Better Late Than Never
On the 11th November 2011 the Russian and WTO working parties agreed terms to pave the way for Russia’s acceptance to the World Trade Organisation. Russian lawmakers approved membership on the 22nd August 2012.
The path to membership has, to put it lightly, been arduous. Original negotiations started in 1993 and were ongoing ever since.
Following his successful presidential election in 2000, Vladimir Putin got behind the accession plans and was a key player in the eventual outcome. He displayed his frustrations more than once at the negotiations and how “the rules of the game” were changed to suit different WTO partners.
Although the WTO is ostensibly an apolitical global trade organisation, the delays and barriers that Russia has dealt with in recent years have been politically charged.
Prior to the agreement, Vladimir Putin said in a recent Chinese TV interview;
“We want to join the World Trade Organisation. This is our goal and our objective. In our opinion this would have a generally positive impact on the Russian economy, mostly because it will increase the level of trust in the economy, and on the administrative and legal procedures within the economy. By the way, we have fully adjusted our domestic legislation to WTO requirements. We have done this. We have also settled the major problems with all of the key partners. I think that it has become more of a political issue.”
He was less diplomatic when interviewed on Russian TV when he lambasted the EU and USA for procrastination and for causing deliberate delays to Russian accession. This back drop is against open hostility to Russia by some US lawmakers who wrote to the US WTO Trade Representative on the 10th November about their ‘significant concerns’ and demanding that Russia display “transparent, substantive and prompt action” in its’ adherence to WTO obligations.
“Substantive” could be used as a Russian accolade but neither ‘transparency’ nor ‘prompt’ are virtues I see much of in the Federation.
As an organisation the WTO supervises and liberalises international trade, regulating trade between member countries and providing the negotiating and trade agreements platform.
Importantly for Russian success and her ability to attract fresh inward investment, the WTO enforces dispute resolution aimed at member’s adherence to 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 has been anachronistic. With a $1.5 trillion GDP and as the world’s largest oil and gas producer Russia should have been in the WTO years earlier.
Membership of the WTO will not change the business environment or the high risk assessment given to Russia by foreign investors. What it should do is add impetus to the significant reform and efficiency drives and reflect the seriousness the Russian government places on combating inefficiency, corruption and cronyism.
Look at the closure of hundreds of customs posts, the dismissal of many customs officers and the opening of new import facilities to promote faster, fairer growth plus the billions of dollars attracted from the auto and pharmaceutical sectors in the last 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 2008 five-day Georgian conflict and, in the seven months following hostilities, investors pulled $300 billion out of Russia. In 2011 further outflow reached $70 billion against a $36 billion forecast by the Russian central bank.
According to the World Bank, Russian WTO membership will bring both sustainable and incremental annual economic growth of 2% and this success is measured against the backdrop of shrinkage and uncertainty in the global markets. Russia joining the WTO is the ‘good news’ the world markets are looking for following the WTO failure at Doha, the incessant Euro-zone doom and unremitting, depressing news from the US markets.
The consensus to join the WTO (the final barrier fell when Russia and Georgia signed an agreement approving Russia’s WTO entry on November 9 in Geneva, after both agreed on international monitoring on the disputed crossings with South Ossetia and Abkhazia) came only weeks after Vladimir Putin confirmed his return to the Russian Presidency on September 24th.
Following this consensus the rouble was the strongest performing of the top 25 currencies, having gained over 5% against the US dollar. The Russian stock market gained over 15% in what has been the world’s biggest jump and Russian oil jumped 7% in the same period.
Whether WTO accession is good in the immediate term for smaller or inefficient industries is another story. Fears are rife that cheap imports will flood the market and ‘small’ Russian industry will suffer. Quite who and what these ‘small’ industries are, I do not know. Russia today is a huge importer of consumer goods and distributors may find they have fresh competition on their hands but the absence of a cottage industry begs the question.
