Russia is the largest country in the world in land area. It covers
17.1 million square kilometers (6.6 million square miles), which is 70
times the size of the United Kingdom and 1.8 times the size of the United
States. The country has 11 time zones, stretching between the Western
border with Baltic republics and Eastern Pacific coast.
A map of the Commonwealth of Independent
States shows the location and the borders of the Russian Federation.
Almost 30 percent of the country is located in the permanent
frost zone and cannot be utilized for any agricultural activities. The
rest of Russia has a continental climate with long, cold winters and
brief, hot summers. Around Moscow, January temperatures can sometimes drop
to - 20°C (-4°F) and below, while in July and August
temperatures of 30°C (86°F) and above are not uncommon.
Russia's
population is approximately 150 million, with 78 percent living in
European Russia (west of the Ural Mountains). Moscow is the largest city
in Europe: it has an official population of 10.8 million and an estimated
population of approximately 13 million people. About 5 million live in St.
Petersburg (formerly Leningrad).
Russian is the common and
official language. However, the country is very multinational and up to
100 different languages are spoken in various regions and autonomous
districts. Visitors to the big cities will find many people who can speak
English, German, French, and other major languages.
The Union of the Soviet Socialist Republics (USSR) was created by the
Bolsheviks in 1922, who took over the power as a result of the October
Revolution of 1917. Russia was transformed from the Empire (autocracy)
ruled by tsars into a totalitarian state runned by the Communist Party.
The USSR expanded its territory during the World War II and continued to
expand its sphere of political influence up until its crash in 1991.
The attempted coup in August 1991 can be viewed as a benchmark for the end
of the Soviet Union. Over the following few months after the coup the
independent republics were established, and the Commonwealth of
Independent States was formed.
Now, the Russian Federation is a
federation of 20 republics, 50 regions, 16 other
territorial-administrative formations (territories and autonomous
districts), and the cities of Moscow and St. Petersburg, legally bound
together through the Federation Treaties. A
map of Russian administrative divisions shows the republics,
regions, and other sub-divisions.
Some
cool
links about Russian history are provided for the curious reader.
Soviet economy had been centrally planned. Now, it is undergoing
transformation to a free market. Russia's gross domestic product (GDP) for
1995 amounted to just 62 percent of the 1990 figures. Since 1996, however,
there has been a growth of about 3 percent on 1995 figures. Output of
industries fell by 46 percent from 1991 to 1995, but in 1996 this trend
turned over and an increase of 4 percent on 1995 figures was estimated
along with $61.7 billion of exports. Average real income had dropped over
one-third from 1991 to 1995. The official unemployment figure for 1996 was
9.5 percent. (Source: "Doing Business in the Russian Federation"
by Price Waterhouse LLP)
Some
major facts and figures about Russian economy can be found at the
Information
Technology Associates site.
It is presently difficult to
evaluate the condition of the Russian economy. The crash of state
statistics and governmental supervision, together with the legalisation of
the "shadow" activities of the former Soviet period, have
created an entirely new situation, characterised by the absence of any
publicly available indicators of the economy's health.
In addition to the serious problems caused by the economic difficulties in many regions and industries, political interests at all levels and corruption of the government often worsened the situation. Privatisation of undervalued state property created strong incentives for the management to magnify all the negative details and hide all positive information.
Since the end of privatisation and the completion of share offerings, the situation has changed completely. Managers of the newly privatised enterprises, together with many new businesses, have now begun to compete for investment capital. Although the capital markets are now being exploited by the more dynamic new enterprises, privatised companies are also turning to this source of financing.
These tendencies lead to believe that there are resources now in Russia to finish the restructuring of the economy. Moreover, the enormous growth potential of Russia with its natural resources and still almost empty consumer market is also attracting foreign investment.
Political stability is now the primary factor for the development of Russia. It is very probable that in the absence of political disturbances the economy will show a growth rate unmatched in the world history. However, the current political situation in Russia is not very satisfactory yet. New forms of federal government are only appearing, and the new parliament is just learning to perform its functions.
There are now three major sectors in the Russian economy. The first is the state sector, which mostly consists of public services, military and other strategic enterprises. The second is the sector of privatised enterprises. Although in this sector the enterprises are now formally independent, they are only beginning to learn to live under the new conditions; moreover the state still holds a large share in some of them, especially in the oil and gas industry. The third sector consists of new enterprises created mostly by new entrepreneurs. It is sometimes difficult to distinguish between various scams and legitimate enterprises running a good business. Almost all financial companies (mostly banks) belong to this third sector, but retail trading is also developed mostly by enterprises in this sector.
