EU considers Russia, other BRICS too well off for trade privileges

By bne IntelliNews May 13, 2011

bne -

Russia is no longer an emerging market according to the cash-strapped EU, which wants to get rid of the preferential trade terms implemented in the 1990s to support Russia and the other BRICS' transitions to free-market economies. The proposal is the most concrete example yet that the world economic order is changing as the leading emerging markets begin to mature.

"Almost 40% of our current preferences benefit Russia, Brazil, China, India, and Thailand, which no longer need preferences to maintain and build upon their success," Trade Commissioner Karel De Gucht told reporters on May 10 following the annoucement by the European Commission that it plans to exclude middle-income countries such as Russia and Brazil from special rates under the EU's General System of Preferences (GSP).

The decision to cut benefits is viewed as the most significant revamp of the trade system since the preferential scheme was first introduced in 1971. "Global economic balances have shifted tremendously," De Gucht said. "If we grant tariff preferences in this competitive environment, those countries most in need must reap the most benefits."

Currently 176 countries are entitled to the special tariffs that together account for 4% of total trade turnover. Under the proposals, the EU will cut about 80 countries from the list. "Trade preferences do not make much sense anymore for relatively well-off countries such as Russia, Malaysia, Saudi Arabia or Qatar," De Gucht said.

But the proposal might face challenges as it goes through negotiation with 26 other commissioners; at least 10 commissioners have already expressed their opposition to the proposal, which must be approved by the European Council and European Parliament.

Bear up

The proposal is the most explicit acknowledgement by the EU of Russia's rising economic power. The EU is by far Russia's biggest trade partner and trade volumes have grown quickly over the last decade. The EU accounted for 49.5% of Russia's trade turnover in 2010 after the total volume of business increased more than four-fold from $66.3bn in 2000 to $298.8bn in 2010, according to investment bank Renaissance Capital. German-Russian trade turnover alone was up by just under a third in 2010 to $5bn - about as much as Russia's entire foreign trade turnover a decade and half ago.

A final list of countries that are to be excluded from the GSP has not been set yet and the Commission said it would like the new rules to be in place by January 1, 2014. The countries they eliminate will be offered the opportunity to secure alternative concessions by signing free-trade deals, EU officials said. However, while Ukraine is lobbying hard for a free-trade agreement with the EU, Russia is primarily focused on building up its own trading bloc, the Customs Union, with Kazakhstan and Belarus that came into force last year.

Under the new EU scheme proposed by De Gucht, countries "not classified by the World Bank as high-income or upper-middle income countries during three consecutive years" can enjoy the GSP benefits.

Russia's per-capita income has increased nearly 10-fold over the last decade to $15,900 at the end of 2010, according to the CIA Factbook, making Russia a "developed middle-income country" according to the most recent UN Human Development Index report.

Western European companies have responded to the spike in disposable income by flocking to Russia and capitalising on the fast-growing and increasingly wealthy consumer market. Russia's TV ad spending is expected to become the biggest in Europe and in the top 10 globally as soon as 2013, according to media experts. Likewise, Russia is so far on track to become the largest car market in Europe in the next five years.

Even if the EU proposal is implemented, it would have only a moderate impact on Russia's external trade. Russia's exports are largely driven by natural resources, including oil, revenue from which rose 22% in the first quarter of this year to $112.8bn; this was due to higher than expected oil prices and unrest in the Middle East and Northern Africa. However, as the economy starts to recover, the value of Russia's imports, mostly manufactured products and retail goods, soared to $60.2bn, twice their level a year earlier.

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