WTO to issue first-ever Trade Policy Review of Russia

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By Marina Romanova

full-1465370789151128gng-1465382476WTO to question import substitution

Last week World Trade Organization held two days long discussion on its first Trade Policy Review of the Russian Federation since Moscow joined WTO in August 2012 as its 156th member.

The Review took place at a time when Russia faced a challenging economic environment: fall in oil prices, the sanctions imposed on Russia by some countries, and the counter measures taken by the Russian Federation were among the main reasons for the contraction in the economy, WTO’s Chairperson Concluding Remarks reads.

Although, many observers agreed the sharp decrease in GDP might have stabilized and growth was expected to resume next year, yet Russian economy recovery is slow and modest. Russia’s real GDP growth rates are slowed down in 2013 and 2014, and contracted by 3.7 percent in 2015. The economic uncertainty resulted in strong capital outflows, a sharp decline in the value of the ruble, and an increase in inflation.

Members of the discussion acknowledged ‘ongoing structural reforms’ which aim to diversify Russian economy reliance on hydrocarbons. However, several delegations stated that more could be done, “given the high level of education, excellence in technology, and the wide range of resources available in the Russian Federation.”

There are three principal measures performed by Russian cabinet in response to the current economic crisis, namely: fiscal stimulus, the floating of the ruble by the Central Bank, and import substitution. Some members questioned how import substitution could align with the basic principles of the organization without undermining trade liberalization and discouraging the competition.

In respond, Russia defended its policies, claiming it was the European Union’s responsibility that Russia adopted import substitution policies as well as a ban on certain agricultural products from the U.S., EU and some others WTO members.

russian-tariffs-v5-1039x530Russia largely banned U.S. and EU agricultural products after the Western nations imposed sanctions on it in 2014 over the conflict in Ukraine. The WTO highlighted the restrictions in a report it submitted as part of the review, noting that import substitutions had become a ‘key factor’ in Russia’s agriculture policy.

At the same time, Russia has successfully implemented many of its notification requirements, including bringing up-to-date its notifications on domestic support and export subsidies for agriculture, according to the Trade Policy Review draft. During the review period, Russia also has made significant Intellectual Property Rights reforms in terms of legislative, administrative and enforcement systems, notably the amendment of Intellectual property chapters of the Civil Code in 2014 and the establishment of the Intellectual Property Rights Court in July 2013.

State heavily involvement in the economy through the companies that it owned and controlled, which altogether represented over half of the country’s GDP and dominated key sectors such as banking, transport and energy, remain among the most serious concerns’ of WTO members regarding Russia. According to the Review draft, excessive regulation, weak governance, and significant government intervention in the economy are particularly discouraging investment in the country economy.

Although, Russia tried to fulfill some measures, the bulk of the privatization program 2014-2016 has been postponed mainly due to adverse market conditions (low asset prices) compounded by the economic slowdown.

WTO vs EEU

schermafbeelding-2014-04-24-om-21-35-26WTO Review has noticed that many policies and practices are now decided and applied at a regional rather than national level due to the “expanding role” of the Eurasian Economic Union (EEU; core states of which are Russia, Belarus and Kazakhstan).

In a separate statement regarding WTO Trade Policy Review on Russia, Michael Punke, the U.S. ambassador at the WTO, expressed special concern regarding EEU, which allegedly made arrangements, which “do more to protect certain industries than to create incentives to increase trade.” Some other members of the Organization “sought further information on the policies of the Union and the legal competence of the Eurasian Economic Commission.”

Although, members questioning legality of the EEU and its Commission haven’t provided the floor with specific examples, it might concern recent issue raised by the Ukraine.

According to the WTO statement from September 15, 2016, Ukraine has filed a complaint at WTO to challenge Russia over restrictions on freight transit, which allegedly do not comply with WTO terms.

On January 1, 2016, president Vladimir Putin signed a decree to suspend a free trade deal with Ukraine. According to the former Soviet republic complaint, its banned road and rail transport from Ukraine through Russia to Kazakhstan unless the route also goes through Belarus. Adding an extra country and a border crossing into the trip adds time and cost to trade, complaint said.

Originally valid until July 1, the decree was renewed last summer until the end of 2017. It also add Kyrgyzstan as a destination along with Kazakhstan, and “ban any goods embargoed by Russia or subject to a tariff in the Eurasian Economic Union”, Reuters reports.

It estimated that by the end of this year Ukraine may lose about US$400 million worth of exports to Kazakhstan and Kyrgyzstan.

Active participation of WTO members in two Russian sessions and the large number of advance written questions are testimony of the members’ interest in Russian economy, the WTO’s Chairperson Concluding Remarks reads.

Russian trade officials said after the meeting that they heard what they expected and acknowledged that there were developments to be made, calling the review “a work in progress.” The Trade Policy Review will be completed within the next month when Moscow will reply to all questions.

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