Pros and Cons of Russia’s WTO Membership

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Nov. 18 – After roughly 18 years of membership talks, Russia finally looks set to enter the World Trade Organization on favorable conditions, both Russian and international analysts say noting the minor import tariff cuts.

The final barrier keeping Russia from the global trade club fell when Russia and Georgia signed an agreement approving Russia’s WTO entry on November 9 in Geneva, after both agreed on international monitoring of the disputed crossings with the breakaway regions of South Ossetia and Abkhazia.

Tariffs
Russia’s WTO tariffs are one of the key issues, with the main terms of the Russia WTO agreement as follows:

The average import tariff will be cut from 10 percent to 7.8 percent with an agreement to lower 33 percent of the tariffs from the date of accession. A further 25 percent of tariffs will drop after a three-year lead time, while other tariff changes (e.g. automotive and aviation) will drop after seven years. Meanwhile, agriculture tariffs are protected for eight years.

The average agricultural import tariff will be cut from 13.2 percent to 10.8 percent. Dairy import tariffs will drop from 19.8 percent to 14.9 percent, and cereals from 15.15 to 10 percent.

Import tariffs for poultry products will be protected for eight years and the total Russian government agricultural subsidy will be capped at US$9 billion in 2012 and then cut to US$4.4 billion by 2018.

The average manufactured import tariff will be cut from 9.5 percent to 7.3 percent and the automotive import tariff will be cut from 15.5 percent to 12 percent, 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 percent to 5.2 percent

Russia has also 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 tariff cuts are not significant,” Uralsib Investment Bank’s Alexei Devyatov said to the Russian information agency RIA Novosti. “Tariffs will remain in most cases – they will be lower, but will not disappear at all. Moreover, long transition periods are implied in many sectors.”

“If we compare the conditions which Russia received with those of other countries which have become WTO members recently, the situation for our producers is much better,” Deutsche Bank Russia’s Chief Economist Yaroslav Lisovolik said to the Voice of Russia.

Sectors
In addition, Russia’s WTO accession conditions include some of the more long-term goals. For example, with Russia’s accession to the WTO, foreign insurance companies will be able to open branches in Russia nine years after accession.

David Tarr, adjunct professor at the New Economic School in Moscow, and an economic consultant for the World Bank, said Russia’s insurance sector could see post-accession growth of the type experienced in China after Beijing joined the WTO in 2001.

“In China, there was enormous concern in the services sector, especially insurance, about China opening up as part of its commitment to multinational insurance companies,” Tarr said in a recent telephone interview. “What happened was a huge boom in the insurance sector subsequent to accession, and what was surprising was that the number of domestic companies doubled in the subsequent four or five years after accession. Most of the multinationals that came in looked for Chinese partners.”

Tarr said the search by multinationals for joint venture partners in Russia could result in similar expansion within Russian insurance companies post-WTO accession.

Among other long-term goals are the limits for foreign equity ownership of 49 percent for the telecom industry, which will be scrapped in 2016.

For the first time, 100 percent foreign-owned banks will be allowed to open in Russia, but with an overall 50 percent limit of foreign bank control of the sector. Similarly, 100 percent foreign-owned companies will be able to operate in wholesale, retail and franchise sectors immediately after membership.

As for the media market, Russia will not change legislation forbidding foreigners to set up media outlets in the country when it joins WTO.

“Our main restriction on the media is that foreign nationals and stateless persons cannot act as founders,” Maxim Medvedkov, Russia’s chief WTO negotiator, told reporters on Wednesday.

Pros and cons
Russia is in real need of foreign investments to modernize its industries and markets. From this perspective, it is no doubt that WTO membership is good for Russia. Economists have noted that the latest figures indicate a positive trend regarding the willingness to return to and invest in Russia.

FDI increased in 2010 from 2009 (US$42.9 billion in 2010, US$36.5 billion in 2009, US$75 billion in 2008) and net capital outflow from Russia is on the decline (US$38.3 billion in 2010, US$56.9 billion in 2009, US$129.9 billion in 2008).

According to the World Bank, Russian WTO membership will bring both sustainable and incremental annual economic growth of 2 percent and this success is measured against the backdrop of shrinkage and uncertainty in the global markets.

“I have no doubt that Russia joining our WTO family will strengthen the multilateral trading system and enhance global economic cooperation,” said Stefan Johannesson, chairman of the WTO’s Working Party.

Tarr stated earlier this year that Russia would gain about 3.3 percent of the value of its GDP from WTO accession in the medium term, and 11 percent of Russian GDP in the longer term.

“The main positive consequences of Russia’s entry will be lower import prices, increased competition on the domestic market and the application of international business rules,” Natalia Turdyeva from the Center for Economic and Financial research at New Economic School said.

WTO accession would spur foreign investment, something Putin has championed for some time.

“WTO accession would help in enforcing the rule of law desired by both foreign and Russian investors. WTO membership requires enormous legal changes to fulfill the obligations, such as: market access and non-discriminatory treatment, protection and enforcement of intellectual property, transparency, and trade related investment measures,” Kristoffer Svendsen, with the University of Tromso, writes in his column in EU-Russiacentre.org.

Furthermore, Svendsen rightly noted down, WTO membership will provide foreign investors with the WTO Dispute Settlement Mechanism to settle disputes in Russia.

Outside Russia, the biggest beneficiaries of the WTO deal are global companies based in the European Union (by far Russia’s biggest trading partner) the United States and other countries. Only 27.3 percent of U.S. businesses currently in Russia say that WTO membership wouldn’t bring new opportunities for expansion there, according to a survey by the American Chamber of Commerce.

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. Even if no doubts remain among analysts that WTO membership is good for the economy, it is inevitable there will be winners and losers in the Russian industry.

For Russia, joining the WTO is likely to hurt less-competitive domestic manufacturing industries that have failed to keep up since Soviet times – such as those in the food processing, textiles and construction materials industries. Also, Russian banks and insurance companies will likely face more competition.

Global airlines also will catch a tail wind from Russia’s WTO accession in a deal that cancels annual fees of about US$300 million a year for flying over Russian territory.

“I expect big western banks to come to Russia, which will not in any way change a position of market leaders such as Savings Bank and VTB, but mid-sized banks will be in danger,” Sergey Hestanov with Alor Invest said to the Russian daily Isvestiya.

The competition in the financial sector, especially in retail, will remarkably increase after WTO accession.

“The benefits for Russia are basically long term. It’s going to normalize Russia as an investment destination market,” Andrew Somers, head of the American Chamber of Commerce in Russia, said to The Wall Street Journal. “Over time, Russian companies will be forced to be more efficient and competitive.”

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