For 2012, America’s trade deficit with Rus­sia stood at USD18.6 billion, a figure that was USD7.7 billion lower compared to the results for the preceding year. Exports of products from the United States in 2012 totaled USD10.7 billion, which is nearly 29 percent lower com­pared to the figure for the previous year. The imports of Russian products into the United States declined 15.4 percent to USD29.3 bil­lion. Altogether, the Russian market now takes the 28th place in the ranking of U.S. export destinations. American foreign direct invest­ment in Russia was at USD9.7 billion as of 2011, a number that increased from USD8.3 billion measured in 2010. Top sectors for for­eign direct investment include goods produc­tion, bank operations, oil and gas, as well as mining.

In August of 2012, Russia joined the World Trade Organization as its 156th member. In December 2012, U.S. President Barack Obama terminated the application of the discrimina­tory Jackson-Vanik amendment to Russia and extended the PNTR status (permanent normal trading relations) to Russia. In the same month, the United States and Russia submitted docu­ments to the World Trade Organization pro­viding for the mutual application of the WTO Agreement to govern the trading relations of the two countries.

Customs union

As of January 2010, the countries of Rus­sia, Belarus, and Kazakhstan entered into a customs union, which means that a common tariff applies to all goods imported into the customs zone. Most of the tariffs were set in accordance with the rates that Russia imposed at the time of the union’s inception. A uniform customs code applies in the territory of the customs union effective July 1, 2010. As of July 2011, the three member-countries dispensed with customs checkpoints that existed earlier at their common borders. When Russia joined the World Trade Organization, the customs union countries opted to adopt the WTO tariff rates in effect for Russia. In 2012, an organization known as the Eurasian Economic Commission was substituted in place of the earlier customs union governing authority. The competence of the new body now includes setting the foreign trade policies for the member-countries of the customs union and putting in place the frame­work for the Eurasian Economic Union, which is expected to come into existence in 2015.

Tariffs and taxes on imports

The rates of excise taxes for alcoholic bev­erages rose markedly and progressively in the recent years. As such, in 2012 alone, the tax rate went up by 29.8 percent for spirits containing over nine percent of ethyl alcohol. In early 2013, excise tax rates for alcohol increased even more, by 33.3 per­cent. As for the beverages containing less than nine percent of ethyl alcohol, the excise taxes for those products rose 42 percent in 2012 and 18.5 percent in 2013. Tax rates for beer, wine, and sparkling wine went up by 20 percent, 20 percent, and 28.6 per­cent respectively in 2012. In January 2013, those rates again went up by 15 percent, seven percent, and 24 percent. Alcoholic beverages that are imported usually bear a higher price sticker in relation to Russian-made products, particularly beer and wine. As a consequence, these imported goods are subject to higher taxes.

One significant problem that the dealers of alcoholic beverages regularly encounter is that tariffs, excise fees, and the value-added tax are to be remitted to the state budget prior to the sale of the products with the use of advance deposits or bank guarantees. Com­petent authorities devised a rate schedule to determine the amounts of advance fees, as the exact amount of the taxes to be actually paid in the future is impracticable to ascertain. As a consequence of having to pay upfront, some importers find themselves paying extra in relation to the amounts that would be actu­ally assessed, particularly when it comes to products with lower-end pricing points. Fur­thermore, companies operating in the bev­erage sector have reported that the state’s reimbursements of advance payments can be delayed for a period of several months. The obligation to furnish advance duties and tax payments for alcoholic beverages can create a limiting effect for market players, inasmuch as operating cash would be tied up in keeping the bank guarantees open.

The Russian Customs Service imposes im­port duties on royalties paid for the in-country display of audio and video production material, such as original radio and television record­ings. American companies have questioned the fairness of this arrangement, noting that the system creates double-taxation distortions. Royalties are separately taxed as income in Russia.

Producers of consumer products from the United States have also raised complaints that Russia assesses tariffs on the combined value of products and the royalties paid by domestic subsidiaries to overseas parent companies, ar­guing that such a system leads to higher tariffs.

