreading to other sectors. Gaining access to new markets and technologies. gas and metals sector.5%. Russia¶s share in emerging markets¶ ODI stock increased to around 9% from 2. Russia¶s share in world GDP was around 2% in 2006. reaching an all- .some of the largest companies in the oil. High oil prices and the booming domestic economy will continue to boost Russian ODI in the coming years. after Hong Kong Its share in worldwide ODI stocks. Large resource-based corporations not only dominate the Russian economy but are also taking the lead in terms of outward investment. Russia has outperformed the other BRIC countries since 2002. securing raw materials and obtaining a wider range of financing opportunities are among the key economic reasons for Russian ODI. becoming the second largest ODI source in emerging markets. Regarding ODI flows. Russia¶s ODI stock increased nearly eightfold to USD 157 bn at the end of 2006 from only USD 20 bn in 2000. meanwhile.2% in 1999 For comparison.

Overall.By Year (in USD million) Country Jan-Sept. 2010 Jan-Sept. which measures the share of a country¶s outward FDI in world FDI as a ratio of its share in world GDP. Russian ODI flows appear sizeable even when compared to flows from industrialized Countries.time high of USD 48 bn in 2007 The only exception was in 2006 when Brazilian corporations invested larger sums abroad. Russia¶s ODI flows were placed in rank 30 out of 128 countries in UNCTAD¶s most recent Outward FDI Performance Index. 2009 Total FDI Total FDI . PROFIT MARGINS INVESTMENT CLIMATE WHY RUSSIAN INVESTMENT ABROAD GROWTH POTENTIAL RAW MATERIAL Top Ten Investors .

095 5. both . and after a sharp contraction in 2008-09.912 5.520 1. the total value of mortgages in Russia is still under 3% of GDP. Thus far this law has been successfully implemented and generally effective.240 2.279 1. recreational.738 9. inherit.884 47.494 1.827 2.098 1. mortgage.258 Ireland USA Japan 1.066 2.272 2.488 8. The rights of Russian citizens to own and sell residential.507 Cyprus UK France China 5.507 943 8.635 4.136 16. with over 40 million properties of this type under private ownership. Foreigners enjoy similar rights with certain restrictions. and sell real property.092 317 537 N/A N/A N/A 92 N/A Netherlands 7.635 1. New mortgage issuances in 2010. lease.231 1.348 1.Germany 7.975 PROTECTION OF PROPERTY RIGHT The Constitution and a 1993 presidential decree give Russian citizens general rights to own. Mortgage legislation enacted in 2004 facilitates the process for lenders to evict homeowners who do not stay current in their mortgage payments.196 54.641 Luxembourg 1.231 430 735 N/A N/A N/A 222 N/A 4. Mortgage lending is in its initial stages. and garden plots are clearly established.905 595 1. notably the ownership of farmland and areas located near federal borders.600 N/A 8.229 862 818 All Others Total 14.

In Russia. The local business and entertainment software industries have also reported declining levels of piracy. and increased law enforcement action against pirates. Copyright violations (films. sound recordings. The Civil Code sets up the level of compensation for IPR infringement and/or incurred damages for copyright. amended its Customs Code to include ex-officio authority for Russian Customs officials. over enforcement issues such as deterring piracy and counterfeiting through criminal penalties. An administrative investigation may be initiated at the request of an IPR owner or by law enforcement authorities (police or customs) suspecting possible IPR infringement. Russian police . and the need for a court system with greater expertise in IPR cases. patent and trademark rights committed on a large scale and causing gross damages as defined by the Criminal Code. videos. but do not meet the criteria of the Criminal Code. lowering the monetary damages threshold to initiate criminal penalties. Legitimate DVD sales are on the rise. Russia made significant progress in improving the legislative environment and legal framework for IPR protection. the lack of Internet-related IPR enforcement (including ISP liability and regulations for takedown notices). Russia passed amendments to Part IV of the Civil Code for compliance with the Trade-Related Aspects of Intellectual Property (TRIPs) agreement. however. Administrative cases are dealt with by general jurisdiction courts or state commercial courts that have jurisdiction over economic disputes. were more than double that in 2009. trademarks and geographical indications. however. totaling more than $11 billion. criminal or customs legislation. The Code of Administrative Offenses concerns IPR infractions which violate public or private interest or rights. the protection of intellectual property rights (IPR) is enforced on the basis of civil. Concerns remain. In 2010. thanks in part to cheaper legitimate products. administrative. and amended the Law on Circulation of Medicines to provide for 6 years of regulatory data protection upon WTO accession. and computer software) remain a serious problem. The IPR provisions of the Criminal Code apply to infringements of copyright.by number and volume. a growing consumer preference for high quality goods.

and ratified the two treaties in early 2009. he signed a law that authorizes the use of mediation in various kinds of disputes. 2011. and provides for the confidentiality of mediation proceedings and for their enforceability in court. Individual bankruptcy cases would be handled by the commercial courts. including commercial ones. it represents an important step towards further development of ADR in Russia. and is expected by many observers to be enacted. the Geneva Phonogram Convention. . police have used IPR enforcement as a tactic to elicit bribes or harass NGOs. New legislation that would introduce a system of individual (personal) bankruptcy or insolvency has been drafted. In July 2010. and in 2010 completed steps to implement the Treaty. and the Madrid Agreement. At times. Topologies of integrated microcircuits are protected by Russian law.´ In 2008.continue to carry out end-user raids against businesses using pirated products. the Patent Cooperation Treaty. Russia applied to join the World Intellectual Property Rights Organization (WIPO) Copyright Treaty and the Performance and Phonograms Treaty. Although there are still issues concerning how it will be applied. Russia has had a law providing for bankruptcy of enterprises since the early years after the breakup of the Soviet Union. Russia also ratified the Singapore Treaty on the Law of Trademarks in 2009. Russia has acceded to the Universal Copyright Convention. President Medvedev has repeatedly and publicly encouraged the more widespread adoption of alternative dispute resolution (ADR) to help courts handle their caseloads and to provide citizens with speedier and cheaper methods of resolving legal disputes. whereas computer programs have the same level of protection as literary works. The law took effect on January 1. The copyright term is ³Life + 70. the Berne Convention. the Paris Convention.

