April 1999

By Derek Nowek

Total U.S. exports to Russia grew by 8.8 percent in 1998 to US$3.58 billion, up from US$3.29 billion in 1997. Until the end of the third quarter, U.S. exports were on track to set a year-end record of US$4.2 billion, but the ruble's crash in August 1998 caused a significant decline in export sales in the fourth quarter. Manufactured goods and consumer foodstuffs dominated U.S. exports to Russia last year with aircraft, meat products, machinery and parts, and electrical equipment the leading categories.

August Brings a Big Change

Before the August crisis, U.S. exports to Russia averaged a solid $353.7 million per month. After the crisis hit, export sales fell to $186.5 million a month, an almost 50 percent drop from pre-crisis levels. U.S. exporters of meat products, traditionally the leading U.S. export commodity to the Russian market, were the group hardest hit by contracting sales. Meat exports averaged a respectable $72 million per month until August. In subsequent months, average meat deliveries lingered at little more than $12 million per month. Total 1998 exports of meat products closed at $625.3 million, a 28.3 percent decline from 1997.

Exports of machinery and parts shrank by more than 14.6 percent to $575.8 million in 1998, while electrical equipment deliveries dropped 15.8 percent to $212.8 million. Russian orders for tobacco products, motor vehicles, precision instruments, and other commodities also experienced a significant decline last year.

The chief cause of shrinking U.S. exports in autumn 1998 was the Russian ruble crisis that began in mid-August. In four months, the Russian currency depreciated fourfold. Russian importers, who suffered losses as the ruble lost its value, halted orders for imports of both staple food products and high-value goods. Ordinary Russian consumers lost much of their purchasing power and could not afford to buy imported goods at significantly higher prices. Many were even struggling to buy domestic staples such as cooking oil or meat, which doubled or tripled in price. The collapse of the banking system has hampered importers, whose inability to arrange payments for deliveries and problems paying customs duties have curtailed the volume of exports to Russia even further.

Growth Areas in 1998

Prior to the financial crisis, a number of U.S. export commodities experienced significant growth in Russian orders. For example, exports of commercial aircraft and parts, the leading category of U.S. exports to Russia last year, jumped to more than $840 million (up from $17 million in 1997) and accounted for almost 25 percent of total U.S. exports to the region. The Russian Government's granting of tariff wavers for the purchase or lease by Russian airlines of foreign aircraft helped to spur the growth. One of the main reasons for the significant increase in U.S. aircraft exports was the purchase of 10 Boeing B737s by Aeroflot. This transaction marked the first time a Russian airline "outright" purchased non-Russian aircraft. Prior acquisitions of Western aircraft were obtained through leases.

U.S. medical and pharmaceutical exports also experienced a sizable increase to $41.5 million in 1998. Much of this gain, however, was made before the August crisis. The latest trade data shows a sharp reversal of this trend after August, and only modest sales are expected in the foreseeable future. Russian consumers were hit hard by the ruble devaluation, which caused prices for foreign drugs sold in Russia to triple or even quadruple. The Russian Government's volatile trade decisions, inconsistent tax treatment, and complicated import licensing procedures are also hampering U.S. export sales of pharmaceuticals. Experts predict that those Russians who cannot afford Western brand drugs will switch to imported lower priced generics from India and Eastern Europe. Industry analysts estimated the pharmaceutical market in Russia at some $3.5 billion in 1997, about two-thirds of which were imports (BISNIS Bulletin, Dec. 1998).

In the first seven months of 1998, U.S. preserved food sales also reached a new peak for the year at $33.1 million, compared with $12.4 million in 1997. Exports of combine harvesters increased from $2.4 million in 1997 to $25.4 million in 1998. Sales of heavy machinery, such as bulldozers, excavators, and front-end loaders, experienced more modest growth of $10.3 million, to a total of $18 million.

Exports Recovering?

By the end of 1998, a few signs that U.S. exports to Russia were recovering had materialized. U.S. export sales in December reached that of the previous year's level, and freight carriers began observing a modest resurgence of Russia-bound cargo volumes. As of January 1999, the currency had stabilized at around 23 rubles to the US$1.00 (from about six rubles to the dollar in August).

Moreover, the Russian Government has abolished a 3- percent surcharge tax introduced on all imports last year. It also plans to reduce the value-added tax (vat) from 20 to 15 percent, beginning July 1 (certain products will have a 10 percent vat). If implemented, this measure is expected to help imports of consumer goods and high-tech items bounce back.

What is unclear is the effect that massive U.S. and European Union food aid programs now under way in Russia will have on demand for U.S. food products in the short run. Part of the aid will be provided to Russia under concessional sales terms to be sold at market prices. The rest will be distributed throughout the country to the most needy segments of the population (BISNIS Bulletin, Jan. 1999).

In general, U.S. exporters can expect the volume of trade to be curtailed during at least the first half of 1999. Exports of consumer-oriented foods, high-value consumer goods (high-tech products), telecommunications equipment, machinery, and parts are likely to recover. If they can afford them, Russian consumers, for the most part, still prefer high-quality Western imports over domestic goods. How quickly Russian imports will rebound, however, depends on the country's economic situation. Once it recovers, so will imports.

For more detailed information on U.S.-Russian trade statistics, visit the U.S. Bureau of the Census website at www.census.gov/foreign-trade/sitc1/.

Derek Nowek covers transportation for BISNIS in Washington, D.C.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)