Companies in the American information tech­nology sector have criticized special copyright assessments, which are levied against prod­ucts that may give the appearance of copyright infringement. Royalty collection agencies ac­cumulate the duty payments gathered in this manner and later remit payments to the entities whose rights are infringed upon. While a col­lections agency has been granted approval to engage in passing on royalties to bona fide right holders, some U.S. firms have challenged the transparency of its operating procedures. Further, the authority of the collections body also has now become a subject of litigation, exacerbating the market players’ concerns as to the agency’s legitimacy and permanency. Of equal alarm is the fact that the lists of Russian-made goods and imported products, against which copyright assessments are to be made, are not identical.

Companies engaged in bilateral trade have voiced worries to the effect that the Russian Customs Service acts arbitrarily in proceedings to contest the valuation of certain products. As such, Russian officials often rely on prices referenced in internal guidelines, disregarding invoice-listed prices. Another complaint is that evidentiary standards are not uniform across all entry ports. American trade officials have addressed these issues with their Russian counterparts.

The advocates of American exports to Russia stated that they were also worried over the fact that not all regulations, administrative decisions, and court opinions are released in a publically-accessible format. In line with WTO standards, Russia made a commitment to disseminate for the public’s benefit all documents related to international trade, in addition to ensuring that public comment procedures are in place for future measures impacting commerce.

Additionally, American companies oftentimes encounter other difficulties and market barriers that are either industry-specific or company-specific.

Alcoholic beverages activity licenses

Russia made improvements to its regime for licensing products and technologies at the time of WTO accession; however, procuring a license to carry on certain activities is still an onerous task. For instance, when it joined the World Trade Organization, Russia did away with liquor import licenses. Nevertheless, sector-specific permits must be secured to conduct the distribution of alcoholic beverages and to store them in a warehouse. U.S.-based organizations have complained that the barriers to obtaining such licenses are detrimental to commerce in those commodities. As such, three years ago, the Russian alcoholic beverages watchdog, abbreviated as FSR, promulgated criteria for warehousing alcoholic products that created hard-to-meet guidelines for companies desiring to warehouse liquor. Commentators noted that such regulation were for the most part unnecessary, inasmuch as some of the prohibitions banned storing different types of beverages on a single pallet, required the goods to be stored at a certain height above the floor level, barred mixing alcohol products with other goods in the same storage com­partment, and mandated certain certificates from other state bodies. American exporters suggested that their activities on the Russian market were blocked for months at a time, and that a great deal of monetary resources had to be invested in conforming their storage procedures to the new regulations. Even as the FSR alcohol watchdog introduced draft amend­ments to warehousing practices in the middle of 2012, such proposals did not dispense with a number of the onerous provisions included in the earlier decree.

Cryptography machines

Importing crypto­graphic equipment into Russia is re­stricted and must be done with either a general import li­cense or a case-by-case notice. When Russia joined the World Trade Organi­zation, it vouched to change the require­ment it imposed on encryption technol­ogy. One construc­tive initiative was ex­tending the one-time notice procedures to mass market con­sumer electronics, as defined in the Wassenaar Arrange­ment. The only problem existing at this point is that the requisite changes to the tariff codes of the customs union countries have not yet been made. Be­sides, in 2012, Russian authorities changed the regulations addressing the distribution of cryptography products. In the past, it used to be the case that the distribution of consumer electronic products capable of functioning as encryption devices was not subject to licen­sure. Because a special license for the distribu­tion of cryptography-capable goods is one of the prerequisites for securing an importation permit, the new 2012 mandate in effect gener­ates a new hurdle for bringing such equipment to the Russian market.

Special and general licenses are required for companies to be involved in wholesale opera­tions and in production activities for goods such as pharmaceutical products, explosives, drugs, nuclear material and equipment, hazard­ous waste, and non-processed animal origin goods. Companies have said that the process of securing such licenses is difficult.