Investors must do careful research to ensure that each contract fully conforms to Russian law. Companies often have little recourse other than the courts to resolve tax disputes. branches of government. and government resolutions is a challenging task. They complain that the tax police make no distinction between overt tax-evaders and inexperienced SMEs who do not fully understand the bookkeeping requirements. While firms have successfully appealed to the courts. Penalties for non-compliance include confiscation of property and freezing a company's bank accounts. tax authorities are often slow to implement judicial decisions. as well as due diligence processes. Keeping up with legislative changes. reaching final agreement with local political and economic authorities can be a long and burdensome process. Uneven implementation of laws creates further complications. As a result. Negotiations and contracts for commercial transactions. Contracts must likewise seek to protect the foreign partner against contingencies that often arise. and allowed first-time offenders to escape . various officials. forbade pre-trial detention for tax offences. Well-intentioned small and medium-sized enterprises (SMEs) often go out of their way to follow the law but are then penalized for making mistakes in documentation. A 2010 law greatly increased the criminal threshold of tax underpayment. continue to be complex and protracted. Companies should be prepared to allocate sufficient funds to engage local legal counsel to set up their commercial operations in Russia. with various parts of the government continuing to implement new regulations and decrees on a broad array of topics. and jurisdictions interpret and apply regulations inconsistently and the decisions of one may be overruled or contested by another.TRANSPARENCY OF REGULATORY SYSTEM The legal system in Russia remains in a state of flux. including the tax code and requirements of other regulatory and inspection bodies. Surveys have shown that many entrepreneurs complain about the complexity of the tax code and requirements of other regulatory and inspection bodies. presidential decrees.

but not consistently. which are effectively under the Kremlin¶s control. Mr. President Dmitry Medvedev. Medvedev¶s victory was assured given the genuine and overwhelming popularity of his predecessor. POLITICAL STABILITY General Political Environment: Political power in Russia is highly centralized in the President and the Presidential Administration within the Kremlin which exert their influence over all aspects of domestic and foreign policy. The State Duma is a body that is loyal to the Kremlin and has little autonomy. ministries and other Russian government bodies also publish proposed legislation (including draft laws. All draft laws that go through the Russian Duma are published on the Duma¶s website. the few western observers present for the elections conceded that Mr. Medvedev¶s candidacy. United Russia. Putin ensures policy stability and predictability for the long-term. Putin¶s anointed successor and endorsement by the pro-Kremlin governing party. Mr. the legislative and executive branches are for all intents and purposes now fused. The 2008 election cannot be considered fair by accepted democratic standards: opposition candidates were banned from standing and the broadcast and much of the print media. Putin¶s protegé was elected with 70% of the popular vote in the March 2008 presidential election.criminal liability for a tax offence if they pay their arrears during the pre-trial investigation. Given the dominance of United Russia in the Duma and Mr. government decrees and regulations) on their websites. Mr. While there is opportunity for public comment. the general perception is that this opportunity is limited and that it can have minimal impact. Sometimes. Following the election of former President Vladimir Putin in early 2000. favoured Mr. Despite the lack of fairness. Putin¶s position as PM. as its candidate. There is little effective opposition with only the Communist Party opposing the Kremlin within the . Medvedev¶s election and his close partnership with Mr. political stability and policy predictability gradually increased. Medvedev benefited tremendously from being Mr.

the GOR also issued a decree establishing the new ³Titanium Valley´ industrial SEZ located near rich titanium deposits in the Yekaterinburg Region. Putin should he decide to return to the Presidency in 2012. conceivably giving him another 12 years in power under current conditions. Irkutsk Region. and port zones (Ulyanovsk airport and Murmansk and Khabarovsk seaports). President Medvedev signed into law a constitutional reform that extends the presidential term from 4 to 6 years. Moscow. North Caucasus Federal District. and reduced tax rates on income. tourist and recreation zones (Kaliningrad Region. Stavropol Region. Specifically. a more favorable customs regime (including the waiver of import duties and refunds of the value-added-tax). In January 2009. The SEZs are developing gradually. In December 2010. Tomsk). technology and innovation zones (St. property. Russkiy Island. Altai Region. pro-Kremlin parties hold 393 of the 450 seats. Moscow Region. with the majority of investments still listed as ³planned. These SEZs fall in one of four categories: industrial and production zones (Lipetsk Region. and transport. This reform would benefit Mr. SEZ investors also receive cut rates on infrastructure expenses. land. Enterprises operating within SEZs enjoy a range of benefits that the Ministry of Economic Development (MED) ± which manages the SEZ program ± estimates can save investors up to 30%. Petersburg. FOREIGN TRADE ZONES/FREE PORTS Nineteen Special Economic Zones (SEZs) have been established pursuant to legislation passed in 2005. investors are subject to streamlined administrative requirements and procedures.Duma. Samara. Republic of Tatarstan. Yekaterinburg Region). it comes into effect after the next election in 2012.´ Detailed information about the benefits and results of Russia¶s SEZs can be . as well as in the constituent republics of Altai and Buryatia). including facilities and utilities costs.

