March 1999

Creating conditions for significantly increased trade and investment between the United States and Russia remains a key goal of the U.S. Government. However, the challenges today are even greater than before because of Russia's ongoing economic and financial crisis.

Russia's Economic Crisis
The Russian economic crisis has had a sharply adverse effect on business. During my recent trip to Russia, I met with companies in Moscow, St. Petersburg, and Novgorod that told me that they are continuing to make adjustments to the economic crisis, such as staff reductions and switching inputs from imports to domestic Russian suppliers. U.S. companies, the largest foreign investors in Russia, have estimated their losses at upwards of half a billion dollars thus far. This news is especially serious because U.S. companies are represented with over 600 offices in Moscow and St. Petersburg alone and account for approximately one-third of total inward investment into Russia.

U.S. business representatives stated that they do not see a single, magic cure for the Russian economy, but that the efforts of the U.S. Government and the Gore-Primakov Commission and its Business Development Committee (BDC) remain crucial, including in the priority areas of commercial taxation, rule of law, market access, and regional cooperation.

Commercial Opportunities
Nevertheless, there are still sectors in Russia where commercial opportunities do exist, provided that certain pragmatic steps are taken to improve the commercial environment. The single most important sector is clearly energy, with tens of billions of dollars in pending projects. Energy remains the locomotive for Russia's future economic recovery; revenue and jobs created by oil investment could help stimulate other parts of the economy. International energy investors welcomed Duma passage of production sharing (PSA) legislation in December. President Yeltsin has signed the PSA amendments into law, and when I was in Moscow in January, the Enabling Law was approved by the Legislature's upper house. Government and Duma leaders are determined to get PSA projects under way. While I cautioned that investors may move more slowly due to the decline in oil prices, I also reassured the Russians that U.S. companies and the U.S. Government support and intend to move ahead with PSA projects.

There are also achievable projects in what Russians call the "real" economy outside of energy. First, in commercial aviation and aerospace, our two industries are world leaders and, in many respects, are complementary. We have built impressive cooperation in commercial satellite launches and are pursuing important joint aircraft projects.

Also, advanced technology will be one of the keys to Russian economic growth by creating high value-added products and services. For U.S. companies, Russia offers opportunities in R&D and technology acquisition, for example in computer software development and in Russia's once-secret nuclear cities.

Overcoming Impediments to Trade and Investment
While there are commercially viable projects in many sectors, there are also several major hurdles to bilateral trade and investment. These include an onerous commercial tax regime and inconsistent administration of tax laws, a weak foundation for rule of law in commerce, and tariff and nontariff barriers to trade.

Commercial Taxation
The Duma took a big step last July when it passed Part I of the Tax Code. Now, the government and the Duma must work together to reform the commercial taxation system to meet revenue needs and stimulate business development. Through the BDC's Working Group on Taxation, the United States is encouraging tax reforms that meet these goals. Already, the Russian side of the Working Group moved to adopt several U.S. business recommendations regarding application of VAT and asked to form a special subgroup with U.S. experts on transfer pricing. During recent consultations in Moscow, I encouraged the Ministry of Finance to implement the improved business expense deduction provisions of Part II of the draft Tax Code.

Rule of Law
Second, a rule of law is vital for the development for both democratic and market-based institutions. Here it is extremely important to strengthen the court system, so that court rulings in commercial disputes are reached in a judicious manner and promptly enforced. We will continue to work closely with the Russian Government, its judiciary, and U.S. and Russian businesses to promote improved mechanisms for commercial arbitration and enforcement of court decisions, as well as better enforcement of criminal laws protecting intellectual property. Two cooperative rule of law projects which are already under way include a code of business conduct and a handbook on the Russian arbitration system.

Market Access
We will also continue to work with our Russian colleagues to improve mutual market access by lowering Russian tariffs, as well as nontariff barriers to trade through reform of customs procedures and technical standards and certification practices. The United States strongly supports Russia's steps to accede to the World Trade Organization on commercially viable terms, and we will continue to work with Russia toward that goal.

It is clear that success in attracting investment to Russia's industries is going to require concerted effort by businesses and governments. A large number of American companies remain committed to Russia, and the U.S. Government has a strong continuing interest in Russia's economic recovery and future growth. We are encouraging openness, which is required to modernize in today's world and to achieve integration into the world economy. Our foreign and commercial policies and programs offer Russia cooperation toward these goals as well as assistance where there will be continued benefit.

Jan H. Kalicki
Counselor to the Department of Commerce and
U.S. Ombudsman for Energy and Commercial Cooperation with the New Independent States

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