Automotive market issues

As of September 1, 2012, Russia instituted a special assessment for vehicle recycling. In line with this requirement, car importers and vehicle producers must tender to the state a payment calculated based on the number of years the vehicle had been in operation and the size of its engine. The fee is designed to miti­gate the cost of disposing of the vehicle when it becomes disabled. These recycling rates were set from about USD840 to USD3.440 for new cars and from approximately USD5.160 to USD21,880 for used vehicles. Car producers with facilities in Russia are not under the obli­gation to pay the fee in the event they provide for a process for disposing of their vehicles at the conclusion of their lifecycle. Moreover, recycling fees do not apply to cars that are imported form the customs union countries. At the time when the assessment was first instituted, Russian state officials explained that the fees are needed to promote ecological programs. Russian authorities initially indicated that the fees would be temporary. On the other hand, some have suggested that the institution of recycling fees was put in place in an effort to balance out decreased revenues associated with lowered import tariffs mandated by the WTO. The Russian government recently issued calls to add agricultural machinery to the list of vehicles requiring a disposal fee.

Tariff rate quotas

The Russian government adheres to a sys­tem of tariff rate quotas (TRQ) in relation to agricultural products, including meats, such as beef, pork, and poultry. As of 2010, the Cus­toms Union Commission follows the practice of estimating the total TRQ size for a given product relying on production and consump­tion forecasts for that specific product. The Eurasian Economic Commission in the year 2013 determined the TRQ values for the coun­try of Russia in line with the WTO schedule. A new TRQ was put in place for certain whey products, such that the in-quota tariff rate of 10 percent and an out-of-quota tariff rate of 15 percent are now used. Even if one takes into account Russia’s TRQ volumes, the ac­cessibility of the Russian market to American producers of beef, poultry, and pork is still limited by the application of various sanitary and phytosanitary measures.

Quotas

In August of 2012, the Eurasian Economic Commission promulgated an order subjecting to import quotas certain stainless products, including piping and tubing. The new quota system is meant to substitute the earlier arrangement of safeguard assessments against steel pipes de­livered into the territory of the cus­toms union. While quotas generally have no place under WTO guidelines, Russia’s pipe quotas will continue in force at least through November 2014.

Substitution

Authorities in Russia made strides to encourage the domestic manufac­turing of pharmaceutical products, even if it meant that locally-manufac­tured drugs would include ingredients from overseas. In line with Pharma 2020, which is the state master blue­print for the pharmaceuticals sector, Russian-made products must com­prise over half of all in-country sales by the target year of 2020. It has been suggested that the government pursues certain policies favoring local manufacturers over American import­ers, such as permitting only Russian companies to make claims for reg­istered price adjustment or giving a 15-percent price advantage to cus­toms union companies in government tenders and auctions. Analysts ex­pect that it will be difficult for Russia to accommodate market access for foreign firms together with nurturing its domestic industry.

As of the end of summer 2011, the Economic Development Ministry together with the Ministry of Trade imposed criteria for determining what telecommunications equipment would qualify as domestically-manufactured products. This determination will then be factored into the authorities’ de­cision as to whether the equipment may be utilized in particular techno­logical applications. Under the stan­dards established, the amount of in-country research work and technical processes needed to construct spe­cific equipment must be anywhere from 60 to 70 percent for the product to be considered of Russian origin. The localization level is not the only factor, however, as the manufactur­ing entity itself must also be at least a 50-percent Russian-owned company with physical premises in the coun­try. Additionally, it is impor­tant that the local producer actually retain intellectual property rights to the tech­nical processes and software components. The equipment producer must have its as­sembly lines in Russia.

Other import substitution policies include the issu­ance of government man­dates for certain companies in the Russian transportation sector to utilize the country’s GLONASS global positioning system in place of the Amer­ican GPS or the European Galileo system. According to a March 2012 decree of the Russian Air Transporta­tion Agency, cargo airplanes hauling dangerous commodi­ties must have installed GLONASS navigation equipment effective Janu­ary 2013. Passenger aircraft operat­ing in Russia must also comply with GLONASS requirements by January 2017. At the same time, all American- made passenger aircraft were not designed for GLONASS use, which means that a technical modification to those planes will be necessary.

Policies for exporters

In the recent years, the Russian government did away with most du­ties on product exports. However, some 240 commodities are still sub­ject to export assessments, primar­ily for revenue generation and trade control reasons. First, a number of products from the food sector are subject to the assessment of export tariffs, including seeds and fish. Oth­er important commodities of notable significance are wood and fertilizers. It has been announced earlier that Russia will abolish export fees in the course of time for all, but the most sensitive products bearing strategic significance. As part of its World Trade Organization obligations, Rus­sia agreed to stop assessing any fees on metals, including aluminum, nickel, steel scrap, and copper. These changes should go into effect within five years of Russians acces­sion to the Organization. Moreover, Russia agreed to lower export assessments on wood to a range of five to 15 percent. In relation to timber tariffs, however, analysts note that the pressure from local producers continues to cause delays in the implementation of cus­toms reforms.

