Eighteen years of solitude: Russia and the WTO

Since he took office, President Medvedev has espoused his dreams of a modern Russia: economically advanced, innovative, and democratic. Yet most observers would agree that Medvedev’s Russia remains more of a mirage than a reality. Russia’s economy is highly dependent on raw material extraction, elections are uncompetitive, and despite the great legacy of Soviet education and science, Russia ranks among the least inventive countries per capita.

Nonetheless, the World Trade Organization is expected to approve Russia as the 154th member of the last major international organization from which it has been conspicuously absent. On Nov. 10, the WTO’s Working Party for the accession of Russia concluded negotiations. Finally, after 18 years, only formalities remain. Russia’s $1.5 trillion real GDP makes it the 11th largest economy in the world and its expected entry into the WTO is an important step towards global trade liberalization and should, in the long-term, transform Russia’s economy.

Benefits

In preparation for accession, Russia has already shown improvements; in its latest “Ease of Doing Business” report, the World Bank categorized Russia as “improved the most over time.” Russia’s investment climate should continue to improve thanks to the WTO’s binding rules and key mechanisms for the resolution of trade conflicts, which will force Russia’s bureaucracy to modernize, strengthen property rights protections, and reduce tariffs on foreign goods.

Russian steel, chemicals, and the Russian Trading System (RTS) should all benefit in the short-term from an improved business climate, while the Russian consumer should witness a reduction in prices. Russia’s most vulnerable industries, notably the heavily subsidized automobile and agricultural sectors, have been given seven- to eight-year lead times to become more competitive.

As a result of accession, the World Bank expects Russia to grow an average of 3.3 percent in the medium term and up to 11 percent in the long term.

Russia needs the WTO if it hopes to build an advanced economy not so heavily dependent on raw material exports. In addition, participation in the development of global trade guidelines plays into the hands of Russia’s self-perceived role as a great power. With so many positive results on the line, why has Russia’s accession to the WTO dragged on as long as it has? After all, since Russia’s initial application in 1993, more problematic countries in terms of WTO values — such as communist China, Cuba, and Vietnam — have successfully joined the WTO.

Barriers

After the fall of the Soviet Union, the new Russian Federation applied for membership. However, during the chaotic transition to a market economy, Russia’s leaders were unable or unwilling to divulge enough political capital to WTO negotiations. After Putin came to power, he initially prioritized WTO accession, but his relationship with the West quickly soured and, as a result, WTO negotiations stalled once again.

More recently, after the 2008 Russo-Georgian War and Russia’s subsequent recognition of Georgia’s breakaway republics, Georgia was unwilling to cooperate. Because the WTO operates through consensus, Georgia’s demand that Russia recognize trade with these breakaway republics as trade with Georgia became a hotly contested issue. The compromise reached will allow a Swiss-chosen private company to monitor Russia’s trade with Abkhazia and South Ossetia. For Georgia, this was a major political victory because it achieved more than was even thought possible prior to the war. Russia’s confidence allowed it to be more pragmatic knowing full well that the observation regime will be powerless to affect the status-quo.

The U.S.-Russian Relationship

Russia’s WTO accession will indirectly lead to an improvement in U.S.-Russian relations. The current trade volume between the two powers is minimal and the relationship is almost strictly limited to issues of security. Considering this limited environment, it is not surprising that dialogue between the two countries continues to be dominated by Cold War and zero-sum attitudes. Increased trade between the two countries should evolve the U.S.-Russia relationship away from suspicion and toward pragmatism, as it has between the U.S. and China or Saudi Arabia. Importantly, the repeal of the Jackson-Vanik amendment, a Cold War relic that placed sanctions upon the communist regimes of the time, would indicate a step in this direction; most analysts predict that Congress will likely prioritize business interests over outdated politics.

Unless Jackson-Vanik is repealed, U.S. business will be at a disadvantage. Once Russia enters the WTO, Jackson-Vanik becomes illegal under WTO rules and could usher in sanctions from Russia, which is adamant about the repeal of the discriminating amendment. Initially enacted in 1974, Jackson-Vanik punished countries that restricted the emigration rights of their citizens and operated a planned economy. No country is named explicitly in the legislation, but it clearly targeted the Soviet Union. Today, Jackson-Vanik exists as a symbolic measure that runs solely on the fumes of Cold War politics. Its relevance is debated because Russia no longer restricts its citizens’ rights to emigrate and features a market economy (if imperfect).

Reservations

Although the accession of Russia is a critical step towards heightened accountability, deeper economic modernization, and further integration into the international system, the WTO can hardly be called an instant “game changer” or even a guarantor of economic growth for Russia. The stalled Doha Round talks demonstrate the dissatisfaction of many WTO members with the one-sided nature of the free trade equation between underdeveloped and developed economies. Analysts have pointed out that Russia’s weak and corrupt institutions make domestic firms uncompetitive and incompatible with a modern global economy; WTO membership for institutionally analogous post-Soviet countries like Kyrgyzstan and Ukraine has failed to create more advanced and competitive economies.

Nevertheless, WTO accession will, in the long-term, not only foster growth, but also help to improve the legitimacy of liberal market values in Russia. The WTO will reflect positively on  Russia’s business environment, encourage investment, and spur innovative growth. Russia would not need the WTO if its intentions were to maintain the status-quo politically and economically. The country’s WTO entry shows that the Russian leadership is aware that it cannot aspire to be a global power in the form of an isolated raw materials exporter.

Source: Partisans.org