This year. compared to the same period in 2009. Applicants for residency are evaluated and selected by an international admission board. compared to the same period in 2009.2% in the first nine months of 2010. Those incentives include complete exemption from profit tax. and import duties. FDI from the Netherlands and Cyprus is consistently high because most FDI coming from these two countries is either returning or reinvested Russian capital through subsidiaries or off-shore vehicles. Independently of the SEZs.economy. the largest share of foreign investment came from Germany. and other investment (largely trade credits). Russia enacted a set of laws to regulate Skolkovo.) . (Note: The data in the tables below are from the Russian State Statistical Service (RosStat) and may differ from data maintained by the Central Bank of Russia and the U. Skolkovo is projected to be similar to an SEZ with a broad array of incentives for resident companies.found at the MED¶s SEZ website: http://www. At the end of September 2010. portfolio investment. and commercialization of technological innovation. Total foreign investment declined by 13. FOREIGN DIRECT INVESTMENT STATISTICS The foreign investment by country for the first nine months of 2010. According to Russian statistical practice. property taxes. Department of Commerce. defining and codifying the benefits associated with it. but no companies are yet resident there. value-added tax. As of December 2010. However. Inspired by the model of Silicon Valley. the government has extended benefits temporarily to non-resident companies until at least 2014. and partial exemption from social fund payments.gov. in 2010 President Medvedev launched an initiative to establish an ³innovation city´ in the town of Skolkovo in the Moscow suburbs to promote investment in high-technology startup businesses. research.S. total foreign investment numbers include direct investment (FDI). several international corporations have made public commitments to invest in Skolkovo.ru/minec/activity/sections/sez/main/.

092 317 537 N/A N/A . 2009 Total 5.231 4.258 FDI 1.600 N/A 8.095 943 1.231 1.912 430 735 N/A N/A Jan-Sept.905 FDI 1.507 5. 2010 Total Germany Netherlands Cyprus UK France China Luxembourg 7.By Year (in USD million) Country Jan-Sept.348 5.507 8.240 2.494 1.066 2.635 4.635 1.520 7.Top Ten Investors .098 1.

641 N/A 92 N/A All Others Total 14.279 1.738 2.272 54.196 16. TRADE REGULATION AND STANDARD .975 6.827 47.136 8.488 2.884 9.Ireland USA Japan 1.229 862 818 N/A 222 N/A 595 1.

IMPORT TARIFFS Russia continues to maintain a number of barriers with respect to imports. and discriminatory licensing. 2004 (with the exception of foodstuffs. Certain commodities continue to be regulated through seasonal duties and quotas. discriminatory and prohibitive charges and fees. The following is a selection of tariff ranges for popular U.S. . Changes in the Commodity Schedule were implemented in 2004 in accordance with the international obligations of the Russian government to comply with HS codes and Russia's intention to enter the WTO. there are two other charges applied to imports: The ubiquitous Value Added Tax (VAT) and selective excise taxes. for fruits and vegetables from 10% to 5% and for sewing machines from 25% to 20%. goods entering Russia. please refer to the ³Customs Regulations and Contact Information´ section below. registration and certification regimes. The universal VAT rate was reduced from 20% to 18% effective January 1. The new customs tariff schedule changed rates for 140 categories of commodities. lowering the tariff ceiling for 90% of the categories. including tariffs and tariff-rate quotas.and video. Notable changes included lowering import tariffs for audio. For more detailed information concerning tariffs. In addition to tariffs.equipment and components from 20% to 15%.

and varies from 20% to 570%.S. harvesters. automobile makers already manufacturing in Russia will be less affected because the duty increases will only impact their imported vehicles and will not apply to their cars produced or assembled at Russian plants. as will other factors. tariff. The duty increases will likely contribute to sales declines in Russia for the major U. and excise tax combined. For example. and increased to a prohibitive level for used cars older than four years.19 of January 17. certain steel products (including pipes.pharmaceuticals and medical supplies for which VAT is 10%) and is applied to the import price. The duty increases for butter and milk were also substantial. 2001 provides a list of vitally essential medical equipment to which no VAT is applied. alcohol and cigarettes. After the initial nine-month period. and certain agricultural products (including butter. The duty increases for soy meal were also likely intended as a revenue collection measure. From December 2008 through February 2009. which will be in effect for a temporary period of nine months. It appears that the Russian government imposed these measures mainly to protect domestic producers from competing imports during the global economic crisis. The duties on imported vehicles increased by as much as 20% for new cars. exports to Russia. the Russian government will make a determination whether to maintain the duty increases or to let them expire. There are some exemptions from VAT. As . These duty increases. The excise tax applies to a number of luxury goods. tube and rebar).S. will likely be a hindrance to U. U. while the duty increase for soy meal (used as a protein supplement in animal feed) was more modest. the Russian government announced a series of significant duty increases on cars.S. resolution No. The duty rates for harvesters were increased dramatically by at least 200%. and EU producers of agriculture equipment. milk and soy meal). including the strengthening of the dollar and Euro against the ruble and the current difficulties in securing financing within Russia for the purchase of foreign agricultural equipment.

S. in most cases. Previously. Russia pledged to allow foreign ownership to account for as much as 70% of the country¶s total banking sector equity. a few foreign service providers have noted that they are forced to pay a range of fees to obtain licenses from local authorities. However. TRADE BARRIER In general. The 1996 federal law ³On Banks and Banking Activity´ permits foreign banks to establish subsidiaries in Russia. However. sub-national regulations and practices that may violate Russian law.Russian companies continue to struggle with the crisis. Those trade investigations.S..S. it is possible that the Russian government will impose additional duty increases on other imported goods. Discrimination against foreign providers of non-financial services is.S. Russia¶s regime remains extremely complex due to its lack of clarity and transparency. which will likely conclude in February and March 2009. the Russian Ministry of Industry and Trade is currently conducting global safeguards investigations of harvesters and of certain steel products. at the time the bilateral agreement was signed. but stems from abuse of power. and overall redundancy. companies are encouraged to obtain appropriate legal advice or assistance from experienced distributors or consultants. For example. U. Russia had the prerogative to legislate the limit on foreign capital to 50% of total equity. In November 2006. U. As explained in detail in the ³Standards´ section below. companies face a number of tariff and non-tariff trade barriers when exporting to Russia. a major step in Russia¶s accession to the WTO. Commercial Service. signed their WTO (World Trade Organization) Bilateral Agreement. A complaint frequently voiced by U. not the result of federal law. As part of this Agreement. Russia¶s pledge essentially ³grandfathered´ in that 20% . Russia and the U. Russia does not allow foreign banks to establish branches in Russia. could result in the imposition of additional duties or import quotas on those products. foreign equity accounted for 20% of the total. fees that domestic companies allegedly bypass via bribes.S. companies is Russia¶s complex system of standardization. While the system has improved somewhat. as well as the U. In addition to duty increases.

