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Mainstream, VOL L No 42, October 6, 2012

Cost and Benefit of Russia’s Entry into WTO

Thursday 11 October 2012

by R.G. Gidadhubli

In the third week of August 2012 the World Trade Organisation (WTO) admitted Russia as its 156th member. In fact the Russian President, Vladimir Putin, had added another feather on his cap as the leader of Great Russia by putting his signature on July 19, 2012 on the agreement, ratified by the State Parliament (Duma) on July 10, for its accession to the WTO and thus ending Russia’s ordeal of waiting for this event for about 19 years. By joining this economic organisation, Russia hopes to further promote its economic objective of integration with the rest of the world having already become a member of other international economic organisations such as the G-8, G-20, APEC. Major Western powers, including the USA, West Europe apart from India and China, who have strongly supported Russia’s case for accession, welcomed this event. As a token of support to Russia joining the WTO, the US Senate panel on July 19, 2012 voted in favour of lifting the Cold War era Jackson-Vanik Bill which restricted trade with the former USSR and post-Soviet Russia.

But inside Russia itself there have been protests by the Opposition parties and several leaders, including those of the Communist Party who voted against the agreement in the Duma, as Russia entered into its final stage of complying with the conditions of joining the WTO. Hence it is worthwhile to analyse and understand the cost and benefit of Russia’s accession to the WTO and what challenges that lie ahead for the Russian leaders to achieve their economic objectives.
The basis for opposition and reservation to the accession to the WTO by certain political parties and leaders within Russia are as follows. First, Nikolaev Arefev, a member of the Communist Party of the Russian Federation, alleged that the WTO is the ‘Economic NATO’ since it insists on liberalisation and free of trade which will worsen the position of Russia that ‘hardly produces anything and is a major importer’ of a large number of goods. Secondly, the Left Democratic Party leader, Yaroslav Nilov, was also critical of the WTO entry of Russia since this step, in his opinion, will increase unemployment as the foreign companies might sack workers to make more profit. Thirdly, some critics have argued that Russia is entering the WTO at a wrong time when there is a Eurozone crisis and recession in many parts of the world and hence goods might be dumped in Russia benefiting those exporting countries at the cost of Russia.

Fourthly, the Opposition leaders and some critics have argued that the Russian industrial and agricultural output will decline sharply as in the case of Ukraine whose industrial production went down by about 40 per cent in one year after joining the WTO. According to some analysts, the negative impact on the Russian economy might be to the tune of 8-9 trillion roubles up to 2020. These contentions are used by the Opposition political party leaders, including Communist Party leader Gennadi Zyuganov who voted against the proposal in the Duma, asserting that the Russian market could be captured, the agro-industrial sector will be put to loss, banking and insurance sectors could be targets by international corpo-rations.
It is important to note that the Russian Government is not unaware of the cost and impact of the WTO entry. For instance, in the short-term when import tariffs are reduced, some branches of economy such as automobile, engineering might face competition from foreign firms. In the opinion of Mikhail Delyagin, the employment position will be affected in engineering, agriculture, light industry and food processing industry to the extent of 1.5 million workers. Russia’s Minister of Economics Belousov also informed at the Duma session on July 9 that Russia might suffer a budgetary loss in the next two years to the extent of about 445 billion roubles due to reduction in import duties.

Hence while some observations of the Opposition leaders and critics are valid, the contentions with regard to the cost of entry into the WTO are exaggerated and several arguments are not valid. For example, to argue and allege that the WTO is an ‘Economic NATO’ is wrong and baseless. There are already 155 member countries in the WTO with varying levels of economic potentialities and differing levels of development. In fact by virtue of their member-ship and cooperation, they promote international trade and also their own economic interest and development. Hence such remarks against the WTO seem to be politically motivated.
In fact Russia has already been paying a heavy price for not being a member of the WTO, but this is not conceded by the critics and Opposition leaders. Due to non-membership of the WTO, Russia has been subjected to many restrictive measures resulting in heavy economic cost. For instance, penalty due to anti-dumping procedure to Russia costs about $ 4 billion every year. Russia can reduce this cost by joining the WTO. Hence the Russian Government had justification to expedite the ratification of the agreement.

