Russian Duties: Those Close To Authority Do Not Pay

14.12.2009 — Analysis

The Russian Ministry of Industry and Trade intends to improve the procedure of providing concessions for technical refurbishment of Russian enterprises. The Government is going to make a judgement on a draft decree which will offer the business itself to decide what equipment can be imported duty-free. The experts interviewed by the RusBusinessNews observer are convinced that the benefits will be used, as per usual, by large vertically integrated structures which enjoy the support of authorities. This is unlikely to make the Russian economy more competitive.

The Ministry of Industry and Trade keeps implementing its plan for the upgrade of the Russian economy. It is based on imports of equipment for the country's most important enterprises. The State is trying to streamline this process by the establishment of sector-wide and federal data banks of technologies and offers from abroad that are needed for the Russian industry. The decision on which equipment is going to be imported into the country on concessionary conditions will be made by structures that the authorities select on competitive basis. Officials claim that these will be selected from virtually every sector of economy.

This initiative of the Ministry caused extremely controversial experts' responses. Vladimir Vinnitski, the Chairman of the Presidium of the Sverdlovsk Oblast Economic Bar Association, believes that the new approach will facilitate the refurbishment of the Russian economy in case the tender for the selection of an entity that will evaluate the need for providing concessions is conducted in accordance with the law, in the spirit of honest competition. "At the moment this would seem to be highly unlikely," the expert says.

Andrei Mekhrentsev, the Head of the Department for Timber Industry of the Sverdlovsk Oblast government, is convinced that the attempts to create an organization that would determine what should be imported to the country and what should not would, as a rule, be aimed at the support of large vertically integrated companies. Small and medium-sized businesses prevailing in the timber industry will not be able to win the tender even if it is conducted fairly. There's nothing new here: today small business cannot afford the state of the art equipment even at concession tariffs.

In 2008 "Krasnoyarsk Combine Harvester Works" JSC, which is a member of Concern "Tractor Plants" Ltd., has won a state contract for the development of a set of harvesting machines that would consist of a harvester, a forwarder, and a log loader. The company was given the budget money only because it once made the decision to start the production of a Danish forwarder Silvatek locally.

According to Andrei Mekhrentsev, the selected version of the machine is not the best. Tests performed in the Sverdlovsk Oblast have shown that its caracteristics are comparable to those of the Byelorussian Amkodor and inferior to such brands as Valmet, John Deere, and Ponsse. In the meantime, having started the production of Silvatek, Concern "Tractor Plants" forced the business people who prefer other manufacturers' machines to pay a 25% duty on them. As a result, Russian timber industry players lost the opportunity for competing on international markets as they cannot purchase the state of the art forwarders capable of increasing the speed of lumbering six to eight times. Business people see no sense in supporting the allegedly Russian design which essentially translates into the reduction of the competitiveness of the sector as a whole.

Experts say that there is no system to the governmental support for the core industries' technical refurbishment: the procurement of customs concessions solely depends on the lobbying potential of a specific enterprise. This is undoubtedly higher for vertically integrated companies; which is why Victor Kralin, director general of "Timber House Building Association" NPP, knows very few occasions of customs concessions having ever been granted to timber industry enterprises.

Machine building plants' lobbying potential is not very high either. According to Pavel Onokhin, the Head of HR and Social Policy Department at PSM-HYDRAULICS Ltd., in 2003-2007 the plant imported 120 state of the art machine tools which were not available in the RF, as part of its technical refurbishment program. The plant had to pay the duties in full. Currently the plant is undergoing a bankruptcy procedure for being unable to pay banks during the crisis for the equipment purchased.

At the same time, the Government routinely grants concessions to metal makers who purchase continuous casting machines abroad despite the fact that these are available from Uralmash Machine-Building Corporation CJSC. For instance, Magnitogorsk Iron and Steel Works JSC is planning to build a continuous cold rolling mill comprising five stands. Uralmashzavod is capable of manufacturing the stand combined with a pickling line; however, their equipment doesn't have the characteristics required by the metal makers. As a result, there appears a draft decree of the RF Government on personal VAT exemption for an imported "five-stand continuous cold rolling mill combined with a pickling line".

Other metal making holding companies are just as capable of scheming in the corridors of power. Their bosses got used to solving any of their problems by means of governmental decrees. This is why experts are not at all surprised that one of managers of Novolipetsk Iron and Steel Corporation made a guess that the December initiative of the Ministry of Industry and Trade would make it possible to reduce duties on imported ferroalloys which, to put it mildly, has nothing to do with technology refurbishment of the industry.

Experts are convinced that Russian business which places its bets on exclusive relations with the authorities will inevitably lose to its foreign competitors.

Technologies are not bricks, you cannot stock up on them: you have to invest in them. The majority of Russian plants do not invest in proprietary technologies. Undoubtedly there are exceptions. For instance, according to Roman Lukichev, UC RUSAL's PR representative in the Urals Federal District, the company has developed a proprietary electrolyser which attracts foreign specialists' interest. RUSAL does not rule out that instead of importing they might start exporting technologies soon.

To be fair, one must say that RUSAL has for a long time been managing to talk the Russian Government into maintaining a concessionary customs regime for the company, which exempted the imported raw materials from VAT. So, this holding company can be perceived as an exception from the rule only by someone with a very lively imagination.

With the lack of proprietary technology sector specialists believe the idea of creating a data bank to be utterly useless. USSR has already had institutes that registered inventions and died together with the country. In experts' opinion, today it is very easy to establish technologies needed in the timber industry, for instance; all it takes is attending the Euro-Asian Timber Industry Forum. The problem lies elsewhere: betting exclusively on vertically integrated companies does not leave any room for the development of medium-sized companies which have truly original technologies and might, in time, quite naturally grow into large businesses.

The conclusion that there is the need to abolish the exclusive relations between the authorities and businesses and start cultivating competitive companies bottom-up is evident to experts but has very little chance of being translated into practice. The experience shows that the Government prefers making a stupid decision (like the one prohibiting the export of round timber from Russia), and then make exceptions by individual decrees. It is a common knowledge that politicians have no steady beliefs - only steady interests.

Vladimir Terletski