FOREIGN ECONOMIC ACTIVITY OF THE UDMURT REPUBLIC

The economy of the Udmurtia Republic is notable for the diversity of its industries. Oil-extracting, machine-building, metal-working, forest and woodworking industries play the leading role among them. In 1995 the gross domestic product accounted for $2,591 million. The industry of the Republic is represented by a unique complex of enterprises producing a wide spectrum of weapons and special equipment. At the same time, the manufacturers of Udmurtia produce consumer goods. Udmurtia produces 80% of Russia s hunting and target firearms, 45% of motorcycles, 8% of radio and medical equipment. The structure of the economy in general is shown on the diagram (fig.1).

Fig.1 Share of different industries in the gross domestic product

At present the Udmurtia Republic is going through a very complicated and conflicting period of development. Rapid decrease of the military production volume has caused a considerable deterioration of the economic situation at the military complex enterprises, which are the fundamentals of the industry of the Republic. This, in turn, led to a decline in production of many defense enterprises and in the industry in general. As a result of that, the financial status of defense enterprises has gone worse. Also it increased the unemployment level to 7.8% in the beginning of this year.

In such circumstances only the rational use of technically and organizationally developed defense enterprises which have powerful productive and research potential will create a base for development of the machine-building industry. For these reasons the Republic is interested in expanding the investment activity in the region and in the development of all forms of foreign economic relations.

To support the foreign economic activity the Udmurtia Republic has a well- developed banking system. On January 1, 1996 there were 215 credit institutions including 23 independent banks with 24 branches and 24 branches of banks from other republics and regions.

Stabilization of the Udmurtia economy highly depends on the development of foreign economic relations. The first stage of this process which implied access of the enterprises to foreign markets and development of exports of local raw materials and semi-products is about to be completed. Now Udmurtia faces the challenge of taking further steps which will be directed towards further development of output of competitive products and diversification of forms of cooperation.

The regional foreign economic activity is represented mainly by foreign trade. In 1995 the foreign trade turnover of the Republic increased 12.4% to $566,6 million (fig.2). The share of export to the CIS countries in the foreign trade turnover accounted for 20%.

Basic indices of foreign economic activity of the Udmurt Republic

(thousand US dollars)

Export from the Udmurtia Republic has a stable tendency to grow. Basically, it is accomplished through "direct links", escaping foreign trade brokers. Main export groups are oil (46.1%), ferrous and non-ferrous metals (18.3%), machines and equipment (10.3%), hunting and sporting guns (5.3%). Compared to 1994 the export volume in Udmurtia rose 31.6% to $408.8 million. Main shipments are consigned to France, Germany, the U.S.A., Kazakhstan, Ukraine and India (fig.3).

Fig.3 1995 export structure (oil export excluded)

The volume of the Republic s import in 1995 decreased 18.3% and accounted for $157.7 million. Machines and equipment (39%), ferrous and non-ferrous metals (19.4%), foodstuffs (19.3%) have the main share in the import structure. The main trading partners here are Ukraine, Germany, the U.S.A., Belarus, Kazakhstan and Austria (fig.4).

Fig.4 1995 Import structure

The most important features of investment attractiveness of the Republic are rich natural resources, powerful industrial base, skilled scientific and research manpower.

The most common form of cooperation with foreign investors in the Udmurtia Republic is a joint venture. There are 162 joint ventures with companies from 38 countries. Among the founders there are companies from the U.S.A., Western Europe and CIS countries. The range of activities of these joint ventures is very wide. It includes trade, manufacturing of food products, industrial products, forest products and scientific research. Gross volume of joint venture products accounted for 171 billion roubles which makes up 2% of all the production volume in Udmurtia. Export volume reached $26.8 million. The biggest joint ventures are Izhtel (communication systems), Ural Oil (oil extracting), Guntner-Izh (heat exchangers), Sarabella (footwear), Mebel-International (furniture), Uvimex (jewelry). The joint stock company Izhevsk Radio Plant is actively cooperating with Motorola. The basic lines of this cooperation are:

• construction of industrial facilities for serial production of Motorola articles;
• joint development of new radio communication systems;
• establishing a joint venture for equipment maintenence and repair;
• creation of sales and service network.

The Udmurtia Republic is very interested in foreign investments, first and foremost for solving the following problems:

• development of the oil-extracting complex, mainly by means of developing new oil fields and increasing the production at the functioning and conserved oil wells;

• improvement of export potential of the machine-building industry;

• conversion of the defense industry; creating conditions for using the productive and research potential of defense enterprises for manufacturing high-tech competitive products;

• creation of a well-developed market infrastructure;

• creation of a network of recreational and tourist facilities.