As far as the equity market is concerned, only the privatized and new privately owned enterprises deserve special attention. In terms of capitalisation, privatised enterprises constitute a major part of the shares issued. During the initial offerings, the trading is usually weak. Real trading starts only after the end of the privatisation offering, when general share redistribution starts between managers, workers and outside investors, both domestic and international. Liquid markets initially appear only for large packages of shares, and small investors so far have had almost no opportunities to participate in the market for shares of privatised enterprises.
Some of the information servers providing constant updates on economy in Russia are
Oil and gas industry.
Oil and gas are the main exports of the Russian Federation. Privatisation of the industries started very successfully, so that now, full state control over the sectors has been lost. If the policy initially introduced remains in operation, by 1998-1999 the industry will be fully in private hands (with the possible exception of the gas monopolist Gazprom; even here, though, a large offering is promised by the government).
The lifting of export quotas and liberalisation of the domestic fuel market have been undertaken in 1995. Modernisation of equipment and implementation of new technologies are occurring in Russia, often with the participation of foreign oil companies.
Gazprom, Russia's monopoly gas producer and distributor, controls 34% of the world's known natural gas reserves, supplies nearly a fifth of the total gas demand of Western Europe and is the country's single largest source of hard currency. Naturally, its size and monopoly status attract many foreign investors and bankers. Currently, nine percent of the shares are planned to be sold to foreign investors.
Unlike the Russian oil industry, there has been no attempt to split the company into smaller units. Privatisation in the oil industry, conversely, split the sector into large holding companies, so that the producers, refineries, and distributors are controlled either by the state-owned company Rosneft, or by eight vertically integrated holding companies, like LUKiol, Surgut, Yukos, and others, which control all operations from the well to the roadside gas filling station; these are still in the privatisation process.
The equity of these companies is divided into common (75%) and preferred (25%) shares. Preferred shares are entitled to receive at least 10% of the company's profit. The Russian government continues to hold between 38% and 45% of the total shares of the holding companies.
The holding companies (except Rosneft) accounted for about 54% of Russia's 1994 oil production. Four of these holding companies are already producing and refining as many barrels of oil per year as Amoco, Chevron, Mobil or Texaco.
The shares of the holding companies, as well as the shares of their subsidiaries, are traded in the stock market. This market sector has now the greatest rate of capitalisation in Russia and is one of the most liquid sectors in the market. More information about Russian securities market can be obtained from Infomarket and OPM Bank.
Compared to western producers, oil reserves of these companies are heavily undervalued. Capitalisation per barrel of proven reserves is currently at $0.11-0.90, compared to approximately $8.60 in North America and $7.00 in Western Europe. With improvements in the Russian economy, increased capital expenditures and more efficient use of resources, the value of Russian oil companies is likely to increase. International investors have already shown great interest in the sector.
Financial services.
Banking is now the most advanced sector among the new sectors of the Russian economy. Insurance companies are also rapidly developing but they are not yet present in the equity market. Investment funds, pension funds, and other types of institutional investors are in the early stages of creation, and so far have not gained their share in the financial sector.
Banking sector is characterised by strong competition as it is still relatively easy to enter the banking business in Russia (for domestic organisations). In order to increase the soundness of the banking system, the Central Bank is now raising its minimal capital requirements and tightening its general control over the sector. Tightening of financial regulation will create even more favourable conditions for the large banks.
Banks are currently competing with small trust companies which offer more attractive interest rates to individuals because of their more speculative nature. In order to win this competition, the banks are beginning to offer new services to individuals, including credit and debit cards (both international and domestic cards are offered by a growing number of banks). This has become a new and developing business for Russian banks.
Transport.
The transportation infrastructure in Russia is very poor, but the size of the country and its position on the globe makes Russia one of the key elements in the world transportation system.
The growth potential of Russian sea ports is enormous. Privatisation of ports has been successfully completed for all Pacific ports, as well as for the majority of Black Sea and Baltic ports. New programmes of development are already being implemented, often with the participation of foreign capital.
As the economies of the CIS continue to recover, shipping companies stand to profit from increased trade with the foreign community both in the export of raw materials from Russia and in the import of finished consumer goods. This is in addition to the revenues that can be generated by shipping goods between two foreign ports-of-call: a very common practice and source of revenue today.
