Chris Weafer of Troika Dialog -
"The true merchant has no country": Thomas Jefferson
World Trade Organization membership will have no immediate impact either on economic growth, the day-to-day operations of Russia's corporations or the risk premium investors apply to investment in the country. But membership will establish a powerful catalyst for a more serious approach to economic reform and industrial efficiency. As the benefits of those changes materialize, sustainable incremental economic growth may reach between 1% and 3% annually (according to the World Bank), while a gradual reduction in the risk premium will significantly cut the discount at which Russian equities have consistently traded against global market peers.
The best way to invest in the Russia-WTO story, therefore, is to buy themes and stocks that will benefit the most from progress in the domestic reform agenda and continued economic expansion. WTO membership will put in place a series of incentives and establish a timetable for the next government's reform agenda.
Membership will set a clearer timeline for reforms
Russia looks set to conclude WTO entry negotiations, which started in June 1993, at the next meeting of the Russia-WTO working group in the middle of November and gain admittance as a full member at the WTO Council meeting in December. Membership, while not offering any quick fix to the generally poor business environment or the high level of investor scepticism toward investment risk in Russia, will nevertheless be a very important step in the government's efforts to force industries to become more efficient and to attract larger volumes of foreign and domestic sourced investment capital.
Membership will provide an improved regulatory backdrop for foreign investors and create a long-term incentive for Russian industry to become more efficient in the face of increased foreign competition. In that context, it will be a significant step that adds to hopes that the next government will prioritize increased improvement in the economy and, more importantly, start to address the perception of high country risk and increase the involvement of foreign manufacturing and service companies in the economy.
Membership will therefore create a framework for the next government to foster greater efficiency and diversification, just the 2018 FIFA World Cup will provide a timetable for improvements in key parts of the nation's infrastructure. Such timelines and external pressures can, of course, be ignored or missed. Investors will only find out over the next few years. But the greater government support for WTO membership this year, ie. after more than 17 years of indifference, does at least confirm that improving the long period of domestic preparation is at an end and now it is time for openness and investment.
The economic impact will not be immediate, but will only build over time. But the incremental trend will be net positive rather than negative given that the government is expected to use the terms and obligations of membership as the backdrop to the pursuit of a more active reform programme. Otherwise, it would not have accelerated efforts to join before the start of the next presidential term. Not all industry groups in Russia will welcome WTO membership but, over time, all sectors will be affected by it. Some will benefit from fewer export barriers; others will be forced into greater efficiency due to fewer import barriers.
European companies are initially better placed to benefit from Russia's WTO entry. Trade with the EU dominates Russia's external trade, and industry relationships have been more integrated for longer. Opportunities for US companies will be constrained because of the Jackson-Vanik amendment. But, because the terms of that amendment are specifically in violation of the terms of WTO membership, Russia will have to be removed from the provisions very quickly once it has been admitted to the global trade organization. For all the political blustering in the US Congress, Jackson-Vanik will go almost by default given Russia's entry to the WTO. Otherwise, US companies will lose out.
Following the resolution of WTO entry negotiations between the EU and Russia in mid-October, Swiss arbitration between Moscow and Tbilisi over the vexed question of border monitoring in Abkhazia and South Ossetia is reported to have led a deal late last night. The remaining issues are technical and are not expected to cause any major delay and should be resolved in time for a final agreement to be thrashed out at a Russia-WTO working group meeting on November 10-11. The next WTO Council meeting is scheduled for December 15-17, and that is the session at which Russia's membership is expected to be unanimously approved.
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