The Government and the State Council of Udmurt Republic are ready to assist foreign investors in getting additional guarantees of economic safety.

BALANCE OF CURRENT TRANSACTIONS

OF THE UDMURT REPUBLIC IN 1995

(thousand US dollars)

Comments

Foreign trade turnover of the Udmurtia Republic in 1995 accounts for $566,468,000 which is 12.4% higher than in 1994. Turnover with foreign countries increased 68.3% and amounted to $449,665,900. In comparison with the last year, favourable trade balance increased 113.5% or $251,151,800, including $295,956,900 with foreign countries. Exports of the Udmurtia Republic went up to $408,809,900 or 31.6%, including exports to foreign countries of $372,811,400 (91.2%), and CIS countries of $35,998,500 (8.8%).

Implementation of the policy of further liberalization of foreign economic activity and decline of production of domestic industry in demand in the country caused substantial increase of export in 1995.

Besides, the growth of world prices on many raw materials of the republican exports from Udmurtia caused the increase of cost volumes of exports. It is worth mentioning that implementation of "the currency corridor" affected the development of the regional exports, especially to foreign countries.

Raw materials prevail in trade structure.

In 1995 export deliveries of oil to foreign countries rose 56,1% ($188,318,800). There were no oil exports to CIS countries.

The largest growth in quantity and currency volumes of exports in comparison with 1994 was registered in exports of ferrous and non-ferrous metals and products made from them.

Exports of products of the machine-building industry of the republic continued to decline and accounted for $42,154,200 which is 10.3% in total volume of exports in comparison with 13.8% in 1994.

As compared to 1994 export of sporting and hunting guns and ammunition went down 74.2%, basically due to decrease of export of ammunition (export of ammunition in 1995 accounted for $2,470,000 which is 5.6% of export of ammunition in 1994).

Volume of imports to the Udmurtia Republic went down to $157,658,100 (-18.3%) including imports from foreign countries of 76,854,500 (-30%), and CIS countries of $80,803,600 (-3%).

The structure of import is formed under the influence of effective demand and further decrease of production in the country. Stabilization of the US dollar/ Russian ruble in the second half of 1995 stimulated efficiency of import transactions and the growth of their volume, but it didn t raise the regional imports compared to 1994.

Major deliveries of foodstuffs were made by CIS countries (76.1% of the total volume of import of this group of products).

In spite of the fall of import of machines and equipment 6.5% or $61,523,900, the share of this group of products in the total volume of exports from Udmurtia increased 4.9%, which indicates positive changes in the structure of imports. Import of ferrous and non-ferrous metals and products made from them increased. This is due to the expansion of exports of this group of products: export of nickel used as a raw material in metallurgy increased 6 times in comparison with 1994.

Balance of "invisible" transactions of the republic has a negative result: $2,796,800 due to an imbalance of non-factor services. Enterprises of the republic are importing a large number of transport services, most of them are oil transportation services. Since services exchange is the most effective trend for developing international relations, it is necessary to further develop it: expansion of technical services and creation of a developed tourism industry. Today the lack of balance of services is a serious problem not only for Udmurtia but also for Russia.

Having compared foreign trade balances of the Russian Federation and the Udmurt Republic we came to the following conclusions:

There are no principle differences between the balances.

Due to the regional specificity there are some minor demonstrative differences in the structure of:

a) exports:

in 1995 export of oil from Russia decreased 4.2% while it rose 56.1% from Udmurtia,

export deliveries of oil from Udmurtia to CIS countries are null (Russia exports 21.2% of total volume of oil exports to CIS countries),

export of machines and equipment from Udmurtia makes up 10.3%, from Russia 6% of the total volume of exports, both have equal shares in exports to foreign countries;

b) imports:

- share of import of machines and equipment in the total volume of imports to Udmurtia increased in comparison with the last year and is over 5.6% of the share of Russia (33.4%).

The main groups of imports to CIS countries from Udmurtia are products for the machine-building industry and ferrous metals, from Russia - oil.

Udmurtia has an adverse balance of trade with CIS countries, Russia has favourable balance of trade both with foreign and CIS countries.

CIS countries are exporting basically foodstuffs, machine-building products and lubricants to Udmurtia and Russia.

Privileges for foreign investors and commercial organizations with foreign investments.

1. The profit of enterprises with foreign investments engaged in the sphere of material production and registered in accordance with the established procedure before January 1, 1992 , shall not be subject to taxation for 2 years since the balance profit has been received.

