Russia & the WTO: the end in sight

2011-11-01 14:11:49

Russia has set many deadlines for joining the World Trade Organisation, having first applied to enter its precedessor, the General Agreement on Tariffs and Trade (Gatt), as long ago as 1993. But early next year now looks on the cards. Arkady Dvorkovich, president Dmitry Medvedev’s economic adviser, said on Monday that Russia hoped to finish negotiations at a WTO ministerial conference on December 15.

While a mass of formalities will still need to be addressed, this should pave the way for membership in a few months. And not before time. Russia should have joined this particular club long ago.

It came close to accession in late 2007 just before Vladimir Putin left the presidency and became prime minister. But in 2008, the war with Georgia put the bid on ice: the Georgians (as well as their US backers) had a veto on accession, in common with all 153 WTO members.

However, the relentless economic and political logic of Russian accession has convinced even Tbilisi that it has more to gain than to lose. In the last few days, Russian and Georgian officials have, with the help of Swiss mediation, reached a deal on the last contentious issue dividing the two countries. Georgia had insisted that Georgian officials supervise trade across the borders of Abkhazia and South Ossetia, the two breakaway regions that have been occupied by Russian troops since the war. Last week, Tbilisi accepted that international monitors could do the job.

This is good news for Georgia, Russia and the world economy.

For Tbilisi, it should bring an end to a 2006 Russian ban on Georgian wine and mineral water imports and, more broadly, ease access to Russia’s food and drink markets. While the political impasse between Russia and Georgia will continue to cast a shadow, it should steadly become less difficult for business people from the two countries to cooperate. As a small state with a very large neighbour, this matters more to Georgia than Russia.

For Russia, membership should improve access to key markets, including the European Union. It will not help with gas and oil – two-thirds of Russian exports – since the energy sector isn’t covered by the WTO. But other industries should benefit: steel, for example.

Accession should also encourage foreign investment in Russia – a key of aim of Putin as he prepares to return to the presidency and replace his protégé Dmitry Medvedev. Foreign companies will welcome the extra security that WTO membership provides including a means to resolve disputes.

In the short-term Russia will pay a price – in the form of increased competition for domestic producers, for example in the motor industry. Domestic car makers have been among the strongest lobbyists against Russian accession. But their determination to keep out foreign rivals has been undermined by the increase in foreign investments in domestic Russian car companies, notably by France’s Renault in Avtovaz, the troubled maker of the Lada.

In the long-term, Russia should benefit from the increased efficiency that greater competition will bring, though the gains will be limited by the continuing political and legal restrictions on private sector investment (domestic and foreign) in the huge energy sector. As reported in the FT earlier this year, David Tarr and Natalya Volchkova of the New Economic School in Moscow estimate that entry would boost Russia’s GDP by 3.3 per cent a year, and possibly as much as 11 per cent.

The bulk of these gains would come from the effects of more competition rather than increased exports. As Chris Weafer, of Troika Dialog, the Moscow investment bank, said in a note on Monday:

WTO entry is a clear net positive for the Russia market as, apart from the benefits and conditions of membership, it demonstrates that Moscow is now more focused on improving its investment credentials and reversing the poor perception of business risk amongst foreign investors. It is hoped that this will be a key priority for the next administration.

For the WTO, Russian accession would end the embarrassment of having one of the world’s largest economies outside the world’s leading trade body.

Russia would join four years after Ukraine (2008), the most recent new entrant from the former Soviet Union. But this will leave other former Soviet republics still out of the fold, including Kazakhstan and Belarus – which in 2009 announced a customs union with Russia. How the union and the WTO will mesh remains to be seen but it’s not regarded as a significant barrier for Russian accession.

Even if Russia and Georgia settle their differences, things could still go wrong. The European Union concluded talks a year ago but re-opened discussions after it objected to new Russian restrictions on car part imports. This argument was resolved last month: Brussels would be within its rights to suspend the accession agreement if it took offence at another sector-specific dispute.

In the US, president Barack Obama wants to go ahead with Russian accession. But Republic Congressmen have objections – some refuse to admit Russia until it pulls its troops out of Georgia’s breakaway regions while others want more concessions for US exporters.

Congress cannot block accession. But it can prevent the abolition of the so-called Jackson-Vannick amendment – a 1974 Cold War law originally passed to put economic pressure on the Soviet Union over the emigration of Jews to Israel.

Its existence has little effect on Russian companies but could conceivably complicate life for US groups doing business in Russia. Failure to abolish Jackson-Vannick would not prevent Russian accession but it would slightly spoil the party.

The Obama administration should do its utmost to overcome the objections of Congress. Jackson-Vannick has become an irrelevance. As for the wider concerns about cooperating with Russia – trade is the wrong arena in which to fight political or ideological battles.

In particular, democracy and a good human rights record should not be the criteria of joining an organisation that already has China, Burma and Saudi Arabia as members. Russia should not be held to a different standard.



The Financial Times