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. Last Updated: 07/27/2016

A Code to Open World's Longest Frontier

For years, the paramilitary State Customs Committee, or GTK, has acted like a state within a state, patrolling the entry and exit points for all goods coming in and out of the country and exacting trillions of rubles in taxes and tributes from importers and exporters alike.

Ostensibly enforcing, but often liberally interpreting a voluminous and outdated Customs Code that in some cases relies on instructions written in the 1950s, the GTK is expected to collect some $20 billion this year.

Although the GTK accounts for up to 40 percent of all federal budget revenues, many say the figure would be much higher if its notoriously pervasive system of graft could be eradicated. A little math illustrates the problem: while the 57,000 employees of the GTK collect an average of $1,000 a day in legitimate duties from traders, their average daily salary is officially just $5.

Until now, top GTK officials have successfully parlayed the committee's economic clout into political power, resisting reforms by delaying for years the introduction of a new Customs Code designed to streamline trade, stimulate economic growth and ease Russia's entry into the World Trade Organization.

All that may change next month, however, when the State Duma considers the new code in a crucial second reading -- 3 1/2 years after it passed a first reading. And as GTK specialists put the finishing touches on the draft, legitimate businesses, both foreign and domestic, are keeping their fingers crossed, hoping their more liberal proposals make the cut.

A New Era

GTK chief Mikhail Vanin has made it clear that Russia's customs regime is in for a radical restructuring.

"If before we said that our priority was to collect customs duties, then our goal now is to facilitate trade," he told reporters at a recent and rare news conference.

Meeting with Vladimir Putin to discuss the new code last week, Vanin told the president that "it might have taken a year and a half of working with Duma deputies and representatives of the business community," but the draft had finally been scheduled for a second reading April 23.

"The code looks good. ... Our partners in the WTO are waiting for it," Vanin said.

After it passed a first reading, which sets basic parameters, in November 1999, negotiations to hammer out details of the code were shelved until after parliamentary and presidential elections. Work did not begin in earnest again until some 18 months ago, with lawmakers, businesses, the government and customs officials all weighing in.

The new code was originally designed to fill in the gaps and loopholes from the previous code, which was hastily passed in 1993 and produced the current "make it up as you go" system.

This time around, however, participants in the process expect the new and improved code to pass both houses of parliament and be signed by Putin in time for it to come into force in January.

It hasn't been easy, and changes are still being made to the draft, which is larger than the current code, said Alexei Mordashov, chairman of steel giant Severstal and head of the working groups on WTO entry and customs reform in the influential Union of Industrialists and Entrepreneurs, or RSPP.

"It's a gigantic document and each item presents a problem," Mordashov said. "We're now trying to forecast any possible consequences of the new code and make it as much of a law of direct application as we can."

Plugging the Holes

Most businesses say that the current code, while not perfect, is not necessarily bad either. But it's too vague, and the GTK has to issue too many precedent-setting rulings or "instructions" that interpret unclear passages in the legislation.

"It's the myriad of bylaws and GTK instructions that ruin us," said Mikhail Mikhailov, IBM's general manager for Russia. "Over 60 percent of our business is regulated by those bylaws and instructions."

"Those instructions can completely twist the original meaning of the code," said one company official who asked not to be identified.

GTK officials couldn't agree more.

"The existing system, which has been created in the past decade, is an enormous and volatile mass of documents," said GTK First Deputy Chairman Leonid Lozbenko, who served five years as the deputy general-secretary of the World Customs Organization.

"You sometimes have to refer to a document from 1958 to understand an instruction," Lozbenko said.

GTK officials estimate the number of such instructions at between 2,500 and 4,000 -- too many for businesses and even customs officials themselves to keep track of -- and new ones are frequently issued without notice, catching importers off guard and leaving them at the mercy of often predatory inspectors.

This vagueness encourages bribery on both sides.

In the first nine months of last year, customs officials uncovered 142,037 procedural violations and launched nearly 2,000 criminal investigations. As a result, the state lost an estimated 4.7 billion rubles in duties during the period.

Meanwhile, GTK's own numbers show corruption within its ranks is growing. In 1999, 179 corruption-related criminal investigations were opened against customs officers. Last year the figure was 243.

Perhaps tellingly, GTK gave no figure for the number of convictions.