and has been permitting multinational companies to benefit from this more generous treatment provided they conduct their Russian investments via their EU-based offices. and will be able to open direct branches at the end of a nine-year transition period. the electricity holding company that controlled all of Russia¶s power assets. Although the unbundling and privatization of RAO UES was initially hailed as a huge success. however. Once Russia becomes a WTO member and the United States grants permanent normal trade relations status. as in the banking sector. the hydroelectric giant RusHydro. Heads of foreign banks' Russian offices are required to be proficient in the Russian language. Russia maintains the discretion to limit foreign sourced charter capital in the insurance sector and if the ratio of foreign sourced to total charter capital in the insurance sector ever exceeds the 50% cap. The Central Bank has required new foreign bank subsidiaries to have a minimum of ¼5 million in capital (the same requirement is applied to domestic banks) and that at least 75% of the bank's employees and 50% of the bank's management board be of Russian nationality if the chairman is not a Russian citizen. s a condition to the generating companies¶ spinoffs. and a number of distribution operators. insurance companies will be allowed to operate through subsidiaries. In the insurance sector. completed its corporate reorganization and ceased to exist. were grandfathered and are not subject to the foreign equity limit. foreign insurance firms are subject to a 49% equity restriction. Foreign firms that were active in Russia when this requirement came into effect. U.S. It has been succeeded by 24 companies: six wholesale private generation companies (³OGK¶s´) and 14 ³territorial´ generation companies (³TGK¶s´). including 100% foreign-owned non-life insurance companies. with the exception of those connected to nuclear energy. Russia¶s regulators will have the discretion to take certain actions specified in Russia¶s WTO commitments. Russia also has more generous operating provisions for insurance companies from the European Union.and provided new foreign equity the potential to absorb/account for an additional 50% of total banking sector equity. concerns are growing. a Federal Grid. investors in the OGK¶s and TGK¶s agreed to implement plans to modernize and expand their respective electricity . However. RAO UES. In July 2008.

it limits the share of foreign capital in aviation enterprises to less than 25% and requires that board members and senior management staff be Russian citizens. fuelefficient aircraft they need to remain competitive with foreign airlines. However. It seems unlikely that modernization and expansion of the sector¶s infrastructure ± a major purpose of the reorganization ± will occur in the near future.5% over four years following . but several are seriously considering significant purchases or wet-leases of foreign aircraft in an attempt to be more competitive with Western airlines.500 additional planes in the next twenty years. doubt that recent proposals to raise the limit to 49% would be sufficient to attract foreign capital for Russia¶s aircraft industry. guarantees on investment) for Russian and foreign investors in aviation-related research and manufacturing ventures. Domestic aircraft manufacturers only produce ten planes per year on average and therefore cannot keep up with Russian airlines¶ projected demand for 1. The signed bilateral agreement on Russia's accession to the WTO and the corresponding side letter on leased aircraft could yield significant market access opportunities. Consequently. In aviation. with narrow body leased aircraft enjoying immediate tariff reductions.infrastructure. The side letter on leased aircraft has been in force since November 19. Tariffs on wide body aircraft will be reduced from 20% to 7. and access to affordable credit. Current Russian law stipulates preferential treatment (tax holidays. There is speculation that the 25% limit could be raised or eliminated to make way for further investment. however. it is still unclear to what degree the electricity generation market will ultimately be deregulated. these investment obligations have become very expensive. Some observers. In light of slowing Russian economic growth and tight financial conditions. Because the restructuring was only completed in July 2008. and whether it will operate in a transparent and non-discriminatory manner. The airlines hope that Russia's commitment to reduce aircraft tariffs as part of its WTO accession will help them purchase the modern. These plans were premised on the assumptions of robust economic growth and demand. 2006. a number of investors are backing out of acquisition deals or seeking to renegotiate the terms of their acquisitions with the Russian government. many of the Russian-flagged carriers have aging fleets and use outmoded avionics and engines.

The Customs Authority issues authorization for temporary entry of goods based on a written application submitted by an importer. commercial documents such as commercial invoices and packing lists. at customs. A declaration must be supported by the following documents: contracts. Full conditional relief from customs duties is allowed when it does not affect the Russian economy. exporting firms are required to complete a Shipper¶s Export Declaration (SED) but this document does not need to be presented to Russian Customs. Exporters must present the appropriate export license (see next section). As long as the lease is signed before January 1. aircraft with less than 50 seats will be charged only 8% and those with 115-160 seats will be charged 10%. such as the temporary import of: ‡ Containers. will be reduced to an average of 5%. The regulations also ensure that transfers of hard currency payments for imports are for goods actually received and properly valued. certificates of conformity and/or safety (see "Product Standards" below) certificates of origin (if applicable). 2011. Tariffs on civil aircraft parts. transport documents. As for all exports. although they may ask for it. and other types of containers and packages for repeated use . sanitary certificate (if applicable) and documents confirming legitimacy of declarants/brokers/importers. import licenses (if applicable).accession. In addition. including engines. The list of goods for temporary entry with full relief from customs duties and taxes as well as terms of such relief is regulated by the Russian government. if one had to be obtained. Customs officials may seek other documentation to substantiate the declared value of any shipment. currency control regulations require issuance of a "passport" for both exports and imports to ensure that hard currency earnings are repatriated to Russia. pallets. IMPORT REQUIREMENT AND DOCUMENTATION Importers are required to complete a Russian customs freight declaration for every item imported. Temporary entry of goods is allowed with full or partial relief from customs duties and import VAT for a period of up to two years.

