Russia’s accession to the WTO – what does that mean?

Better late than never

On November 11, 2011, the working groups of Russia and the WTO agreed on terms to pave the way for Russia’s admission to the World Trade Organization. Russian lawmakers approved membership on August 22, 2012.

The road to membership was, to say the least, arduous. The original negotiations began in 1993 and have been going on ever since.

After his successful presidential election in 2000, Vladimir Putin backed the accession plans and played a key role in the eventual outcome. He more than once showed his frustration at the negotiations and how “the rules of the game” were being changed to suit different WTO partners.

Although the WTO is ostensibly a non-political global trade organization, the delays and obstacles Russia has dealt with in recent years are politically charged.

Before the agreement, Vladimir Putin said in a recent Chinese TV interview;

“We want to join the World Trade Organization. That is our goal and our goal. In our opinion, this would have a generally positive impact on the Russian economy, mainly because it would increase confidence in the economy and in the administration and legal processes within the economy. Incidentally, we have fully adapted our national legislation to WTO requirements. We did. We also solved the big issues with all the important partners. I think it’s become more of a political issue.”

He was less diplomatic when interviewed on Russian television when he berated the EU and US for delaying and deliberately delaying Russia’s accession. This background speaks against the open hostility towards Russia of some US lawmakers, who wrote to the US WTO trade representative on November 10 about their “significant concerns” and demanding that Russia take “transparent, substantive and immediate action” upon its accession to the WTO shows commitments.

“Noun” could be used as a Russian distinction, but neither “transparency” nor “speed” are virtues I often see in the Federation.

As an organization, the WTO monitors and liberalizes international trade, regulates trade between member countries and provides the platform for negotiations and trade agreements.

Critical to Russia’s success and its ability to attract new foreign investment, the WTO enforces dispute settlement aimed at ensuring members’ compliance with WTO agreements.

The WTO has 153 members and represents more than 97% of the world’s population, so Russia’s absence since the fall of the USSR was anachronistic. With a GDP of $1.5 trillion and the world’s largest oil and gas producer, Russia should have been in the WTO years earlier.

WTO membership will not change the business environment or foreign investors’ high risk assessment of Russia. It aims to give new impetus to the significant reform and efficiency efforts and to reflect the seriousness the Russian government takes in fighting inefficiency, corruption and nepotism.

Look at the closing of hundreds of customs offices, the laying off of many customs officials and the opening of new import facilities to encourage faster and fairer growth, as well as the billions of dollars that have been attracted from the auto and pharmaceutical sectors in the past 12 months .

There is no doubt that membership is good for Russia. It brings much-needed capital to the Russian markets. Strained relations with the West followed the five-day Georgia conflict in 2008, and investors withdrew $300 billion from Russia in the seven months following hostilities. In 2011, further outflows reached US$70 billion against a forecast of US$36 billion by the Central Bank of Russia.

According to the World Bank, Russia’s WTO membership will bring both sustained and additional annual economic growth of 2%, and this achievement will be measured against a backdrop of contraction and uncertainty in global markets. Russia’s accession to the WTO is the “good news” that world markets have been waiting for after the WTO collapse in Doha, the incessant sinking of the eurozone and incessant, depressing news from US markets.

Consensus on WTO accession (the final hurdle fell when Russia and Georgia signed a deal approving Russia’s WTO accession in Geneva on November 9, after both agreed on international surveillance of disputed border crossings with South Ossetia and Abkhazia ) came just weeks after Vladimir Putin confirmed his return to the Russian presidency on September 24.

According to this consensus, the ruble was the strongest performer among the top 25 currencies after gaining over 5% against the US dollar. The Russian stock market gained over 15% in the world’s biggest jump, and Russian oil gained 7% over the same period.

Whether joining the WTO is good for smaller or inefficient industries in the short term is another matter. It is feared that cheap imports will flood the market and the “small” Russian industry will suffer. I don’t know exactly who and what these “small” industries are. Russia is now a huge importer of consumer goods, and traders might find they have new competition on their hands, but the lack of a cottage industry begs the question.