GTK collected 588.26 billion rubles ($18.75 billion) last year, which was 3 percent above target, and this year expects to pull in 638.09 billion rubles. Import duties accounted for about two-thirds of the total, or 392.7 billion rubles, while revenues from export duties amounted to 195.48 billion rubles, up from 301 billion rubles and 235 billion rubles in 2001, respectively.

By comparison, customs collections in the United States account for less than 3 percent of the country's budget revenues.

Lozbenko said that while filling budget coffers will remain one of GTK's key functions, the aim of the new code is to lower trade barriers and improve the overall investment climate.

"We would like to create if not the best then perhaps one of the best customs administrations in the world," he said.

Alexandr Belenky / MT

A truck pulling into a new check point on the Russian border with Finland. GTK expects to collect some $20 billion this year.

Direct Application

Lozbenko said the goal is to reduce legal vagaries by making the code "directly applicable" in 70 percent of all situations, leaving GTK officials to issue instructions clarifying the other 30 percent.

That's an improvement on the current code, which is hardly "directly applicable" at all, but it falls short of the liberal code with 100 percent direct application some are advocating.

GTK Deputy Chairman Yury Azarov said the GTK would reserve the right to issue clarifying instructions because "no law can embrace every activity and every detail."

"The new code will clearly set out the rights and obligations of all participants -- customs officers and those moving goods across the border alike," Azarov said.

"It will clearly describe what data must be shown on a customs declaration and what additional information customs officials can demand to support it," he said.

Current law sets no limit as to what information a customs official can demand.

Another feature of the new code is establishing a system to allow goods to be partially cleared before crossing the border.

"One of the goals is to accelerate the turnover of goods and remove hurdles in their way," Azarov said.

Other mechanisms to improve expedition include reducing the amount of time officials have to clear goods to three days from 10, and introducing so-called "post control," whereby goods clear the border and then are checked against the books.

The draft would also defer some of the current power GTK has to the courts, such as ruling on allegations of unfair treatment at the border. Likewise, the courts and not GTK would have the power to revoke licenses for brokers, temporary storage facilities and other customs-related activities.

Techniques & Technology

Along with new rules will come new infrastructure, technology and behavior, Lozbenko said.

The World Customs Organization recently agreed to open a training center in Moscow to teach GTK officers of various ranks "how to respond, how to behave, what to say and how to dress," he said.

"Vanin put a task before us -- any company working on the Russian market that encounters a problem and comes to the GTK ... for help should leave with a solution to that problem or a variant of a solution," Lozbenko said.

If there was any doubt that the Kremlin was serious about customs reform, Putin erased it in September when he demoted 43,000 of the then 63,000 GTK officers, ordering them to remove the stripes from their uniforms in order to demilitarize the committee and make them look more friendly.

Putin's move also reduced GTK's payroll: Gone with military rank were the perks and privileges enjoyed by military personnel, and at least 5,000 people have quit since his decree came into force.

But Putin's decree may have also encouraged graft.

"If you count their perks, 43,000 people suddenly lost 40 percent of their salary," said one former customs officer who spoke on condition of anonymity. "This only encourages those who didn't quit to grab what they can."

Perhaps even more challenging than behavior modifications is modernizing the infrastructure of the service, which includes 140 "houses," more than 500 "posts" and some 130 highway checkpoints spread across two continents.

Some checkpoints, especially in the Asian part of Russia, are nothing more than wooden huts manned by a couple of officers without access to a telephone.

It will cost some 200 billion rubles to equip "the longest border in the world," Lozbenko said, adding that most of that sum will be borrowed from abroad since the government cannot afford it.

As part of that borrowing program, the World Bank last week signed off on a $140 million loan to improve GTK's technology, Vanin said.

"Staring Jan. 1, 2004, and for the next four years, the customs service of Russia will undertake an unprecedented modernization based on loans, a new code and improved staff," Lozbenko said.

Part of that effort will be to ensure that declarations can be processed electronically. Last year the GTK launched a trial system using e-declarations and e-signatures in three of the seven federal districts -- Central, Southern and North-Western.

GTK says the system reduced clearance times to 20 minutes, but apparently few people participated. The committee wouldn't say how many e-declarations it processed in the trial period, but Izvestia reported that it was just 14 -- a far cry from the 2.5 million declarations GTK handles every year.

GTK blamed the low turnout on its software program, but businesses polled for this article said computers were not the issue.

