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Foreign trade: now Russia is in the WTO, will it obey the rules?

Financial Times. Jun 18, 2013

It is a coincidence that Russia's long-awaited accession to the World Trade Organisation last August was followed by mounting concerns about a slowdown in economic growth. But this accident of fate has caused a sharp shift in sentiment about the country's new status inside the global trade club.

When the Kremlin restarted its drive for WTO membership in the early years of the past decade, the economy was storming ahead, with growth rates averaging 7 per cent. China's accession to the WTO in 2001 marked a milestone in its development as an economic powerhouse ­ why should Russia be any different?

Now Russia is facing increased competition from abroad just as it is starting to fear a new reality of weaker growth and lower investment.

"The mood is to defend the economy," says Natalya Volchkova, director for policy studies at the New Economic School in Moscow.

Pascal Lamy, the WTO's director-general, was forced to issue a firm rejoinder this year after senior Russian officials asked him if there was scope to ease or escape the strict conditions of their membership.

EU trade commissioner Karel De Gucht accused Russia of "doing exactly the opposite of what they are supposed to do" after joining, by seeking to raise obstacles to trade.

"Since accession, Russian trade policy has mainly been about using WTO rules in favour of protectionism," Ms Volchkova says.

Thanks to negotiations that dragged on for 18 years, it came as a big surprise to many Russian businesses that the Kremlin had finally done a deal.

"Right up to August lots of people didn't believe we would join, so it came as a shock," says Alexey Portanskiy of the department of trade policy at Moscow's Higher School of Economics, who advised negotiators. "Ninety per cent of big business and the elites thought we wouldn't join."

But the slowdown has made Russian companies sit up and take notice.

"We have moved from the political priority, which was to join, to the reality of what it means. Various industries are now looking at it more closely, and it's causing a lot of concern," says Chris Weafer, a partner at Macro Advisors, an investment consultancy in Moscow. "It had been assumed that growth would return to pre-crisis levels instead we are seeing slowing growth and investtment."

There are several reasons why Russia was the last G8 member to join. One factor was its heavy reliance on raw materials exports, which caused Russia's energy giant Gazprom to secure after lengthy negotiations a highly prized exemption from WTO reductions in import tariffs.

Russia will benefit to the tune of about $2.5bn from the lifting of anti-dumping measures that have restricted exports of steel and fertiliser, according to Prof Portanskiy, but it had already struck low-tariff "most favoured nation" deals bilaterally with most of its markets for mineral exports. So, when agriculture and weapons are stripped out of the remainder of Russia's exports, this leaves only a small base of export manufacturers, weakening the domestic lobby for trade liberalisation.

Why then, if so little of Russia's economy is oriented towards value-added export, did it bite the bullet? "Strategically it is important that Russia is a WTO member because we get the right to take part in setting the rules of trade," Prof Portanskiy says. "That is why membership in itself is important, even if many do not see this."

Another clue to president Vladimir Putin's logic in pushing ahead is to be found in the World Bank's analysis of the likely impact on Russia's economy. The Bank estimates that membership would boost growth by a very attractive 3 percentage points a year in the medium term.

But a closer look at the Bank's calculations reveals much of that gain is expected not from higher exports but from improved productivity through liberalisation of services. The Bank makes the bold assumption that this will lead to lower prices for services such as communications, insurance, consultancy and retail. Remove this element from the calculations and the economic gain of WTO membership is marginal, says Ms Volchkova.

Prof Portanskiy agrees: "Only if we modernise and develop will we get any benefit from WTO membership. If we stay reliant on raw materials then we will get nothing." The shock of trade liberalisation may be overstated Russia negotiated a period off up to nine years before all tariffs are scrapped. Will Russia play by the new rules? Much attention will be on the automotive sector, which has a strong tradition of protectionism and which now faces a five-year period of grace before tariffs are flattened.

In the meantime, foreign exporters to Russia have much to be pleased about. The WTO rules reduce the time and cost of customs procedures and allow railways to carry foreign goods at the same prices as domestic.

John Deere of the US can now get a combine harvester to a farm much more easily and cheaply than before to the chagrin of Russia's domestic agricultuural machinery producers.

Nor does the slowdown mean protectionist voices will inevitably drown out those calling for liberalisation. "I would say the reform process in Russia improves in inverse proportion to the economy," says Stuart Lawson, executive director at Ernst & Young in Moscow. "If they see trouble, then there is more urgency."


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