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80 Oil 40 Natural gas (right 10 axis) 0 Fig. 2. Average wholesale motor gasoline and furnace fuel oil prices set by enterprises in US $ terms in 1992 through 2003, US $ / metric ton Motor gasoline Furnace fuel oil Yu. Bobylev New regime of sugar market regulation in Russia The world market of sugar is one of the most regulated food markets. Less than one fourth of the world sugar output is sold on a free market. Russia is a major player on the world sugar market: it buys about 4-million tons of sugar (both raw and white) annually. So, the world price for sugar is largely shaped by Russias behavior on this market. Changes in respective domestic demand have an effect on the world price.

Besides, prices on the world sugar market (similarly to most markets of raw materials) are very volatile.

Given the current situation on the world sugar market Russia has to support home production of sugar beets as a damper mitigating the effect of world market fluctuations on domestic market.

But the world average cost of processing sugar out of beets is higher than that of processing it out of cane.

That is why almost all countries growing beets implement rigid protectionist policies. Sugar production is the most regulated production in the world and all attempts to liberalize trade in sugar have failed. Russia also has to render certain support to domestic production of sugar beets in order to protect itself from too much dependence on fluctuations on the non-free world market.

Its logical to assume that the rate of protection should be set so that to ensure competitiveness of white sugar produced out of sugar beets grown and processed at average costs with, first, sugar processed at the same average costs out of imported raw sugar, and, second, with imported white sugar. But if applied, such an approach to protection mechanism will preserve the non-efficient production structure both in sugar beets growing and in sugar processing: production becomes profitable for many marginal producers that failed to restructure their business during the reform years. In agriculture its certainly due to soft budget constraints that shaped in the past 11 years. Such a protectionist measure will only hinder the needed restructuring. Thus to encourage higher efficiency both in the primary production and in processing its more rational to determine the necessary protection rate on the basis of modal, i.e. the most typical, production terms.

In this case the current rate of protection for raw sugar is according to our estimates a little bit below the required level while that for white sugar is excessive, i.e. it unduly lowers the efficiency of sugar consumption in the country.

Now lets consider a possible mechanism of protection. It can be effected using different tools and their combinations: tariff quotas, production quotas, flexible, fixed and seasonal duties. Lets review some of the potential approaches currently discussed in the agrarian establishment.

First of all, this is the mechanism of tariff quotas for raw sugar and seasonal duties on white sugar applied in the past three years. As we have stressed in earlier publications, the current quota mechanism has failed to notably increase sugar beets production in Russia (Picture 1 and Picture 2). In 2003 the planted area enlarged but this was due to a sharp drop of grain production profitability in the previous season rather than to raw sugar import constraints. On the other hand, the then effective mechanism of quotas was accompanied with the growth of domestic retail prices for white sugar (and, correspondingly, for products containing sugar) and also of wholesale sugar prices for industrial consumers. Finally, the quota mechanism for raw sugar in combination with seasonal duty on white sugar resulted in larger imports of sugar substitutes. Quota auctions not only increased direct costs of purchasing raw sugar but also resulted in higher associated costs:

consumers of raw sugar had to get credits for buying quotas and thus enlarged their expenditures even more.

Picture 1. Russia: Areas planted in sugar beets, million hectares 1, 0, 0, 0, 0, 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 Source: RF State Committee for Statistics.

Picture 2. Russia: Gross production of sugar beets, million tons 3 3 2 2 1 1 1 9 8 6 - 9 0 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 Source: RF State Committee for Statistics.

Production quotas, i.e. the lower limit of sugar production out of sugar beets for all sugar plants, could be void of tariff quotas drawbacks, but sugar production is not a licensed one and thus control and effective punishment for violating this constraint become hardly possible.

The enforcement of seasonal duties on white sugar results in corresponding growth of raw sugar imports.

The advantages of fixed duty are its simplicity and the highest efficiency in influencing market. But given high volatility of world sugar prices it becomes a stiff mechanism transferring all world market fluctuations to the domestic market.