In December 2011, Russia outlawed exports of certain scarp containing ferrous metals because it constitutes a considerable natural resource base for steel manufacturers. This requirement is in force with respect to all the far eastern sea ports in Russia, with the notable exception of the Magadan port. Experts do not deny that there is a global market in ferrous scrap and further note that the decision on Russia’s part to ban all exports created a supply and demand imbalance and drove up the prices on those goods worldwide. Even while the decree was then countermanded by a Rus­sian court decision, the Russian government continues to make proposals for closing down far eastern ports to scrap exports. Furthermore, in early 2012, the Russian authorities also came out with a draft order prohibiting steel scrap ex­ports from ports in St. Petersburg. Even though the decree has not yet entered into legal force, the prospect of losing St. Petersburg as a point of origin for scrap steel exports resulted in new worries for American market players.

For many years, Russian authorities pursued policies of setting high export assessments on crude oil in an effort of promoting the country’s oil refining sector. At the same time, operators at a number of oilfields located in the Caspian region and in Eastern Siberia have come to benefit from significant discounts on crude exports. As of October 2011, state authori­ties decreased crude export assessments to 60 percent from 65 percent, where they had been earlier. At the same time, the government increased export assessments for heavy fuel oil and some petroleum products. As such, Russia has a 90-percent export tariff for gaso­line. Customs code amendments of this na­ture had as their primary objective heightening domestic production to ensure profitability of well operators on the one hand, and on the other ensuring that enough motor fuel gasoline remains in the domestic market. The changes also reflect the policy of promoting domestic refining capabilities.

The Russian government also implements a much-regulated export regime for samples gathered in the course of research expedi­tions. Similar requirements are applicable to storage sources containing large volumes of data. Special licenses are also required for exporting precious metals and stones.

State procurement

In acceding to the World Trade Organiza­tion, Russia opted out of joining the separate Agreement on Government Procurement. In­stead, the Russian government made a dec­laration to the effect that it will use transpar­ent procedures to give out state contracts in line with the country’s laws and administrative rules. Russia further agreed to serve as an observer within the Organization’s government procurement committee to be on track for accession to the Agreement on Government Procure­ment in 2016.

IP safeguards

In 2012, Russia was included in the Priority Watch List of the Special 301 Report. The report identifies trade barriers to U.S. companies and prod­ucts from the inadequacy of intel­lectual property laws covering such aspects as copyrights, patents, and trademarks in other countries. The chief reason for concern enumerated in the report is the enforcement of intellectual property rights.

The subject of enforcement was recently added to the intellectual property rights bilateral agenda of the U.S. and Russia. A very specific action plan was signed in December

Analysts believe that problems with the framework of intellectual property rights protection in Rus­sia are a contributing factor that is slowing down the country’s efforts to diversify economically and to spur innovation.

In 2010, the Russian government enacted changes to the law deal­ing with medicine circulation, which extend regulatory information protec­tion for a period of six years following the country’s accession to the World Trade Organization. When Russia became a member of the WTO, it assumed the obligations under the TRIPS Agreement, which covers the protection of regulatory data. Ameri­can companies have addressed is­sues relative to Russia’s inadequate ability to safeguard confidential clini­cal testing and miscellaneous regu­latory data furnished as a condition of pharmaceutical goods marketing.

The Russian Ministry of Health re­ported that it was in the final stages of drafting legislative measures for streamlining pharmaceutical products registration. While the initiative was set to be introduced by December 2012, the measure has still not been passed into law. American stakehold­ers and trade officials vowed to ad­dress these concerns with Russia in the near future.

Copyright infringement with the use of the Internet is a significant concern that is very much prevalent in Russia for all types of audiovisual media and computer programs. U.S. officials have addressed their Rus­sian counterparts as to the impor­tance of counteracting online piracy by holding infringing Internet service providers accountable for distribut­ing pirated content. American trade officials constantly pursue collabora­tive initiatives with Russia aimed at reducing Internet piracy.