For any country that enters the WTO, there is some cost and adjustment involved in complying with certain conditionalities. Russia, being a former communist country and a closed economy, was guided mainly by political considerations and interests in matters relating to both domestic economy and foreign trade and economic relations. During the last two decades some measures have been initiated to bring about a market economy and incorporate regulations stipulated by the WTO for its membership.

Benefits of Entry into WTO

The basis and arguments in favour of joining the WTO are as follows. First, the contention of a Communist leader that Russia has been dragged into the WTO during the period of crisis and that the West will get benefit at the cost of Russia is not valid. While it is a fact that the timing of Russia’s admission into the WTO has coincided with the Eurozone crisis and economic recession in some European countries including Greece, Spain etc., for that Russia has no control and moreover Russia’s negotiations with the WTO were already in the final stages. On the contrary in November 2011 Russian political leaders expected that the WTO entry might spur its economic development and World Bank experts also indicated a very optimistic scenario contending that Russia’s membership could expand its economic growth by 11 per cent in the long term. Hence the then Russian President, Dmitri Medvedev, was quite satisfied with the decision of the Russian Government for joining the WTO. Hence having complied with the necessary formalities, the Russian Government signed the protocol for admission to the WTO on December 16, 2011. In view of this the accusation by the Opposition party leaders on the timing of admission is not valid. It is important to note that having signed the protocol in December 2011, the ratification of this document had to be completed by July 23, 2012 for Russia to become a full-fledged member of this organisation failing which the whole procedure, which is quite complicated and time-consuming, had to be repeated.

As regards the delay in Russia’s accession to the WTO, there is an important factor while looking back. Russia applied to join the WTO in 1993 but the negotiations dragged on in the 1990s. During the first decade of independence although many Western countries, including the USA, supported Russia’s admission, the Baltic states of Latvia, Lithuania (which were part of the former USSR) objected to Russia’s admission to the WTO mainly due to their ongoing mutual political conflict of interests. Subsequently, during the last decade Russia’s admission was further delayed after Georgia blocked Russia’s membership bid following Tbilisi’s brief war with Moscow over South Ossetia in 2008. Moreover, under the then prevailing economic crisis conditions, Russia had difficulty in complying with the conditionalities of the WTO. This is evident from the fact that by March 2011, according to Russian sources, even after nearly 15 years, negotiations on 14,000 items were still underway with 56 countries since the process of negotiations had been a lengthy and technically complex job

Apart from that, on Russia’s delay for admission into the WTO, the leading American expert on Russia, Marshal Goldman, opined in November 2011 that there were some political leaders and business firms and enterprises owned by Russian oligarchs who enjoy monopoly control in Russia that were against Russia’s accession to the WTO since they did not want outside competition and thus lose their economic advantage. In fact this happens in any country and Russia is not an exception. Hence the delay due to sabotage of the proposal by some vested groups was quite possible.

Secondly, Russia is partly responsible for the delay in its entry into the WTO, since it has often used the political whip in its trade relations even with the countries of the former Soviet Union. This has been the case with Ukraine on the issue of the price for oil and gas. Similarly, as noted by some analysts, on several occasions Russia used health concern as a pretext and banned import of cheese from Ukraine, mineral water from Georgia in 2006, dairy products from Belarus in 2009, wine from Moldova in 2010 and so on. Moscow’s health officials can still be able to ban such imports, says Stephen Woolcock from the International Relations Department of the London School of Economics. But after joining the WTO, Moscow has to apply uniform standards to all trading partners and provide scientific documentation to justify their action, since such matters are covered by the WTO’s Sanitary and Phyto-sanitary Agreement (SPS). While temporary bans are possible, if proved otherwise there is heavy penalty for imposing these. To safeguard the interest of all trading partners, the WTO keeps an eye on trade policies and could put pressure on any country if it was found to be imposing politically motivated trade sanctions. Russian economist Andrei Portanski has opined that Russia should have joined the WTO long back arguing that it is at present a highly discriminated country in the world and with accession to the WTO this limitation can be overcome for the benefit of Russian exporters and producers.

