- To conduct industrial policy, set priorities, and use government commissions, subsidies, credits, guarantees, customs quotes, customs duties, and industrial monitoring. This will become the core of Russian economic policy aimed at improving competitiveness of domestic manufacturers =>

- To use conditions on joining WTO as a means of competition regulation in different areas of the Russian manufacturing sector and segments of the domestic market. We should open those market niches where we either hopelessly lag behind our competitors or are prepared to compete with foreigners without any national preferences. We should use WTO's institution of "transition periods" and close those niches where domestic manufacturers are not yet ready to immediately join the international competition. Those are the niches that cannot afford loosing due to reasons of national security or macroeconomic importance =>

Simultaneously we prepare a packet of measures for joining WTO. For that we need a program aimed at the support of Russian export; a program that will train specialists on WTO, international lawyers, international economists; a system of standardization and licensing; copyright protection. Regional and national legislatures need to be adjusted to international norms.

2. Competitiveness of Russian Business in Several Areas (Results of Survey Conducted Among 50 Top Managers and Experts)

2.1 Agriculture

Agriculture that survived all years of reforms and emerged anew turned out to be quite efficient and competitive. Its products are so much sought for that the European Business Club, according to Seppo Remes, the club's president, is intended to open a branch in Krasnodar Region, because there are lots of foreign companies that would like to make investments into Russian agriculture there.
However, world markets are divided and protected by tariffs and license barriers. Within Russia our export is limited by high transportation tariffs and underdeveloped infrastructure, especially seaport infrastructure. The strategy for the development of the agricultural products export should include investments in ports and warehouses, stimulation of joint ventures with foreign capital, and promotion of certification activities.
The competitiveness of agriculture is jeopardized by the lack of investments. There is no secret that capital stock is worn out, fields do not get harvested, and irrigation systems do not function. Current efficiency is a result of not spending money on modernization. However, in the future, agriculture will require significant investments, including government support. Of great hazard is the increase of tariffs for gas and electricity. Currently they are relatively low, which makes Russian agriculture highly efficient.
Grain. Our nation is on the verge of a major crisis of grain overproduction. The crisis may last for several years. This is why the emphasis should be made on the development of the export infrastructure, promotion of new nontraditional grain markets, promotion of crop diversification, support of the seeds industry, and creation of warehouse certificates (D. Rylko, Institute of Agricultural Markets Studies).
Oil-bearing Crops.This industry is exceptionally attractive for those investors who want to oust western oil and margarine from the domestic market. At the same time, in the near future Russia is to become a stable net-exporter of vegetable oil. Among the problems is the limited raw-material base. It is virtually impossible to expand cultivated areas; this is why crop yield is of paramount importance (D. Rylko).
Sugar. Strict government regulation of the sugar market in Russiais inevitable and justified. A favorable option would be to gradually substitute the import of raw sugar with the production of sugar beets. This objective can be reached by gradual decrease of the quota on imported raw sugar with simultaneous retention of rates for raw sugar on a high level.
Milk. In 2-4 years our country will face the problem of milk overproduction; however, entrepreneurs do not really know what to do in this situation. The problem is aggravated by seasonal fluctuations in the milk production industry (S. Plastinin, General Director, Wimm-Bill-Dann, President, Milk Union).
Meat. During the 1990s, this sector was subjected to a heavy attack in form of EU export subsidies. It resulted in a long-term distortion of price proportions for beef, pork, and poultry: the price for beef in our country is virtually the same as the price for pork, whereas in developed countries beef is much more expensive. As a result, Russia has almost no incentives to expand its livestock. What is needed in this situation is the allocation of tariffs. An ordinary increase of import duties may turn out to be inefficient against EU export subsidies (D. Rylko).
Poultry. Domestic companies have fairly good chances of ousting imported products fully in all segments of the market, excluding chicken thighs. It would be wise to think about exporting separate parts of chicken (breasts and wings). The import of chicken thighs should be regulated in a way that reflects the fact that chicken thighs are a source of cheap meat protein for the majority of Russians (D. Rylko). "I won't like it if American bird is blocked and our poultry entrepreneurs become kings and dictate prices on the market. At the same, Americans should not dominate the market because they will crush us with their low prices. Russian chicken is better; we feed it with quality grain, not growth stimulators" (I. Babaev, the Cherkizovsky company).
