Panel IV :

Relations and
into the
World Economy

Russia: External Economic Relations
and Future Development

Leonid Fituni

Russia's participation in international trade and the world economy in general has declined during the current reform period. At the same time, the country has become much more dependent on external economic factors. Private consumption in particular now relies heavily on foreign goods. The positive side of this, says Leonid Fituni, is that the country will eventually become much more closely integrated into the world economy. But he warns that the poorer majority of the population may feel squeezed out of today's new economic order. There is a danger that they will give vent to their feelings of alienation by turning to isolationist politicians - a situation that would be worrying for both Russia and the West.

Professor Fituni is Director, Centre for Strategic and Global Studies, Moscow.


This paper offers a comprehensive overview of current trends in the Russian external economic sector. The analysis is given of the current trends in exports and imports. Capital flows into and from Russia are reviewed. Special attention is given to the problem of capital flight.

The paper argues that Russia's participation in international trade and other sectors of international economic relations (except for foreign borrowing) decreased in volume during the years of reform. At the same time, Russia's dependence on external economic factors has increased many-fold. Therefore, future Russian governments will not be able to execute policy without taking into consideration the external economic factor, as domestic economic development is largely dependent on outside factors. Internal consumption - especially in the private sector - relies heavily on foreign supplies, as domestic supply has been severely undermined.

This situation can result in Russia's further integration into the international community and Moscow's greater preparedness to participate in joint efforts to solve major international problems. At the same time it may lead to unprecedented feelings of privation and rejection for the poorer majority of the population, who may choose to bring to power political forces that are more inclined to implement an inward-looking national policy and economic development.

External Economic Relations and Integration into the World Economy

External economic relations are an important sector of Russia's economy. By the level and type of the development of this sector one can judge how far Russia has progressed along the way of market reforms; what is its new role in the world economy, the prospects for accelerating its development.

The changes that took place in Russia's external economic sector are radical and unprecedented. The most far-reaching result of the late perestroika and post- perestroika periods was abandoning the concept of the state currency and foreign trade monopoly. Now thousands of economic units are engaged in both spheres. The volume and the structure of exports and imports changed, too.

Unfortunately, while they are theoretically "progressive", these changes did not bring about increased efficiency in external economic relations. In fact a lot of negative results impeded Russia's development along the lines of a market economy.

First of all, the demise of COMECON resulted in a catastrophic decrease in trade with its former participants and reduced the amount of available resources for economic reform and for maintaining the standard of living of the population. By the end of the 1980s COMECON countries accounted for over 50 percent of foreign trade turnover of the Russian Federation; now they account for only about 15 percent.

Second, the anticipated free market breakthrough of Russian goods to Western markets did not materialise. The barriers, introduced by the West against Russian goods, not only remained as in Soviet days, but in some cases became even more intricate. In 1992-1994 two dozen anti-dumping legal procedures were started against Russia in the West. Many traditional markets were lost. The situation was aggravated by unfavourable dynamics of world prices: they fell for Russian export products and increased for imports.

As a result of these developments and trends, Russia's foreign trade turnover in 1994 was only half of that reached in 1990. Raw materials now absolutely dominate exports - 50 percent of the total is accounted for by energy sector products (mainly oil and gas), and 25 percent cent by metals and diamonds. In fact it exactly repeats the composition of Angola's exports in 1973 (with exclusion of coffee). The share of machinery has been constantly falling since 1988.

In 1994, the export value of the fuel and energy complex (FEC) products reached $21.3 billion, up 6 percent from 1993, though its share in overall export volume has been falling since 1992. Russia tries to compensate for the falling efficiency of its exports by increasing the physical volume of exports. But it manages to reach this goal only by reducing prices for its products. Therefore economic efficiency of export is declining. Over the past two years the growth in total export volumes is due to increased deliveries of FEC products and a boost in exports of other sectors. However, the FEC continues to remain a key sector of the economy for hard currency resource provision and export efficiency. The latter is caused by a rather low level of domestic prices - especially for oil and gas, compared to world markets.

