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. Last Updated: 07/27/2016

Export Boom Despite Corridor

In light of the ever-increasing availability of Western products in Russia, it is surprising that Western imports are still below pre-reform levels. In 1991, imports into Russia from the "far abroad" -- that is, beyond the Soviet Union -- amounted to $45 billion. By 1995, after a deep decline in the previous three years, imports from outside the Commonwealth of Independent States, or CIS, were still only $42 billion.

Even more surprising is that, despite the dislocation of reform, exports of Russian goods to the West have grown by 56 percent over the same period, from $41 billion in 1992 to $64 billion last year.

Both phenomena, in conjunction with the freedom of Russian entrepreneurs to do as they please, have brought natural resources -- oil, gas, coal and timber -- and some semi-manufactures -- steel, aluminum, pulp and chemicals -- to the export market in spades. The strength of these two categories means Russia's total exports in 1995 already amounted to $78 billion -- around $500 per capita, the same as Poland, or three times more than China. Factor in diamonds, aircraft, boilers and turbines, and even over the short term Russia's export capacity is huge.

Nearly half of Russia's exports are oil and gas, with most of the rest being other raw materials. This may be no bad thing. Continued raw material exports mean more foreign exchange earnings, which could, in turn, be used to import capital goods. Once machinery and infrastructure are in place, given high levels of technical education, it may not be long before Russia is a very significant exporter of manufactured goods as well as raw materials. As incomes grow, more imports will naturally be sucked in, meaning the trade surplus will shrink. But as long as Russia continues exporting raw materials, the potential is there for capital goods imports to spawn manufactured exports.

In fact, there are signs that such "import substitution" is already happening. Predictably, in the first two months of 1996, fuels and semi-manufactures accounted for 45 percent of all exports, with ferrous and non-ferrous metals providing another 16 percent. But whereas "machinery" currently accounts for only 8 percent of exports, the same heading covers no less than 28 percent of all imports; "machinery" is by far Russia's largest import category.

One problem Russia faces is that its export performance has been so strong that it now has a balance of trade surplus with the West to the tune of $22 billion in 1995. Western boardrooms still dismissing Russia as a "basket case" should note that the country is now enough of an export player to goad the capitalist giants into response. Russian steel exports to Europe only needed to reach 2.2 million tons -- 1 percent of the total European market -- and in mid-1995 the European Union slapped on quotas. In addition, the deadly serious theatrics of the chicken-leg war reflected not only the importance of such exports to U.S. President Bill Clinton's home state, but also the $1.2 billion trade surplus Russia ran with the United States in 1995. And anyone not taking exports from these parts seriously should note that Russian aluminum sales last year reduced world prices seriously enough to initiate a brand new global cartel.

Trade lobbyists from Europe and the United States claim that because Russia's cost and subsidy structures are distorted, Russian goods are not exported to the West but are "dumped." Lobbyists who bother to look at numbers might find it useful to know that, compared with the first two months of 1995, Russian exports to the West have grown yet another 2 percent -- to $9.8 billion -- in 1996. Meanwhile, further scandal: Over the same period, imports from the West fell by 10 percent, to $5.8 billion.

Unfortunately for the lobbyists, though, Western imports fell primarily because Russia eliminated its customs border with several other CIS members last July. Poor customs control between Poland and Belarus means Western goods subject to heavy excise -- cigarettes, alcohol, automobiles -- are posing as CIS goods to avoid tax payments. In fact, although nobody knows for sure, it is unlikely that Western imports into Russia have fallen at all in the first two months of 1996. After all, they grew 9 percent during the first two months of 1995, and since then the ruble's real appreciation has made imports more attractive.

It is odd that, although the West's protectionist penchant is a very real problem for exporters, only isolated Russian opinion-makers -- such as Sergei Glasyev -- raise their voices in dispute. Russia's exporters instead lobby their own government over the exchange rate corridors.

By keeping the ruble within nominal bounds while inflation has continued, the corridor has caused an 18 percent real appreciation of the ruble since it was introduced 10 months ago. While a stronger ruble makes imports cheaper, it cuts into exporters' profits.

On the home front, Russia's export lobby has little to moan about. The real exchange rate appreciated only 0.9 percent in February, 1 percent in March, and since then, because inflation has been so low, it has been rock steady. Indeed, the recent decision to slightly slip the band means we may even see a real depreciation over the coming months. More fundamentally, Russia's exporting regime is becoming more liberal. All export taxes were eliminated on April 1, with the oil variant being continued until July in the interests of revenue collection. And so far this year, despite claimed "difficulties," exports of nickel are up 11 percent, copper up 55 percent and aluminum up 28 percent.

Having been presented with a gold mine, Russia's powerful exporters should not wince about a genuinely necessary real exchange rate appreciation.

They should use their influence to urge the government to be judicious in the sectors in which it controls imports. In particular, flows of capital goods from the West should be as unregulated as possible. For it is Western capital goods that will transform Russia's export boom from a quiet phase into a bustling era.