Domestic Market Protection. The struggle for high import duties for food products is inefficient. The United States and European Union know how to break the tariff protection, which is quite inefficient during Russia's attempts to strengthen its national currency and fill gaps in its customs system. It is more efficient to regulate import by means of introducing quotes for basic products.
Russia faces a serious external threat that is affiliated with the accession of Central European countries to the EU. These countries have been already receiving subsidies; starting from 2004 the subsidies will grow. Many western companies are looking into the possibility of transferring a number of their food enterprises (farms and ranches) to Central European countries and expand local production of grain. This will result in strengthening of import's pressure on Russia's domestic market and strengthening of competition for foreign markets with the EU (D. Rylko).
Penetrating Foreign Markets. Russian companies will not be able to do it on their own. There are two reasons for that.
Reason number one. Tough competition and insufficient government support. Markets of Russian grain are fairly limited (Azerbaijan, Israel, Republic of Georgia). From the mid 90s, the share of world's major wheat exporters has never fallen below 82% of total wheat export and several times exceeded 90%. Within the group of major exporters there is a struggle for market redistribution (R. Gumerov). "We are not protected. Chicken thighs got prohibited and immediately we had to receive a delegation from America. Because they know what the prohibition means. It means trouble. What about us? Our attempts are pathetic" (I. Babaev).
Reason number two. Domestic government policy. Among drawbacks are overcharges for railroad transportation, volatile standards, absence of Russian certification agencies abroad, export duties, and low throughput of ports. Western countries are obsessed with organic food; our products meet all organic food requirements. However, we need a strong system of certification, which is currently our weak point. Lending and insurance systems are underdeveloped; there is no information and consultancy services for agricultural companies. All this is the "green box," the measures of which are not taken into account by WTO in terms of the aggregate protection measure (E. Serova, the Transition Economy Institute).
Government Support. "I support the mechanism of subsidizing the interest rate. The whole world enjoys loans with the annual interest rate of 3-4%. Russian rate is 22%. We would like to take loans under the program of interest rate subsidizing. Many people would work like that. However, alas, the money is very scarce. If we had at least a 10-year lease, the grain would pay for itself faster, within 1 to 2 years. We will invest in agriculture if we get this sort of yield. If somebody offers us equipment lease, I will meet this person near his office with flowers" (Ya. Shlyapochnik, RusAgroKapital).
"The first thing that has to be done on the federal level is to lease semen of beef breed from abroad. If the government announces that it supports this lease, investors will show up. We have to think about export subsidies now, while we are not a WTO member. Without export subsidies we won't enter the world market. As far as the infrastructure is concerned, our government has no money, but can provide guarantees. Many companies will be happy with these guarantees" (V. Semenov, former minister of agriculture).
Main Threat. "The main threat for Russian agriculture is linked to the results of domestic natural monopolies reforming. Currently, our agriculture uses, perhaps, the cheapest energy resources and nitrogen fertilizers in the world. If we fulfill WTO requirements, the prices for them will go up, which will significantly weaken the competitive abilities of the Russian agriculture. Besides, it will reduce profits of industrial companies that invest their funds in agriculture, which will result in the reduction of non-profile expenses, including expenses for agriculture" (D. Rylko).

2.2 Automobile Industry

It seems like domestic cars are about to get extinct. Probably, some models of trucks, pick-ups, and all terrain vehicles will survive, but the bulk of domestic cars will be produced for no more than 5-7 years. After that our automobile industry will either die or start closely cooperating with western major car manufacturers in the cheapest segment of the market ($5,000-7,000).

Currently, the strategy of Russian car manufacturers should be the following:

- to master and polish existing models, enhance the quality of standard parts, and retain and improve competitive technologies in order to save their reputation and win customers’ trust;

- to conduct restructuring, prepare for the cooperation with western investors, and introduce western standards of management,  accounting, and corporate policy;

- to protect the domestic market from western used cars, otherwise investors will not be interested in Russia;

- to attract investors and launch production of either inexpensive western cars or cars that are designed jointly with western companies.