River shipping companies also play an important role in the Russian transportation system, bringing raw materials, metals, and petroleum products to rail centres or sea shipping destinations as well as foreign ports. Air transport established prior to the collapse of the USSR is still mostly controlled by the state. Some private initiatives are being undertaken to build new airports or to perform modernisation of old ones. However, new air transport companies are already functioning in the area of cargo transportation, and steadily gaining a share of passenger transport. Bearing in mind the size of Russia, it is very probable that passenger airlines will become one of the main transportation means in the next five to ten years.
Railroads are still held entirely by the state and, as of yet, there are no plans for privatisation. But foreign and Russian private capital are considering opportunities to build new railroads based on contemporary technologies (a Moscow - St. Petersburg high-speed railroad, for example). It is very likely that a new sector will appear in the years to come which will require large outside investment.
Telecommunications.
The current state of telecommunication networks is very poor. According to specialists' estimations, Russian telecommunication system is behind those of developed countries by 20 to 25 years. The growing demand for quality services creates a huge market in all sectors -- from home phone lines to cellular communication and high-capacity digital lines. Computer networks are developing exponentially and e-mail communication often plays a more important role then regular phone and fax. .
In the beginning of the 1990's Russia had about 1,000 international lines for communication. Today that quantity is over 20,000. Such growth has been attained because of foreign capital inflow and the creation of a market environment in that field. Privatisation in the field of telecommunication is going on with almost all telephone companies in large cities now in private hands.
There are about 300 firms operating in the sphere of communications throughout the country. The Russian Ministry of Communications has issued more than 1,200 licenses to firms providing cellular networks, digital overlay systems, paging services and direct access to international and long distance telephone lines. Prices for most of these services are unregulated.
Rostelecom is Russia's virtual monopoly provider of long distance and international telephone services, handling an estimated 95% of domestic and international telephone traffic. Its shares are now sold at New York Stock Exchange. The only other Russian company, (as of the middle of March 1998), whose stock is traded on NYSE is Vimpelcom, a provider of cellular services in the central Russia.
In some telecommunication companies foreigners own 18-25% of the common stock; these projects tend to be high profitability with a short pay back period (1-2 years for long distance telephone lines and 3-6 years for international lines). US West International, AT&T, MCI, Andrew American companies, NEC, KDD, IDC are among the largest foreign investors.
Energy.
The energy sector is crucial for the Russian economy as well as for other countries of the former Soviet Union. As with other infrastructure companies, the state is keeping some control over the energy sector through its holdings in the Unified Energy System of Russia (UES). After privatisation, UES was given control over the largest generating plants in Russia as well as the central dispatching system, which regulates the flow of electricity around the country. The remaining generating facilities were then given to local joint stock companies (seventy-two in all), called "Energos"; as a way of keeping some control over these enterprises, a large share (typically 49%) of their outstanding stock was given to UES, making it the largest provider in Russia, by virtue of its own holdings, and its equity stake in the Energos. Theoretically, UES is slated to sell off this portion in the future (and has in some cases), but no hard timeline has been set.
Among the most actively traded local Energos are Irkutskenergo, a low cost provider which solely uses hydroelectric plants, Mosenergo, the energy generator for Moscow, and Lenergo, the provider for Saint Petersburg, and an exporter of energy to Finland.
Metallurgy.
Non-ferrous metallurgy is one of the most interesting sectors of the Russian economy. Russia is among the world leaders in the production of aluminium and titanium, and although domestic demand has fallen somewhat due to the crisis in the machinery and aviation sectors, producers have been able fill the gap with exports, so that relatively small decreases in output have been experienced. Other non-ferrous groups include nickel, copper, and other rare earth metals.
Most of the firms operating in this sector have significant levels of exports, and operate with costs below world levels. All of the largest enterprises in these area have already been privatised. In some cases, the state has kept a controlling share of the capital, but it is planning on selling it off within a year or two.
Like non-ferrous metals, Russia is a leading world producer of steel,
responsible for about 20 percent of world steel output. This production is
split among 37 different companies, each of which typically represents a
single facility; the vast bulk of the production, however, occurs at a
handful of large plants, which typically exceed the total capacities of
such companies as Bethlehem Steel and British Steel. Unlike the
non-ferrous metals industry, however, most of the ferrous metals producers
sell their product to domestic users.
Agriculture and fisheries.
Since the fall of communism, agricultural reforms have been introduced. Land was decollectivized and prices of agricultural products were liberalized. By the end of 1993 more than 95 percent of all the collective farms were reorganized. In May 1996 a Presidential Decree was issued, giving landowners a secure legal basis for their property rights.
Russia has the second largest fishing fleet in the world (after Japan).
Depletion of territorial waters and pollution, however, have forced
fisherman to search out new grounds. Introduction of licenses for
fisherman are currently under consideration.