Thirdly, it is important to note that after joining the WTO, the country enters a three-year period during which the leadership has to take effective measures to liberalise its markets to conform to the WTO rules. In fact, this is a good enough period for Russia to complete the process of implementing economic reforms and changes in institutional structures to make the Russian economy competitive. Moreover, the Russian leaders face a challenging task to cut import tariffs and open up key sectors of the economy to attract foreign investment.

Fourthly, in this era of globalisation there is a need and realisation for Russia to integrate with the rest of the world and become a market economy and embrace open competition. Hence Russia cannot afford to remain isolated and continue to depend upon petro-dollars by export of oil and natural gas. The problem for Russia has become more complex since under the prevailing recessionary conditions the global demand for oil and gas has declined and so also the international price at about $ 90-98 per barrel which will significantly affect income generation from export of oil and gas. This would have a worsening effect on the Russian economy since during the last two decades, under the policy pursued by the Russian leaders, the country has been over-dependent on export of oil due to which other branches of the economy have been neglected and are lagging behind. Hence for diversification and modernisation of the industrial sector, accession into the WTO is necessary and desirable. This is also the valid argument of the United Russia party leaders. So far as the agricultural sector is concerned, Russia suffers from the spill-over effects and continuity of the Soviet era policies and hence this sector is highly subsidised, suffers from low productivity, high wastages and hence in many regions farms make losses. Therefore the WTO entry might bring benefits to Russian agriculture and improvements in this sector with better quality agricultural machinery and setting up agro-processing plants to cut down wastages and produce high quality products.

Fifthly, it is important to note that with entry into the WTO and reduction in import tariffs, the Russian population, particularly those belonging to the lower and middle income groups, will benefit from larger imports of consumer goods and services of better quality at lower cost. Hence the members of United Russia and Ministers tried to argue in the Duma about these benefits for the country when the proposal was put for adoption in Parliament.

Challenges

There are, however, a few challenges for Russia in achieving its objectives on joining the WTO. For instance, after joining the WTO, Russia hopes to benefit by the net inflow of the much needed foreign direct investment and that is what the government wants and what Putin spelt out in his presidential address on assuming office in June 2012. Many Russian entrepre-neurs, who are millionaires and billionaires, have also parked their money outside. It is a challenging task for the Russian Government to give incentives in order to get back that money. Moreover, Russia should be able to attract Foreign Direct Investment from Western countries, which can help in the economic growth of the state. Germany is the largest trading partner of Russia relying on which the Putin Government hopes to get major investments in Russia. But Germany, being involved in salvaging its Eurozone partners such as Greece and Spain, the prospects of huge investments in Russia could be limited in the short term. However, there are possibilities that other countries, including the USA, China and India, could invest in joint ventures in Russia. For that reason the Russian Government should be consistent in its policies to improve the investment climate, open up the economy and offer opportunities for setting up joint ventures in various branches including hydrocarbon, engineering, IT, pharmaceutical, consumer goods sector, infrastructure development and so on.

Apart from getting FDI, Russia should be able to get advanced technology from the West. This is very important since, as underlined by certain analysts, in some sectors, including engineering, the level of technology in Russia at present is virtually the same as it was before the break-up of the Soviet Union. By overcoming this shortcoming, in the long run Russia will be a competitive economy and achieve its declared objective of modernisation and innovation which is very much needed. For instance, the objective of developing Skolkovo near Moscow—expected to become Russia’s Silicon Valley—could radically improve its competitiveness in the IT sector on a global scale. Russia has the advantage of a highly qualified skilled manpower which can benefit with better job opportunities and higher levels of income for the younger generation of Russians. But Russia cannot modernise its economy without free and liberalised exchange of trade, services and technology. For that the Russian Government should pursue consistent and liberal economic policies, reduce state intervention and bureau-cratic control and corruption to facilitate joint ventures with foreign partners in order to boost economic growth.

In view of what is stated above there is some cost Russia has to pay for entry into the WTO. This is mainly the cost for adjustment in the short term which will be more than compensated by the benefits for the country in the long run. Hence Russia should be ready to pass through a tumultuous period of economic challenges and adjustment; this also needs strong political will and support to ultimately achieve the economic 
objectives.

Dr R.G. Gidadhubli is a Professor and former Director, Centre for Central Eurasion Studies, University of Mumbai, Mumbai.

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