Polish-Russian Economic Cooperation

 

 

1. Polish-Russian trade exchange

The preliminary stage of the economic transformation in the post-Soviet countries was marked by a positive development of the trade exchange between Poland and Russia. Regrettably, the turn of the 1990s brought a considerable decline of this exchange, apparently due to the 1998 crisis and abrupt depreciation of rouble[1] as well as the rising cost of import to Russia and an overwhelming recession.[2] A noteworthy factor magnifying the post-crisis distress among Polish exporters was their well-established conviction that they held an advantage, tangible or illusory, over their foreign competition resulting from the language similarities, mentality and tight relationship with their Russian partners formed in the times of COMECON. This conviction and the resultant practices of Polish exporters in the Russian market were put to serious test and had to be reviewed in the time of the crisis.[3] As a consequence, soon after the outbreak of the crisis (September 1998), Polish export to Russia dramatically fell and had not recovered until 2004 when the crisis was finally surmounted.[4] The table below illustrates the point.

 

Table 1. The scale and dynamics of trade exchange between Poland and Russia in the years 19972006

 

 

 

USD million

dynamics (comparable period of previous year = 100)

Export

Import

Balance

Export

Import

1997

2,155

2,685

– 530

130.3

106.3

1998

1,597

2,372

– 775

74.1

88.3

1999

710

2,676

– 1,966

44.5

112.8

2000

862

4,619

– 3,757

121.4

172.6

2001

1,059

4,422

– 3,363

122.9

95.7

2002

1,332

4,407

– 3,075

125.8

99.7

2003

1,512

5,215

– 3,703

113.5

118.3

2004

2,843

6,391

– 3,548

188.0

122.6

2005

3,961

8,986

– 5,025

139.3

140.6

2006

3,760

9,739

– 5,979

118.6

135.0

 

Source: Forecast and Analysis Department of Trade Ministry on the basis of the date delivered by the Central Statistical Office.

 

When analyzing the factors conditioning the bilateral relations and trade exchange between Poland and Russia, it is necessary to discuss the legal basis. The economic relations between the Republic of Poland and the Russian Federation are regulated by a number of agreements and bilateral accords. Among the most significant there are: the Treaty of Amicable and Neighbourly Cooperation of 22 May 1992; the Treaty of Trade and Economic Cooperation of 25 August 1993 (establishing the Joint Polish-Russian Commission for Trade and Economic Cooperation); the Double Taxation Agreement of 22 May 1992; the Air Transportation Agreement of 26 July 2002; the Agreement on the Construction of Gas Supply System for the Transit of Russian Gas via Poland and Gas Supplies to Poland of 25 August 1993; the Agreement on Transborder Cooperation of 2 October 1992; the Agreement on the Quarantine and Protection of Plants of 5 May 1994; the Agreement on Border Crossings of 22 May 1992; the Agreement on Customs Cooperation of 18 February 1995; the Agreement on Combating Business Fraud of 11 June 2002; the Agreement on Cooperation in Environmental Protection of 25 August 1993; the Agreement on Prevention of Industrial Disasters, Natural Disasters and Neutralization of their Effects of 25 August 1993; the Agreement on Employment of Polish Citizens in the Russian Federation and Russian Citizens in Poland of 15 March 1994; the Agreement on Cooperation in Antitrust Policy of 15 March 1994; the Agreement on Relations and Cooperation in Fishery of 5 July 1995; the Agreement between the Polish Research and Certification Centre and Russian Gosstandart on Mutual Recognition of research Reports of 18 July 1994; the Agreement on Legal Assistance and Legal Relations in Civil and Penal Procedures of 16 September 1996; the Agreement on Cooperation in Tourism of 17 January 2002; the Consular Convention of 22 May 1992; the Agreement on Cultural, Scientific and Educational Cooperation of 25 August 1993. Broadly speaking, the fundamental legal matters concerning the Polish-Russian economic cooperation were settled in the first half of the 1990s. The only missing agreement seems to be the one pertaining to the mutual protection of investment.