Russia exported over US$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 makers are vocal supporters of Russian accession and will benefit greatly if trade barriers are lowered and Russian products are allowed access, if not welcome, to 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 generated abroad… we are seventh in the world in terms of exports. We need a stable, predictable tool to develop trade.”

European companies are initially best positioned to benefit from Russia’s WTO accession. EU deals dominate Russia’s foreign trade and have been integrated longer than other blocs. In the short term, US options are limited because of the Jackson-Vanik Amendment, but with Jackson-Vanik violating WTO membership, Russia must be released very quickly. With all the US political rumblings and anti-Russian sentiment, Jackson-Vanik will default or US companies will miss opportunities.

What will be the differences?

Domestic consumer goods producers will face more competition from imports and this sector has been earmarked for protection and measures to help it become more efficient.

WTO rules call for liberalization of the domestic energy market and an end to monopolies and gas subsidies. This means more competition in Russia’s domestic gas market and easier access for independent producers as domestic prices converge closer to the export price.

Given the efforts the Russian government has made to attract foreign investment in both R&D and manufacturing, it is no surprise that the protection for emerging and emerging industries will last for seven years. Agriculture, automobile and aircraft manufacturing sectors are earmarked.

Exporters will face fewer obstacles in terms of import tariffs and quotas, which will be phased out with membership rather than overnight.

The main provisions of the WTO agreement are:

The average import tariff will be reduced from 10% to 7.8%, with an agreement to reduce tariffs by 33% from the accession date. 25% of tariffs will fall after a three-year lead time, while other tariff changes (e.g. auto and aviation) fall after seven years. Agricultural tariffs are protected for eight years.

The average agricultural import tariff will be reduced from 13.2% to 10.8%. Import tariffs for dairy products will be reduced from 19.8% to 14.9% and grain from 15.15% to 10.0%.

Import tariffs on poultry products will be protected for eight years, and the Russian government’s total farm subsidy will be capped at $9 billion in 2012 and cut to $4.4 billion by 2018.

The average import tariff for manufactured products will be reduced from 9.5% to 7.3%.

The car import duty will be reduced from 15.5% to 12.0%, but with a seven-year grace period. Preferential tariffs for automakers making large investments in production in Russia will be reduced by July 1, 2018, clearly in line with the provisions of Decree 166/566.

The import duty for chemicals will be reduced from 6.5% to 5.2%.

Russia has agreed to develop market-based prices for the domestic market, but will continue to regulate prices for households and non-commercial users in line with its social programmes.

The 49% foreign ownership limit for the telecoms industry will be removed in 2016.

100% foreign-owned banks will be allowed to open in Russia for the first time, but with an overall restriction of 50% on foreign banks’ control of the sector.

Foreign insurance companies can open their own branches nine years after Russia joined the WTO. 100% foreign-owned companies can operate in the wholesale, retail and franchise sectors immediately after membership.

In summary, we can say “better late than never” and acknowledge that the accession marathon (for Russia) was not a waste of time as the terms negotiated by Russia are favourable. They guarantee Russia access to foreign markets (Most Favored Nation status) and enable Russia to use the WTO to settle any trade disputes. Membership creates a better climate for foreign investment and gives Russia greater opportunities to invest in WTO member countries.

Russia can now better defend its economic interests in negotiations on international trade agreements.

Of enormous importance are the interim concessions, which limit the access of foreign goods to Russia as Russia upgrades manufacturing and infrastructure to challenge international competition.

Russia has shown it is not afraid to make the necessary investments, allocating hundreds of billions of dollars to brand-new and replacement infrastructure and manufacturing projects. Russia’s accession to the WTO is the biggest step in world trade since China joined more than a decade ago.

If you’re sitting in Strasbourg or Washington DC, consider that Russia has negotiated unhindered access to world markets while securing its domestic manufacturing base against foreign invaders for a long period of time, and that it has done so in the worst-case world trade downturn in of recent history. They may not respect the stroke of genius that negotiated access to new markets while ensuring their own protection. This negotiating skill would mean that Russia’s leaders not only know what’s on their mind; You also know what everyone else is thinking.