Thus the most adequate mechanism of sugar market regulation in the current situation could be flexible import duties equal to the difference between domestic support prices set for the whole year and the world prices.

Such a mechanism is transparent for all market agents, is not fraught with corruption, ensures flexibility of regulation enabling to preserve balance between interests of both sugar consumers and producers in Russia.

Besides, its necessary to introduce duty on all sugar products (with sugar contents above a certain percent determined by technical experts of Russian sugar industry). Only then the tariff protection will be efficient and the government wont have to take ad hoc protective measures against import of sugar syrup, caramel, etc. (further in the list will be corn sweeteners and chemical sugar substitutes). Almost all countries regulating sugar import regulate the market of sugar products as well.

In December 2003 a new mechanism of sugar market regulation was introduced in Russia the flexible import tariff. It actually sets the level of raw sugar support price at 470 US dollars per ton presuming that the basis of Caribbean Sea Krasnodar region deliveries is 100 dollars per ton. The world price is determined on the basis of New York Board of Trade (CSCE/NYCE) quotations. The principal formula for calculating the size of duty is as follows: the support price less delivery basis and less the average monthly price for raw sugar at the exchange. Since the first two variables are fixed, the duty will be determined by the world price:

the higher it is, the lower is the duty. So, the world market fluctuations are mitigated on the domestic market ensuring certain stability for both buyers and sellers.

So, the idea is good but its implementation details may result in its utter discredit.

First, the support price for raw sugar is set at 470 US dollars per ton although such an amount could be enough even for white sugar (the difference between prices for white and raw sugar is approximately 50 US dollars per ton). In other words, the support price for raw sugar is at least 50 US dollars per ton higher than it should be thus fostering further retail price rise.

Second, the method of binding import tariff to the average exchange price is non-transparent. The new regulation specifies 9 intervals of exchange price change, and the import duty size is to be determined for each of them. However, the exchange price intervals and import duty intervals do not coincide. Besides, uncertainty on the market is provoked by the mechanism of import duty calculation. The draft specifies that the Ministry of economic development and trade publishes the mean arithmetical exchange price by the 15th next month. The duty comes in force beginning from the 1st following month. So, the duty for t month will be based on exchange price in t-2 month. Its too a risky mechanism: e.g. exchange prices in t month can be low and the duty is correspondingly high, while in t+1 month the situation can differ radically. Then the import of raw sugar in t+2 month will be unduly costly. In other words, the proposed mechanism does not mitigate the world market volatility and can even aggravate it thus inciting speculative trends on the market.

Third, the flexible duty is introduced only on raw and white sugar while the mechanisms for other sugar products remain as they were. This is certainly fraught with the market situation when the import of sugar products will become much more lucrative than the import of raw sugar. This will entail the forming of a group of speculators, i.e. the phenomenon that contradicts the strategy of ensuring stability on agrifood markets in the country.

E. Serova Foreign Trade In October of 2003, the Russias foreign trade turnover grew by 20.1 per cent in comparison with the figures registered in the respective month of the preceding year and made US $ 19.1 (according to the balance of trade methodology). At the same time, the amount of exports made US $ 12.4 billion (a historical high in all the post-Soviet years), while imports were registered at the record high over the last 6 years (US $ 6.7 billion). The foreign trade turnover grew by 9.1 per cent in comparison with the figures registered in the respective month of the preceding year.

The growth in exports by 23 per cent in comparison with the figures registered in October of 2001 was primarily determined by the persisting favorable business situation on the world markets.

In October, the oil market demonstrated an upward trend in prices. The average Urals oil price made US $ 28.2 per barrel (a 9.6 per cent growth in comparison with the September figures), while the Brent oil price was registered at US $ 29.6 per barrel (an increase by 9.2 per cent). The major factors behind the rise in prices were the decision of the OPEC member countries to decrease oil extraction by 900 thous. barrels per day since November 1, 2003, and the high seasonal demand for oil and oil products, especially in the USA, at the background of a relatively low level of reserves in oil storage tanks.

