Saturday, August 30, 2014


Features

Russians Brace For Tradeoffs That Come With WTO Membership

A sales clerk prices goods at a market in Vladivostok, Russia. (file photo)
A sales clerk prices goods at a market in Vladivostok, Russia. (file photo)
By Claire Bigg
Vladimir Appakov has been running a successful vegetable business in Tatarstan for more than two decades. So successful, in fact, that he is widely known in this central Russian republic as the "potato king."

But with Russia now officially a member of the World Trade Organization (WTO), Appakov is deeply worried about his farm's future.

"Starting a business in Russia is already a heroic feat," he tells RFE/RL. "Under the new rules, for example, vegetables and potatoes will have to be cleaned and neatly packed before they are sent to shops. No farmer in Tatarstan can meet WTO standards."

With its $1.9 trillion economy -- the world's ninth largest -- Russia was by far the biggest economy outside the global trade club.

Vladimir AppakovVladimir Appakov
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Vladimir Appakov
Vladimir Appakov
Its August 22 accession, after 18 years of arduous negotiations, is the most significant WTO entry since China joined more than a decade ago and could lift long-term economic growth.

But for many Russian entrepreneurs there it little cause for celebration.

While the country hopes to attract more foreign investors as a WTO member, joining the organization means Russia will have to dismantle its protectionist policies and open up its markets to foreign competitors.

The agricultural and industrial sectors, which have enjoyed subsidies and high tariffs, are expected to be the hardest hit.

Division And Accession

Russians have been deeply divided over whether to join the WTO ever since accession talks began almost two decades ago.

The Communist Party has been at the forefront of opposition to WTO entry, holding protest rallies and earlier this year staging an unsuccessful attempt to have the accession agreement rejected as breaching Russia's constitution.

Despite estimates that the country can expect 11 percent growth in the long run, there are widespread fears that membership will destroy large swaths of Russia's industry and lead to unemployment.

In terms of exports, joining the WTO will bring no significant gain in the short term, since few Russian products aside from raw materials are in much demand abroad.

A truck harvests corn at a collective farm some 250 kilometers southeast of the Russian city of Voronezh.
A truck harvests corn at a collective farm some 250 kilometers southeast of the Russian city of Voronezh.

Mikhail Delyagin, the director of the left-leaning Institute for Globalization Studies, says membership will sound the death knell for thousands of producers catering to the domestic market.

"Russian producers will suffer big losses, tariff protection of some sectors will drop by about 10 percent," Delyagin says. "In some sectors where the profit margin is 5 percent, like in the milk industry, for example, this reduction is fatal. Producers of cheese, pork, [and] trucks will suffer a terrible blow. The government's promises that the losses will be compensated by budget subsidies contradict WTO rules, so they probably won't be fulfilled."

'Sad Consequences'

Konstantin Babkin, the president of Russia's Union of Agricultural Machinery Manufacturers, says the Russian economy has already slumped in the run-up to WTO accession.

"The entire agricultural sector has been very tense ahead of those new rules," Babkin says. "We have been selling fewer combine-harvesters, which means we have been investing less in development and buying less equipment. Machinery equipment producers are also feeling the negative effects of Russia's entry into the WTO. We are seeing these sad consequences in almost all sectors, so I don't think anything good will come out of this."

Entering the global trade body also means that Russia will have to cut back on privileged trade deals it has negotiated with a number of other ex-Soviet countries.

The customs union launched last year by Russia, Belarus, and Kazakhstan, in particular, which offers lower export-import tariffs and cheaper prices for many goods, is inconsistent with WTO rules requiring equal treatment for imports from all other member states.

"Special relations will now require special decisions," Yevgeny Yasin, a former Russian economy minister, notes. "Concerning the customs union, the issue of WTO accession for the other members, Belarus and Kazakhstan, will have to be raised. The deal will definitely have to be revised."

President Vladimir Putin himself appeared ambivalent about WTO membership until the global financial crisis underscored the Russian economy's vulnerability and lack of competitiveness.

According to official estimates, Russia will lose $5.7 billion in revenues in 2013 and $7.8 billion in 2014, with some of the losses likely offset by accrued foreign investment.

WTO Director-General Pascal Lamy cautions that Russians should not expect an immediate economic boom.

"There is one more reason for that, which is, like China 10 years ago, this is not a big-bang accession," Lamy says. "The Russians have negotiated, of course, an opening of their trade regime, which is what the country needs to do to join the WTO, but with necessary transitions and phasing-in periods. So nothing like a big bang."

The Payoffs

But many economists believe the risks carried by entering the club will eventually be outweighed by the benefits.

Advocates of Russia's WTO accession stress that the reduction of import tariffs will take place gradually to give firms time to bring their policies in line with international standards and boost their competitiveness.

Economist Aleksei Portansky, who heads the information department of the Russian committee for WTO entry, says being outside the organization has put Russian exporters and producers at a clear disadvantage on global markets.