Until 1987, state-owned enterprises were the only form of legal
entity existing in the former Soviet Union. Since then, new legislation
has opened the field for enterprises of diverse ownership. Privatization
has brought the majority of the former state enterprises into the hands of
private owners.
Privatization.
Russian privatization process began in July 1992, when President Yeltsin signed a Decree requiring all large-scale enterprises to transform themselves into joint stock companies. Sufficiently large subsidiaries of large state enterprises were allowed to "spin off" from their parents and undergo privatization as separate companies. In less than three years, more than 14,000 large and medium-size companies became private, turning 40 million Russians into shareholders.
The number of shares (preferred or common) to be issued by all companies was defined by a standard formula: the 1992 book value of the enterprise divided by a standard nominal value of one share (usually 500 to 1,000 rubles). Most enterprises prepared their own book values for privatization purposes, which often understated the actual market value of the assets. Such understatements, combined with 1992/1993 hyperinflation, resulted in book values that were just a fraction of the actual values permitting managers to aquire control of leading companies for extremely low prices.
The government, however, retained control of companies considered strategic, and specific categories of enterprises were excluded entirely from privatization (e.g., minerals, forest resorces companies, firms involved in precious stones, armes and weapons' manufacturers, etc).
Foreign investment.
Foreign legal entities, governments, and individuals have the right (in accordance with current legislation) to invest in Russia through share participation in companies, the formation of wholly foreign-owned subsidiaries and branches, and the aquisition of Russian companies and property. Foreign investment in Russia is also protected by the current law against nationalization and expropriation, and compensation for loss or damage under such circumstances is guaranteed. Also, political risk insurance and insurance against nonconvertability of the rouble can be obtained from the Overseas Private Investment Corporation (OPIC).
In general, foreign investment is welcome, especially where technology transfer and capital investment are involved. However, special restrictions apply to investment opportunities in the mineral resourse, energy, and alcoholic beverage sectors. Registration is required for all ventures through the ministry responsible for the particular industrial sector and through the Central Bank for banks and other financial institutions.
Among the possible business structures are joint ventures, wholly owned subsidiaries, representative offices, and branches. The most common ways are setting up a representative office and direct investment in the charter capital of enterprises. Charter contributions (cash or noncash) are exempt from Russian value-added tax (VAT) at 20 percent. Also, taxable profits of an enterprise can be reduced by the amount of capital investment expenditures: this tax benefit is referred to as "construction exemption." Two-year tax holidays are available to newly organized small enterprises engaged in producing and processing agricultural products, producing foodstuffs, consumer goods, construction materials, medical equipment, and companies engaged in the the construction industry. Any exemption, however, is limited to 50 percent of taxable profits of an enterprise.
Several regions in Russia offer attractive incentives for foreign investors. Currently, there are 13 free economic zones (FEZ): the legislation governing the existance of such zones is still pending, however. Among the incentives provided by the FEZs are exemptions of imports and exports from customs duties, favorable requirements to exchange hard currency earnings (ranging between 10 and 20 precent as opposed to a 50 percent requirement for the rest of Russia), lower tax rates for foreign investors, and exemptions of googs produced in FEZs from licenses and quotas.
One of the major problems faced by the foreign investors is associated with the movements of foreign currencies. The Central Bank of the Russain Federation is the principal authority responsible for exchange control in Russia. The rouble is not convertible and may not be imported or exported; therefore, foreign companies are not able (in most instances) to sell their goods produced in Russia for hard currency. At the same time, the central bank requires a license for foreign currency capital movement and a separate license to trade in foreign currency. Local capital availability is very limited, but long-term loans from abroad are subject to licensing requirements and any transfer of funds may be subject to VAT. Besides, both Russian and foreign legal entities are limited to one current and one investment account they may have in Russia: this step was taken by the government to keep better track of debtor enterprises as at the beginning of 1997 tax arrears totaled 60-70 trillion roubles ($11-13 billion).
The Constitution of the Russian Federation came into effect in January 1994. The legislative branch consists of the Federal Assembly divided into two parts: an upper chamber, the Federation Council, and a lower chamber, the State Duma. The Federation Council is made up of two representatives from every constituent part of the Russian Federation. The State Duma has 450 members, who are elected from constituency and "party" list. Russian citizens over 21 years are eligible for election.
According to the Constitution, the Russian president is elected every four years, may not be under 35 years of age, and cannot hold office for more than two consecutive terms. The president has the power to nominate the Chairman of the Central Bank of Russia, serves as the head of state, and as the commander-in-chief. Subordinate to the president is the prime minister (chairman of the Soviet of Ministers) who is nominated by the president and approved by the Duma.