The bilateral relations underwent considerable changes upon the Polish entrance to the European Union on 1 May 2004. It entailed the termination of the Treaty of Trade and Economic Cooperation of August 1993. Since that time, both parties have been bound by the EU regulations, namely the EU-Russia Partnership and Cooperation Agreement, which became effective on 1 December 1997. The main alterations concern the introduction of EU standards, visa regime, customs rates, etc. Reportedly, Poland had expected that its new position would support the local companies’ endeavours in seeking the EU assistance in foreign trade. However, Russia registered her complaint as for the grounds for the termination of the aforesaid 1993 treaty and attempted to bargain for the EU concessions as Poland was accepted as a member state.

The trade turnover between Poland and Russia in 2006 reached, according to Polish statistics, the total of 13,499.6 M Euros.[5] Polish exports to Russia totalled 3,760.6 M Euros and imports 9,739.0 M Euros. According to the Trade Ministry, Russia is almost the sole supplier of petroleum and natural gas to Poland; consequently, in 2006 Russia was the second largest Polish import resource. Simultaneously, Russia was the sixth major recipient of Polish commodities. Thus, fifteen years after the dissolution of the Soviet Union, Russia still counts as a key trade partner of Poland, notwithstanding the past trade crisis and rather frosty political relations between the two states. During the meeting of the Polish Prime Minister Donald Tusk and the Russian President Vladimir Putin in February 2008, the latter stated with a tinge of sarcasm that despite the many attempts of various politicians Polish-Russian economic cooperation “has not been wrecked”.

Besides the unfavourable political particularities, the Polish-Russian trade cooperation is invariably affected by the aftermath of the 1998 crisis. The export grows at a snail's pace. Some of the Polish products have gradually returned to Russian market; yet, in 2006 the annual trade gap totalled 5,978.4 M Euros.

The structure of Polish export to Russia is varied. The most popular exports are machines and installations for electromechanical industry – 30%, chemicals – 22%, foodstuffs – 11.5%, wood, paper and resources for paper industry. Recent years have seen an elevated competitiveness among the Polish commodities exported to Russia. This mainly influenced the farming and food industry. High competitiveness also concerned frozen beef – unfortunately the import was banned by the Russian side, which deteriorated this situation – apples, processed vegetables, bakeries, dairy products and butter, saplings and plants and meat meal.

As far as the Russian imports are concerned, the dominating commodity is minerals: petroleum, natural gas and mineral ore; they account for as much as 88% of the total import in 2006. The size of import of the mentioned articles has not varied over recent years. The remaining commodity groups cover merely 11% of import with common metals and their products and chemicals topping the list.

As regards the volume of Polish investment in Russia, it leaves much to be desired; still the situation is gradually improving. Depending on the quoted assessment, the accumulated value of Polish investment amounts to no more than 300 M USD (in 2006 Poles invested – against the unfavourable political atmosphere – 95.2 M USD). The most sizeable investment is a 119.7 M USD worth investment of Pfleiderer Grajewo; the company opened a chipboard manufacturing plant in Veliky Novgorod. Another important player is FORTE accompanied by Bioton and TAMO Bella. According to the National Registry Chamber of the Russian Federation, there are about 490 enterprises registered in Russia established with the shared Polish ownership, about 180 fully owned by Poles and over 20 branches and 70 agencies of Polish companies. A considerable fraction of Polish investment in Russia has been allotted to the agency services and foreign and domestic trade. The Polish investment in Russia is dominated by medium-size undertakings. The National Registry Chamber reports that merely in 15 established Polish enterprises the Polish contribution to the initial capital exceeded 100 thousand USD.

When analyzing the activity of Polish enterprises in Russia, it transpires that a number of them intend to set up a local subsidiary. A preferred organization of business activity is the registration of a limited liability company or the establishment of sole agency. However, despite the oral declarations of interest in the Russian market, the number of newly registered companies is limited. It is caused in part by the high cost of registration procedure and legal obstacles in the employment of foreign citizens. Due to the excessive customs rates and free productive capacity in Poland, many companies decide to relocate to Russia. The attracting factor is lower taxation levied on natural and legal persons and high demand for the produced commodity.

