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They have been suffering from the consequences of RUR strengthening and competition improvement. The demand for Russian motor vehicles has gradually been declining since the middle of 2003 against growing demand for imported motor. In 2004, import of light motor vehicles to Russia grew by 2,3 times as compared to 2003, its volume reached $163,5 million.

The policy aimed at protecting domestic manufacturers by way of introducing import duties on foreign motor vehicles failed to achieve the expected efficiency. Neither quality of Russian vehicles nor output volumes have been improved over a period of two years of the customs duties imposed. Consequently, the RF Government plans to rely on using im ported auto parts to assemble vehicles in Russia.

The Interdepartmental Commission for Protection Measures in Foreign Trade and Tariff Policy made a decision on its meeting held on January 27, 2005 to recommend the RF Government to abolish the import duty on a part of the auto parts imported to the Rus sian Federation for car assembly, as well as reduce it for several types of auto parts by 3 to 5%. Auto parts imported for free trading in the secondary market would be subject to the applicable rates of duties.

Reducing import duties on auto parts has a direct relationship with integration of the Russian automobile industry into the world automobile industry. This is an objective proc ess which will help to improve quality of motor vehicles. At the same time, domestic manu facturers will not suffer from a decrease in duties on auto parts. At present, almost all modern car assembly enterprises enter into investment agreements with the RF Govern RUSSIAN ECONOMY in trends and outlooks ment, which specify zero rates of customs duties on all auto parts. Thus, the new decision will create equal conditions for all automobile manufacturers.

At the same time, the duties on imported foreign cars will remain high enough. Rus sia has achieved agreements with almost all countries with advanced automobile indus tries (except for Japan) on supply of motor vehicles to Russia after its accession to the WTO. The duties imposed on import of second hand light motor vehicles, trucks, auto buses being in service more than 7 years will remain unchanged, i.. banned in fact. Duties on new vehicles will be reduced from 25 to 15%. The decrease, however, will continue within a period of 7 years. The rates will remain the same over the first 4 years out of the ones. Customs duties on import of foreign light cars being in service from 3 to 7 years from the production date will be reduced insignificantly, however, they must not exceed the du ties on import of new motor vehicles by a least 5%.

Foreign trade conditions improved for the Russian Federation on the majority of product lines in 2004. Average growth in export prices exceeded the growth in import ones by 12 percentage points.

Export surplus was positive in 2004, $88,3 billion ($59,9 billion in 2003).

Geographical structure of Russian foreign trade was slightly changed in (Fig. 74). Due to the accession of 10 new countries to the European Union in May 2004, a share of this group in the gross volume of Russian foreign trade increased from 36.7% in January thru April up to 48.8% in May thru December 2004. Thus, in analyzing foreign trade transactions of Russia with the European Union, we will consider new EU countries apart from the old ones.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003 January-April 2004 May - December EU EU candidates APEC CIS Other countries Source: the RF Federal Customs Service.

Fig. 74. Geographical structure of Russian foreign trade In 2004, Russian foreign trade turnover with the old EU members increased by 36.6% as compared to the previous years, including export by 40.5% and import by 28.4%. For Section 3.

The real sector eign trade turnover with the new EU countries increased by 21.7%, including export by 20.6% and import by 26.8%.

It should be noted that a share of the old EU countries in the foreign trade turnover stricture increased by 0,5 percentage points in 2004 as compared to that in 2003. At the same time, a share of this group of countries increased by 1,2 percentage points in the Russian export structure, and decreased by 1,1 percentage points in the import structure.

A share of the countries newly accessed to the European Union decreased by 1 percent age point, a share in the export structure decreased by 1,2 percentage points, and by 0,percentage points in the import structure.

CIS countries remain second in the structure of foreign trade turnover volume and import. Other countries come second in export volumes, export to the APEC (Asian Pacific Economic Cooperation) countries and the new members of the European Union is nearly equal in volume.