D. Sterzshnev (GAZ):

Short-Term Objective. Out of Gazelle we have to make a vehicle with higher capacity, new breaks, new frames… well, in fact, it has to be a totally new automobile with a new engine and gear-box. It will be a vehicle of the Bychok class. We are capable of enhancing the quality of Volga so that it becomes more reliable, fuel efficient, durable. It won't leak or make strange noises. We have to regain our customers’ trust. But if we talk seriously about a car with a completely new design, its development and manufacturing will hardly be possible without foreign investments and partnership with a western automobile concern.

About Customs Duties. We are no gang of lobbyists driven by some momentary needs. We are not inclined to produce bad cars using customs duties as a sort of shield. But if we still want to see our automobile industry alive we have to create necessary conditions for large Russian companies to emerge and go into designing and producing components of high quality as well as for western automobile companies to come to our market. The government should draw up a set of common long-term rules for all kinds of companies – those importing new and used cars, car-producers and investors. We have to define our goals – what is it that we actually want? If we aim at making the automobile industry in this country truly professional, our priorities are to secure high quality of standard parts and facilitate a high level of demand for them. It’s a universal truth that creating automobile industry calls for a ban of imported used cars. This is a mandatory condition.

Strategy. We should either create a new automobile jointly with a western company at a western plant or produce it at a Russian plant with external technical assistance. We do have some competitive advantages that can and should be used. It is true for casting, forging, and other operations affiliated with metal production. We are capable of building a foundry and manufacture top-notch products. By the way, KAMAZ supplies cast parts to Volkswagen, and ZMZ supplies its products of aluminum casting to MAN.

Besides, we have a stunning amount of industrial sites and facilities with developed infrastructure. All we need is to install new equipment, bring in western experts, train our specialists – and off we go. As a result, the cost of launching new products will be ½ of what it is now.

About Investors. Generally speaking, we need two types of investors – technical (automobile manufacturer) and financial. I believe these two types should nicely complement each other.

W. Schlimme (BMW Russland Trading):

"When I hear people say that Russian automobile industry has no future I can’t agree with this – no automobile producer in the whole world would be able to sell new cars at a price lower than the one offered by Russian producers. That is there will be no one to compete adequately with local producers in this segment of the market. The future of the industry lies in this low-price segment."

Russian automobile industry, shielded by import duties, will get a chance to grow within the super cheap segment ($5,000-6,000). The industry has no choice but to create a new high quality car (using its own resources or assistance of a strategic investor) and make it popular, or go bankrupt. Yes, western countries are already familiar with this phenomenon: if there are no alternatives, people prefer not to buy rather than buy something of poor quality. People will wait, become richer, and then shift to a different market segment, while the low-price segment will simply cease to exist.

O. Akhmedov (Audi Russia):

"I think that the Ford plant in Vsevolzhsk is a good project for Russia in the long run. I don't know whether they will be able to launch mass production of their cars, though. They are planning to produce 100,000 cars per year – but are they ready to sell them for $5,000? I don’t believe in miracles, it is going to be a Russian-made Ford at a usual Ford price."

Ford is able to launch its manufacturing in Russia. They have done it in many other countries, what’s to stop them in Russia? But it takes time to find partners and launch the production of standard parts. The problem is it is a vicious circle. It is possible to maintain low prices for standard parts only if you have mass production. Mass production calls for a broader market, for the market that is not confined to the Ford plant in Vsevolzhsk. But the thing is, if they want to become a Ford supplier they will have to provide very high quality.

2.3 Communications

If Russia joins WTO, it will result in radical shifts in the way the industry is regulated, which will seriously affect many companies. The following is an analysis of these shifts.

Protection for Competition means availability of the market and equal chances for all the players. This requirement directly affects interests of the companies that already work on the market and first of all Rostelekom, Russia's international and long-distance communications provider. Currently, according to existing regulations, this company has exclusive rights to provide long-distance communications to population, which allows it to maintain rates at a high level. "Our government's desire to grant Rostelekom an exclusive right for international and long-distance telephone traffic until the year 2010 is an acute and highly disputable issue. It certainly refers to regulating the internal market but it also shows how our government perceives the competition among communications companies" (A. Vinogradov, Golden Telecom).

