Russia's WTO accession fails to bring any benefits

By bne IntelliNews July 8, 2013

bne -

It took Russia 18 years to get into the World Trade Organization, but as the one-year anniversary approaches most Russian businesses are starting asking why the government bothered. None of them report any economic benefits, while several important sectors are actually a lot worse off. And if anything, the simpler trade rules have actually made Russia's relations with the rest of the world worse, not better.

That is the conclusion of several surveys and reports issued ahead of the anniversary of Russia's accession to the global trade club on August 22. At the time, Russia's membership was hailed as a real step forward in modernising the Russian economy and a badly needed goad that would force the Kremlin to press on with reforming and diversifying the economy. However, it seems that the benefits, if any, will arrive much further down the road.

"The majority of Russian businesses have felt little or no change following Russian accession to the WTO in 2012," Global Counsel, a consultancy belonging to Peter Mandelson, a former British politician and EU commissioner for trade, said in a report released at the St Petersburg International Economic Forum on June 20-22. "The Russian authorities expect that the impact of new competition will begin to be felt after three to five years, but the full impact could take much of this decade to emerge."

In the spring, the Strategy Partners Group (part of state-owned banking giant Sberbank) surveyed 2,000 owners and top managers of Russian companies with annual turnover of more than $100m. More than half of them said they had expected a positive impact of WTO accession on the Russian economy immediately following accession, but now more than 50% think that there has been no impact at all, with 32% thinking that the impact was negative.

These findings were mirrored in a separate survey conducted by the Association of European Business, although with the caveat that these foreign businessmen, as opposed to their Russian peers, remain optimistic about the benefits from the club's membership in the medium term: two-thirds of the AEB's members report no change in their business from the WTO accession.

Down on the farm

The one area where the WTO accession is regarded as having a significant impact is in the agricultural sector - and that was extremely negative. Russia is phasing in the compliance to the WTO rules over eight years, with the most vulnerable sectors, like automotive, required to meet the new rules last. But with agriculture all the restrictions were dropped from day one.

"WTO entry has to some degree exposed a lack of price competiveness and a dependence on state support. The pork industry in particular has felt the impact of a reduction in in-quota tariffs to zero by some Russian companies," says Global Counsel. These problems are already causing a backlash in the Duma where companies are lobbying for some more protection, or at least compensation.

Opposition lawmakers from the Just Russia party (that voted against WTO accession) claimed at a panel discussion held on June 20, which was attended by groups lobbying on behalf of engineering, agriculture and clothing industries, that Russia has lost "billions of dollars" due the cut in import tariffs and lost business for domestic companies.

"The WTO is bringing us into an [economic] depression," Konstantin Babkin, head of harvester producer Rostselmash, was quoted by the Moscow Times as saying during an emotional speech, adding that his industry is amongst the hardest hit by the lower tariffs which have opened Russia up to cheaper imports; milk imports alone have grown 17% in the last year, making Russia the biggest fresh milk market in Europe.

Babkin has threatened to challenge the accession in the constitutional court on the grounds that Russia still doesn't have a representative office at the WTO headquarters. However, the Kremlin have ignored their complaints and is very unlikely to reverse the WTO accession, which was personally championed by Russian President Vladimir Putin.

Even so, the Kremlin itself is in hot water with the EU by imposing administrative barriers on the more sensitive sectors. The EU has threatened to sue Russia after it imposed an auto recycling fee on foreign, but not domestic, car makers in an effort to protect its domestic manufacturers. On the other side of the coin, Russian producers have not taken advantage of the opportunities that they now enjoy from the nominally freer trade with the rest of the world.

Moreover, several commentators say there is a serious lack of Russian lawyers that are au fait with WTO rules and Russia has not brought a single case in the WTO to protect the interests of its own manufacturers in other markets. "Many Russian businesses do not fully understand the implications and potential benefits of WTO membership in terms of a more level global competitive playing field. This has often encouraged a defensive position in which WTO entry is seen as something for which industry must be compensated with domestic protection or subsidy. In some cases, the Russian government seems to see the problem the same way," says Global Counsel. "Both in government and in the private sector, the first year of Russian WTO membership has highlighted a clear shortage of qualified experts on WTO law and procedures."

Wider problems

The WTO accession has been a disappointment, but some analysts say that the problems are symptomatic of a more general reduction in Russia's competitiveness in the global market place, which has caused the economy to slow even more dramatically than was expected at the start of this year.

"The WTO accession has done little good to the economy so far. Instead, Russia has to spend more resources protecting the uncompetitive sectors of the domestic economy than it benefits from through its exporters having access to international ones. Coupled with the cooling off of the commodity markets these factors suggest that no breakthrough can be expected over the next year, at least," say analysts at Russian investment bank Uralsib.

Still, the majority of commentators still believe that the WTO accession was an important step for Russia and that over the longer term the increased competition will benefit the country and its economy. The point of increasing the competition is that domestic firms will have to work harder and more efficiently to stay in front, but for this to work they actually have to make the effort.

At the moment most companies and several elements in government are still hiding behind protective barriers, looking backwards at the loss of their easy life, rather than looking forward to the benefits that easier access to bigger markets will bring.

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