Russia is composed of federal units (see "History" in the "General Information" part of this report) with their own powers as defined by the Constitution. On the Federal level, the Supreme, the Supreme Arbitration, and the Supreme Constitutional Courts have the ultimate judicial powers. The main responsibility of the Constitutional Court is to determine the constitutionality of all legislation enacted within the Russian Federation, regardless of its source. Arbitration courts have exclusive jurisdiction to hear commercial disputes between Russian and foreign legal entities and private entrepreneurs. The decision of an arbitration court is legally binding, though it can be appealed to the appelate arbitration courts, the highest of which is the Supreme Arbitration Court. Cases involving international commercial laws are resolved in the Supreme International Arbitration Court in Stockholm, Sweden.
Russia seems to have established almost all of the basic foundations of a market system by now. However, the government is still developing a comprehensive legal framework capable of regulating most types of economic activity.
The legal basis for conducting commercial activities in Russia today can be traced back to 1990, when the Law on Enterprises and Entrepreneurship was passed. That event can serve as a benchmark for the end of Russia's socialist past: the state's long-established right to be involved in any business being conducted on the territory of the Soviet Union was removed. Instead, the Enterprise Law provides that the state and administrative bodies are generally precluded from interfering in the activities of enterprises exept in cases specifically designated by law and within certain limits. For example, all transactions in excess of minimal petty cash limits must pass through the bank via wire transfer: in this was the Central Bank can regulate and control almost all commercial transactions.
The 1991 Law on Competition and the Restriction of Monopolistic Activities in Trading Markets specified several forms of government intervention as unacceptable for the proper functioning of a competitive market. In general, the law prevents state organs from adopting acts which create favourable conditions for individual enterprises at the expense of others: theoretically, this legislation challenges government subsidies and other forms of state aid, but practically it will take some time before this particular aspect develops to a great extent. Mergers, acquisitions or liquidations are permitted, provided they do not lead to the creation of the dominant position in the market. Authorization of the State Antimonopoly Committee is required in order to complete a merger or an aquisition if the balance sheet asset value of the parties exceeds 100,000 minimum monthly wages. Similarly, the approval of the State Antimonopoly Committee is required in order to purchase 20 percent or more of the voting shares of an enterprise if the value of such equity transaction exceeds 100,000 minimum wages.
Until mid-1995 no single government or independent agency was charged with monitoring Russian equity market. Eventually, the Ministry of Finance was assigned the function of regulating brokers through the issuance of licenses and registering new issues. Now, the Federal Commission on Securities and Capital Markets is responsible for the regulation of the Russian securities markets (similar to SEC).
The following types of securrities may be placed for public offering:
Corporate securities may exist either as physical documents or as records in prescribed registration books. However, only securities registered by the Ministry of Finance can be publicly traded. All the brokers and investment institutions (besides banks) must be licensed by the Federal Commission on the Securities Market.
At the end of 1992, the Law on Bankruptcy was adopted by the Russian parliament: the Presedential Decree allowing companies to be declared bakrupt. Also, some provisions relating to the liquidation of companies can be found in the Enterprise Act.
The Central Bank of Russia (CBR) plays a regulatory role with respect to more than 2,000 commercial banks. For example, it establishes the minimum charter requirement for Russian banks, which in 1994 was about ECU 1 million (about $2 million). One of the most aspects of CBR's regulatory activity (for the purposes of this report) is that it is working toward the introduction of international accounting principles and standards within the banking sector. At the present time, a cash-based system of accounting is predominant in Russia (described further).
A number of banks (for example, Menatep, Incombank, Oneximbank, MostBank, and others) have developed rapidly into holding companies for financial or commercial conglomerates, which have significant holdings in financial institutions, insurance and trading companies, real estate firms, and industrial enterprises. This leads to the creation of financial and industrial groups, which is somewhat similar, for example, to the system in German Republic. (In the US, commercial banks cannot invest in equity securities of industrial comapanies).
Also, during 1991 new Fundamental Priciples of Civil Legislation of the USSR were passed. Although this is an outline statute, the Fundamantal Principles had considerably amended Soviet 1964 Civil Code. Until an updated civil code is passed, these statutes will be applied. The provisions relating to contracts are the core of this new legislation: it is a big move towards an assumption of contractual supremacy. In the Soviet Union many aspects of a relationship between two parties were set by a certain plan or fixed norms; now, contractors are generally free to agree on the contract conditions which suit themselves.
