Shake Up In Baltic Customs

The worldwide economic crisis hit Russia hard. Cargo volumes in the port of St. Petersburg, Russia’s largest port, are down by over forty percent versus 2008, with no end in sight. The shipping slowdown blew a hole in the Russian Federation budget, which depends heavily on Customs duties for its income. With the good times rolled for the Russian economy, the Medvedev Administration is scrambling to find every ruble it can to meet its financial obligations.

In March, according to the Russian newspapers Kommersant and Fontanka, the Chief of the Russian Federal Customs Service ordered an inspection of Baltic Customs. Baltic Customs controls the First Container Terminal, Petrolesport and other cargo complexes in the greater Port of St. Petersburg.

Baltic Customs collects a lion’s share of customs duties for the Russian state. Now it appears that the inspection will cost some of St. Petersburg’s top Customs officers their jobs, including the Chief of Baltic Customs, Oleg Tugolukov.

Federal Customs inspectors put Baltic Customs under scrutiny after noticing differences in valuations between similar types of goods clearing customs in Moscow and in St. Petersburg. The lower the value of the goods, the less duty collected by Customs for the Russian federal budget.

A lower value assigned to goods is a strong indicator of bribery. An importer may offer to kick back a few thousand dollars to a Customs inspector in return for paying less duty on the shipment. Experts estimate that the practice costs the Russian state hundreds of millions of dollars in lost revenue annually.

Over twenty Customs officers from various departments, led by Boris Shurkin, Deputy Chief of the Federal Customs Income Department, inspected shipping documents and financial results at Baltic Customs. The inspection, which began in early March, lasted over two weeks.

The Chief of Baltic Customs, Oleg Tugolukov, and his chief economist, Elena Rumyantseva, have been asked to resign their posts for negligence of duty (упущения в работе). Kommersant and Fontanka did not offer details of the charge.

Tugolukov and Rumyantseva were offered to resign of their own free will. In Russia, resigning by one’s free will – увольнение по собственному желанию – is a commonplace resolution to labor disputes. Resignation entails a contractual buyout, usually generous (but less than mandated by government regulations). It allows the person who resigns to avoid a black mark in his or her Labor Book (Трудовая Книга), a person’s official work record.

Tugolukov apparently asked for a transfer to another position. When a guarantee was not forthcoming, he refused to tender his resignation. Kommersant dubbed the house cleaning in St. Petersburg a “purge.” According to its sources, the Chief of the Federal Customs Service, Andrey Belyaninov prepared orders to fire dozens of highly placed Russian Customs officers in the next few months.

Inspector Shurkin commented to Kommersant:
“It is worth remarking that, considering the crisis and increasing competition, very few participants in foreign trade are prepared to provide useful information about imports. At the same time, the Russian Federal Customs Service, faced with an ambitious objective set by the Russian Federation government, is becoming more and more a financial entity. Naturally, even fewer companies wish to reveal information to a financial entity, particularly considering our friendly relations with the [Russian Federation] Tax Service."

Russian President Dmitry Medvedev has declared corruption one of the biggest threats to the Russian state, and made its elimination one of the goals in his administration. In late 2008 case, the Chief of Kaliningrad Customs and eleven fellow officers were arrested for organizing a criminal group. Kaliningrad is Russia’s second largest Baltic port, is an automobile manufacturing center for BMW and has designs to become a free-trade zone.

According to Fontanka, the Kaliningrad arrests were a lead-up to the move against Baltic Customs. Following the inspection of Baltic Customs, investigators moved on to scrutinize the activities of a number of accredited, bonded warehouses and storage facilities in the St. Petersburg region, as well as St. Petersburg Customs. Upon completion of the inspection, Belyaninov summoned Yuri Prokofiev, the Chief of Northwest Customs, which has regional authority over Baltic and St. Petersburg Customs, to Moscow for discussions on further actions.

The move against Baltic Customs comes as no surprise. The port of St. Petersburg handles a huge percentage of imports into Russia, including almost ninety percent of its meat. The meat importing industry in Russia is riddled with corruption; in 2006, over thirty shipping containers of meat were stolen from the port, and a Customs inspector was gunned down in his office.

In 2008, the Federal Transportation Militia raided the offices of major container shipping firms as part of an international conspiracy to change the country of origin and cargo description for meat. The Militia determined that workers in the container shipping companies colluded with criminal organizations to falsify the information on Bills of Lading.

The endemic corruption, combined with onerous customs clearance procedures, result in an average container dwell time of up to two weeks in the port of St. Petersburg. Baltic Customs rules mandate a full, one hundred percent physical inspection of all shipping container with meat. This means each and every shipping container with meat must be moved to a special area within the terminal and opened for a complete examination of all 20 tons of meat in the container.

The shake up at Baltic Customs is part of two larger trends in the Russian shipping industry. First, the Russian government is simplifying cargo clearance by pushing all customs posts to the Russian border. Under the present system, it is possible to clear cargo either at the Russian border, or at inland customs posts. The practice is called VTT, or internal customs transit (внутренный таможенный транзит). Some perceive VTT as a temptation to corruption, since it lets importers bring cargo to “their” customs post and work with “their” customs officers. Pushing customs clearance to the borders removes this element of temptation.

Second, the number of customs brokers is decreasing in step with the decrease in cargo. Customs brokers handle the difficult and complex tasks required to clear Russian customs on behalf of importers and exporters. Literally hundreds of them service the St. Petersburg market. Generally, they operate in one of three modes – by placing a cargo bond themselves, or using a power of attorney on behalf of the cargo owner, or a bank guarantee. The financial crisis is tying their hands as well. This will be the topic of my next blog.

http://www.fontanka.ru/2009/04/17/127/
Газета «Коммерсантъ» № 63(4118) от 09.04.2009