"OK, a customs officer will get an e-declaration in a split second, but then you will have to provide 5 kilograms of paperwork," said Alexei Zernov, vice president of the Kaliningrad Association of Forwarding Agents.

"People are so used to stamped and signed paper documents, it will take time," said Oleg Ilyin, a customs specialist at Kraft Foods.

Doubt Springs Eternal

While many businesses express confidence the draft code will liberalize the system and make trade easier, others are under no such illusions.

"The government's proposed code is an absolute clone of the current one," Zernov said. "All this talk about improvements is akin to applying nail polish to a terminally ill patient -- a patient with cancer."

Another businessman said: "It's the same code as before, only phrased differently and with additions by GTK that are written by itself and for itself."

"It would be easier to cut the whole code down to just two phrases: Everything should be done in accordance with a customs officer's decision; signed Vladimir Putin. Then we can save on paper," he said.

Zernov, however, gave a nod of approval to amendments put forward by the Duma budget subcommittee in charge of customs regulations, which is headed by former GTK chief Valery Draganov.

"Those amendments have been brought together into a system and in fact make up a new version of the customs code draft," said Sergei Istomin, an independent expert and a former customs official.

"We want to radically change the rules of the game," Draganov said. "Making the code liberal will make it easy to fulfill, it will galvanize trade turnover... and the state will become not a muleteer but a participant with equal rights and obligations."

"Under the current, bad code even law-obedient importers violate some rules because the code is impossible to fulfill," Draganov said. "The code should be created not so much for customs officials but for the courts as well, so that there are no doubts as to what the legal norm is."

Draganov proposes importers be required to provide an exhaustive list of documents and information, with which it would not take more than a day to clear their goods.

"We want to make the code clear and simple," he said.

Letting the Genie Out

Draganov admits his liberal proposals are unlikely to be fully adopted, but says the debate has already resulted in a victory of sorts.

"I've woken up business, let the genie out, and now it has its own opinion," he said.

Indeed, the powerful RSPP is backing variants of his proposals.

Severstal's Mordashov said the RSPP is pushing to make the code as much a law of direct application as possible.

"One of the main goals here is to create conditions that will prevent abuse and corruption and create difficulties for businesses," Mordashov said.

One way to serve this purpose is for the code to clearly identify what information and documents importers are required to present at the border.

"Every issue must be described in the Customs Code," he said. And if any instructions are issued, importers should be informed and given a three-month grace period before it comes into force. Otherwise, the government must compensate an importer who suffered because he had not been informed, he said.

Likewise, he said the code must be phrased in a clear, simple way so there is no ambiguity.

But most important of all, Mordashov said, is for the new code to fully comply with international standards to ease Russia's entry into the WTO.

The Bottom Line

Like other businesses, RSPP members, are eagerly awaiting the GTK's final version of the draft and are reluctant to comment until they see it.

"We don't have the text yet," Mordashov said. "For us it's important that all views, mechanisms and compromises are reflected in the text," he said.

With so many delays in the drafting of the code, many are speculating that it might once again be put off until parliamentary and presidential elections in December and March respectively. The GTK had been due to deliver its final draft to the Duma in February, then it was delayed until March, and now it has been set for April.

"This is a purposeful delay to miss the Duma's spring session," said Zernov of the Kaliningrad Association of Forwarding Agents. "Then there will be discussions on the 2004 federal budget, then elections -- when will the newly elected lawmakers have time to learn anything about customs?"

"It's ridiculous for the GTK to say that Russia is not ready for liberalization, it is the GTK that is not ready. The GTK is used to having a lot of money, getting almost as much for itself as it does for the state," Zernov said.

GTK officials were unavailable for comment this week.

Art Franczek, who heads the American Chamber of Commerce's customs and transport committee, said the delay is all about power.

"The reason the GTK is resisting is because a liberal code with clear definitions of what customs agents can do will take some power away from it," he said.

"The State Customs Committee is an 800-pound gorilla because, by accounting for 40 percent of all budget revenues, it has the clout to do whatever it wants," Franczek said.

"This is something that GTK officials bring out anytime they start seeing liberal versions of the code -- it's a trump card they play with Putin," he said.

"But somebody has to make the case that you can't just play with numbers, that you are going to be picking up more revenue just by moving items from the gray economy into the regular economy."