MOSCOW BLOG: Why is Russia's WTO accession important?

By bne IntelliNews July 11, 2012

Ben Aris in Moscow -

It's done. After an 18-year humiliating wait in the anteroom, Russia is now a fully paid-up member of the world's biggest trade club after lawmakers ratified the World Trade Organization (WTO) protocol on July 10.

Why is accession important? Membership comes at a very real monetary cost: Economic Development Minister Andrei Belousov put a number on it, telling Duma deputies WTO accession could mean $13bn of lost revenues due to imported competition through to 2014. But the Kremlin is willing to accept this in exchange for the increased competition in the market place that is designed to force Russian companies to modernise and become more efficient.

That is the most widely quoted benefit from accession, but there are more and less obvious benefits. It is hard to access just how important the increase in competition will be. The state is struggling to push through reforms to liberalise the market, but it is hoped that the pressure of competition will highlight where the weaknesses are and change the nature of reforms from the theoretical speculation of what Russia "should do" and put the reform effort on a more pragmatic "what we need to do" basis.

Where Russian owners have been mainly focused on abusing their market power and/or corrupting officials to milk the system, tap state funds or charge excessively high margins in the past, now these same owners will have to use their connections in the government to push through market-levelling legislation and administrative regime changes in order to better compete with their foreign rivals. Accession should (slowly) bring about a sea change in the mindset of how owners work with the government from here on in. Well, that is the hope anyway.

However, less widely acknowledged is that Russia is already in a great position to capitalise on WTO accession in that it already runs one of the more open trade and capital account regimes among the big global emerging markets. Brazil has imposed special taxes on inbound capital to cool its capital market and stop the real appreciating. China doesn't even pretend to run an open currency or trade regime, and despite the huge investment there foreign companies have a hard time making money or getting profits out. And the administrative trade barriers to foreign business in India are legendary.

In this set-up, Russian companies (and foreign companies) are in a much better position to capitalise on the free flow of goods and capital that WTO membership offers. And it is already happening: bear in mind that a quarter of the $85bn of capital flight in 2011 was actually Russian companies reinvesting profits earned from their foreign assets abroad. (These profits never reach Russian shores, but are included in the capital flight numbers because of an accounting quirk.)

There is already a steady stream of consumer-related businesses arriving in Russia, such as the fast food companies KFC and Burger King that arrived last year. But this stream could turn into a flood as Russia is already on the verge of becoming the largest consumer market in Europe and the first trade barriers to fall following Tuesday's vote will be those on consumer goods.

But maybe the biggest and most important benefit that WTO membership will bring is that it should bring the price of goods and services down.

The cost of living in Russia (and especially Moscow) is famously high. Journalist Yulia Latynina once poignantly asked why a cup of coffee in Moscow cost as much if not more than the same in London or New York when the average income was less than half of those in the west.

The reason, of course, is the closed nature of the Russian market that allows big companies to charge huge margins with impunity, which in turn has led to the creation and astronomical growth of a super-rich class made up of businesspeople who successfully set up and capture any market niche. That should start to change.

This will have important political consequences. Going into the Duma elections last year, a survey found the number one biggest concern amongst voters was the high cost of living. WTO-inspired competition could start to bring down prices from this year to a level more appropriate to Russia's income levels. Making life more affordable would make life better, aiding President Vladimir Putin's popularity. If he does have ambitions to stand again for the presidency in 2018 (the gossip in the Kremlin is that he won't, but that could change), then he will be able to point to lower prices as a real and significant (and vote-winning) achievement in this term in office.

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