In the fall of 2006, the United States and Russia signed the Bilateral Intel­lectual Property Rights Agreement with the U.S. that was aimed at strengthening anti-piracy enforce­ment. As part of the agreement, the United States provides technical support and IP-enforcement train­ing for Russian customs personnel. While problems persist, Russian law enforcement officials detected a number of IP rights violations by end users and businesses. These violations resulted in the prosecu­tion and conviction of the producers and, in some cases, consumers of pirated content.

Barriers in the service sector

The service sector in Russia is readily accessible to American com­panies, particularly in the areas of educational, financial, distribution, and legal services. At the same time, certain difficulties continue to exist. First, Russia does not allow any banks from foreign countries to set up branches within the country. Second, the abilities of western firms to extend services to state utility com­panies are significantly constrained. Third, in the insurance industry, the maximum share of foreign capital may not exceed 50 percent. Fourth, no legislative changes have yet taken place to implement Russia’s WTO obligations to allow selling biological food additives and substances in the open market generally, as opposed to only in pharmacies. Business rep­resentatives have also complained that the process for obtaining certain technical licenses is difficult and burdensome.

Barriers to investment

Improving the investment climate in Russia has become the government’s ultimate target. Nevertheless, problems in the way of foreign direct investment include difficult-to-understand regulations, bureaucracy, and, in some cases, corruption. Russia has tried to address the issues in this sphere with the formation of the Anticorruption Council in 2008 and the passage of substantive corruption-targeting laws in 2011.

The adequacy of procedures to resolve controversies and disputes involving two or more parties is also a problem. The reliabil­ity of the Russian court system in rendering just decisions has been characterized as less than ideal. Among other market chal­lenges investors have cited high risk exposure of minority shareholders. Some western companies find it in­convenient that Russian firms do not compile their financial reports in line with international standards.

Russia’s Law on Investment, passed in 1999, contains a list of instances in which the overarching national treatment doctrine is not applicable. These instances include safeguarding the Constitution and the state, protecting the public morale, ensuring the health of the popula­tion, as well as keeping intact the rights of other persons. The gov­ernment’s ability to circumvent the national treatment principle through discretionary rulemaking and an open interpretation of the exceptions found in the 1999 Investment Law is a con­cern to investors.

In line with Russia’s law on invest­ment, priority foreign investment proj­ects that were in existence in 1999 that had 25 percent or more foreign capital can enjoy protection with re­spect to some tax changes and other restraints. Priority projects are defined as ventures with cumulative invest­ment equal to or exceeding USD41 million, of which USD4.1 million is for­eign money. While the investment law provides for a measure of protection, some companies have complained that the lack of customs and tax guidelines implementing the law lim­its the scope of protections available.

There are specific limitations im­posed on telecom service providers and new agencies. Pursuant to Rus­sia’s Law on the Mass Media, foreign entities are limited from investing in the Russian media sector. The same restriction applies to domestic le­gal entities that are more than half foreign-owned and that belong to Russian citizens who are citizens of other countries as well. Generally, the media law disallows foreigners to establish television stations in Russia and prevents them from holding or acquiring any equity interest in TV broadcast companies that reach half or more of the country’s regions or, in the alternative, half of Russia’s population.

Security companies are too the subjects of substantial investment limitations when it comes to foreign­ers. The Law on Private Detectives and Security Activities does not allow for the use of foreign capital in fund­ing a private security organization.

In addition to these specific re­strictions, the 2008 Strategic Sector Law creates 42 strategic sectors for which the acquisition of controlling stakes by foreign investors is prohib­ited absent the approval of Russia’s Commission for Control­ling Foreign Investment.

Last year, the Strategic Sector Law was changed to remove bank cryptog­raphy activities and ra­diation source use. The amendments further de­creased the number of circumstances where pre­merger approvals were re­quired. The Commission for Controlling Foreign In­vestment over the course of four years from 2008 to 2012 issued approval to 129 entities of the 137 that applied.

