THE INSIDERS: Getting the WTO mindset

By bne IntelliNews November 19, 2012

Peter Mandelson -

In October, I witnessed the first snowfall of winter in Moscow. In between navigating the puddles of melting sludge I found most of my discussions being dominated by Russia's World Trade Organization (WTO) accession. Having spent a good chunk of my time as EU Trade Commissioner trying to get Russia's membership over the line, it was good to talk to people about the impact of joining the WTO rather than the merits of doing so. Whether talking to business or political leaders, most people were keen to know what I thought this might mean for Russia, or rather, I suspect, what we in Western Europe thought. For a system that has prioritised stability over the past decade, the accession brings the promise of change. This is inevitably generating a sense of opportunity, but understandably also some apprehension.

Readers of bne will not need me to tell them of Russia's has massive latent economic potential. You can't speak to any ambitious European business who does not sense the opportunities in Russia if they are not already operating there. Some 140m middle-income consumers, right on our eastern border. An educated workforce. Lots of land. The fiscal underpinning of massive hydrocarbon wealth - if it is well managed.

But the economic challenges seem as big now as they did a decade ago. The Russian economy is less diversified now than it was ten years ago. Dependence on energy products has risen from 44% in 2001 to 69% at the end of 2011. The Russian state is still too dependent on energy revenues. Foreign capital is nervy to put it mildly. Russia's key trade relationship with the EU remains turbulent and difficult. Where does WTO entry fit into this picture? Does it fit in at all? I believe potentially it does.

Saving Russian importers

How much will WTO membership actually change for traders? The Russian average tariff for manufactured and agricultural goods will fall to the lowest among the BRICs over the next five years. This will probably save Russian importers several billions a year, but the tariff cuts are relatively small. Russia has also agreed to bind export duties on over 700 products. There are new tariff rate quotas on meat and wood products, which are key for the EU and important imports for the processing industries in Russia. Overall, the change in trade profile is not large - especially when compared to the equivalent change in China's 2000 accession. Nevertheless, they will undoubtedly make Russian more attractive as a trade partner.

It is my hope that WTO accession is a sign that Russian leaders understand that trade is a vital tool to build wide-ranging, mutually beneficial and durable relationships. The key here will be Russia's own orientation. If it sees its own economic sphere as rooted chiefly in the Eurasian Customs Union (of which the other two members are not members of the WTO) and its regional ambitions, it will not make the most of the opportunity for closer economic integration with partners around the globe.

On investment, the basic challenge hasn't changed in the ten years that I have been closely involved with doing business and trading in Russia. Russia can be a risky and unpredictable place to do business as a foreigner - it is ranked at 112th in the World Bank's latest "Doing Business" survey. Perception of "Russian risk" among international investors has risen to alarming levels, prompting significant capital flight - over $80bn in 2011.

Here the WTO entry could play a crucial role. The bottom line is that WTO entry matters for what it implies about the political and economic outlook of the state that seeks it. The policies that really make a difference for the acceding state tend to be the package of reforms and capacity building that accompany accession. Joining the WTO generally includes a certain level of reform and openness, and a tolerance for foreign competition. This is why it acts as a useful signal to inward investors. In principle it is something on which Russian firms could trade in attracting joint-venture partners.

However, in Russia's case this has been somewhat uneven. In large part I fear this is because the leadership has not actually seen the value of WTO membership in these terms, but as a club that Russia should not be outside of for power political and national pride reasons. Leaders in China and Vietnam saw it as a vital signal to the world of their own mindset and intentions, and used it to great effect to attract foreign investment. Russia's signals are a lot more ambiguous.

Nowhere are those signals being read more carefully and closely than in Europe. For Russia's trade relations there is no getting away from the upmost importance of the EU-Russian relationship, to both parties. The level of interdependence is very high - the EU accounts for half of Russia's exports and Russia is the EU's fourth biggest export partner. Although the US is often seen a key geostrategic partner for Russia, the EU trade relationship with Russia is 16-times larger than that between the US and Russia.

Russia's view of Europe swings between enthusiasm and ambivalence. I have always believed that Russia is the answer to a set of questions for Europe and vice versa. How does Russia prosper off its energy resources, diversify its economy, integrate its economy with the global economy? How does Europe create energy security, expand the trade networks that have built the Single Market, unlock new supply chain opportunities? The answer to all these questions is some variation on a better, closer, more long-term relationship between Russia and the EU. Anybody who tells you different is missing the bigger picture.


Is Russian WTO entry a "game-changer" for EU-Russia relations? Probably not. Trade relations remain tense in many respects. Irritants like the new Russian recycling tax for cars, implemented only weeks after WTO entry are seen in Brussels as a dispiriting sign of things to come.

Nevertheless, WTO membership can be the first step in re-setting the foundations of the relationship. It has been hard to organise a trading relationship on the scale of that between the EU and Russia outside the framework of the WTO. Russian accession offers a real opportunity to put in place the structures for a more functional, productive and valuable relationship that delivers for both partners. There will continue to be disputes; in an ideal world these disputes will be resolved through WTO courts, and less politicised.

Overall, the impact of Russian WTO accession is hard to gauge. It is hard to gauge because accession is a necessary, but not sufficient condition for bringing about change. Exploited to its fullest, WTO accession provides the opportunity for strengthening Russia's relationship with Europe, building wider trade links around the world, diversifying the economy, and securing foreign investment. The opportunities are great, but Russia must take further action to realise them. Whether this will happen is dependent on whether Russia sees accession as the end of the process, or just the beginning.

Peter Mandelson was European Trade Commissioner between 2004 and 2008. He is now Chairman of Global Counsel

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