Among the most important pieces of legislation concerning labor relations are a USSR Law on the Resolution of Individual Labor Disputes, a Russian Federation Law on Collective Contracts and Agreements, and an Act amending the Russian Labor Code -- all passed during 1991 and 1992. Generally, this legislation is aimed on the reduction of the role of the unions and moving towards the West European norms.
Some provisions realting to the privatization and foreign investment were described in the "Business Environment" section of this report.
The most current Russian legislation can be obtained in
Russian (with a few documents in English) from the
site.
Russian fonts can be found at
Although accounting in Russia is coming closer to international
accounting practice and standards, the accounting profession is only being
formed and does not have clearly defined standards, code, or objectives.
The national qualification of a professional accountant introduced in 1996
is not mandatory. The only certification required oficially is for
auditing. Auditors and audit firms must obtain a license to perform an
audit. This requires knowledge of Russian accounting regulations, tax
legislation, audit legislation, corporate finance, and corporate
legislation. Special licenses are issued for bank audits, audits of
insurance companies, audits of exchanges and investment institutions, and
audits of commercial and production companies. The Ministry of Finance is
responsible for licensing auditors in Russia as of 1994 (Source: Frere
Cholmeley Bischoff). Individuals applying for any of the above audit
licenses must have an education in economics or law, and for at least
three of the five years immediately before the certification exam the
individual must have practical experience as an auditor, accountant,
economist, head of a company, or economics instructor. The participation
of certified auditors in the charter capital of an audit firm seeking
audit license must be at least 51 percent.
Some 4,000 audit firms are licensed to operate in Russia, according to Ministry of Finance statistics (1,000 in Moscow alone). However, a survey conducted in 1996 by the journal "Audit and Taxation" found that a third of clients were dissatisfied with the quality of the audits they received. The reasons include the lack of proper laws governing the auditing process and the low qualifications of many auditors in small firms (source: Buraff Publications, a division of LRP Publications; obtained from LEXIS/NEXIS). A complete list of Russian audit firms can be found (in Russian) at the Exposervice site.
All of the Big Six accounting firms have opened their offices in the Russian Federation in the past decade. For example, in June 1997 for the first time an audit using International Accounting Standards was performed for the giant Russian utility company Gazprom. The audit was conducted by Price Waterhouse LLP: the quality of raw accounting data used for the audit was good. Gazprom, one of the world's biggest producers of natural gas, is seeking the opportunity to get access to the world's capital markets; it is responsible for 8% of Russia's gross domestic produc (Source: ABC-CLIO, Inc., Russia). Also, KPMG has been appointed as the official auditor of Russian oil giant Lukoil. It has had an on-going relationship with the company in helping it to bring its bookkeeping into line with international standards. Lukoil controls 15% of all oil extraction in Russia and produced over 32.4m tonnes of crude in the first nine months of 1994. Deloitte & Touche LLP's biggest Russian clients are banks. As well as audit work, banking clients are assisted with translation of accounts into US GAAP and establishment of overseas offices. On top of private sector client work, assignments come from public development agencies, such as the EU's TACIS (Technical Assistance for Economic Reform in the 11 members of the Commonwealth of Independent States and Georgia) and the European Bank for Reconstruction and Development. Deloitte & Touche has separate St Petersburg offices dedicated to USAID (US Agency for International Development) and to TACIS work (Source: Accountancy magazine, April 26, 1995). Finally, Coopers & Lybrand LLP has established an International Privatisation Group to coordinate and further boost its privatisation projects. In 1993 it undertook 385 privatisation assignments in 67 countries including Russia, more than any other firm (Source: Reuter Textline).
All businesses are required to maintain books and records in Russian roubles on their assets, liabilities, and transactions through double-entry bookkeeping. A simlified format of books and records is allowed for qualified small businesses. Accounting books, records, reports, and financial statements must be filed by a company for five years. Annual financial statements of a Russian legal entity must be filed with the tax authorities by April 1 of the year following the reporting year. The financial year is the calendar year, and all accounts should be compiled on this basis.
The objective of an audit as defined in Russian legislation is two-fold: an auditor must express an opinion on the trustworthiness of financial statements (compliance of financial statements with Russian legislation) and on compliance of transactions performed by a company with the existing Russian legislation (Source: "Doing Business in Russia" by Price Waterhouse LLP). As of 1997, there are no rigid rules covering auditor's liability. Individual private auditor's may be liable under the Civil Code of the Russian Federation.