However, Rostelekom gets no more than 50% of profits from international communications and about 13% from long-distance communications. The thing is that Russia still practices what is called cross-subsidizing under which low unprofitable rates for local communications services are compensated by artificially overpriced rates for long-distance communications. That is why with such a rate misbalance a new player on the market, even a player comparable in terms of size with Rostelekom, will be harmful not only for Rostelekom but also for all traditional local communications providers.

This market has to be gradually prepared for de-monopolization. The first step in this direction would be to introduce independent accounting for all providers in order to count the real cost of services. After that it will be possible to adjust rates and only then to address the issue of the long-distance communications market. The procedure of letting a new company onto the market should be very clear-cut and transparent. For instance, this process took decades in the US and Europe.

There is yet another reason to retain status quo. Rostelekom has laid trunk-lines all across the country. But currently the majority of lines is only several percent loaded, which means that a new company will have to share with Rostelekom a small market. Besides, all potential competitors originate from at least partially state-owned companies. Transtelekom is affiliated with the Ministry of Railroads, Gazkom is affiliated with Gazprom, and Enifkom is affiliated with RAO UES. These companies build their infrastructures at their founder’s expense and are never too much preoccupied with such thing as returns on investments. Therefore, we can expect destructive damping prices from them.

Networks Compatibility means access to existent networks and stable traffic exchange for new participants on the market, clear non-discriminating requirements, and procedures for fair conflict resolution.

Virtually all new providers demand that this issue should be solved, but the providers who already work on the market resist to government efforts to find the solution.

For example, for all cellular companies it is difficult to get connected to local networks in regions. Such difficulties can hardly be called purely technical. Will the provider be able to use local area codes or federal area codes? Will he use existing traffic networks or have to lay his own cables? Everything will depend on the goodwill of the local Electrosvyaz office. Tariff rates for connecting to local networks are also a mess. So it is time to do something about this situation.

Availability of Services – introduction of mandatory requirements for the standard packet of services that all providers have to provide to the population. The packet should not become a major burden for providers themselves. Traditionally it has been especially challenging to telephonize rural areas. In many western countries as well as in some countries of Eastern Europe this problem is solved by means of universal service funds. All communications providers invest part of their profits into the fund and the money is used to build networks in rural areas. There are some attempts to introduce such a mechanism in Russia. However, the idea of creating a non-budgetary fund faces strong resistance from the Ministry of Finance and some of communications companies that do not agree that only they have to carry the burden of rural area telephonization, especially in form of allocating cash. There counter suggestion is to shoulder “labor burden,” that is to install a certain number of telephones or booths with pay phones in rural areas.

Availability of License Criteria – transparent and fair terms and procedures of licensing.

Fair Distribution of Limited Resources – transparent and non-discriminate procedure for the distribution of limited resources such as radio-frequencies, telephone numbers, and traffic priorities. Resources in general and frequency resources in particular are scarce. In former days, all frequency ranges were occupied by the military. Currently, according to the Ministry of Communications, providers can have free access to only 4% of all frequency resources. The severe deficit calls for total transparency in distributing the resources. But in fact an open tender for the provision of cellular communications services was conducted only once in 1998.

Independent Regulatory Entity – a regulatory entity, independent from all telecommunications services providers, that uses mechanisms of unbiased approaches to disputed issues and never discriminates against specific participants of the market. This requirement for joining WTO must be of the greatest concern for the Ministry of Communications. Such an independent entity will take over a considerable number of functions currently assigned to the ministry (licensing, supervising frequency distribution, solving conflicts between providers, etc.), and to the Ministry of Antitrust Policy (tariff policy).

2.4 Air Transportation

The main objective of the industry is not to loose its current position on both the domestic and global market. The aviation industry will exist if Russia possesses a national air carrier, efficient and competitive on the global market. Currently, Aeroflot is a dynamically developing company with strong positions on the market. But it needs adequate government support to modernize and restructure its flying stock.

