Trade relations between the United States and Russia are governed by the U.S.-Russia trade agreement, signed in June, 1990 with the USSR and approved by the U.S. Congress in November, 1991. The USSR ceased to exist before ratification of the agreement, but the United States offered the agreement (with minor technical changes) to each of the emerging states of the former Soviet Union. Russia's parliament approved the agreement, making it possible for the United States to extend most-favored-nation status to Russia on June 17, 1992. Russia is now in the process of acceding to the WTO.

Russia's bank for foreign economic relations (VEB) continues to owe about $220 million to U.S. companies,a debt that accumulated in the early part of the decade. The For the past several years, a source of friction has been the failure of Soviet/Russian enterprises to pay their debts; since 1990 approximately 70 U.S. companies have reported to the Commerce Department that they were owed over $220 million total. In addition to the arrears problem, Russia's Bank for Foreign Economic Relations stopped payment on its letters of credit and froze all hard currency accounts in late 1991. The Government promised to begin covering VEB debts beginning in 1994, but no funds were allocated in either the 1994 or 1995 budgets for this purpose. The Department of Commerce is currently trying to coordinate an effort to form a U.S. creditors group to facilitate negotiations on this effort with the Russian Government.

IMPORT POLICIES

The combination of high import duties, a 20 percent value-added tax charged on imported goods, and excise taxes assessed on certain imported goods (automobiles, cigarettes, alcoholic beverages, aircraft) depresses demand for imports. Frequent changes in customs regulations without warning have created problems for foreign and domestic traders and investors. The government has raised import duties several times since 1992. In mid-1995, under the advice of the IMF, the government rationalized its duties, establishing rates of 5 to 30 percent on most goods.

Russia has recently announced moves to quantitatively restrict imports such as vodka and textiles. However, these efforts are contravened by commitments made by the Government of Russia to liberalize trade under the IMF Extended Fund Facility.

In early 1996, the Russian government took a series of actions which effectively banned U.S. poultry exports which account for 20 percent of all U.S. exports to Russia. As a result of stricter sanitary standards, the government refused to issue import licenses for U.S. poultry. In addition, the Russians raised the tariff on poultry and implemented a minimum reference price, both of which negatively impact on U.S. exports. The U.S. is working with the Russian government to reopen the Russian market to U.S. poultry.

STANDARDS, TESTING, LABELING AND CERTIFICATION

Russia's July 1993 Consumer Protection Law stipulates official certification (by GOSSTANDART) of imported products for conformity to Russian technical, safety, and quality standards. Certification is based on a combination of international (notably European Union) and Russian standards. All food items imported into Russia are subject to food quality and safety standards and require a certificate for each shipment. Manufactured items can receive certificates allowing import of a good over a three–year period. Import licenses are required on the normal range of dangerous and harmful materials and goods. U.S. companies have complained of costly procedures and arbitrary certification requirements. Due to the many difficulties experienced by American companies in this area, the American Chamber of Commerce in Moscow recently named standards and certification as one of four main obstacles to increased American trade and investment in Russia.

Russia is establishing reciprocal standardization with the U.S. and other countries and acceptance of foreign certification by accredited institutions. A joint Russia–U.S. communique of December 1993 pledges cooperation on improving and simplifying certification, testing and quality assurance of U.S. and Russian products in each others' markets. A February 1994 Memorandum of Understanding between the U.S. Food and Drug Administration and the Russian Ministry of Health and Medical Industry established a framework for cooperation and exchange of information on drugs and biological products in order to speed their importation.

Under a new protocol for fresh pork, signed in late 1995 by the Russian veterinary department and USDA's Food Safety and Inspection Service, fresh U.S. pork is entering Russia for the first time. Cooperative agreements on food safety being worked out between the U.S. Food and Drug Administration and the Russian State Committee on Sanitation and Epidemiological oversight (Goskomsanepidnadzor) will facilitate trade in fresh fruits and vegetables and other food products.

GOVERNMENT PROCUREMENT

The Russian Government has virtually eliminated the Soviet practice of centralized imports through state- owned foreign trading companies, but an organized system of government procurement with standardized regulations and procedures does not yet exist. Some large-scale trade deals "for state needs" (such as oil-for- sugar barter deals between Russia and Cuba) still take place. Typically, however, the government awards the right to implement such deals on its behalf to private or quasi-private trading houses.

Russian ministries and government agencies are frequent purchasers of equipment, goods and services for their own needs or for the needs of various domestic organizations or groups (ie, the military, regional health organizations, or population centers located in remote areas). However, these purchases are done on an ad hoc as-needed basis, are not subject to uniform procedures or supervision, and are usually accomplished through direct negotiations with selected potential suppliers rather than through publicly announced competitive tenders. While domestic suppliers are not accorded any official advantages or privileges in competing for such procurement, the Russian government's strong political bias toward supporting domestic industries probably works in favor of Russian suppliers.

EXPORT SUBSIDIES

The Government has announced plans to introduce a system of support for exports in 1996. Discussion to date indicates that it will have very limited budgetary funding and be aimed at stimulating exports of manufactured goods. Russia has no explicit export subsidies on agricultural products, although from time to time subsidies for specific commodities may have the effect of spurring temporary increases in exports of those commodities.

LACK OF INTELLECTUAL PROPERTY PROTECTION

The Russian government has made considerable progress in putting into place the legal framework to bring the country up to world standards in the area of intellectual property protection. Meaningful criminal penalties for IPR infringement are still needed. The U.S.-Russia bilateral trade agreement also requires Russia to provide protection for intellectual property. In 1992, acceptable laws on trademarks and appellations of origins, patents, and protection of semiconductor chips and computer software were enacted. A law on copyright was approved by the Supreme Soviet in July 1993. Since 1994, Russia has been a member of the Paris Convention, the Universal Copyright Convention and other major multilateral intellectual property conventions. In 1995 Russia began to adhere to the Berne and Geneva Conventions.