Analysis of the foreign trade turnover structure revealed the following trends: a share of the old EU countries and CIS countries is increasing in the geographical structure of Russian export, while a share of the countries accessed to the European Union in May 2004 and a group of other countries is decreasing.

A share of the APEC and CIS countries increased in the geographical structure of Russian import at the background of decreasing share of the old and new members of the European Union.

Russian foreign trade represents an important factor in financial stabilization of the national economy. Revenues from foreign economic activity have a substantial impact on the revenues of the Russian budget. In 2004, the federal budget received RUR1 219,5 bil lion in revenues, which is by 61% more than that received in 2003 (Fig. 75). Customs pay ments accounted for 5.65% of GDP in 2003, and nearly 8% of GDP in 2004. The increase in federal budget revenues was caused mainly by growth in prices of energy sources as well as increased import volume. 1998 1999 2000 2001 2002 2003 Source: the RF Federal Customs Service.

Fig. 75. Customs Revenues Inflow to the RF Budget (USD billion) RUSSIAN ECONOMY in trends and outlooks A share of revenues from export of goods increased in 2004 against the previous year. In 2003 a share of export revenues accounted for 39% against 54% in 2004. How ever, though a share of import revenues (import duties, VAT, excises, customs duties) de creased, there was an upward movement in import revenues.

Basic import revenues are received from goods imported from foreign countries other than CIS countries. Transportation means come first (group 87). In 2004, import of these goods accounted for 19% of import revenues (12% in 2003), primarily motor vehi cles. Other types of equipment come second (groups 84 and 85). Meat products come third (group 2) whose import volumes remain substantial in spite of the introduced quotas.

Plastic materials and related products come forth (group 39). Such goods as sugar (group 17) and pharmaceutical products (group 30) are also considered as basic goods generat ing import revenues.

3.7.2. Establishing a Single Economic Zone for Russia, Ukraine, Byelorussia and Kazakhstan Creating a Single Economic Zone (SEZ) for Russia, Byelorussia, Kazakhstan and Ukraine is one of the top priorities for Russia for the time being. A search for new and opti mal ways of economic integration resulted in an Agreement and Concepts of Establishing a Single Economic Zone signed on September 19, 2003 in Yalta.

The Single Economic Zone means an economic zone which is integrating customs zones of the member countries for the purpose of ensuring free movement of goods, ser vices, cash and labor force and pursuing a single foreign trade, financial and foreign ex change policies.

In the long term, the four countries are expected to use a single currency. Most im portantly, the SEZ is nothing but economic organization meeting the vital interests of all its members.

It was agreed that the SEZ would be created on a stage by stage basis, each stage including fulfillment of certain obligations on achievement of a particular stage of integra tion. A new stage can not be approved until obligations of the previous stage are fulfilled.

The primary goals are to establish a free trade regime for imported goods of the SEZ members, create conditions for establishing a customs union and a single competitive en vironment, take measures on harmonization of national laws. Next step is to create a free trade zone without exceptions and restrictions, conduct a coordinated competition policy, and establish the customs union providing a single tariff. Finally, to ensure a free move ment of goods, services, cash and labor force as a result of joints efforts of all the mem bers.

It is proposed to establish a single regulatory body which could assume some pow ers from the SEZ countries. Decisions of the body would be approved by a weighted voting and mandatory for all the four members. A Council of Heads of States would be a supreme body of the organization. Decisions of the Council would be taken on a consensus basis.

At present, there is a High Level Group acting as working body of the SEZ, which is represented by Deputies Prime Minister of the member countries. Russia is represented by V.B. Khristenko, Minister of Industry and Power Industry and a special representative of the RF President on integration cooperation issues with CIS countries. The High Level Group includes 7 task groups working in various segments:

1. Customs and tariff regulation, non tariff regulation, customs administration ;

2. Competition policy, natural monopolies, subsidies, government purchases, privatization ;

3. Technical regulations, intellectual property ;

Section 3.