No qualitative changes in the area can be expected without active involvement of the government – the all-powerful market laws are helpless in these circumstances. First of all, it is a global practice to have the state regulate air transportation and related matters. It is very natural because passenger safety and security, in general, are the state’s responsibility. Second, the state either owns in full or controls the stock of most companies in the industry. Third, aircraft production, especially the design stage, is traditionally (either implicitly or explicitly) subsidized by the state, which is a global practice. And finally, efficient competition (or efficient cooperation) with international aircraft producers is only possible in case of government support.

Short-Term Objective – the state should focus its support on one and maximum two key areas in the aircraft manufacturing industry. It simply will not have enough resources to manage more. Unfortunately, the current doctrine is destructive: to provide little support to all aircraft manufacturers and keep the industry the way it was in the Soviet days. As a result, budget funds are wasted on extending agony rather than prompting robust development of the industry.

The following areas should be financially supported by the government:

-         they should satisfy needs of air carriers;

-         they should be competitive in the international air-space industry;

-         they should make the most of the Russian aircraft industry potential.

What Air Carriers Need:

-         To operate 2 or 3 aircrafts built by one company rather than 9-11 plains built by several manufacturers.

-         Aircrafts should meet regulations that will be issued in 2006 and not current regulations issued on April 1, 2002. Moreover, they should be able to meet even more advanced regulations since their service life is usually 20-25 years.

-         Aircrafts should be no less reliable, economical, and comfortable than foreign makes (Boeing and Airbus).

-         And finally (this provision does not refer to production), the number of airlines should be reduced to 10-15. Otherwise, numerous companies will exhaust one another in dumping wars and will not be able to accumulate funds on upgrading their flying stocks.

What Can Be Competitive? It is quite obvious that higher concentration will contribute to preserving the industry. Instead of having dozens of design bureaus and aircraft plants, it is necessary to create 1 or 2 vertically integrated holdings. The key issue is what kind of activity will be the most competitive. There is no definite answer to this question. The following is a list of areas found viable by a number of experts.

Long-distance and medium-distance airplanes. Here we don’t have too many options: Tu-204, Il-96, and their modifications. Discussions of the major characteristics and specifications of these airplanes can last for ages – there is no real data about these makes. The data can be collected only as a result of mass use of the planes. One thing is indisputable, if we are talking seriously of competing with Airbus and Boeing we should at least achieve the same production volume. That is, if we strive to get at least 20% of the world market, we have to produce approximately 100-150 airplanes per year. It is technically feasible – in the Soviet days we used to produce 80 long-distance planes per year. However, it is hardly possible to sell this large amount of planes on the local market. Because

-         airlines can afford to purchase no more than 3-6 airplanes per year;

-         Russia in general needs 500 airplanes even taking into account the recent increase in the volume of traffic (currently Russia has much more planes).

The most optimistic export programs (Egyptian Sirocco) envision sale of 24 to 36 airplanes per year in the vague midterm perspective. That is why if we choose this direction, we have to draw up plans for broadening the market considerably. Another way to go ahead in this area is to make the most of the existing resources (many plants possess standard parts for the assembly of new aircrafts) to suffer the minimum of losses in the business.

Short-distance and regional aircraft. Passenger capacity is up to 80 people. There is a number of factors that speak in favor of the project:

-         It’s easier to cross the threshold to enter the market. The project is less expensive (if compared to the long-distance airplanes project). The market is less monopolized. It is occupied by four participants, which means that it is enough to win 10% and not 20% of the market to become competitive;

-         The local market is comparatively broader: there are plans to substitute Tu-134 for Yak-40, etc.;

-         in the segment of planes with the flight range of 5,000 kilometers we currently have no foreign competitors.

Yet there are some problems:

-         It is hard to choose a project. Tu-334 is almost ready but it has no modifications. The project lacks flexibility. The Sukhoi project has a whole range of modifications, and it envisions a partnership with Boeing (which relaxes international competition), but at this point it is on the initial stage, and it should take at least 6 years.

-         We cannot disregard the problem of tough competition – for example Fokker, a company that used to produce airplanes of this class, went bankrupt because it failed to stand the competition.

International cooperation. In late 60s, the major European aircraft producers realized that all attempts to compete with the US are useless unless the companies unite their efforts. That is how Airbus consortium came into being. Given specific conditions we can enter the alliance with either Airbus or Boeing. But this objective should be sough on the state level.

