International Aircraft Imports
In 1998, Russia had just over 8,000 registeded civil aircraft, but many are aging. To satisfy internal demand the Russian aviation industry must produce and/or import approximately 30-40 aircraft annually.
Many of the Russian-flagged carriers continue to operate aging fleets with outmoded avionics and engines, but several are undertaking significant purchases or "wet-leases" (covering the aircraft, complete crew, maintenance, and insurance) of foreign aircraft in an attempt to be more competitive with Western airlines. Despite continuing high import duties, several Russian airlines purchased new and used Western aircraft in 2007 and this trend promised to continue over the next few years. Russia's aircraft manufacturers only produce 10 planes per year on average and therefore cannot keep up with Russian airlines' projected demand for 1500 additional planes in the next 20 years. The Russian government has backed Sukhoi's Superjet project in an effort to revive Russia's civil aviation manufacturing industry.
In 1996, the United States and Russia concluded a Joint Memorandum of Understanding (MOU) reflecting U.S. concerns about barriers to the Russian civil aircraft market and the application of international trade rules to the Russian aircraft sector. The MOU states that U.S. aircraft manufacturers will be able to participate in the Russian market and share in its growth.
The Governments of the United States of America and the Russian Federation acknowledged that the viable market demand for civil aircraft in Russia was very weak (with delivery of only 10 aircraft being taken by Russian airlines in 1995) but recognized that the airlines of Russia were beginning to experience a growing demand for new and replacement aircraft. Given the important role national airlines play in economic development, both governments believed that there will be a substantial number of sales and/or leases of Russian and non-Russian civil aircraft in the coming years. In this regard, the Russian Federation indicated its intention to create an environment which will allow its airlines to meet their needs for non-Russian aircraft leases and purchases by granting an adequate number of tariff waivers each year on a non-discriminatory basis, providing equitable treatment for foreign civil aircraft, and taking other appropriate actions to remove impediments to such transactions.
The MOU also makes clear that the Russian aircraft industry will become fully integrated into the international economy over time. Russia pledged to eventually undertake the same international trade principles in the aircraft sector as the United States and many others have done, as embodied in the WTO Agreement on Trade in Civil Aircraft. In the interim, the MOU commits Russia to take steps, such as the granting of tariff waivers, to enable Russian airlines to meet their needs for non-Russian aircraft on a non-discriminatory basis.
In August 2001, Russian Prime Minister Kasyanov took open-market steps by repealing Resolution #716, "Additional Measures for State Support of Russian Civil Aviation", which was approved by the Russian Ministry of Economy in July 1998. This Resolution had established certain conditions for obtaining tariff waivers (or tariff reductions) on the importation of aircraft, engines and flight simulators.
Despite continued bilateral assurances that the Russian Government would join the Agreement on Trade in Civil Aircraft, Russia has expressed an unwillingness to join the Agreement in the context of WTO accession. Through 2004, discussions continued with the aim of securing a commitment that Russia join the Agreement, including adopting a commitment to eliminate tariffs on aircraft and parts.
In a report issued 28 March 2008, USTR outlined a number of unresolved issues that made it difficult for U.S. goods to enter Russian markets. The 2008 National Trade Estimate Report on significant barriers to U.S. trade and investment, issued annually, said that while Russia has reduced tariffs on a number of food products, import tariffs, taxes and custom handling fees make it "virtually impossible for Russian airlines to afford to purchase foreign planes," USTR said. And duties and taxes increase the prices of larger U.S. passenger cars and sport utility vehicles by 70 percent.
The effect of the tariff, VAT, and customs handling fees on aircraft was equivalent to a 40 percent tax, making it virtually impossible for Russian airlines to afford to purchase foreign planes. When Russia joins the WTO, tariffs on aircraft and aircraft parts will be substantially reduced. Tariffs on civil aircraft parts, including engines, will be reduced to an average of 5 percent. In particular, the bilateral agreement on leased aircraft, which entered into force on November 19, 2006, obligated the Russian government to reduce immediately tariffs on narrow body leased aircraft. As a result, in January 2007, the Russian Interdepartmental Commission for Protective Measures in Foreign Trade and Customs Policy approved the decision to cut import duties on foreign leased aircraft from 20 percent to 8 percent for aircraft with 50 seats and fewer and from 20 percent to 10 percent for aircraft between 115 seats and 160 seats. The measure would apply to planes leased for no more than 3 years and would remain in force until January 1, 2011.
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