1994 witnessed a cut in contract prices for nearly all types of FEC products; compared to 1993 the aggregate index of contract prices reached 0.95. A rise in export value (against the backdrop of reduced contract prices) was due to growing delivery volumes; the physical volume index reached 1.12. In the first quarter of 1994 it stood at 1.07, in the first half-year at 1.11; it reached 1.12 over the first nine months of 1994.

The export structure of FEC products, notwithstanding slight fluctuations over the year, became almost identical to the 1993 structure by the end of 1994. Oil deliveries account for 42 percent of total exports of FEC products. In 1994, oil exports reached 89.4 million tons, up 9.5 million from 1993. The increase in delivery volume amounted to 11.9 percent At the same time, average contract price dropped from $104.7 to $99.8 per ton, or by 4.7 percent. As a result, the export value grew by a mere 6.6 percent to total $8.9 billion.

It is worth noting that oil contract prices underwent nearly the same changes as did contract prices on the world markets; the deviation in average contract price from the world market did not exceed 3 percent in the spring and early summer of 1994; in other seasons this deviation ranged from 4.5 to 6.7 percent. Moreover, 1994 saw a closer correlation between world and contract prices and volume of oil deliveries, which was not typical of 1993.

A boost in oil exports occurred against a backdrop of declining oil extraction. According to preliminary results of 1994 compared to 1993, oil extraction decreased by 11.5 percent. The share of exports in production volumes increased to 30.4 percent against 24.1 percent in 1993. In 1994, 109.7 billion cubic metres of natural gas were exported, up 14.4 percent from 1993. This means that a larger proportion of natural resources is not used internally, but has to be used to secure hard currency inflows, absolutely necessary in order to service Russia's huge external debt.

According to the Ministry of Foreign Economic Relations, in 1995, countries outside the former Soviet Union accounted for four-fifths of the $33 billion worth of foreign trade Russia did (in the first four months of this year). Trade with what is called the "Far Abroad" was worth $26.7 billion in January-April, 13.2 percent more than in the same period of last year. Trade with the CIS fell 4.5 percent to $6.5 billion. Russian trade with the countries outside the former Soviet Union has continued to grow over the entire period, despite a 15 percent drop in January-April turnover with Australia and Oceania. Trade with Africa doubled to an albeit still modest $463 million in the first 4 months. The country still does half its trade with the non-CIS nations of Europe - $18 billion in January-April, $2.5 billion more than in 1994.

Overall, in the first five months of 1995, Russia reported exports up 14.7 percent at $20 billion and imports up 11.1 percent at $13 billion, giving a hefty surplus of $6.9 billion. The Commission for Urgent Issues, a key executive body, reported January-April exports of oil at 38.1 million tonnes, 3.7 million tonnes more than in the same period of last year and including 9 million tonnes to the CIS and 29.1 million tonnes to the rest of the world.

The import trends are quite volatile. Until 1992 imports were increasing. Then the government managed to reverse the trend and the volume of imports began to decrease, but since 1994 growth has resumed.

In 1994, considerable changes were seen in distribution of import volumes between sectors and in the composition of imports within sectors: ferrous metals imports, engineering product imports, chemical product imports, foodstuff imports and non-food consumer goods imports.

The share of ferrous metal products in the overall value of imports dropped to reach 2 percent from 2.5 percent in 1993. Some $564 million of imports were purchased.

Compared to 1993, the share of rolled products and steel imports in import values increased, rising from 15.2 percent to 19.5 percent, while imports of pipes fell from 84.8 to 80.5 percent in 1994. $110 million worth of rolled products and steel were purchased, down 10 percent from 1993. In 1994, a total of 569,000 tons of pipes was imported, compared to 812,000 tons in 1993. However, in 1994 purchases were made at higher prices. The average contract price totalled $798.4 per ton, up 16.4 percent from 1993.

The amount of engineering products in overall import value remained at the 1993 level -34 percent. Some $9.6 billion worth of machinery, equipment and vehicles were purchased as compared to $9.1 billion in 1993. The structure of engineering imports has undergone drastic changes (Table I).