There is another, less complicated way. It possible to produce standard parts for foreign aircraft enterprises almost without government support. "It is more profitable to be involved into standard parts production than into assembling process. One can start by producing landing gears and proceed by launching aviation system production or something else." (S. Nedoroslev, Kaskol)

In This Situation the Government Should

- focus its support on one or two competitive airplane makes and not all the aircraft companies like it does nowadays;

- impose no limitations on the use of western machines during the period when advanced domestic aircrafts are being designed;

- agree, in the course of negotiations with WTO, to stop producing specific types of aircraft in order to get special treatment in terms of manufacturing a selected types of planes.

Valeriy Okulov of Aeroflot:

Problems with Flying Stock. A flying stock that consists of 11 types of airplane is not efficient. The stock should be reduced down to 2-4 types of planes, which will result in significant reduction of expenses. What are these types of airplanes? By 2006, neither Tu-154 nor Il-96 are going to comply with new EU regulations. Currently, the period from the statement of work to putting into commission is 7 years. But the deadline is early 2004. It means we have no time to carry out the full cycle of production of a new airplane that will meet all requirements.

Aeroflot really needs an airplane for short distances and regional transportation. Therefore, we have been working with the Tupolev design bureau on the Tu-334 project. The work started several years ago but the project is a no go. We also work together with the Sukhoi design bureau on the joint project they have with Boeing. Among the planes we possess, Il-96 is considered to be the most advanced model, yet it calls for drastic modifications of its FS-90 engine in order for us to meet noise and reliability regulations. But the program Perm Engines designed to conduct the necessary modernization has been frozen.

I guess our aircraft manufacturers are either scared or prefer to ignore the cooperation with western companies, creation of licensing programs, and promotion of our machines on the international market. The best thing about the Sukhoi-Boeing project is that Boeing opens up a gateway into the global market for our producers and this airplane in particular.

In order to preserve the aviation culture in Russia we have to stay involved in the production of airplanes as end products. This will allow the industry to preserve all the necessary specialists, experts on reliability, engines, chassis, and on-board equipment. How can it be done? We should not be afraid of cooperation. Civilian aircraft manufacturing in Russia started with Li-2, a licensed plane by Sikorsky. Americans sold us their blueprints.

 Government's Objective. The state has to take the responsibility for unpopular measures such as the reduction of our domestic aircraft manufacturing volumes and promotion of only 1 or 2 competitive makes. Neither western nor domestic investors will support the industry unless political will as well as clear objectives and ways to achieve them are shown by the government.

About Customs Duties on Western Hardware. We can ban western airplanes, but it will kill not only our air carriers, but our aircraft manufacturers as well. Without western airplanes, Russian airlines would not be seen either on the American or European markets. No one would be interested in commissioning Russian airplanes. It is easy to withdraw from the market. It would make western air carriers happy. But it would be absolutely impossible to re-enter the market even with a new flying stock.

2.5 Timber Industry

2.6 Ferrous Metallurgy

External Markets. Currently, the world market is characterized by excessive steel production capacities and antidumping trials against exporters of various origins, including those from WTO member-states, are common. «Conditions for the access of ferrous metals to foreign markets will hardly be any different with Russia’s accession to WTO. Excessive steel production capacities will still result in tough competition and replacement of Russian metal products from the world market by means of antidumping procedures and other restrictive measures, which does not contradict the WTO system» (S. Kolpakov, International Union of Metallurgists).

WTO membership does not help us solve crucial problems but points out certain preferences. In order to foster Russian steel export it is necessary: «?) to get the status of a country with market economy and join WTO shortly afterwards (market economy status without WTO membership will rather make export conditions worse because exporters will have to pay compensatory duties in addition to antidumping duties), b) internally it would be reasonable to adjust tariffs of natural monopolies to the needs of exporters, to lower tariffs for railway export traffic in particular» (D. Gorshkov, Severstal).

Domestic Tariffs. In order to make our prices competitive we should create competitive environment for energy suppliers. All metallurgical enterprises should have a free access to FOREM. It is necessary to review the system of transportation tariffs in export areas. The share of transportation expenses in the final cost of our major export items amounts to 30 %» (A. Ivanushkin, Mechel