Next to the trade exchange undertaken by commercial entities, there are intergovernmental economic initiatives. The central one is the construction of pipelines for the transit of Russian gas via Polish territory. The negotiations held concerned the construction of a pipeline through Poland supplying gas to Western Europe and circumventing Ukraine. The attitude of both countries to the feasibility and purposefulness of the project has varied throughout recent years. At some point, Poland paid attention to the fact that the pipeline route should provide for the Polish ecological conditions. The Russians considered some alternative solutions. Poland heavily criticized the project of a pipeline across the bottom of the Baltic Sea – from Russia to Germany. Russia also proposed the Agreement on Cooperation in Long-Term Oil Supply to Poland and its Transit to Third Countries. The negotiations are tough and even the February 2008 meeting between Prime Minister Tusk and President Putin proved inconclusive.

As far as power engineering is concerned, both countries work on the projects focused on the development of power supply networks, the construction of high-voltage transfer lines and hold negotiations on the combination of the Russian power network with the European UCTE system with Poland as its part. When discussing the Polish-Russian economic cooperation, it is necessary to mention the many barriers that Polish enterprises encounter, including political ones. One of the observable problems in the accessibility of the Russian market for the Polish products is the costly and time consuming certification process. Another impediment is the unfavourable Russian customs tariff which uses the so called customs component for selected products, i.e. the taxation of every single unit of the imported commodity. The Russian oil and steel concerns reported unfair treatment during the procedure of denationalization of Gdańsk Refinery and Polish steelworks. The Polish side used the arguments of political threat related to the inflow of Russian capital. Russian entrepreneurs were concerned about the encumbrance to trade and economic cooperation with Poland after the 2004 EU enlargement, stressing the visa regime in particular. As for the future prospects for trade exchange, the visit of the Polish delegation in Moscow in February 2008 concluded with an assurance of more favourable climate for economic cooperation. The Polish prime minister talked to the Russian president, prime minister and deputy prime minister as well as the candidate to Russian presidency in the oncoming election. This slightly thawed out the cool political climate; however, the time will tell whether these declarations materialize. Nevertheless, no turnaround in the mutual relations is presently expected.

Of substantial weight in the support of Polish export to Russia and other countries of the region is the commitment of the state. Among the most effective methods of support, there is the insurance of export loans guaranteed by the state treasury. This activity is the focal point of the Association for the Insurance of Export Loans KUKE SA. The export loans may be realized through direct insurance, indirect insurance (reinsurance) or granting insurance guarantee by KUKE SA. The operation of this instrument is regulated by the Act on State-Guaranteed Export Insurances of 7 July 1994. When assessing the practical results of KUKE’s activity, the conclusion is that there is a need for more robust mobilization of the export supporting instruments.

Another form of enlivening the trade exchange is the subsidies to the interest rates of export loans. The relevant Act on Subsidies to the Interest Rates of Export Loans of Fixed Interest Rate was passed on 8 June 2001. In order to adjust the official Polish export endorsement system to the OECD and EU regulations, the former system of subsidies to the interest rates of export loans of variable rate was replaced by a system of subsidies to the interest rates of export loans of fixed interest rate (Pol. abbrev. DOKE). The banks which entered a DOKE agreement were in a position to obtain, via the National Economy Bank, subsidies from the state budget assuring the stability of their projects.[6]

Foreign trade is of utmost importance for the Russian economic growth. The Russian export provides foreign currencies which stabilize the domestic currency by support the so called Stabilization Fund. The import, on the other hand, is a key factor for Russian enterprises which often reach for foreign products, e.g. modern technologies having no substitutes in the local market. The imported commodity is also food and consumer goods being more expensive that their Russian equivalents but of incomparable quality and therefore enjoying an increasingly greater demand.

