With freight volumes down between twenty and thirty percent nationwide compared to 2008, the Russian Federation is facing the prospect of serious budget shortfalls for the first time since the collapse of the ruble in 1998. The lost cargo volumes badly hurt Russia’s budget, which depends on customs duties for up to half of its revenues. Customs contributed only six hundred and fifty five billion rubles to the Russian budget for the first quarter of 2009, compared to one point three trillion in the first quarter of 2008, a drop off of thirty three percent.
The Russian government’s response to the shortfall in customs duties is to squeeze the remaining cargo that crosses the border for every available ruble. Everybody feels the pinch – ocean carriers, ports and terminals, warehouses and logistics companies. Perhaps the hardest hit, though, are Russia’s customs brokers (таможенные брокеры). According to a recent article in the newspaper Kommersant, the decline in cargo volumes, together with tough new Customs rules requiring of brokers enormous financial guarantees, may put up to one-third of them out of business.
First, some background. Customs brokers, more commonly known as known as expeditors (экспедиторы) or freight forwarders, play a special role in servicing the Russian freight market. Generally, they are small-to-medium sized companies, rarely more than a hundred staff in total, providing the significant service of guiding cargo through the perils of the Federal Customs Service and getting it into the hands of its legal owners. No Western company would dare to navigate the treacherous reefs and shoals of the ten-thousand page Russian Federation Customs Codex and attempt to clear cargo on its own; many, many companies have suffered huge losses for the attempt.
The expeditors, though, have just the skills to traverse the dangers of Russian Customs, and bring your cargo to you – for a price. The best expeditors work fast, have predictable prices and are honest brokers and representatives for business to Customs. The worst – so-called grey (серые) brokers – are little more than bribe-shops for quasi-legal importers and exporters. A major portion of preparing customs declarations consists of categorizing and assigning values to goods, and the oldest swindle in the book is to pay off a Customs officer to sign off on a lower valuation, save thousands of dollars in duties, and kick back a chunk of the savings to the officer.
Expediting companies flourished during the boom times. When I was with Maersk in St. Petersburg, we counted no fewer than 400 expeditors representing our clients by Power of Attorney. There were a few bad actors, greasy self-styled sharks of capitalism that abused credit agreements, ran up huge debts, then liquidated and appeared again before us, re-constituted and operating under a different name, to ask for yet another credit agreement.
One reason the companies prospered was the relative ease of entering the market. Russian rules on freight forwarding generally allowed a company to operate with a license under easy conditions – leaving a fifty-million ruble (about one point five million dollar) deposit with the Federal Customs Service, presenting a bank guarantee, or a presenting a third party Power of Attorney to Customs.
Third parties were limited to three organizations – a commercial organization called Customs Card (ООО Таможенная карта) a non-commercial structure known as the Customs’ Service Veterans Union (Совет ветеранов таможенной службы), and Rostek (Ростэк, part of the Federal Customs Service). The Federal Customs Service changed the rules at the beginning of 2009. Only Rostek is allowed now to provide a third-party guarantee, and the other two organizations are excluded.
This is a body blow to the smaller expeditors; as Kommersant points out, while a third party Power of Attorney from the Veterans Union cost only thirty-five thousand rubles per year – about one thousand dollars at today’s exchange rate – a bank guarantee can run up to three percent of a company’s annual turnover, plus ten thousand rubles for each shipment, a total of one point five million rubles (close to fifty thousand dollars) The Federal Customs Service therefore nearly is forcing expeditors to deposit fifty million rubles as an entry cost to the brokerage business.
According to Kommersant, the Federal Customs Service is concerned that importers may go bankrupt. Since expeditors guarantee duty payments when the clear goods and larger companies often use the services of multiple brokers, the Customs’ point of view has certain logic. The Russian budget is protected from the consequences of bankruptcy and non-payment of duties and fines.
This protection, however, comes at a price. As Andrei Barinov, the general director of Customs Card points out, “It is clear that taking fifty million rubles out of circulation, both previously and at present, is an option available only to a few companies, and makes little sense when you consider that all of the expenses related to it result in price increases on goods, which are passed along to the consumer.”
Other commentators see an increase in the number of instances of suspicious clearances of goods through customs as expeditors and foreign trade companies try to avoid the new regulation. The expeditor exodus, in any case, has already pushed over two hundred brokers out of business, or about one third of the market. Many closed up shop and brought their portfolios to their former competitors, where they continue to operate under new imprimatur. Kommersant quotes Federal Customs Service general-major Alexander Puchkov, an advisor to the Eurosib group,
“They and their clients are working now behind the seal of larger brokerage companies but doing the same thing as in the previous structure. It is therefore logical to conclude that the cost of brokerage services will only increase for companies involved in foreign trade.”
Less competition equals increased expense? There is worse to come, some operators in logistics companies think. Dmitry Vasilev, the general director of Arivist Logistics Overseas GmbH told Kommersant,
“Customs, encountering the issue of its planned revenue results falling together with the reduced cargo flows, is trying to squeeze the maximum amount of revenue out of the remaining cargo. Because of increased controls and a slowdown of cargo processing at the borders and in the ports, cargo owners and foreign trade companies are finding it increasingly difficult to maintain the delicate balance of business profitability. This situation may have serious and deadly consequences for the economy as a whole. In conditions where credit is either expensive or unavailable, and hard currency rates have grown, when you try to increase normal customs duties with stricter control over the release of goods in ports and at border crossings, the attempt to get more revenue can be a serious blow to the economy.
In other words, although there is much less cargo on the market, companies operating in Russia can expect to pay more for customs brokerage services, while the amount of time their cargo spends dwelling in port and at border crossings will increase. The crisis continues.
Materials cited:
Таможня затягивает пояса на участниках ВЭД
Приложение к газете "Коммерсантъ" № 71(4126) от 21.04.2009
www.kommersant.ru
Tuesday, May 5, 2009
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