Even though Russia has passed laws that generally meet world standards, enforcement of those laws to date has been limited. There is currently extensive piracy of U.S. video cassettes, films, music, recordings, books, and computer software in Russia. Administrative and judicial review bodies will have to be created and their personnel trained. The United States will continue to monitor IPR enforcement carefully and will provide assistance to help the Russian Federation improve enforcement.

SERVICES BARRIERS

Discriminatory measures against foreign providers of non-financial services are not so much the result of federal laws as abuse of power, sub-national regulations, or practices that may even violate Russian law. For example, foreign providers of services have sometimes noted discrimination in obtaining licenses from local authorities, often having to pay several times the fees paid by domestic companies.

INVESTMENT BARRIERS

A Bilateral Investment Treaty (BIT) was signed between the United States and Russia in June 1992. It has been approved by the U.S. Senate, but it will not enter into force until approved by the Russian Duma.

Survey data generally indicate that fear of political instability tops the list of impediments to investment in most emerging markets such as Russia. According to a survey by the Russian/EU Center for Economic Performance between February and May 1995, foreign investors in Russia indicated their greatest concern to be the legal system. They were particularly concerned about shareholders' rights and weak contract law. Foreign investors must seek approval for their projects on the federal, regional and local level. The vagueness of existing laws can lead to differing interpretations and conflicting requirements on the different levels. Much of the legal system is being rewritten, a naturally slow process further complicated by the unsettled political situation in Russia. Ownership of real property, particularly land, is highly controversial. The land code is still under consideration in the Duma, having passed only the first of three readings necessary for passage. However, on March 7, 1996, Russian President Boris Yeltsin signed a land decree guaranteeing individuals the right to own and trade property.

Economic disincentives were ranked second by foreign investors, with particular concern about inflation and the incoherence of the tax system. The government has made significant progress on inflation through greater fiscal and monetary discipline in 1995, but the tax system remains a major disincentive to investors. Crime and corruption in commercial transactions are also an inhibiting factor; in 1995 the government undertook highly publicized efforts to reduce corruption in the police force.

The primary political concern of foreign investors surveyed in late spring of 1995 was expressed as skepticism about a lasting commitment to reform. Recent government decisions affecting foreign investment have been mixed. In January 1994 the government expanded the rights of foreigners to participate in the privatization process (admitting foreigners to voucher auctions without prior approval), thus improving prospects for foreign investment. In February 1994, the government began to allow foreigners to purchase up to 10 percent of each month's issue of government securities, a market previously off limits to foreigners. The commercial banking law passed in December 1995 allowed the moratorium on foreign and joint-venture banks to expire on January 1, 1996, but it contains potentially troublesome clauses on reciprocity and other potential limitations which could put foreign banks at a disadvantage. Foreign banks entering as branches may open only one branch, and the capital of all foreign banks cannot exceed 12 percent of the capital of the entire banking sector. The law on production sharing agreements for the oil, gas and minerals sector was also passed at the end of 1995, but it fell short of what most foreign investors were seeking. Some concern about the government's commitment to reform will remain a substantial barrier to investment even after the outcome of the June 1996 presidential elections is known.

Regarding purely financial disincentives, most foreign investors list concerns about profit repatriation. There are no longer any legal barriers to profit repatriation, but dividends must be paid into special accounts. These funds can then be converted to hard currency and repatriated, but investors perceive themselves vulnerable to changes in the currency and banking regulations which might impose limits on the right of repatriation. Investors have also expressed concern about their inability to get accurate information about potential business partners.

OTHER BARRIERS

In an effort to curtail capital flight accomplished through export and import operations, the Russian government has instituted a "passport" system for exports and imports. An additional requirement may be instituted in 1996 that exports and imports be evaluated by an independent agent to certify that the value listed on invoices is accurate. Such additional bureaucratic steps could potentially add time and cost to the process.

Aircraft

Russia raised its tariffs on imported aircraft from 15 to 50 percent in March 1994. Although these tariffs were lowered to 30 percent in 1995, they were still at a prohibitive level. There are also concerns about non-tariff barriers protecting the Russian domestic market while Russia supports its well-established domestic aircraft industry.

On January 30, 1996, Vice President Gore and Russian Prime Minister Chernomyrdin concluded a Joint Memorandum of Understanding (MOU) that addresses U.S. concerns about barriers to access to the Russian civil aircraft market and the application of international trade rules to the Russian aircraft sector. The joint MOU ensures that U.S. aircraft manufacturers will be able to participate in the Russian market and to share in its growth. The MOU also makes clear that the Russian aircraft industry will in time be fully integrated into the international economy and will be subject to the same international trade disciplines as are U.S. and most other aircraft manufacturers. Russia has confirmed that it will eventually become a signatory to the Agreement on Trade in Civil Aircraft, which together with the WTO, establish the basic international rules governing trade in the aircraft sector.

In the interim before Russia accepts full international trade obligations, the MOU commits Russia to provide fair and reasonable access to its market. The Russians will take steps, such as the granting of tariff waivers, to enable their airlines to meet their needs for U.S. and other non-Russian aircraft on a non-discriminatory basis. As the Russian economy and the demand for aircraft strengthen, the granting of tariff waivers will increase. Russian tariffs on aircraft will be steadily reduced.