The real sector 4. Tax, budget and monetary policy. Foreign exchange regulation and control, macroeco nomic performances ;

5. Services ;

6. Cash flow, investments ;

7. Labor force movement.

A meeting of the heads of the SEZ countries that was held on September 15, 2004 in Astana (Kazakhstan) actually initiated a practical implementation of the provisions of the Agreement and Concepts of Establishing a Single Economic Zone. In particular, a list of top priority international regulatory documents aimed at substantial liberalization of mutual trade and creating conditions for further advance towards the customs union and a single competition environment as drafted by the High Level Group was approved. These agree ments are scheduled for signing before July 2005.

Humanitarian issues are also among the vital ones. A series of agreements were de veloped for the purpose of simplifying formalities in crossing state borders by citizens of the SEZ countries.

The experience gained as part of the bilateral relations established between our countries is widely used in creating the SEZ. For example, a series of bilateral agreements were signed in Astana to ensure that VAT in is collected on the country of destination principle without excep tions as early as January 1, 2005 in the member countries. To date, the High Level Group has developed a draft basic set of international agreements (more than 80 ones) which represent a legal and regulatory basis of the SEZ has been drafted by.

The Agreement and Concepts of Establishing a Single Economic Zone is open for ac cession of other countries sharing its principles, provided that they meet the established macroeconomic and institutional criteria. It should be borne in mind, however, that it is the Single Economic Zone that should be established first, primarily its contractual and legal ba sis, to ensure that every SEZ membership seeker be able to measure its compliance and ca pacity provided for by the aforementioned documents.

Accession to the WTO of all the four countries is evidently one of the key issues ef fecting the entire process of SEZ establishment. The SEZ countries have already estab lished a mechanism of coordination in regard to their accession to the WTO.

3.7.3. Regulating Foreign Trade In 2004, measures on improvement of tariff and non tariff regulation in the Russian foreign trade were continued to develop.

In regard to tariff regulation in 2004, a wide range of issues was considered on ad justing export (in particular, asbestos and bleached sulfate pulp) and import (for example, various types of meet, cheese, sodium sulfite, digital audio and video equipment) customs duties.

Rats of export duties on oil and oil products were changed several times due to a price growth of energy resources. A new regulation took effect in February specifying that the rate of export duty on Russian oil must be determined on the basis of its price in the world markets. The oil export duty was revised once on a two month basis (Table 52). The rate of duty on oil products was adopted together with the rate of duty on oil. It accounted for 90% of the export duty on oil until 1 August 2004, and 65% after 1 August.

RUSSIAN ECONOMY in trends and outlooks Table Rates of Export Duties on Oil and Oil Products in 2004 (USD/tons) Oil Oil products January 31.2 28.since February 1 33.9 30.since April 1 35.2 31.since June 1 41.6 37.since August 1 69.9 45.since October 1 87.since November 20 57.since December 1 101.Data source: regulations issued by the RF Government Rates of export duty on oil products became differentiated from November 2004.

Now they are calculated on the basis of world oil prices and will average nearly 65% of the oil export tariff. Inside the oil products basket, however, export of fuel oil will be twice as cheap as export of refined oil products. For example, with general rate of duty on the oil products basket is 15% of export value, the duty on fuel oil is 10%, while that on other oil based products is 20%.

On the basis of the foregoing, the RF Government approved on October 18 a new rate of customs duties to be imposed on oil based products exported from the Russian Federation to countries other than the customs unions member countries. Benzol, tolu ene, xylol, lubrication oils, oil product residues, propane, butane and other condensed gazes are subject to the rate of duty of $57 per ton. Since November 20, the same rate was applied to export from Russia of xylols, distillates, gas oils, residues from refining of oil and oil products produced from bituminous rocks. Crude oil products and calcined oil char are exempted from export duty.

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