nutritional value (calories. When partial relief from customs duties is applied. sports. conditions of storage. LABLING AND MARKING REQUIREMENT Labels on food items must feature the following information in the Russian language: type and name of the product. used at trade shows and exhibitions. cinematography and tourism fields ‡ Products for international assistance ‡ Commercial samples. food contents (name of basic ingredients and additives listed by weight in decreasing order). not for sale. 3% of the amount of customs duties and taxes should be paid on a monthly basis for the period when goods are located in the customs territory of the Russia Federation. expiration date (or production date and period of storage). legal address of the producer (which may be given in Latin letters). as established by the Customs Code. All goods falling outside of this list are subject to partial relief only. weight or volume of the product (if a food item is preserved in liquid ± weight without the liquid mass). vitamins if their content is significant or if the product is intended for children or for medical or dietary use). Article 213 of the Customs Code provides for temporary import with a partial exemption from customs duties for 34 months when goods are classified as main production assets on the condition that such goods are not owned by the Russian entities using them in the territory of the Russian Federation. cultural. .‡ Goods for the purposes of the development of international relations in the scientific.

. which stipulates the application of quotas. PROHIBITED AND RESTRICTIVE IMPORTS The import and export of goods in Russia is carried out in accordance with the Federal Law on ³Government Regulation of International Trade Activities´ of 2003. rules and conditions for effective and safe use of the product. licenses and other temporary restrictions on such operations. and terms and conditions of use. usage instructions.directions of preparation of semi-finished goods or children foodstuffs. the main characteristics. and other information determined by the state regulation body. Labels on nonfood items must include the name of the product. warning information on any restrictions and side effects. the country of origin and the name of the manufacturer (which may be given in Latin letters).

Licenses for sporting weapons and self-defense articles are issued by the Interior Ministry. and controlled by the State Customs Committee. Licenses are required for many items including: ‡ Alloys ‡ Carpets ‡ Color televisions (14.Import licenses are issued by the Russian Ministry for Economic Development or its regional branches. and 25-inch) ‡ Combat and sporting weapons ‡ Ethyl alcohol ‡ Explosives ‡ Medicine ‡ Military and ciphering equipment ‡ Precious metals ‡ Radioactive materials and waste ‡ Self-defense articles ‡ Stones ‡ Strong poisons and narcotics ‡ Tobacco products Stones ‡ Vodka and many other types of alcoholic beverages MARKETING OF PRODUCT AND SERVICES . 21.

7. MARKETING OF PRODUCT AND SERVICES MODES TO ENTER IN RUSSIAN MARKET .

About 43% of all franchisors are in the Moscow region (Central Federal . as well. Since 2000.1. The fast food and retail sectors represent the largest shares.900 franchisees. the number of franchising systems in Russia has grown from 54 to approximately 300. many Russian entrepreneurs have discovered that working with established brands requires the utilization of modern business practices and technology. therefore. First. both the business community and consumers are better educated about established brands. On average. lack of market middleman makes distribution expensive and inefficient. resulting in brand value and recognition. being associated with an established brand may offset certain risks characteristic of the Russian economy. 2 FRANCHISING: The Russian business community has developed a better understanding of franchising as a way to do business and has a growing interest in it. giving them more efficiency and. Development of the service sector is slower. In order to take advantage of these favorable factors. an advantage over their competitors.AGENT AND DISTRIBUTOR: In Russian marketing through agent and distributor is weak and inefficient. with a total of 2. There are over 160 domestic franchising businesses in Russia. Finally. Therefore people or entrepreneur in Russia uses small service contractors which initiate the marketing activity. This has come about as a result of three main factors. 22% and 46% respectively. and more and more private Russian enterprises and entrepreneurs seek partnerships with recognized Western companies. many entrepreneurs have turned their attention to franchising. Statistics on franchising in Russia are somewhat unreliable and figures vary widely. each franchisor has six franchisees in Russia. but in general they tend to support several observations. with some sources estimating as many as 600. Firms engage in training and development various middleman in basic marketing and principles and practices. but growing. Second.

District). For this reason the organization and carrying out direct marketing for your company will be carried out from studying of your target audience. There are a considerable quantity of means of direct-marketing and information channels. communications (representation of your company and its production) should occur to target audience on its native language. and with most effective communication channels (information distribution management). Russia presents great opportunities for skillfully designed joint ventures. or IJVs. International joint ventures. 3 DIRECT MARKETING : Direct marketing is one of inexpensive means to start business of your company on the new grocery markets. but it is becoming more expensive . However. Investing in Russia can be a bargain. in Russia must deal with a weak infrastructure. with more than 148 million people. Petersburg and northwest Russia (North-Western Federal District). Assuming that franchising development in retail segments will have some correlation with the development of the total retail market. Proceeding from your purposes and the budget the most effective decision will be offered to you. Giving of the information and design. According to recent statistics. working out of design and a way of giving of the information. an unstable environment. Russian retail trade turnover in 2008 grew by 13% to approximately $543 billion. it is possible to predict a very bright future for retail franchises. target segments and geographical zones. constantly changing legislation. 4 JOINT VENTURES : There is no question that starting a joint venture in Russia is not for the faint of heart. a well-educated labor supply. corruption. 15% in St. As a rule. and also advancement of your company should be adapted under features of national perception and culture. Also this tool can be used as original studying of the market interesting you. and about 12% in the Urals (Urals Federal District). and bureaucracy. and excellent natural resources. Another large segment where franchise opportunities exist is retail trade.