The Temporary Law on Auditing of 1993 regulates auditing. It defined audit services and established to some extent audit certificatin requirements, rights, obligations, and liability of auditors and audit firms. In August 1997, the regulatory basis for the work of Russian auditors was strengthened by the publication of the unified rules (standards) for auditing practices and approved by the President's commission on auditing practices. The standards have been drafted on the basis of international requirements and bring the quality of Russian auditing close to the international norm. For example, one of the procedures introduces types of audit opinions, similar to those recognized internationally (unqualified, qualified, adverse, and disclaimer of opinion). The quality of an auditor's work now assessed according to compliance or noncompliance with the auditing standards. Lawsuits filed against auditors by their clients now have a basis for legal action and firms have to indicate in their final reports that they have complied with the standard requirements or provide convincing justification for not having done so. However, the law "On Aditing Practices in the Russian Federation" has been pending for several years now. Such a law is needed for determining the legal status of the standards and procedures for adopting them.
The Federal Law on Accounting is the major regulation of accounting rules in Russia. Accounting regulations, prescribed by the Ministry of Finance, introduce a general concept, scope, categories of accounting, and the Chart of Accounts. Companies choose some of their own policies within the guidelines governed by the industry accounting regulations.
Among the major accounting standards are
The only financial statements acceptable for filing purposes are statutory financial statements. The statements are to be prepared in the Russian language, in Russian roubles, and in the formats established by the Ministry of Finance. Basic annual statutory financial statements include a balance sheet, income statement, cash flow statement, and disclosure notes.Intangible and fixed assets, except for residential buildings and nonamortizable intangible assets, are shown at the net book value. Inventory can be accounted for using average cost, LIFO, or FIFO. Items denominated in foreign currency are recorded in the accounts in Russian roubles at the exchange rate of the Central Bank on the date of transaction. Under Russian accounting rules, outstanding losses of previous years and the loss of the reporting year are shown in the assets section of the balance sheet. The legal reserve is formed as a provision for a limited number of payments (for example, to cover the loss of the reporting year. The year end balance of the legal reserve is carried forward into the next reporting period. The additional capital (paid-in-capital) includes the results of statutory revaluations of fixed assets. Cash flow statement does not include cash equivalents.
Starting with 1996 annual financial statements, the Ministry of Finance has issued the procedure for publication of annual financial statements by open joint stock companies. Prior to publication, financial statements must be audited. Only balance sheet, income statement, and auditor's report must be published. For publication a company can use a regularly published magazine or newspaper or financial statements can be distributed as booklets. The deadline for publication is June 1 of the year following the reporting year.
The chart of accounts is described in Regulation No.56 of the Ministry of Finance. This chart of accounts must be used by all companies on the territory of the Russian Federation including companies with foreign participation. Banks and state-financed companies have special charts of acconts. A typical chart of accounts for an industrial company is presented in the following table:
| Category | Account number |
| Fixed assets and other long-term investments | 01-09 |
| Production stores | 10-19 |
| Costs of production | 20-39 |
| Finished goods, products, and sales | 40-49 |
| Monetary assets | 50-59 |
| Settlements | 60-79 |
| Financial results and use of profit | 80-84 |
| Equity and reserves | 85-89 |
| Loans and financing | 90-99 |
| Off-balance accounts | 001-015 |
Over the last two years the four accounting standards previously described have brought Russian financial reporting closer to Western practice. Issues like going concern, consistency, accrual basis, and substance over form have been introduced to Russian accounting. However, the objective of Russian financial reporting is still the compliance with Russian legislation as opposed to the IAS requirement to give a true and fair view of the financial position, performance, and changes in the financial position of the comapny. Other major differences between Russian and Western practices are summurized in the following table:
| Accounting Issue | Western Practice (GAAP or IAS) | Russian Practice |
| Inventory valuation | Valued at historical cost/lower of cost or market. Rigid rules as to how apply LIFO/FIFO. | Valued at historical cost. No provisions as to how apply LIFO/FIFO. |
| Statutory revaluation of fixed assets | Fixed assets are carried on the books at historical cost unless the impairment in value is permanent. | Fixed assets must be revalued on a regular basis to offset the effects of inflation: (1) indexing or (2) appraisal. |
| Depreciation (amortization) | Straight-line, sum-of-the-years-digits, and other methods as well as MACRS are used. No cash funds. | Straight-line basis over useful life of asset is used. If useful life is not known, 10 years. Use of cash funds to replace assets. |
