Better late than never
On 11 November 2011, the Russian and WTO working groups agreed on terms to pave the way for Russia’s accession to the World Trade Organization. Russian lawmakers approved membership on August 22, 2012.
The road to membership has been, to put it mildly, a rocky one. Initial negotiations began in 1993 and have been ongoing ever since.
After his successful presidential election in 2000, Vladimir Putin supported the accession plans and played a key role in the eventual outcome. He more than once showed his frustrations during the negotiations and how “the rules of the game” were adapted to the different WTO partners.
While the WTO is ostensibly an apolitical world trade organization, the delays and obstacles Russia has faced in recent years are politically charged.
Prior to the agreement, Vladimir Putin said in a recent Chinese TV interview;
“We want to join the World Trade Organization. This is our aim and our goal. In our view, this would have an overall positive effect on the Russian economy, especially as it will increase confidence in the economy and on the administrative and legal procedures within the economy. As a matter of fact, we have fully adapted our national legislation to WTO requirements. We have done that. We have also resolved the major issues with all major partners. I think it is more of a political issue.”
He was less diplomatic when interviewed on Russian TV when he denounced the EU and US for procrastination and for deliberately delaying Russian accession. This backdrop is against open hostility to Russia by some US lawmakers who wrote a letter to the US WTO trade representative on November 10 declaring their “significant concerns” and demanding that Russia demonstrate “transparent, substantive and prompt action” in its accession to the WTO. obligations.
“Substantive” could be used as a Russian award, but neither “transparency” nor “promptness” are virtues I see a lot in the Federation.
As an organization, the WTO monitors and liberalizes international trade, regulates trade between member countries, and provides the platform for negotiation and trade agreements.
Important to Russia’s success and its ability to attract new investment, the WTO enforces dispute settlement that aims to ensure that members adhere to WTO agreements.
The WTO has 153 members and represents over 97% of the world’s population, so Russia’s absence since the fall of the USSR is anachronistic. With a GDP of $1.5 trillion and as the world’s largest oil and gas producer, Russia should have joined the WTO years earlier.
WTO membership does not change the business climate or the high risk rating that foreign investors give to Russia. What it should do is give impetus to significant reform and efficiency efforts and reflect the seriousness the Russian government takes in fighting inefficiency, corruption and favoritism.
Look at the closure of hundreds of customs posts, the firing of many customs officials and the opening of new import facilities to promote faster, fairer growth, plus the billions of dollars raised from the auto and pharmaceutical industries over the past 12 months.
There is no doubt that membership is good for Russia. It brings much-needed capital to the Russian markets. Tense relations with the West followed the five-day conflict in Georgia in 2008, and investors pulled $300 billion from Russia in the seven months following hostilities. In 2011, further outflows amounted to $70 billion, against a forecast of $36 billion from the Russian central bank.
According to the World Bank, Russia’s WTO membership will deliver both sustainable and incremental annual economic growth of 2%, and this success is measured against a backdrop of contraction and uncertainty in global markets. Russia’s entry into the WTO is the “good news” global markets are looking for after the WTO failure in Doha, the continued demise of the Eurozone and the continued depressing news from US markets.
The consensus to join the WTO (the final barrier fell when Russia and Georgia signed an agreement on November 9 in Geneva approving Russia’s accession to the WTO, after both agreed on international supervision of the disputed border crossings with South Ossetia and Abkhazia) came just weeks after Vladimir Putin confirmed his return to the Russian presidency on September 24.
Following this consensus, the ruble outperformed the top 25 currencies, gaining more than 5% against the US dollar. The Russian stock market gained more than 15% in what was the world’s biggest jump and Russian oil rose 7% over the same period.
Whether WTO accession is good for smaller or inefficient industries in the short term is another story. There are widespread fears that cheap imports will flood the market and that ‘small’ Russian industry will suffer. I don’t know exactly who and what these ‘small’ industries are. Russia today is a huge importer of consumer goods and distributors may find themselves with new competition on their hands, but the absence of a cottage industry begs the question.