joint ventures were allowed only between Russia and Eastern European countries through the Council for Mutual Economic Assistance. foreign companies. However.are now allowed to start wholly foreign-owned firms in Russia. and IJVs no longer receive preferential treatment over other forms of business. were allowed to start joint ventures with the USSR as part of Lenin's New Economic Policy. of Joint Ventures with Participation of Soviet Organizations and Firms from Capitalist and Developing Countries. International joint ventures are not a new phenomenon in Russia. A number of U. and found the Russian consumer market to be lucrative. however. Procter & Gamble. . From the foreign partners' perspective. including those from Western countries. where the greatest opportunities lie. consumer goods companies including M&M Mars. In the 1920s. and Pepsi. Between 1930 and 1987. however. IJVs still represent the optimal method of foreign direct investment in Russia. SELLING TO GOVERNMENT : selling the commodities to government in Russia follow the same step as in other countries like tender. project ventures. or CMEA. Coca-Cola. several key factors make a joint venture desirable: 5. quotations. "The Establishment and Operation.DISTRIBUTION IN RUSSIA : Despite many challenges. Foreign investors. to name a few have penetrated beyond the major cities.every day. It is Russia's vast hinterlands. on the Territory of the USSR. in the early 1930s Stalin ended most joint venture activity in Russia. if challenging. Firms considering starting a Russian-foreign joint venture can substantially improve their chances of success by learning from the experience of JVs already operating in Russia. In January 1987 a new wave of joint venture activity began when the USSR Council of Ministers passed a decree. bidding etc 6.S. In most cases. Russia remains one of the world's last great untapped consumer markets." This decree opened the door for all foreign firms to open joint ventures with Russia.

wines. and spirits.Distribution is one of the greatest challenges facing U. The first Western items to penetrate these stores have been M&M Mars products ("Mars Bars. Coca Cola and Pepsi beverages. East European juices. erratic distribution channels. relentless competition. consumer goods companies in Russia. and an emerging class of indigenous Russian retailers. To sell successfully outside Moscow and St. sporadic competition. Western joint-venture shops." "Whiskas" pet foods. A growing number of these outlets now sporadically distribute Western goods to supplement sales of local products. . though they do not yet resemble product distribution systems found in Western countries. by contrast. and "Uncle Ben's" sauces. and word-of-month advertising. In Russia. The present Russian distribution system still incorporates the old Soviet-era gastronome (or food store). as well. and European chocolates. distributed by Mars Russian subsidiary Masterfoods). Many have privatized. distributors encounter well-defined distribution channels. Penetrating these channels is often the key to success or failure. though most are still run by their Soviet-era managers. In the United States. These changes have pushed the informal market channels to become more structured and sophisticated. Since Russia began its transition to a market economy. Retail Distribution Russian retail distribution is a fascinating combination of the old and the new. more and more Western consumer goods have become available. and million-dollar advertising budgets. The gastronome and other Soviet-era shops continue to be vital retail outlets in many Russian cities.S. Petersburg means working in a system where distribution takes place through relatively informal channels. Many shops and gastronomes now have Kodak film processing facilities. distributors face rudimentary.

8. AVALABILITY OF LOCAL PROFESSIONAL SERVICE .

Here accountant are easily available. being a developed economy people uses expert consultancy and services for business. tax benefits etc y Accountant : An accountant is a practitioner of accountancy or accounting which is the measurement. busy enough running the company and lacking the resources of larger corporations. But in this environment.Availability of professional services in Russia are satisfactory. promotion. often end up leaving the financial operations and day-to-day bookkeeping to a local employee.Everyone operating a business in Russia faces the challenges of an unfamiliar accounting system and complicated legal requirements. tax authorities and others make decisions about allocating resources. and representing clients before courts. investment. y Attorneys: A person admitted to practice law in at least one jurisdiction and authorized to perform criminal and civil legal functions on behalf of clients. These functions include providing legal counsel. The Big Four auditors are the largest employers of accountants worldwide. administrative agencies. drafting legal documents. Business managers. investors. disclosure or provision of assurance about financial information that helps managers. and other tribunals y Advertisement firms: t . where laws and regulations are changing daily.

Russia intends to become a hub between Asia and Europe. Bozell 8. insufficient transparency and limited logistics know-how do. Bates/S&S/Zenith 3. It covers 11 time zones that have completely different geographic. Nonetheless. Bureaucratic hurdles and a poor infrastructure complicate logistics processes in Russia just as a lack of competition. cultural and climatic features. DHL. Friedman & Rose 7. 1. McCann-Erickson Russia 4. GGK Moscow 9. Example´ TMBC. Grey y Logistics: Russia is the world¶s largest country in terms of area. the leading agencies are:. Ogilvy & Mather 5. BBDO Marketing 6.here are many advertisement firms in Russia . Young & Rubicam 2. Limco etc .

BUSINESS TRAVEL .9.

the handshake is less firm When female friends meet. almost bone-crushing handshake while maintaining direct eye contact and giving the appropriate greeting for the time of day.When close male friends meet. Close friends and family members call each other by their first name only. Last name. Naming Conventions Russian names are comprised of:First name. The typical greeting is a firm. In formal situations. .Customs in Russia Meeting Etiquette . which is the person's given name. Friends and close acquaintances may refer to each other by their first name and patronymic. When men shake hands with women. which is the family or surname. starting with the left and then alternating. people use all three names. they kiss on the cheek three times. The son of Ivan would have a patronymic of Ivanovich while the daughter's patronymic would be Ivanovna.ovna' for a female. Middle name. which is a patronymic or a version of the father's first name formed by adding 'vich' or '-ovich' for a male and '-avna' or '. they may pat each other on the back and hug.