In 2012, the Russian President issued an order that mandated all Russian entities included in the list of strategic enterprises (57 business organizations altogether) to receive approval from Russian federal execu­tive authorities prior to responding to any information request from foreign authorities. Government clearance is mandated to make changes to agree­ments made with foreign companies. Transactions of these strategic com­panies in foreign countries are also subject to approval.

Privatization

Private companies in Russia gener­ally compete with government-owned companies under the same market conditions. At the same time, com­petition can be difficult. Frequently, state companies have government representatives as members of their boards. The forms of business or­ganization can also result in certain benefits for state companies. Govern­ment-owned companies are created on legal grounds that are different from the statutes used in creating most private companies. Such an ad hoc approach to creating the legal framework for state companies may result in certain advantages to gov­ernment companies, such as lobby­ing access and insider maneuvering.

Separate from the limits imposed under the Strategic Sector Law, Rus­sian authorities also have designated 196 entities that are totally or partially controlled by the state and that are not subject to further privatization because they are important for the state.

The plans of the Russian state to privatize other eligible companies are implemented slowly. In 2011, the state approved the privatization scheme up to 2017. In 2012, the framework underwent revision more than once because of delays in the implementation of the earlier plan.

Despite Russia’s plans to privatize state-owned companies, the gov­ernment intends to keep its majority interests in such industry mainstays as the Federal Grid Company, Ros­neft, the Russian Railways, Sberbank, Transneft, and VTB. Additionally, the government intends to retain blocking stakes in a number of other compa­nies, which are subject to privatiza­tion.

Taxes

Foreign commercial entities op­erating in Russia have complained that value-added tax refunds that are supposed to be reimbursed to domestic exporters in a period of three months following claim pre­sentation are not being refunded. Leasing companies have also chal­lenged the non-payment of the VAT refunds. Some of those entities moreover companied that tax in­spectors at the regional level fre­quently subjected them to audits and seized their bank accounts. Such measures have necessitated expensive court enforcement re­sponses. American companies have indicated that they were forced to seek value-added tax reimbursement through the court system. The delays arise from Russia's efforts to combat fraudulent value-added tax refund requests.

American entities further voiced concerns relative to the tax audi­tors’ treatment of transfer prices. Two problem areas have generally been identified in this respect. For one, there have been issues detected in instances where a transnational company transferred an employee from one of its offices to Russia. Second, tax inspectors had prob­lems when the Russian division of a multinational company made intra­company purchases of IP products. In accordance with international ac­counting practices, intra-company payments do not generate taxable events for the parent and subsidiary entities concerned. Still, up until auditors in Russia suggested that such payments were not eco­nomically justified and impermissible. Russia’s new law on transfer pricing that came into effect in 2012 is to phase in transfer pricing gradually over the course of three years. In transfer pricing regulations will cover legal entities with annual revenues exceeding USD1 million. For 2013, transfer pricing rules will apply to companies with revenues of approximately USD625,000. Next year, transfer pricing rules will be ap­plicable to companies with revenues of roughly USD320,000. Since the system was put in place, no major obstacles regard­ing transfer pricing were reported in Russia.

Car sector

The Russian govern­ment has introduced domestic content and production incentives for the automotive industry as early as 2005. Two years ago, in 2011, Rus­sia introduced a second program with stricter con­ditions, requiring the pro­duction of 300,000 auto­mobiles by each domestic manufacturer, instead of the 25,000 automobiles as provid­ed for in the initial program. With Russia’s accession to the WTO, the government consented to lower the domestic content requirement. Rus­sia further came to an agreement that the controversial provisions of both programs would end in July

2018.

E commerce

E-commerce is expanding signifi­cantly within Russia. The market size reached USD16.6 billion in 2012, a figure reflecting a 26-percnet in­crease compared to the previous year. The taxation of e-commerce transactions is still an area of the law that is underdeveloped. Companies from abroad have vast possibilities for entering into the e-commerce market in Russia. While certain is­sues with product delivery through the Russian postal service still per­sist, especially in remote areas out­side of Moscow, the situation is im­proving. In April 2011, Russia passed a Law on Electronic Signatures. In line with that enactment, the use of electronic signatures in Russia has been greatly expanded and foreign electronic signatures have validity within Russia. Under the law, elec­tronic instruments executed with e-signatures have full legal force, just as a paper document that is signed by hand.