"By becoming a member we will be able to start lifting the discriminatory restrictions affecting our exporters and producers," Portansky says. "We are still excluded from the process of drafting rules governing international trade, which hurts us now and will hurt us even more in the future. Also, we cannot make modernization plans without being involved in the free exchange of goods, services, and new technologies -- in short, without being in the WTO."

Vladimir Putin delivers a speech during an international investment forum in Sochi, Russia, in 2011.
Vladimir Putin delivers a speech during an international investment forum in Sochi, Russia, in 2011.


WTO membership is likely to improve Russia's investment climate with the new reassurance that Russia is expected to play by international rules.

It will also force the country to better allocate its resources and undertake much-needed agrarian and industrial reforms.

An additional benefit could be the repeal in the United States of the Jackson-Vanik Amendment, a set of trade sanctions introduced by Washington during the Cold War to pressure Moscow into allowing Soviet Jews to emigrate.

With Russia now a WTO member, Jackson-Vanik puts the United States in violation of the organization's rules and may result in unfavorable terms for U.S. exporters.

In the end, the biggest winners of Russia's WTO accession are perhaps Russian consumers, who stand to gain in terms of choice, quality, and prices of goods as foreign imports gather pace.

"We can say that we are not modernized, that we lag behind, that we are not ready," Igor Nikolayev, who heads the strategic analysis departmental at the FBK audit firm, says of Russia's growers and producers. "But let's view this process from the perspective of the consumer rather than the producer. If the consumer gains from it, then the producer will gain from it, too. Planned economies are centered on producers, and we've all seen where this type of economy leads."

Danila Galperovich of RFE/RL's Russian Service and Rustem Iskhakov of RFE/RL's Tatar-Bashkir Service contributed to this report
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Comment Sorting
Comments
     
by: Anonymous
August 24, 2012 07:58
We saw openness initiated by Gorbachev and later on massive scale by Yeltsin.

Russians also soviets were at receiving(or correctly deceiving) end then and some individuals looted pubilc money.

Oil was one of the key component that kept Russian economy later in good shape.

As for now it seems that Russian export will fetch better returns, question remains can they compete with chinese.

Chinese export industry is aggressive and will overpower them, Even Americans are badly affected.

And as for investment to come it will sure but what about disturbing local economy and the unemployment issue.

Anyway Opening -Up comes at a price and on positive note we should hope Russia and Russians progress in long term.
In Response

by: Marko from: USA
August 24, 2012 10:40
In broader terms, the Russians negotiated a pretty good deal-- in large part because of Putin's (apparently genuine) ambivalence about the WTO and his willingness to walk away. The US and Western Europe initially demanded what amounted to economic colonization-- effective control over Russia's banking system and insurance industry and far more access to Russia's energy market. All of that would have been damaging to Russia's economy, and they (the West) got relatively little there in the end.OTH, I would be worried if I am a Russian making a living in civilian aerospace, the auto industry, or agriculture. The former two sectors are more or less dying (or being taken over by the West or Japan) anyway. WTO access will hasten their demise.Agriculture, however, has prospered quietly under Putin. It will now have to compete hard to maintain its share of the domestic market and adapt to become more competitive globally. Thus, there will be tradeoffs, but, in the end, I am inclined to agree with the Luzhkov and Zyuganov types on this one-- this won't be a winner for Russians -- who would have maintained greater flexibility by keeping the world's 6th largest (according to the traditional less politicized rankings) economy out of an organization whose rules were originally written to benefit others-- not Russia. This may be an incorrect prognostication if American legislation like Jackson-Vannik and the stunning political gridlock in Washington keeps the world's top, and most efficient, agricultural producer partially out of Russia's domestic agricultural market.
In Response

by: Eugenio from: Vienna
August 24, 2012 11:21
You are saying: "question remains can <Russian exports> compete with chinese?" Why would they need to compete with the Chinese? The two countries have two completely different macroeconomic structures: the PRC is a resource-POOR economy with very low labour costs, making it necessary for the Chinese to focus on producing (cheap and thus internationally competitive) industrial goods and then export those to the global market.
Russia is a resource-RICH economy that makes it possible for the Russians to export to the global markets such products as oil, natural gas and grain (that the Chinese just do not have) - prices on all of which have remained constantly high over the last 10 years.
The only area in which Russia and China could really compete is the global arms trade, where Russia has traditionally been the second biggest exporters and where China is making advances over the last years. But other than that, there is no need for the Russian and Chinese exporters to compete with earch other - the export structures of the two economies just differ from each other too significantly.
In Response

by: Eugenio from: Vienna
August 24, 2012 11:59
Thank you Konstantin for using my name to post these interesting thoughts.
In Response

by: Konstantin from: Los Angeles
August 30, 2012 11:48
Lying again, Eugenio!
I never use any other name but my own!
Unlike your Gelena habbit to spoil air behind my back,
To get me and my mother killed, Russia CIA killed her 7/7/2012,
or Jacks habbit to accuse himself of being somebody also, I am strait - you must know!

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