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Knights of the Vine RUSSIA

The Way It Is

Russia Joins the WTO
John Harrison

The news that Russia has finally been approved to join the WTO after an off-on 18-year negotiation period has passed almost unnoticed by the general public in Russia. The official invitation made by WTO ministers from their conference in Geneva on December the 17th was not the headline news it would have been in quieter times, but nevertheless is of real significance for Russia.

Russia will not actually enter the WTO until the State Duma ratifies the agreement, and it has six months to do that. Given that the Duma’s make up will, it seems, become more rather than less democratic, although we don’t know for certain, Russia’s membership is now in the bag.

President Medvedev, in the pre-“snow revolution” (or whatever acronym is eventually coined to describe the virtual revolution that is taking place now) seems to have been instrumental in securing all the necessary support in order to overcome the two final stumbling blocks hindering Russia’s accession, which were Georgia’s (admitted to the WTO way back in June 2000) previous objection, and a lack of mutual trust. Russian negotiators were worried that Americans might change the rules of the game after all major issues have been settled, and Americans were worried about Putin’s somewhat erratic foreign policy statements. In November, Putin commented on the various costs and benefits of joining the WTO: “The benefit of joining the WTO is only 50/50 for Russia.”

Russia could have joined the WTO a long time ago if it had had the political will. This was too much for even the prodemocratic governments of the 1990s to pull off. What happened?

The USSR was never a member of GATT, which it perceived as being a capitalist organisation similar to the IMF. To join the IMF and the World Bank is relatively easy, and Russia joined in 1992. The WTO demands bilateral protocols with all the countries that the applicant country has trade relations with, and in Russia’s case that was a lot of countries: sixty. Each of these countries had and used the right to veto the entry of a new applicant. Russia delegated such tricky negotiations to a deputy minister for foreign trade, who lacked the necessary clout to persuade ministers to push negotiations through, so actual negotiations did not start until 1998, although a formal start was made in 1994. To handle all the various disputes, scores of lawyers and specialists were needed, meaning that the government needed to have been very supportive, and it wasn’t until quite recently.

In the early 2000s, the senior business community was split into two camps. Putin, Gref and Kudrin and the businessmen they were friendly with, such as the steel exporters, supported membership. Liberals in Russia’s parliament produced a range of studies of the effects of Russia’s accession to the WTO.

The camp against membership was headed by people such as Oleg Deripaska, CEO of Rusal, owner of Rospromavto and one of Russia’s big airplane building companies. Deripaska argued that Russia needed a substantial period of transition to adjust to freer trade. Other industrialists in the Russian Chamber of Commerce argued that access to foreign markets was not that important, because industrialists could barely keep up with domestic demand, which was rising because of the increased value oil and gas exports. Agriculturists also argued against WTO caps on state subsidies, and veterinary services raised doubts about Western imports of chicken, pork and beef. Russian retailers, telecommunication providers and the banking industry have also voiced their opposition from time to time, with the whole issue of intellectual property rights proving to be a major problem.

When Putin was elected for a second term, the liberal insignia of his first term faded, and so did emphasis on joining the WTO. All kinds of politicians, including Yury Luzhkov, came out against WTO accession. Perhaps he wanted to appear to be a nationalist. In October 2006, Putin declared on television that foreign traders should not be allowed ‘‘to sell processed goods such as smoked salami’’ or ‘‘clothes bought from China.’’ His attitude was similar to that of the leaders from the old Soviet days, where the state had authority over everything but responsibility for nothing.

Despite this rhetoric, Russia came close to joining the WTO in 2006. Putin seemed to be riding two horses at the same time. One was for protectionism, and the other a realistic foreign policy. Accession was dashed by the deterioration of Russia-Georgia relations (Georgia was already a member of the WTO), and the continuing enforcement of the Jackson-Vanik amendment which was attached to the U.S. Trade Act of 1974. To give Russia normal trade relations, the US president must grant an annual waiver, certifying that Russia does not deny its Jewish citizens the right to emigrate, in order for Russian exports to enter the US market at normal tariff rates. Jewish emigration has not been a problem since the mid-1980s, but this amendment has been used to apply pressure on Russia for all kinds of purposes. Russia’s war with Georgia in 2008 did nothing to help the accession process.