For Russia Poland is an important yet secondary economic partner. In recent years, the trade turnover with Poland comprised barely 3.3% of the overall Russian turnover. This makes Poland fifteenth largest Russian economic partner. From among the EU states, Poland is ranked fifth after Germany, Italy, Holland and Finland.[7] Upon the entry to the EU, Poland became a party to the agreements concluded between the EU and Russia; consequently, Poland is conditional on the same contractual regulations like the remaining EU countries lying “further abroad.” [8]

Among the chief Russian exports to Poland there are petroleum and natural gas. The share of other commodities is limited. The export stream from Poland to Russia is by far narrower. The trade exchange balance is definitely disadvantageous to Poland. Likewise, Polish input in the Russian economy is insignificant. There is much being said about the absorptive power and development potential of the Russian market. Yet, the ignorance of legislation, business practices and a gradual cooling of political relations inhibit the free investment flow and trade exchange between the two countries.

 

 

2. Foreign investment – including Polish – in the Russian Federation[9]

According to the information of the Federal Service of National Statistics of the Russian Federation, in 2006 the arrival of foreign investment to Russia reached 55,109 M USD (an increase by 2.7% compared to 2005), including direct investment of 13,678 M USD, portfolio investment of 3,182 M USD and other investment of 38,249 M USD.

 

Table 2. Foreign investment in Russia in the years 19992006 (USD billion)

 

 

1999

2000

2001

2002

2003

2004

2005

2006

Total

2.10

1.80

3.70

14.30

22.10

31.70

52.40

53.00

Direct investment

2.80

2.50

2.70

3.20

7.50

14.80

10.90

28.30

Portfolio investment

– 0.20

0.30

0.70

2.80

– 0.40

0.80

0.80

8.30

Credits and loans

– 0.40

– 0.90

0.80

8.30

15.10

16.20

40.90

16.80

Direct investment in non-finance sector

USD billion

4.30

4.20

4.00

4.00

6.80

9.40

13.10

13.70

% GNP

2.20

1.60

1.30

1.20

1.60

1.60

1.70

1.40

% to prev. period

126.70

98.00

94.40

100.60

169.90

138.50

138.80

104.60

 

Source: Goskomstat, Moscow, 2007.

 

Investment arrives from different directions. For example, in 2006 the most investment-bearing companies in Russia were incorporated in Cyprus (9,851 M USD)[10], Great Britain (7,022 M USD), Holland (6,595 M USD), Luxembourg (5,908 M USD), Germany (5,002 M USD), France (3,039 M USD), Virginia Islands (2,054 M USD), Switzerland (2,047 M USD), the USA (1,640 M USD) and Japan (695 M USD).

While having a closer look at the different sectors of the Russian economy, the greatest inflow of foreign investment in 2006 was visible in: farming and forestry, extraction industry, processing industry, production and distribution of energy, gas and water, construction, wholesale and retail sector, transportation and communications and finances.

The end of 2006 saw the total of foreign investment in Russia at 142,926 M USD, including direct investment of 67,887 M USD (47.5%), portfolio investment of 4,902 M USD (3.4%), other investment of 70,137 M USD (49.1%).

The 2006 statistics show that the most generous investors were the enterprises incorporated in Cyprus: 32.2 B USD (22.6%), Holland: 23.5 B USD (16.4%), Luxembourg: 22.9 B USD (16.0%), Germany: 12.3 B USD (8.6%), Great Britain: 11.8 B USD (8.2%) and the USA: 7,698 M USD (5.4%).

The inflow of foreign capital to Russia after 2000 exceeds the outflow of Russian capital abroad.[11] As far as Russian investment abroad is concerned, in 2006 52.0 B USD was transferred out of Russia. The majority of Russian investment was targeted on the USA (35.1%), Austria (25.0%), Germany (6.1%), Ukraine (5.8%), Cyprus (5.2%), Great Britain (3.9%) and Luxembourg (1.9%).

The presence of Polish enterprises in Russia is subject to the analyses of Polish diplomatic posts which trace their development and operations.[12] According to the balance of payments statistics and the National Bank of Poland, in 2005 Poland received 28 M Euros of Russian direct investment. As determined by the Polish Information and Foreign Investment Agency, there are three major Russian players among the largest foreign investors in Poland:

– GAZPROM (the construction of transit gas pipeline system via Poland and investing in telecommunications);

– ŁUKOIL – petrol stations;

– Bagdasarian – Śnieżka S.A. in Walbrzych Special Economic Zone – food industry (confectionery).