Russia exported over $400 billion in 2010 predominantly to the EU, Ukraine, Turkey, China and Belarus. WTO membership opens up new markets where historically Russian products have been blocked. Russian steel and iron manufacturers have been vocal supporters of Russian accession and will be major beneficiaries as trade barriers are lowered and Russian products allowed access, if not actually welcomed to the new markets. General imports were valued at nearly $250 billion
Maxim Medvedkov, the chief Russian negotiator to the WTO, said “More than one third of our GDP is made abroad… we are seventh in the world in terms of exports. We need a stable predictable instrument to develop trade”.
European companies are initially best positioned to take advantage from Russia’s WTO entry. EU business prevails in Russia’s external trade and has been integrated for longer than other blocs. In the short term U.S. opportunities are constrained because of the Jackson-Vanik amendment, but as Jackson-Vanik violates WTO membership, Russia will have to be released very quickly. For all the U.S. political blustering and anti Russian sentiment, Jackson-Vanik will go by default or U.S. companies will miss opportunities.
What will be the differences?
Domestic consumer goods producers will face greater competition from imports and this sector has been earmarked for protection and measures to help it become more efficient.
WTO rules require liberalisation on the domestic energy market and an end to monopolies and gas subsidies. This means more competition in the Russia domestic gas market and easier access for independent producers with domestic prices moving closer to the export price.
Given the effort the Russian government has put in to attracting inward investment in both R&D and manufacturing it is no surprise that protection will be in place for the nascent and remerging industries for seven years. Agricultural, automotive and aviation manufacturing sectors are ring-fenced.
Exporters will face fewer obstacles in terms of import tariffs and quotas which will be phased out gradually, rather than overnight with membership.
The main terms of the WTO agreement are:
The average import tariff will be cut from 10% to 7.8% with an agreement to lower 33% of the tariffs from the date of accession. 25% of tariffs will drop after a three year lead time while other tariff changes (e.g. automotive and aviation) will drop after seven years. Agriculture tariffs are protected for eight years.
The average agricultural import tariff will be cut from 13.2% to 10.8%. Dairy import tariffs will drop from 19.8% to 14.9% and cereals from 15.15 to 10.0%.
Import tariffs for poultry products will be protected for eight years and the total Russian government agricultural subsidy will be capped at $9 billion in 2012 and then cut to $4.4 billion by 2018.
The average manufactured import tariff will be cut from 9.5% to 7.3%
The automotive import tariff will be cut from 15.5% to 12.0% but with a seven year protection period. Preferential tariffs for automakers making large investments in Russian-based production will be cut by July 1 2018, well within the Decree 166/566 agreements.
The import tariff for chemicals will be lowered from 6.5% to 5.2%
Russia agreed to develop market-based pricing for the domestic market but, in line with its social programs, will keep regulating prices for households and non-commercial users.
The limit for foreign equity ownership of 49% for the telecom industry will be scrapped in 2016.
100% foreign-owned banks will be allowed to open in Russia for the first time but with an overall 50% limit of foreign bank control of the sector.
Foreign insurance companies can open owned branches nine years after Russia joins the WTO 100% foreign-owned companies will be able to operate in wholesale, retail and franchise sectors immediately after membership.
In summary we may say ‘better late than never’ and appreciate 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 favoured nation” status) and enable Russia to use the WTO for settlement of any trade dispute. Membership creates a better foreign investment climate and gives greater Russian opportunities for investment in the WTO member-countries.
Russia can now better defend her economic interests in negotiations on international trade agreements.
Of enormous importance are the transition concessions which limit access of foreign goods to Russia whilst Russia upgrades production and infrastructure to challenge international competition.
Russia has shown that it is unafraid to make the necessary investment and has committed hundreds of billions of dollars in brand new and replacement infra structure and manufacturing projects. Russia’s entry to the WTO is the biggest step in global trade since China joined over ten years ago.
If you are sitting in Strasbourg or Washington DC you may want to consider that Russia has negotiated unfettered access to the world markets whilst securing its domestic manufacturing base against foreign incursions for a lengthy period and, that it has done this in the course of the worst downturn in global trade in modern history. You may not respect the stroke of genius that negotiated access to new markets whilst ensuring protection of his own. This negotiation skill would imply that not only do Russia’s leaders know what they are thinking of; they also know what everyone else is thinking.