Guest Post: Risks And Rewards Of Russia In The WTO

By Fredrik Erixon

Russia’s bid to join the World Trade Organisation (WTO), filed in 1993, has been the longest accession saga in the history of the world trade body. Yet now, after bilateral deals with the US and the European Union that secured their support for the membership bid, Russia looks set to join the pantheon of rules-based global capitalism at some point next year.

This is welcome news. Russia would benefit from being part of the WTO club. Its exports will not get much of a boost because they are dominated by the hydrocarbons and minerals (representing more than two thirds of total exports) and they are already traded at zero or very low tariffs. But Russia will benefit from lower prices of imported consumer and industrial goods, and, hopefully, from an increase in foreign direct investment (FDI).

If the Kremlin also decides to follow the WTO rule book, membership will help to constrain Russia’s erratic trade policy, especially its regular descents into protectionism. Naturally, that would be of value for exporters to Russia (and for importers of Russian goods, too, as Russia regularly uses export taxes), but the biggest beneficiary would be Russia itself. The biggest casualty of protectionism is always the country that imposes such measures.

Other countries would benefit from Russian WTO membership through a reduction in tariffs – average tariffs will go down from 12-14 percent to around 8 percent – and from an improvement in their predictability. The sectors that will benefit specifically from a reduction in tariffs are civil aircraft, construction, agricultural and scientific equipment, and medical devices.

Russia will need to introduce greater transparency (and less discrimination) in its system for product standards, licenses and other so-called non-tariff barriers (NTBs). Moreover, sectors dependent on intellectual property, such as chemicals and biotechnology, will benefit from having recourse to the WTO’s accord on intellectual property rights (TRIPS) to discipline Russia’s shambolic IPR policy. Finally, foreign banks and insurance firms will be granted bigger opportunities to do business in Russia.

But there are also risks and downsides to having Russia as member of the WTO. The biggest risk is that the Kremlin will simply disregard rulings against Russia in the dispute-settlement system, the backbone of the WTO. As the WTO itself cannot enforce rulings that require policy change in a country, the system requires that countries respect the authority of the dispute-settlement body and that bigger and more powerful countries avoid playing power games with smaller nations over rulings.

The case for respecting rulings is simple: it is in everyone’s interest that countries adhere to agreed rules. The weakness is the same as for all systems that depend on enlightened interest for a common good: some may free ride on the system in the belief that it benefits them, at least in the short term. And if some are free-riding, others will follow. And the system will unravel.

This risk is underlined by Russia’s recent history of flaunting international agreements (and, as in the case of the Energy Charter Treaty, withdrawing from agreements) in the belief that no one would have the courage to fight the Kremlin to the bitter end.

Russian membership will also add a new layer of difficulties for WTO negotiations, like the current Doha Round. Russia will be part of the protectionist wing of the membership and will resist in areas that are central to world trade today and in future, like freeing up services trade, cutting red tape that prevents trade, and limiting the freedom to subsidize domestic firms at the expense of foreign competitors.

It will also enforce the opposition to addressing “old” issues, like reducing or eliminating tariffs on consumer and industrial goods. Russia’s manufacturing sector is weak – it only represents 6-7 percent of Russia’s export – and suffers from the Dutch disease: the heavy reliance on hydrocarbon exports have pushed the real exchange rate to such a degree that the manufacturing sector has suffered. Many industries are saddled with old Soviet technologies, and they survive on subsidies and border protectionism.

There are positive signs that Russia is keen to change its economic model. The new Kremlin rhetoric on modernization and the privatization plans suggest that energy and state-based economic authoritarianism is on a downward trend. The new dawn in its membership bid for the WTO is also a good sign. But the signs are far too few to be upbeat about Russian economic policy. Like before, optimism over the WTO accession can soon shift to pessimism. The old model is entrenched in the Kremlin economic psyche and there are many powerful figures that dislike the idea of being constrained by international agreements or increased foreign competition. President Medvedev has now secured the support from the US and the European Union for its WTO bid. Now he needs to take the fight with Kremlin colleagues and oligarchs. That may become a far bigger problem.
Editors Note: Fredrik Erixon is director of the European Centre for International Political Economy (ECIPE), an economic think tank based in Brussels
The Financial Times