When Dmitri Medvedev became President in May 2008, he mentioned WTO accession in every major speech, whilst Putin virtually ignored it. On June the 9th, however, Putin boldly announced that Belarus, Kazakhstan and Russia were abandoning their separate talks to join the WTO. Instead, they would enter as a single customs union. Putin jeopardised Russia’s almost completed accession process. No country has ever entered the WTO collectively with another. The crisis ended when Putin back-tracked and clarified that each country will still need to apply for accession independently. But Russia’s accession was, because of this incident, still frowned on by the majority of WTO executives.

Since then, other factors have encouraged Russia’s leadership to join the WTO. Russia’s GDP fell by 8-9% in 2009, much more than in 2008, when it fell by 4.8%. Russia’s exports are no longer 90% minerals, and these now equate to roughly 60% of export earnings. In other words, it makes economic sense for Russian to join up.

So what exactly just joining the WTO mean for Russia? Not an awful not to begin with, apparently.

Russia has concluded 30 bilateral agreements on market access for services and 57 on market access for goods. The average tariff ceiling will be 7.8% rather than the 2011 average of 10% for all products. The tariff for agricultural goods will be 10.8%, down from the present average of 13.2%.

Only a third of the tariffs will be cut next year, most others in three year’s time. The longest delay will be 8 years for poultry, 7 years for cars, helicopters and civil aircraft.

Perhaps more important are the agreements on market access. The foreign equity limitation (49%) in telecommunications will be eliminated four years after accession. Foreign insurance companies will be allowed to establish branches nine years after Russia accedes, and foreign banks would be allowed to establish subsidiaries. There will be no cap on foreign equity in individual banking institutions, which is going to mean a revolution in Russia’s banking system. In general, WTO provisions regarding quotas, bans, licensing will gradually replace Russia’s complex systems. Railways transportation charges will be standardised with WTO requirements. From the date of accession, importers of alcohol, pharmaceuticals and products with encryption technology will not need import licences, and so on.

This all sounds incredible, if it is all implemented. But who will enforce the agreements? The WTO has its own inspectors, but it mostly relies on each State’s own customs and other services to provide accurate information. Who, exactly will check that such information provided is correct? These kinds of questions are rather difficult to answer, because Russia has yet to join the world of civilised countries which have an independent judiciary to settle arguments. The fact that WTO membership does include the use of an independent arbitration court is probably the most important aspect of the whole agreement.

Will accession eventually change the way business operates in Russia? Not necessarily. Accession means that the imports and export of goods into and from Russian will gradually come into line with WTO, indeed world norms. But the WTO is not really concerned with how these goods are produced. WTO membership won’t cut down on corruption, it won’t cut down on lack of transparency and really won’t affect government economic policy. It might affect Russian foreign policy because if Russia decides to invade a country which is also a member of the WTO, its membership might be jeopardised.

WTO membership will give Russia bargaining power with America, as if the latter does not rescind the Jackson-Vanik agreement, Russia can limit America’s new access rights to Russian markets, stipulated by WTO provisions. However Russia’s accession to the WTO at this time could have as much to do with the WTO itself being embarrassed that Russia is not a member, as it is the only G20 country not to be a member, than guarantees that it will abide by all the rules. Entrance qualifications definitely seemed to have been made lenient to the point of being ridiculous, and are certainly more lenient than those which the Ukraine had to put up with when it joined in 2008. Perhaps the good ol’ American expression applies to the WTO “establishment”. They thought it was better to have Russia inside the tent pissing out than outside the tent pissing in. Perhaps it is also true that either way, the pissing’s not going to stop.

