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Article in “New Europe” on Russia since its accession to the WTO

Silvana Koch-Mehrin contributed an article to “New Europe” on Russia’s accession to the World Trade Organisation (WTO):

 

Russia since accession to WTO

 

China’s accession to the World Trade Organisation (WTO) in 2001 was an important milestone in its development into a global centre of economic growth. Will China’s WTO accession story be repeated for the Russian Federation?

Accession overdue

Russia is the last G8 and BRIC country to join the WTO. Its accession was overdue, especially since analysts revealed that the four large emerging countries of Brazil, Russia, India and China had already reached the peak of their potential growth. Over the past decade the four BRIC countries have been the driving force for the global economy. They generated almost half of total global growth; for a time their economic output was growing annually by double-digit percentages. For Russia, current forecasts suggest only 2.5% growth. In the Global Competitiveness Report 2011-2012 produced by the World Economic Forum, Russia slid three places to rank 66th out of 142 countries. For the EU this is not insignificant – Russia is its third largest trading partner after the United States and China. 75% of foreign investments in Russia come from EU countries. Of the 27 EU Member States, Germany leads the way. Weak economic growth in Russia can also be felt in this country. Much hope is therefore pinned on WTO accession. Russia requires greater levels of competition and needs to open its markets further in order to tackle long overdue internal reforms. For example, a greater diversification of the economy is necessary; in previous years the Kremlin has relied on the fact that the healthy flow of revenue from energy exports was able to continue and expand. However, the EU has been successful in its attempts to achieve a better balance of energy imports, and the high price of oil, upon which the Russian economy depends, cannot be guaranteed either. Before the 2007/08 financial crisis the Russian economy was growing quickly and steadily. The demand for oil, gas and metals from Russia was high. This led to the assumption that domestic industrial production could be neglected.

Changing perspectives after the recession

The slump that occurred from 2009 as a result of the recession forced a change in perspectives. President Putin recently promised the creation of 25 million new jobs in the manufacturing industry. However, how and where they will be created remains to be seen. The British newspaper “The Economist” considers there is potential, particularly in the aviation, automobile, turbine and other mechanical engineering sectors. Returning to the issue of WTO accession, however, according to World Bank estimates, Russia can bank on additional growth opportunities of 3.7% of GDP by 2016 and 11% by 2021. Growing consumer demand among the 140-million-strong Russian population could also provide a boost to growth. For this to happen though, there must be better opportunities for fresh investment and foreign involvement in Russia. The nightmare of bureaucracy, corruption and mafia in Russia is notorious. The World Bank ranks Russia at a lowly 112 in the “Doing Business” table. Accession to the WTO may help to change this. It means Russia has to reduce customs duties, abolish subsidies that distort trade, pass new veterinary and plant protection legislation and protect intellectual property. On the import side, the average customs duty rate will be lowered. Russian customs duties on commodities will fall on average from 10% to 7.8%. The reduction in duties stipulated covers a broad range of products, whereas Russia has negotiated a number of transitional periods.

Recycling fee and other protectionist measures

Russia’s behaviour since joining the WTO has, however, caused astonishment, frustration and anger. Only one week after accession to the WTO, Russia introduced a discriminatory recycling fee for imported cars. Foreign vehicle imports are, from now on, charged a recycling fee on entry of at least €350 for personal vehicles and €15,000 for heavy goods vehicles. This means that it now costs more to import motor vehicles than before accession to the WTO. What a world record! Russian manufacturers, by contrast, only have to guarantee that they will take back old vehicles and will dispose of them at their own expense. This happened just one week after Russia had committed to non-discriminatory treatment with regard to imported goods and services. The duties on new heavy goods vehicles have dropped to 10% and in three years will fall to 5%. For heavy goods vehicles that are between three and seven years old the duties have fallen to 15% and in three years will fall to 10%. Russia is dealing with its trading partners in the same way as before – as though it were not a member of the largest liberalisation club.

In June 2012 the European Commission published its ninth report on trade barriers. This report suggested that Russia had, in the preceding eight months, introduced a range of potentially protectionist measures. An example is its ban on importing ruminants and pigs, which contradicts WTO regulations. Since starting its observations in October 2008, the European Commission counted 86 measures in Russia that could be considered restrictive to trade. The only country with a greater number than Russia was Argentina, where 119 such measures were found. On 6 December 2012 the EU requested the establishment of a WTO panel on importation restrictions in response to the behaviour of the South American country.

European trade Commissioner Karel De Gucht has also threatened Russia with a WTO dispute settlement case. He explained that if Russia does not lift some of the existing protectionist duties and import restrictions, the EU will defend its interests via the WTO Dispute Settlement Mechanism. These comments were made at a seminar entitled “EU-Russia trade – will the WTO change business?” which was hosted by me and my Estonian colleague Kristiina Ojuland on 5 December 2012 but are still valid these days as Russia´s discriminatory law on recycling fee for imported cars is still in place.

China’s success story shows that membership of the WTO can have a positive impact on the economy. As the markets were continually being opened, it created a more attractive environment for trade and investment. Since joining the WTO the country’s trade revenue has grown by around 300%. The Chinese have a more strongly diversified economy. According to current OECD prognoses, China could displace the USA as the largest economic power in 2016. Russia, however, relies on a small number of industries; it is heavily dependent on developments in raw material prices. Without modernising and diversifying, Russia will not be able to follow the same trajectory as China.