The import value of ground transport vehicles, chiefly cars, decreased by $683 million in 1994. Imports of minibuses and trucks increased. The import of minibuses soared, rising by 130 percent. However, the import value did not exceed the 1993 level due to lower contract prices. The average contract price for a car ran at $3,000 in 1994 compared to $4,600 in 1993. The cost of a truck dropped to $34,000 in 1994.

The share of chemical product imports in total import values increased, reaching 4.8 percent in 1994 from 2.1 percent in 1993. Chemical imports reached $1.35 billion, up 140 percent from the 1993 value. This increase is primarily due to increased purchases of medicines. Their share reached 85.2 percent of chemical product imports or $1.16 billion, compared to $300 million in 1993.

The import value of foodstuffs reached $3.4 billion in 1994, which is near 1993's level. The structure of these imports underwent large changes (Table II). In 1994, some two million tons of grain were purchased compared to 11.1 million tons in 1993 and 28.9 million tons in 1992. $314 million was spent on grain imports in 1994 instead of 1.6 billion in 1993 and 4.2 billion in 1992.

Sugar purchases were also curtailed. In 1993, compared to 1992, imports of sugar, including raw sugar, shrank by 19 percent. In 1994, they fell by another 26.5 percent, to total 2.3 million tons. Imports of white sugar comprised 50 percent of overall sugar imports, the same as in 1993.

Imports of other foodstuffs saw a boom: beet purchases rose 350 percent, poultry imports rose 440 percent, the import of coffee and tea rose 130 percent, fruits (apples and citruses) rose 430 percent, and the import of butter rose 140 percent.

Imports of meat and poultry grew to 32.7 percent of total food imports in 1994 from 5 percent in 1993. Domestic production fell by 23.7 percent.

The import of non-food consumer products fell by 50 percent to total $1.7 billion, compared to 3.5 billion in 1993. The increase in import customs tariffs in July of last year caused a reduction in the import of consumer goods. In the second half of the year the average duty per conventional imported unit (including fabrics, clothes, footwear and furniture) rose to 17 percent from 13 percent. The value of imports dropped as a consequence by 12 percent in 1994. No drastic changes occurred in the import structure of non-food consumer products (Table III).

During recent years many changes were introduced in the legal regulation of external economic relations. The law on customs tariffs was adopted as well as laws on currency regulation and currency control. A Presidential decree removed privileges given to participants in export and import operations.

A new import tariff is in force. The average tariff is now 5-7 percent higher. In future a gradual decrease of tariffs is envisaged, starting with commodities, the tariffs for which are higher than 30 percent.

In general, as a result of reforms, the system of external trade became more flexible. It reacts adequately to the general economic changes and to the developments in the world economy. But the system is still far from being economically efficient.

Capital flight is an important problem. It significantly reduces the volume of resources available for implementing economic restructuring and securing internal capital accumulation. Gross capital outflows from Russia are currently estimated at about $50 billion, of which capital flight proper makes for $35-40 billion. Though from a free-market point of view this phenomenon may be considered "normal", in the sense that free capital in a free country looks for greater security and higher efficiency, it poses a severe strain on the Russian economy, which in fact feeds overseas countries and territories at its own expense. Capital inflows of all types (including foreign aid, direct and portfolio investment) average $1-2 billion a year.

Russia timber exporters are reported to have concealed 50 percent of their foreign currency earnings in 1994. According to the Federal Counter-Intelligence Service, violations by some of the exporters have been acquiring an "increasingly criminal nature."

About 30 percent of Russia's timber products was exported at dumping prices in 1994, and some areas (such as the Perm region) exported timber even at below domestic prices. Security services uncovered widespread financial violations, involving mostly barter deals (30 percent of all deliveries in 1994 were on barter). Foreign currency earnings were concealed everywhere. The Arkhangelsk pulp-and-paper mill, for instance, concealed $7.8 million of export revenues.

A dramatic decline in production, despite a favourable market situation and widespread violations, have made timber producers themselves demand government regulation of the industry, and by the start of 1995 virtually all timber exports deals were supervised by the state-owned Roslesprom Co. which has in fact been granted the status of a government ministry.

