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Russia: Entry Into WTO May Be Slowed

Russia's admission to the World Trade Organization may be stalled until 2007 due to disagreements with the European Union and other key partners, a negotiator warned last week. Energy tariffs have become a major barrier, as the EU seeks equal prices while Russia fears inflation and harm to consumers at home.

Boston, 20 August 2002 (RFE/RL) -- Russia is facing a conflict in its campaign to join the World Trade Organization because of efforts to curb inflation by keeping energy prices low.

Last week, Deputy Economic Development and Trade Minister Maksim Medvedkov vowed that Moscow would not agree to raise domestic energy prices to export levels, as demanded by its European Union trading partners in WTO membership talks.

In an interview with the newspaper "Gazeta," Medvedkov said: "This is not a standard requirement. We cannot commit ourselves to this."

The comment was consistent with a statement by Economic Development and Trade Minister German Gref last month, rejecting the EU demand. Gref called it part of "WTO-plus" formulas that go beyond fundamental requirements for membership in the global trade group.

The disagreement over energy pricing is one of several that may delay Russia's membership bid, but it is perhaps the most basic. Other issues at an impasse include unfettered foreign access to Russian markets, financial services, and deregulation, Medvedkov said. He warned that serious negotiations might be put off until 2005 with membership only likely in 2007, far later than the date of 2004 forecast by the Economic Development and Trade Ministry last week.

Despite Gref's complaint about demands that go beyond standard requirements, all countries must negotiate bilateral agreements for WTO membership. Russia has been in talks with a working group of 64 countries for months. Energy may be one of the toughest issues to tackle because of its importance to the economies of Russia and its trading partners. Energy tariffs could put Russia's economy at odds with much of the world.

The EU's concern with Russia's energy pricing is at least twofold. First, Russia has pursued a policy of subsidizing gas tariffs by charging higher prices for exports to the EU. Cheap energy also forms a major component of Russian products, which enjoy the advantage of subsidies over EU goods. Russia also supplies about one-fourth of the EU's gas.

But Russia's industrial users pay only about one-sixth of export prices to the EU, while consumers pay about one-eighth, according to Hermitage Capital Management, a minority shareholder in gas monopoly Gazprom. Russian officials have argued that equal tariffs are impossible until incomes equal those in the EU.

Even so, the Russian system seems to show clear signs of distortion. Consumers in Armenia, for example, have one-third the income of those in Russia but they pay 2 1/2 times more for Russian gas, Heritage said in a presentation on Gazprom in June.

The government's plans to narrow the price gaps have been slowed by economics and politics. Efforts to hold inflation in check have kept tariff hikes below levels needed to prevent Gazprom's domestic sales from running at a loss.

Although Gazprom tariffs were allowed to rise 35 percent this year, the Economic Development and Trade Ministry has recommended an increase of only 20 percent for next year. Last week, the business newspaper "Vedomosti" reported that Gazprom needs to boost tariffs by 50 percent to avoid a budget deficit for 2003.

The ministry also cut the rise for the Unified Energy Systems monopoly from 22.4 percent this year to 14 percent in 2003. Last week, the investment bank Troika Dialog noted that the gain could well be less than inflation.

The government hopes to lower inflation from 14 percent this year to between 9 percent and 12 percent in 2003. Although the Central Bank has pledged to do its part, the government sees no way of meeting its target if tariffs increase.

President Vladimir Putin has set bounds on tariffs that are both political and economic. Earlier this month, he told Gazprom chief executive Aleksei Miller that tariffs should be "directly dependent" on consumer incomes, the RIA-Novosti news agency reported.

The concern is genuine in a country where over 40 million pensioners receive average monthly payments of 1,417 rubles ($45). Other officials are more outspoken in opposition to the EU demands.

In June, Antimonopoly Minister Ilya Yuzhanov called the idea of equal pricing "economic nonsense." Russian consumers will always enjoy a cost advantage because they are closer to the sources of gas, he argued. RIA-Novosti quoted Yuzhanov as saying, "Our critics will have to put up with that."

But it is unclear how much they will tolerate and how much they will compromise. Russia and the EU have incentives to reach a WTO agreement because of trade relations and their growing energy ties. But progress may lag if Russia slows the growth of its energy tariffs in its battle to keep pushing inflation down.