| Investments | Carried at market value. Normally all securities are revalued, depending on the portfolio. | Carried at actual cost incurred by the investor. Short-term foreign currency securities are revalued, L/T are not. |
| Investments in other companies | Mergers, aquisitions, and consolidation rules are rigid. Statements are prepared on a pro-forma basis. | Consolidation rules are very recent: 1996 statements and hence must be consolidated. Close to IAS. |
| Limitations on expenses | For financial reporting purposes most of the expenses are deductibe. | Many types of expenses are limited by the tax legislation: excess of expenses is charged to retained earnings. |
| Finance lease | Normally, a lease transfers all the risks to a lessee. Rules of how to account for a lease are rigid. | Risks related to an asset held under a finance lease are the burden of a lessor. Provisions are specified in lease contract. |
| Borrowing costs | For accounting purposes, interest is either expensed or capitalized along with the asset and amortized. | Bank interest on rouble loans is deducted up to 45%. Interest on hard currency loans - up to 15%. The rest is charged to RE |
| Insurance premiums | For accounting purposes, all the insurance premiums/provisions are recorded in the P/L accounts. | Mandatory premiums are recorded in the P/L accounts. Voluntary premiums are deductible up to 1% of sales. |
| Cost accounting | Cost accounting is used for price determination as well as performance evaluations. The concept of contribution margin is important. | Costs are accumulated for the exclusive purpose of output cost determination. Sometimes, there is no distinction between fixed adn variable cost. |
| Contingencies | Contingent liabilities must be accrued if they are probable and reasonably estimated. Otherwise - disclosed. | No representation of contingent liabilities in the financial statements is required. Must be dicussed in the director's report. |
| Deferred tax | Rules are rigid as to how accont for deferred taxes in P/L and balance sheet accounts. | Deferred tax liability is recognized only with respect to value-added tax (VAT) and excise tax. Cash-basis. |
| Income tax | All the future tax liabilities must be reflected in the current period's financial statements. | No concept of making provisions for future tax liabilities against the events that occur in the current period. |
| Provisions | Provisions for doubtful accounts, warrants, and other estimates are used. No concept of depreciation of securities. | Two types of provisions allowed:
|
| Chart of accounts | No chart of accounts. | The chart of accounts is prescribed by the Ministry of Finance. |
Currently, Russian accounting is in the transition period. In general,
the tendency is to bring Russian financial reporting closer to the
international standards. Organizations like Association of Accountants and
Auditors of the CIS and the Technical Accounting Board of the Ministry of
Finance are growing in importance; these organizations are responsible for
organizing qualification exams to certify chief accountants, which is not
mandatory as of yet.
It was extremely difficult to obtain financial statements prepared in
accordance with Russian accounting standards. However, a friend of
mine in Moscow sent me a Microsoft Excel file of Aeroflot's (an airline)
1996 4th quarter financial statements: I tryed to scan them, but as you
can see I did not do a very good job. For those using Microsoft Excel,
though, the files are available for 
.
For everybody else the scanned copy is presented below (sorry for the
inconvenience).
To illustrate a few points about Russian financial reporting, I will compare these statements to the Balance sheet and Income statement of Delta Air Lines.
Aeroflot Joint Stock company used to be a monopolist air carrier in the Soviet Union. Now its role has diminished due to the increased competition from numerous newly-created passenger and cargo air carriers. The financial statements present all the amounts in thousands of Russian roubles (SUR), and at the moment these statements were issued the exchange rate was approximately SUR5,500=$1. Therefore, the company's total asstes at the end of 1996 were about $1,156 billion, which makes it about 10 times smaller than Delta Air Lines (this is a very rough estimate because of big differences in reporting described further).
The first point to be illustrated is that Delta's income statement breaks its revenues by the source: passenger, cargo, and other. Airflot's "Report on Financial Performance" uses the account called "Net revenue from sales of goods and services" and the account's number is 010 (note that value added and excise taxes are excluded from the total). Also, total operating revenues on Delta's statement are followed by a long list of operating expenses as opposed to Aeroflot's "Cost of goods sold" account number 020. These differences arise from the fact that Airflot has to use a uniform set of the accounts prescribed by the Ministry of Finance. When the total is given, the range or specific account numbers included in the total are shown as well.
The major differences in the assets' section of the balance sheet are
One of the most peculiar detail about Aeroflot's financial statements is that they use all of the accounts prescribed by the Ministry of Finance, some of which are absolutely irrelevant for an air line. For example, "livestock breeding" is hardly to be found among the assets of Delta or any other air line unless the term "horse powers of a jet engine" has a literal meaning; for Aeroflot, it is an account number 212. As Russia is moving further towards International Accounting Standards, the rigid rules pertaining to the chart of accounts are likely to be dissolved.