It should be noted that the said privilege is granted to the enterprises, where the share of a foreign participant in the authorized fund exceeds 30 percent, except for the analogous enterprises, engaged in extraction of mineral resources and fishing.

Enterprises can enjoy the right to privilege, only if their part of receipts gained from the activity in the sphere of material production is more than 50 percent of the total receipts. If this ratio is reduced by the end of the next year the privilege is not granted.

For the application of this privilege the enterprises with foreign investments must maintain separate accounting on the types of activities.

The enterprises with foreign investments engaged in industrial activity and registered after January 1, 1994, in case their paid share in the authorized fund is not less than 30 percent and in equivalent sum - not less than $10 million, shall not pay the profit tax to the federal budget during the first two years of their work, if receipts, gained from industrial activity , are over 70 percent of the total sum of receipts from their product sales (works, services).

In the third and the fourth year of work these enterprises pay 25 and 50 percent of the basic profit tax rate respectively, if the receipts from their industrial activity are over 90 percent of the total receipts from their product sales (works, services) .

The stated procedure of settlements is not applied to the receipts of payments to the budgets of the subjects of the Russian Federation.

2. The federal law " Concerning the introduction of the alterations and additions into the Law of the Russian Federation " Concerning the profit tax of enterprises and organizations " of April 25, 1995, No. 64-O3 , repeals restrictions on superburden expenses on wages since January 1, 1996.

3. a) The Law of the Russian Federation "Concerning the profit tax of enterprises and organizations " of December 27, 1991, No. 2116-1 in the altered wording of December 27, 1995 stipulates that for the purposes of taxation the gross profit is reduced by the sums of positive differences in rates of exchange ( increased by the sums of negative differences in rates of exchange ), resulted from the change in the exchange rate of ruble with respect to the foreign currencies, quoted by the Bank of Russia, on the day of currency receipts to the foreign currency account of an enterprise and from the change in the exchange rate of ruble with respect to the foreign currencies, quoted by the Bank of Russia, on the day of the calculation of taxable profit for the purposes of settlements with the budget.

The same law exempts from the profit tax those funds, which are channeled to financing of industrial and non-industrial capital investments, and also to the repayments of bank credits used for the same purposes.

b) For the purposes of the stimulation of small enterprise development the Edict of the President of the Russian Federation of December 22, 1993, No. 2270 " Concerning some alterations in taxation and in interrelations of budgets of different levels " stipilates that newly formed small enetrprises (including enterprises, founded before January 1, 1994 ) do not pay the profit tax in the first two years of work, if they are engaged in the production of foodstuffs, consumer goods, medical equipment, medicines and articles for medical purposes, hardware for disability preventive treatment and for rehabilitation of disabled persons, and also in housing and industrial construction and town and environment development (including repairs), on the condition, that the receipts from all mentioned types of activities exceed 70 percent of the total receipts from their product sales (goods, services). In the third and fourth year of work these small enterprises pay 25 and 50 percent of the basic profit tax rate respectively, if the receipts from the types of activities specified above are over 90 percent of the total receipts from their product sales (works, services).

4. The federal law " Concerning the introduction of alterations and additions into the Law of the Russian Federation "Concerning the value added tax " of December 6, 1994, No. 57-93 , exempts from the VAT the technological equipment, imported into the territory of the Russian Federation.

5. The law of the Russian Federation "Concerning the customs tariff " of May 21, 1993, No.5003-1, exempts from customs duty the property, imported into the customs territory of the Russian Federation as a contribution of foreign investors to the authorized fund of enterprises with foreign investments in the limits, determined by the foundation documents.

6. The Law of the Russian Federation "Concerning the foreign investments in the Russian Federation" No.545-1 of July 4, 1991 , and the Decree of the Government of the Russian Federation of June 30, 1994, No.757 "Concerning the procedure of determination of products, imported by enterprises with foreign investments for their own needs" stipulate that the enterprises entirely owned by foreign investors, and the joint ventures, in the authorized fund of which foreign investments comprise more than 30 percent, have the right to import goods for their own needs without licences, except for the cases, specified by the international treaties, valid on the territory of the Russian Federation.

7. The Decree of the Government of the Russian Federation of May 19, 1994, No.497, "Concerning the tariff preferences for oil and oil-products, produced by enterprises with foreign investments and exported from the Russian Federation" in respect to the enterprises with foreign investments, registered before December 31, 1993, stipulates that rates and periods of tariff preferences, granted for up to 3 years, are calculated with regard for the volume of practically deposited foreign investments (capital investments) for production of goods, listed in the balance sheet of an enterprise, and with regard for their factual recoupment.