 

 

3. Polish investment in Russia

In the years 20002006, the inflow of Polish investment to Russia – according to Russian data – was as follows:[13]

 

Table 3. The inflow of Polish investment to Russia (USD million)

 

 

Investment total

Direct

Portfolio

Other

2000

11.2

7.5

3.7

2001

9.5

7.0

3.7

2002

5.2

4.1

1.1

2003

20.1

17.0

3.1

2004

39.5

33.0

0.3

6.5

2005

143.2

102.7

40.5

2006

163.6

95.2

68.4

 

By the end of 2006, Polish investment in the Russian market had totalled 295.2 M USD.[14] The quoted data corroborate the concentrated investment activity of Polish companies in Russia, in particular in the years 2005 and 2006.[15]

The majority of them are direct investment. Only the automobile industry, machines and installations comprise the so called “other” investment (mainly loans). Similarly, over half of the investment in wholesale and retail sector comprises other investment (54.1%).[16]

It is worth stressing that of utmost importance for the growth of the Polish investment dynamics in Russia is the stability of business activity in the Russian Federation as well as the improvement of political relations and prompt conclusion of a bilateral agreement on the support and mutual protection of investment.[17]

One of the prevailing forms of Polish business presence in the Russian market is the establishment of a company’s branch or a subsidiary company. The goal of a Polish investor may be diverse: the expansion of the outlet or, most frequently, taking advantage of milder taxation abroad. Many investors anticipate cheap labour and the use of the resident status to have recourse to tax reliefs often available to foreign investors.

The majority (36.6%) of Polish operations in Russia (404) have been registered in Kaliningrad – this being caused by the proximity, joint business traditions, established partnership, lower running costs and an easy manner of making contacts.[18] Moscow and its surroundings have 32.7% of the companies (361) and Sankt Petersburg 11.5% (127). In the three mentioned areas, there is 80% of all the Russia-based Polish-owned enterprises altogether. The table below outlines the locations of Polish companies run in Russia.

 

Table 4. The number of enterprises with Polish capital registered in selected Russian cities

 

Registration area

No. of registered companies

Registration city

No. of registered companies

Kaliningrad

404

Yaroslavl

4

Moscow

and Moscow Oblast

361

Omsk

4

Sankt Petersburg

and Leningrad Oblast

127

Volgograd

4

Smolensk

27

Voronezh

4

Rostov upon Don

18

Archangelsk

2

Irkutsk

8

Astrakhan

2

Yekaterinburg

7

Kazan

2

Kostroma

7

Samara

2

Novgorod

6

Saratov

2

Novosibirsk

6

Kemerovo

1

Sverdlovsk

6

Sakhalin

1

Nizhny Novgorod

5

Sochi

1

 

Source: Data published by the Department of Trade and Promotion of the Polish Embassy in the Russian Federation.

 

According to the information obtained from the Trade ministry, the most important Polish-owned enterprises operating in Russia are[19]:

1.   PFLEIDERER, Ltd. in Novgorod Oblast (chipboard manufacturer) – 100% of Polish capital (Pfleiderer Grajewo).

2.   BELLA, Ltd. in Yegoryevsk, Moscow Oblast (cosmetics and hygiene, transportation) – 100% of Polish capital (Toruń Factory of Medical Dressings).

3.   FORTE RUS, Ltd. in Volodymyr (office and kitchen furniture) – 100% of Polish capital (FORTE Furniture Factory).

4.   MEGAPACK, Ltd. in Vidnoye, Moscow Oblast (drink bottler, distribution) – 50% of Polish capital (HOOP).

5.   KOMANDOR, Ltd. in Yekaterinburg (trade, financial agency, order collection) – 26% of Polish capital (KOMANDOR).

6.   KAMIS, Ltd. – in Moscow (production of seasonings, tea, coffee, cacao) – 100% of Polish capital (KAMIS – Seasonings).