.. . Dressing well shows respect for your hosts. . If you are invited to a Russian home for a meal. and Orthodox Christmas. Male guests are expected to bring flowers. Include advanced university degrees on your business card. Business Cards . note their pertinent information. Russians often protest when they are offered a gift. Women should wear subdued coloured business suits with skirts that cover the knees. Asking 'are you sure?' allows the hostess to accept your offer. . It is bad luck to do so sooner. Dining Etiquette If you are invited to a Russian's house Arrive on time or no more than 15 minutes later than invited. Business cards are exchanged after the initial introductions without formal ritual. Do not give yellow flowers. Hand your business card so the Russian side is readable to the recipient. If someone does not have a business card. Do not give a baby gift until after the baby is born. Men should wear business suits. Dress Etiquette . . Shoes should be highly polished. . You may be given slippers to wear. Business dress is formal and conservative. Reply that it is a little something and offer the gift again and it will generally be accepted. . This may be turned down out of politeness. Remove your outdoor shoes. New Year. Dress in clothes you might wear to the office. Expect to be treated with honour and respect. .Gift Giving Etiquette Gift giving using takes place between family and close friends on birthdays. bring a small gift.Offer to help the hostess with the preparation or clearing up after a meal is served. . Have one side of your business card translated into Russian using Cyrillic text.

which is then taken to a Russian embassy or consulate. Although it is possible to arrange your own Russian visa. travelers need an invitation from a Russian citizen or a company. If you live in a city with a Russian consulate. most travelers choose to hire a visa service to do the work. to a very fast (and terribly expensive) same-day processing. where the actual visa is issued. Russian consulates have many options for visa processing. If you don't make it through this bureaucratic loop. the visa needs to be registered by the person/organization that issued the invitation. Beware. Within three business days of arrival in Russia. In order to get one.VISA REQUIREMENT All foreigners (except citizens of some former Soviet republics) visiting Russia need a visa. you may have problems leaving the country. that most Russian consulates only accept paperwork early in the morning. from a regular 2-week (cheapest) processing. you may save some money by going and applying on your own. .

Communication is mainly regulated through the Federal Law "On Communications" and the Federal Law "On Mass Media" .TELECOMMUNICATION Russia was among the first countries to introduce radio and television. Due to the enormous size of the country Russia leads in the number of TV broadcast stations and repeaters. The telecommunications system in Russia have undergone significant changes since the 1980s. but in the past two decades many new state-run and private-owned radio stations and TV channels appeared. The foundation for liberalization of broadcasting was laid by the decree signed by the President of the USSR in 1990. resulting in more than 1. In 2005 a state-run English language Russia Today TV started broadcasting. and its Arabic versionRusiya Al-Yaum was launched in 2007. There were few channels in the Soviet time.000 companies licensed to offer communication services today.

the same administrative agency owned and operated the airports.InfoCom-2004 telecom exhibit in Moscow. a characteristic that has continued in the Russian Federation. Thus. In 2008 it was re-subordinated back to "Minvsyazi TRANSPORTATION MODES: The transportation system during the Soviet period was organized in the form of vertically integrated monopolies controlled by the central government. for example. The "Ministry of press and information of the RSFSR" was in 1990s renamed to "Ministry of Press. The infrastructure eroded seriously in the late Soviet period and requires much modernization and reform. and . for which Russia relies heavily on foreign investment and aid. Broadcasting and Mass Communications Minpechati and in 2004 it was turned into the "Federal Agency on Press and Mass Communications Rospechat which was no longer a standalone ministry but a subdivision to the "Ministry of Culture and Mass Communications" (originally "Ministry of culture of the RSFSR"). Roads Roads were one of the least-used forms of transportation in the Soviet Union. airlines. and enterprises that manufactured aircraft. Soviet industry placed little emphasis on the production of automobiles and other modes of personal transport.

the demand for road construction was small.608 billion ton-kilometers of cargo traffic.000 kilometers of that total served specific industries and were not available for general use (see fig. in contrast to the emphasis on passenger traffic in West European railroad systems (see table 19. the penchant of Soviet economic planners for locating manufacturing facilities in politically expedient areas rather than where raw materials and other inputs were available. Railroads Railroads are the dominant mode of transportation. and another 25 percent required repaving. The prominence of railroads is the result of several factors: the vast distances that need to be covered. The entire system is 1. 209. but 67. In 1995 Russia had 934. However. This pattern is a product of the Soviet emphasis on heavy industry and production rather than on consumers.000 passenger-kilometers .52-meter gauge. Appendix). 26 percent of which were electrified. In 1995 Russia had some 154.000 kilometers were not available for public use because they served specific industries or farms.3 million kilometers in the United States Of Russia's total. compared with the 26 billion ton-kilometers provided by trucks. therefore. Cargo traffic is the predominant use of railroads. and 445. and the conditions for granting state fuel subsidies.000 kilometers were unpaved.000 kilometers of railroads. and by 1994 the total had dropped to 227. The World Bank has estimated that in twenty years the demands of Russia's new economy will increase the road system's share of transportation to 41 percent from its 1992 level of 13 percent. table 20. compared with 6.the privately owned vehicle was a relatively rare phenomenon. In 1993 railroads accounted for 1. in 1992 some 38 percent of Russia's highway system required rehabilitation or reconstruction. The dominance of the railroads for cargo transport also constrained the demand for the construction of roads. In 1992 Russia's railroads accounted for 253.000 passenger-kilometers.000 kilometers of roads. Many major bridges also required large-scale repair in the mid-1990s. 11). which provided no incentives to break up cargo transportation into shorter-haul operations that could be covered by road.