In the meantime, major Western financial institutions have been displaying a great interest in Russia's timber industry complex, paying particular attention to investment programmes including equity in Russian production facilities. Under existing Russian laws, a foreign investor can currently own up to 35 percent of the stock. However, the Swedish Tetra Laval still managed to acquire absolute control of the Svetogorsk pulp-and-paper mill, and changes in its production policies have already been creating problems for the mill's traditional consumers inside the country.

In general there are a number of channels of capital outflow from Russia - according to MFER at least 10 percent of export revenues are not remitted to Russia under the pretence that the importer refused to pay for the imported goods. But 80 percent of this money is used for import of commodities from abroad. Another channel is deliberate over-invoicing of imports and under-invoicing of exports. The difference is placed in a Russian resident account opened with a Western bank. Still another channel are advance payments against import contracts, which partners allegedly "fail" to fulfil (failed goods deliveries). The sums received by a foreign firm from a Russian partner are placed on account of the latter in a Western bank.

150,000-200,000 permanent residents of Russia opened their private accounts in the West (not an illegal practice, but one normally frowned upon by Russian authorities).

Emigrants from Russia sell their apartments, dachas, cars, etc., for hard currency, asking buyers to place the money on their accounts abroad. The annual outflow in this form is about $1 billion.

The illegal flight of capital from Russia is much higher than the volume of international aid the country received since 1992. Because of internal instability and unfavourable exchange regulations Russian companies and individuals stash their currency earnings in foreign bank accounts rather than bringing the money home and investing it in Russia. In one instance a source in the Ministry of Finance disclosed in August 1992 that "ten to twelve billion dollars came in and they did not know where it was".

The International Monetary Fund is hoping that the tough economic policies it is prescribing for Russia will attract capital back into the country by increasing confidence in the country's ability to pursue painful reforms. However the recent moves by the Russian government indicate that the currency regime may become harsher but it will not compensate for the stability needed.

The last and most important issue to be discussed is how Russia's place in the world economy has changed and what the implications are for internal development. This question is multifaceted and it is difficult to give a simple and clear-cut answer to it.

Our short overview shows that Russia's participation in international trade and other sectors of international economic relations (except for foreign borrowing) has decreased in volume during the years of reform. At the same time Russia's dependence on external economic factors has increased manifold. It means that nowadays no kind of government will be able to execute its policy without taking into consideration the external economic factor. It also means that domestic economic development is also to a large degree dependent on extraneous factors, including external inputs. Internal consumption, especially the private share, relies heavily on foreign supplies, its domestic basis being severely undermined.

This situation can result in Russia's further integration into the international community and Moscow's greater preparedness to participate in joint efforts to solve major international problems. At the same time it may lead to unprecedented feeling of privation and rejection on the part of the poorer majority of the population, which may choose to bring to power political forces more inclined to implement an introvert type of development.

Imports - Table I

in percent
in percent
84-90 Machinery,
equipment and vehicles, total:
100.0 100.0 523
84 Nuclear reactors, boilers, rel. equipm. 50.3 51.1 336
85 Electrical machines and equipment 18.1 21.3 399
86 Railway engines and rolling-stock 40 3.6 -18
87 Ground vehicles 19.2 9.5 -829
89 Ships, boats and other vessels 3.2 0.9 -202
90 Optical instruments and equipment 5.1 12.9 777

Imports - Table II

in percent
in percent
Foodstuffs and food elements including: 100.0 100.0
grain 46.6 9.4
raw and white sugar 31.8 21.9
meat and poultry 3.4 14.5
tea and coffee 4.8 10.9
citruses and apples 3.5 18.7
milk, cream, butter and other fats 3.9 8.7
vegetable oil 1.8 1.8
other foodstuffs 4.2 14.1

Imports - Table III

Second half
compared to
first half '94
in percent
in percent
1st half 1994
in percent
2nd half 1994
Fabrics 97.5 6.1 6.7
Clothes 81.7 54.7 50.9
Footwear 91.8 21.9 22.9
Furniture 98.6 17.3 19.5

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