Generally speaking, the enterprises with a share of Polish-owned capital operating in the Russian market are primarily involved in trade and transportation services. The companies are largely registered in Kaliningrad Oblast, in Moscow and major industrial centres. For practical reasons, they operate as limited liability companies of no more then three shareholders. A majority of them declare the minimal legally required share capital. This in all probability testifies to the reduced confidence of Polish entrepreneurs in the principles governing the protection of foreign investment in Russia, the integrity and permanence of Russian law and other regulations binding foreign businesses in the Russian market.[20]



[1] It is worth noting that the dollar/rouble exchange rate surged in a short time by 250% – from 9.7 Rbl in 1998 to 24.6 Rbl in 1999. In the following years, the floating exchange rate caused the relation to gradually increase to the level of 31.3 Rbl in 2002 and subsequently stabilize to the current level of 24.6 Rbl buying 1 USD.

[2] Rutkowski, J. “Polityka wspierania polskiego eksportu do Rosji na tle polityki Unii Europejskiej”. Stosunki gospodarcze Polska–Rosja na tle Unii Europejskiej, SGH, Warsaw 2004, p. 262.

[3] Forecast and Analysis Department of Trade Ministry, Warsaw, 2 November 2006.

[4] Żukowski, M. “Etapy rozwoju handlu zagranicznego Rosji w latach 19942003”. Stosunki gospodarcze Polska–Rosja na tle Unii Europejskiej, SGH, Warsaw 2004, pp. 98–99.

[5] Współpraca gospodarcza polski z krajami WNP. [Polish Economic Cooperation with the CIS]. Forecast and Analysis Department of Trade Ministry. Warsaw 2007, p. 18.

[6] The information from: Federacja Rosyjska, UNIDO, Warszawa 2003, pp. 155174.

[7] Statistical data of the State Central Committee of the Russian Federation – http://www.customs.ru/ru/stats/stats/popup.php?id286=1709&i286=1 (9.05.2005).

[8] In some cases Russia takes decisions on trade cooperation with Poland violating the principle of equal treatment in trade exchange with the EU states. The cause might be “less than correct” political relations between the two countries.

[9] The information after the materials obtained from the Polish embassy in Moscow and available at: www.polweh.ru/pl-inwestycje/indexp.shtml

[10] It is not difficult to gather that it was the “import” of Russian capital previously taken away to Cyprus.

[11] Wnieszekonomiczieskije swiazi Rossii so stranami Jewropy w kontiekstie rasszirenija ES, Moskwa 2003, pp. 1642.

[12] Prepared on the basis of the information obtained from the Department of Promotion of Trade and Investment of the Polish Embassy in the Russian Federation, Newsletter 7/2007.

[13] See: Babińska, K. “Przepływ kapitału do Polski i Rosji w formie bezpośrednich inwestycji kapitałowych i portfelowych w latach 19892000”. Zeszyty Naukowe WSE-I 14, Warsaw 2002.

[14] See: the Eastern Market Recovery Programme, prepared by the Cabinet on 4 February 2003, Warszawa 2003.

[15] Misala, J. “Konkurencyjność i pozycja konkurencyjna Polski na rynku Rosji w okresie transformacji”. Prace i Materiały Instytutu Gospodarki Światowej 294, SGH, Warsaw 2003.

[16] The entries with highest RCA indicators of Polish-Russian trade exchange in the years 1993-2002 are to be found in: Misala, J. “Pozycja konkurencyjna Polski na rynku rosyjskim”. Stosunki gospodarcze Polska–Rosja w warunkach integracji z Unią Europejską, SGH, Warsaw 2004, p. 174.

[17] This subject was discussed during the Moscow visit of Donald Tusk, PM, in February 2008.

[18] A noteworthy study on the subject: Falkowski, K. “Stosunki gospodarcze polski z obwodem kaliningradzkim”. Stosunki gospodarcze Polska–Rosja w warunkach integracji z Unią Europejską, SGH, Warsaw 2004, p. 271ff.

[19] Data published by the Department of Trade and Promotion of the Polish Embassy in the Russian Federation.

[20] Chełminiak, M. Współpraca obwodu kaliningradzkiego z zagranicą. Pallas, T. Europa Środkowo-Wschodnia w procesie globalizacji i integracji. Wydawnictwo naukowe INPiD UAM, Słubice 2003, pp. 114115.