On the basis of presented documents the Inter-departmental commission submits a proposal to the Government of the Russian Federation on granting tariff preferences to enterprises with foreign investments.

On the basis of the decision of the Government of the Russian Federation to grant a tariff preference to an enterprise, the Ministry of fuel and energetics issues the certificate with the indication of a granted tariff preference for the current year, or, in the course of a week, gives the motivated refusal to issue it.

8. In accordance with the Law of the Russian Federation of December 27, 1991, No.2116-1 "Concerning the profit tax of enterprises and organizations" with regard for alterations and additions, and also in accordance with the instruction of June16, 1995, No. 34 "Concerning the taxation of profit and revenues of foreign legal entities", foreign legal entities are granted with the following privileges :

the profit of foreign legal entities is not subject to taxation, if received for construction, assembling and consulting, for the entire period of implementation of the social-and-economic programs (projects) of housing construction, foundation, construction and maintenance of the professional retraining centers for the military men, for the discharged from the armed forces and for the members of their families, which are subsidized by the loans, credits and gratuitous financial aid, granted by international organizations and governments of foreign states, foreign legal entities and natural persons, in accordance with inter-governmental and inter-state agreements, as well as agreements, signed on behalf of the Government of the Russian Federation by the authorized executive power bodies.

The list of foreign legal entities, exempted from the tax, is determined by the Government of the Russian Federation.

When calculating the tax, the taxable profit with factually effected costs and expences is reduced by :

a) the sum of profit, assigned in the Russian Federation for financing of industrial and non-industrial capital investments, and also for the repayments of bank credits, used for the same purposes.

This privilege is granted to the foreign legal entities, which develop their own industrial and non-industrial base, under the condition of complete spending of the charged wear (amortization) sum by them on the last reporting date.

When foreign legal entities sell or gratuitously transfer (during the first two years since the privilege on profit, assigned for financing of capital investments, has been received) their fixed assets and buildings, construction of which is not completed, and if for purchase and construction of them foreign legal entities were granted privileges on profit tax, taxable profit is to be increased by the residual value of those fixed assets and by the productional expenses on the buildings, construction of which is not completed ;

b) by the sum of 30 percent of capital investments for the environmental protection measures in the Russian Federation;

c) by the sum of contributions in the Russian Federation for charitable purposes (including realization of programs on retraining of military officers and social protection of military men, transferred to the reserve), to the environmental and sanitation funds, for the restoration of units of cultural and natural heritage, to the public organizations of invalids, their enterprises, institutions and associations, to the All-Russia public associations, which specialize in the problems of national development and inter-national relations, to the funds of education and creative activity support, to the children and youth public associations, to the religiuos organizations (associations), registered in the established procedure, and also by the sum of resources, transferred to the enterprises, institutions and organizations of health protection, people s education, social maintenance, culture and cinematography, archives service and sport, associations, creative unions, guilds and other associations of creative workers, but no more than 3 percent of taxable profit, and to the Chernobyl charity organizations - no more than 5 percent of taxable profit. The total sum of contributions must not be more than 5 percent of taxable profit.

9. On the basis of the Law of the Russian Federation of December 13, 1991, No. 2030-1 "Concerning the tax on property of enterprises " with introduced alterations and additions ; the instruction No. 38 of September 15, 1995 "Concerning the procedure of calculation and payment of the tax on property of foreign legal entities in the Russian Federation", the property of foreign legal entities is not taxable, if they are exempted from taxation in accordance with laws of the Russian Federation and internatonal treaties, including the property of diplomatic representatives and representatives of the same status ; the cost of property of a foreign legal entity, estimated for taxation, is decreased by the cost of property, which is not taxable in accordance with laws of the Russian Federation. In particular, this is the property, which is used during the period of realization of stratigic social-and-economic programs (projects) of housing construction, foundation, construction and maintenance of the professional retraining centers for the military men, for the discharged from the armed forces and for the members of their families, which are subsidized by the loans, credits and gratuitous financial aid, granted by international organizations and governments of foreign states, foreign legal entities and natural persons, in accordance with inter-governmental and inter-state agreements, and also agreements, signed on behalf of the Government of the Russian Federation by the authorized executive power bodies.

The list of legal entities, which participate in the implementation of mentioned social-economic programs (projects), is determined by the Government of the Russian Federation (Article 2, the Federal law of June 13, 1995 , N 94-"3).

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