Russia exported more than USD 400 billion in 2010, mainly to the EU, Ukraine, Turkey, China and Belarus. WTO membership opens up new markets where Russian products have traditionally been blocked. Russian steel and iron manufacturers have been outspoken supporters of Russian accession and will greatly benefit if trade barriers are lowered and Russian products are allowed access to, if not actually welcomed into, the new markets. General imports were estimated at nearly $250 billion
Maxim Medvedkov, Russia’s chief negotiator at the WTO, said: “More than a third of our GDP is made abroad…we are seventh in the world in terms of exports. We have a stable, predictable tool needed to develop trade”.
European companies are initially best positioned to benefit from Russia’s accession to the WTO. EU businesses dominate Russia’s foreign trade and have been integrated longer than other blocs. In the short term, the US’s chances are limited because of the Jackson-Vanik amendment, but since Jackson-Vanik is violating WTO membership, Russia will have to be released very soon. For all US political blunders and anti-Russian sentiment, Jackson-Vanik will leave by default or US companies will miss opportunities.
What will be the differences?
Domestic producers of consumer goods will face increased competition from imports and this sector is reserved for protection and measures to become more efficient.
WTO rules require liberalization of the domestic energy market and an end to monopolies and gas subsidies. This means more competition in the Russian domestic gas market and easier access for independent producers, with domestic prices moving closer to export prices.
Given the efforts made by the Russian government to attract investment in both R&D and manufacturing, it comes as no surprise that nascent and emerging industries are being protected for seven years. The production sectors in agriculture, the car industry and aviation are shielded.
Exporters will face fewer barriers in terms of import tariffs and quotas, which will be gradually phased out, rather than overnight with membership.
The main terms of the WTO agreement are:
The average import tariff will be reduced from 10% to 7.8% with an agreement to cut 33% of tariffs from the date of accession. 25% of the fares will fall after a three-year lead time, while other fare changes (e.g. auto and airline) will fall after seven years. Agricultural tariffs are protected for eight years.
The average import tariff for agricultural products will be reduced from 13.2% to 10.8%. The import tariffs for dairy go from 19.8% to 14.9% and for grains from 15.15 to 10.0%.
Import tariffs on poultry products will be protected for eight years, and the total agricultural subsidy from the Russian government will be capped at $9 billion in 2012 and then reduced to $4.4 billion in 2018.
The average import tariff on manufactured products is reduced from 9.5% to 7.3%
The import tariff for cars will be reduced from 15.5% to 12.0%, but with a protection period of seven years. Preferential rates for automakers making large investments in Russian production will be reduced by July 1, 2018, well within the terms of Decree 166/566.
The import tariff for chemicals will be reduced from 6.5% to 5.2%
Russia agreed to develop market-based prices for the domestic market, but will continue to regulate prices for households and non-commercial users in accordance with its social programs.
The 49% foreign shareholding limit for the telecom sector will be abolished in 2016.
100% foreign-owned banks are allowed to open their doors in Russia for the first time, but with an overall 50% limit on foreign banking control of the sector.
Foreign insurance companies can open their own branches nine years after Russia joins the WTO. 100% foreign-owned companies can operate in the wholesale, retail and franchise sectors immediately upon membership.
In summary, we can say “better late than never” and realize that the accession marathon was not a waste of time (for Russia), as the terms negotiated by Russia are advantageous. They guarantee Russian access to foreign markets (“most favored nation status”) and allow Russia to use the WTO to settle any trade dispute. Membership creates a better foreign investment climate and gives Russia more investment opportunities in WTO member states.
Russia can now better defend its economic interests when negotiating international trade agreements.
Of enormous importance are the transitional concessions that limit the access of foreign goods to Russia as Russia upgrades production and infrastructure to face international competition.
Russia has shown that it is not afraid to make the necessary investments and has pledged hundreds of billions of dollars to brand new and replacement infrastructure and manufacturing projects. Russia’s entry into the WTO is the biggest step in world trade since China joined more than a decade ago.
If you are in Strasbourg or Washington DC you may want to consider that Russia has negotiated unfettered access to world markets while securing its domestic manufacturing base from foreign incursion for a long period of time and has done so in the course of the worst downturn of world trade in modern history. You may not respect the genius that negotiated access to new markets while protecting his own. This negotiating skill would imply that Russia’s leaders not only know what they’re thinking about; they also know what everyone is thinking.