5 percent by 1993. the contribution of air service to total travel had dropped to 12. and the number of passengers flying was less than half the 1990 total. Vladivostok.500 and 2.Air Transportation Of the modest amount of passenger traffic in Russia. Subsidized air fares and long-distance flights between cities accounted for much of the air activity in the early 1990s. In 1995 Russia's merchant marine had about 800 ships with a gross tonnage of more than 1. and eighty container ships. Water Transportation Maritime transportation plays an important role in Russian transit.000. Many Russian rivers run from south to north rather than from east to west. The largest Arctic port. Murmansk. of which fiftyfour had runways longer than 3. 202 had runways between 2. Russia's major ports providing access to the Baltic Sea are St. about 100 oil tankers. Russia also owns 235 ships that are over 1. In 1990 the monopoly service of Aeroflot. and another 108 had runways between 1. In 1991 the merchant marine carried 464 million tons of cargo Public Transportation . Petersburg and Kaliningrad. maintains an icefree harbor despite its location on the northern shore of the Kola Peninsula.000 tons and sail under foreign registry. and Novorossiysk and Sochi are the main Black Sea ports. and Petropavlovsk-Kamchatskiy account for the bulk of maritime transportation on the Pacific coast.000 meters. air service accounts for a relatively large portion. However. Magadan. In 1994 Russia had a total of 2. but the country's geography and climate limit the capacity of shipping. accounted for 22 percent of the total distance passengers traveled.400 meters.517 airports. of which half are standard cargo vessels. the Soviet Union's state-owned airline. Nakhodka. a proportion comparable with the proportion of travel on the airlines of the United States and Canada. constraining their use during the Russian winters. although the volume of traffic declined in the first half of the 1990s.000 meters.400 and 3.

Novosibirsk. its closest relatives are Ukrainian and Belarusian. e. Bashir. Russian is a Slavic language in the Indo-European family. especially Polish and Slovak. although Bulgarian especially has somewhat different grammar. next are the South Slavic languages. There are over 100 minority languages spoken in Russia today.g. and in certain areas traditional bilingualism resulted in language mixture. Soviet policy makers gave low priority to civilian transportation. From the point of view of the spoken language. Although few of these populations make up even 1% of the Russian population. built in the 1930s as a showpiece of Stalinist engineering. Most speakers of a minority language are also bilingual speakers of Russian. St. it is thought that over 81% speak the official language of Russian as their first and only language. An East Slavic Old Novgorod dialect. the most popular of which is Tartar. remains the most reliable and inexpensive means of transportation in the nation's capital. and Samara. is sometimes considered to have played a significant role in the formation of the modern Russian language.Although the high price and scarcity of passenger automobiles required Soviet citizens to rely on public transportation. Surzhyk in eastern Ukraine and Trasianka in Belarus. these languages are prominent in key regional areas. Yekaterinburg. Mordvin and Chechen. Petersburg. although vanished during the 15th or 16th century. Nizhniy Novgorod. . these languages are spoken interchangeably. In many places in eastern and southern Ukraine and throughout Belarus. LANGUAGES: The Russian Language Of Russia's estimated 150m population. Other minority languages include Ukrainian. Chuvash. spoken by more than 3% of the country's population. Only six Russian cities have underground systems--Moscow. The next closest relatives are the West Slavic languages. The extensive and decorative Moscow subway system. the other two national languages in the East Slavic group.

This is mainly due to a continued lack of funds. as well as people's attitudes toward this sphere of policy. the quality of services and their accessibility remains quite low." which in many ways defined the very character of medical service organizations across the country. finally. medical and technical equipment and supplies. and. The State cares for the health of its citizens. principles of word formations. The initial reforms liberalized economic relationships and placed the health care system in a market environment. both the East Slavic and the Church Slavonic forms are in use. In this way. most medical facilities have given the highest priority to problems of lack of finances and financial instability.The vocabulary (mainly abstract and literary words). . the East Slavic forms have tended to be used exclusively in the various dialects that are experiencing a rapid decline. see Russian phonology and History of the Russian language. being formerly financed by the federal budget. According to such an approach. which undertake entire responsibility for his or her health. they been unable to provide people with an acceptable level of health care services. every person is under the umbrella of the State and its medical facilities. found itself in a very difficult situation--immersed in a market environment without the capacity to be an active member of that market. However. to some extent. a developed and partly adopted form of the South Slavic Old Church Slavonic language used by the Russian Orthodox Church. a health care system was created which found itself fully dependent on the state and its governing bodies Under present conditions of economic crisis. For details. inflections and literary style of Russian have been also influenced by Church Slavonic. HEALTH y MEDICAL FACILITIES: Despite the large number of hospitals and a huge army of medical doctors. to the ineffective organization of health care delivery services. As a result. with many different meanings. and. The entire health care system. In some cases.

total cost equals original product price plus all import taxes . This makes their prospects rather uncertain: MEDICAL INSURANCE: The healthcare infrastructure throughout the country. Holidays: typically 28 days per year Temporary Entry AND PERSONAL BELONGINGS: Temporary imports by foreign companies which are accredited with Russian government authorities are exempt from customs duties. LOCAL TIME. except major cities ( Moscow. BUSINESS HOURS NAD HOLIDAYS: Standard time zone: Summer time: Current time zone offset: Time zone abbreviation: UTC/GMT +5 hours +1 hour UTC/GMT 6 hour YEKT y y Average working hours: 40 per week. individuals. is important to us all. travelers. and teachers expatriate health insurance. Companies not accredited with Russian government authorities are charged 3 percent of the total cost of the product on a monthly basis. Our expert consultants can advise on the most suitable level of coverage for families. This applies to goods imported only for company use and for one year only.Medical facilities at many different levels of the formerly hierarchical system have become deeply involved in the problems of day-to-day financing of their activities and have been frustrated by their inability to take the necessary steps towards achieving financial stability. is fairly limited in the services that it can offer and typically is only able to provide emergency stabilizing care. and Vladivostok ). groups. Feeling comfortable in the knowledge that if something was to happen to a family member their medical costs will be taken care of. St Petersburg. In this case.

There are no restrictions on the temporary entry of personal laptop computers or other business materials and personal belongings into russia. .

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