In the first ten months of 2003, the average prices of Russian oil (Urals) were by 15.5 per cent above the figures registered in the respective period of 2002, while Brent oil price was above the respective indicator by 17.5 per cent.

The prices of Russian natural gas remained high. For instance, over 10 months of the year the average contract price increased by 27.8 per cent in comparison with the figures registered in the respective period of the preceding year.

The appearing signs of recovery of the world economy facilitated a growth in prices on the market of nonferrous metals. The nickel prices grew especially significantly. By end-October, the current nickel price has reached the record high over the last 14 years US $ 11950 per metric ton. The factor behind the growth in nickel prices already continuing unceasingly for several months running was the increase in the consumption of this metal, especially in China. The average nickel, copper, and aluminum prices increased over months of the year in comparison with the figures observed in the respective period of the preceding year by 34.1 per cent, 10.1 per cent, and 5.1 per cent respectively.

Figure Main indicators of Russias foreign trade (in US $ bln.).

-1997 1998 1999 2000 2001 2002 Balance Export Import Source: RF Goskomstat, Central Bank of Russia Table 1.

The average monthly world prices in October of the respective year 1996 1997 1998 1999 2000 2001 2002 Oil (Brent), USD / barrel 24,08 17,9 12,8 24,1 32,14 21,45 27,2 29,Natural gas, USD /1 mil 2,742 2,346 2,205 2,558 5,767 2,649 4,144 5,Btu Gasoline, USD / gallon 0,67 0,569 0,421 0,699 0,895 0,603 0,801 0,Copper, USD / metric ton 1968,5 1900,7 1659,2 1748,1 1838,6 1405,1 1519,0 1916,Aluminum, USD / metric 1341,1 1538,5 1354,2 1470,7 1473,5 1280,8 1313,2 1474,ton Nickel, USD / metric ton 7060,9 6240,5 4262,4 7984,2 7353,2 4836,8 6840,9 11030,Source: calculated in accordance to the data presented by London Metal Exchange (UK), International Oil Exchange (London) In October of 2003, the real Ruble / US $ exchange rate exceeded the level registered in the respective month of 2002 by 16 per cent. Besides, the level of GDP increased by 7.3 per cent in comparison with the level observed in October of 2002. Higher purchasing power of Ruble in relation to US $ and growing proceeds in the economy objectively facilitated higher levels of imports.

As a result, in October of 2003 the amount of import of goods increased by 14 per cent in comparison with the levels registered in the respective month of 2002. At the same time, imports from CIS member countries grew significantly more: by 27 per cent as compared with the level registered in October of 2002, while imports from countries outside CIS increased by 11 per cent. As a result, the share of CIS member countries in imports decreased by 2 p. p. in comparison with the level registered in October of 2002 and made 79 per cent.

Imports grew at a more slow rate than exports, what resulted in a significant increase in the active balance of trade up to US $ 5.7 billion, what is above the level registered in October of 2002 by US $ 1.5 billion.

Apr Apr Apr Apr Apr Apr Apr Oct Oct Oct Oct Oct Oct Oct Jan Jan Jan Jan Jan Jan Jan July July July July July July July On December 15, 2003, there were enacted new duties on import of cars manufactured 3 to 7 and more years ago. The rate of the import duty on cars manufactured seven and more years ago was set at 2 Euro per 1 cubic cm of motor capacity. Import duties on cars aged 3 to 7 years makes 25 per cent of their customs values, but not less than Euro 0.55 per 1 cubic cm. The duty on newer cars remained without change.

It should be reminded that previously Russian citizens had to pay from Euro 1.4 to Euro 3.2 for import of cars manufactured seven and more years ago (depending on the respective motor capacity). Import duties on the cars aged 3 to 7 years made from Euro 0.85 to Euro 1.8 per 1 cubic cm. The duty on newer cars (manufactured up to 3 years ago) made 25 per cent of their customs values, but not less than Euro 1.8 per cubic cm.

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