Will accession change the way that Russia is perceived abroad? Much depends on Vladimir Putin’s behaviour. However, business people will no doubt have a more favourable opinion of Russia after the country becomes a WTO member. Membership will smooth the path to joining other international clubs, such as the OECD.

I asked a few Russian “old hands” what they think of Russian membership:

Brian Johnson

Len Nebons

Chris Gilbert

Geoffrey Cox

Brian Johnson, Managing Director PFS International Russia

Is Russia joining the WTO a good thing?

I don’t think that most people will even notice that Russia has joined. Import tariffs have only been dropped by a few percentage points. I don’t think that the average Russian manufacturing business will be affected. I can’t really see that there is a big difference there, particularly as there are some long implementation periods up ahead. Yes, I think that Russia joining is a good thing, because it shows the rest of the world that Russia wants to integrate, and gives Russia a place at the table so to speak, but I don’t think it’s going to make that much difference to the economy.

But it does mean that Russia won’t be able to just go and declare war on another WTO member for example?

Well, one would hope that Russia has gone past the stage of declaring war on countries to punish them, and anyway if Russian carries on with its military cutbacks t won’t have a an awful lot to declare war with.

Len Nebons, partner, 4 entertainment

Is Russia joining the WTO a good thing?

This is a very difficult question because we cannot look into the future. If they [Russia] abide by the rules, then it’s a good idea, but if it turns into a China where they don’t abide by the rules and they still limit trade with protectionism, then it’s not a good idea. China took away a lot of jobs from a lot of major countries. About 20 million from the USA and UK for example. It’s a good idea in that the tariffs will go down 2- 3%, but if oil goes up by 10% it’s still very much of a nett gain for Russia. So it remains to be seen. It’s not going to change the control that Russia has over its economy.

Does WTO membership in a way legitimise Russia’s economy?

Yes, China is still doing piracy. They are still protecting whatever industries they want to protect. You look at the WTO and it is really replacing the UN. Maybe it should, because economy and in a way diplomacy revolved around trade. If the UN could be shut down, and everybody was a member of the WTO, then maybe we’d all be better off. I think that basically the whole world will be governed by trade in 15 years, and the UN will still be there because it is a lot of jobs and bureaucracy, but it will be eclipsed by the WTO. Of course we still have military power, but it is getting increasingly difficult to force trade through military means.

Chris Gilbert, Russia Director, Russo- British Chamber of Commerce

Is Russia joining the WTO a good thing?

Yes, it will definitely give Russia a much needed shot of credibility in international trade circles. It means that investors looking at Russia sceptically will be able to see that, yes, Russia is a partner with whom we can do business. Russia will play by the same rules that everybody else does, and this is all a good thing for us and for Russia, which will be able to export more easily.

Do you think that WTO memership means that Russia will take jobs away from other countries?

I don’t think that Russia is able to do that on a large scale, because Russia’s population is not that large, and its economy is completely different to a country like China’s.

Geoffrey Cox, OBE, one of the founding fathers of the AEB

Is Russia joining the WTO a good thing?

I think it is a good thing, for Russia. Is it a good thing for the rest of the world that Russia is joining the WTO? Yes, providing that Russia obeys the rules.

How can Russia be trusted to play the rules?

I don’t know. Can I give you a bit of background? The European Business Club completed a study on this in about 2004. What was interesting was that we found that individual factories were quite capable of breaking any rules laid down by the WTO. The central government may not break rules, but individual companies might be inclined to. It could be, in some of the regions, that certain companies have made special arrangements allowing them to break the rules. So it’s not just what the government says in Moscow, it’s what all the companies in the provinces, and the provincial authorities, think and do, in regard to tax breaks that is important.

Is it going to change the way the economy is run inside Russia?

No, the only thing for Russia is that it is going to make trading a lot easier. Russia won’t have to make separate trade agreements with each indvidual country any more, everything will be simplified. In general though, as far as Russia’s credibility goes, is it a good thing? In general it is good thing for Russia. It affects trade, not investment. Importers and exporters will be encouraged.

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