What Awaits Russia in the WTO

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December 2013
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What Awaits Russia in the WTO

March 2012

The main problem of Russia’s accession to the WTO is that Russian manufacturers are unprepared for taking advantage of WTO membership, government officials believe. Meanwhile, manufacturers themselves are not optimistic although Russian authorities keep on assuring them of governmental support for the most vulnerable industries.

Support commitments are in place, but specific details have yet to be revealed

First Deputy Prime Minister Igor Shuvalov

“The Ministry of Agriculture and the Ministry of Economic Development are working on the sectors that may be adversely affected by the ratification of Russia’s protocol of accession to the WTO. It is important to ratify the protocol by the end of July this year, and we are dealing with this as instructed by the Prime Minister.”

“The main problem we see is that our industries are unprepared for taking advantage of the WTO,” Deputy Economy Minister Andrei Slepnev told a news briefing at RIA Novosti in late January, adding that companies have difficulty spotting niches in external markets. According to him, not so many industries remain that may be exposed to a confined impact, for example, the agricultural engineering, automotive, and, possibly, wood processing industries. As regards agriculture, Mr. Slepnev believes that the situation there is good. Further opportunities come from the fact that Russia has not made any public procurement commitments as part of its WTO membership, he said.

Russian authorities state their possible support but specific areas have yet to be defined.

Specifically, the Russian government is exploring the possibility of providing support for certain business sectors that may incur losses due to Russia’s accession to the WTO, First Deputy Prime Minister Igor Shuvalov said on January 31.

According to Mr. Shuvalov, companies, farms, and sectors will be given support only if their economic problems result from Russia’s accession to the WTO. “This also concerns industrial production. We should assess how adversely the level of customs tariff protection impacts domestic manufacturers. If there’s no such thing as an adverse impact, and a producer is found to be in the same situation as before July 2012, then this is merely a desire for additional support. I don’t think it would be fair,” Mr. Shuvalov said. However, he did not reveal what exactly was planned by the government to help businesses.

The World Bank estimated that accession to the WTO would ensure a growth of three percent in the Russian economy in the mid-term.

Background information:

Russia has sought WTO membership for 16 years, since the organisation’s inception in 1995. But as early as 1993, Russia submitted an application for accession to the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT). Russia remains the only G20 member country that has not been admitted to the WTO. The process of Russia’s accession to the organisation is expected to be complete in the middle of this year, after the presidential election.

According to the first survey CEO Agenda amid Global Risks and Elections in Russia carried out by Strategy Partners Group (SPG) and published on February 1, over 50 percent of senior managers believe that Russia’s accession to the WTO will have a beneficial effect on the Russian economy, and 82 percent of chief executives do not find it necessary to prepare for this in any special way. At the same time, 24 percent of respondents said the country’s accession to the WTO would have an adverse impact on the development of its economy as a whole.

Investcafe’s analyst Ilya Rachenkov believes that it will be easier for Russian exporters to act when legislation of different countries is based on common rules. “Additionally, joining the WTO makes it impossible to place tariff barriers on Russian exports; while in the current situation, Russia has no effective instruments for protecting domestic producers,” he said. “Meanwhile, the WTO agreements do not rule out anti-dumping and countervailing duties. A general reduction in import tariffs will be beneficial for foreign producers as this will make their products more competitive.”

Oil and gas

According to analysts, WTO membership will have a zero-to-positive effect on the oil and gas sector: Russian companies will gain additional protection against tariff and non-tariff discrimination.

At the same time, there is no point in expecting export duties to be abolished because the underlying General Agreement on Tariffs and Trade (GATT) specifies that they can be used to eliminate a critical shortage of some product in the domestic market.

Metallurgy

Russian metallurgical products are among those suffering from the world’s severest discrimination; therefore, when foreign countries’ restrictions on Russian products are lifted, this must be a positive influence on export-oriented metal and coal producers.

Financial sector

It is unlikely that the financial sector situation will change significantly. The financial services market is dominated by Russian banks, and very high barriers have already been erected in the way of new entrants. Besides, the Russian side succeeded in defending the clause that foreign banks will not be allowed to open branches in Russia and will continue to operate in the Russian market through their subsidiaries.

Consumer market

“Russia’s accession to the WTO will not bring about appreciable changes in the consumer market situation,” Mr. Rachenkov hopes. “In actual fact, this sector has already been cornered by existing Russian and foreign players, and even the giant retailer Walmart had to abandon the Russian market after a series of attempts to penetrate it. Reduced tariffs on imported foods and clothes must have a positive effect on retailing because retailers will enjoy lower import-related expenses.”

Agriculture

Agriculture and food processing are the two most problematic sectors that may be hard hit by the country’s accession to the WTO. With a drastic reduction in the duty on imported meat products, quotas will still be used to support Russian producers. Speaking of cereal crops, Russian production fully meets the domestic demand while some crops are exported; therefore, this sector will be affected minimally too. Problems may face vegetable and fruit production because Russian producers are less competitive than their foreign counterparts. However, the WTO agreement on agriculture allows extra tariffs if any prices of imports are much lower than those of domestic products. In addition, the agreement does not prohibit governmental support measures for agriculture.

Engineering industry

It is a widely held belief that the Russian engineering industry will die after the country joins the WTO, but this is not so. Indeed, very high import tariffs are imposed on foreign engineering products; but Russian consumers should not expect a substantial reduction. For example, the current duty on imported three- to seven-year-old cars is 25 percent, but not lower than a certain fixed amount charged for a cubic centimeter of engine capacity. Within seven years after WTO accession, the duty will go down to 20 percent, and the fixed amount will be decreased by 20 percent. It is unlikely that the duty on cars that are in use for over seven years will change. A considerable reduction in tariffs may apply only to new vehicles, but foreign brands of Russia’s most popular inexpensive cars are already made domestically. Russia also succeeded in defending the high tariff on imported airplanes and large vessels. Reduced tariffs will be imposed only on the products that are almost not made in Russia (small aircraft and vessels) and on spare parts. There will be no substantial decrease in import duties on the other engineering products.

Electric utilities

The electric power sector is mainly oriented to home consumption, which is confined to Russia’s United Power System. Accession to the WTO, limited to foreign trade regulation, will therefore have a minor effect.

Telecommunications

Joining the WTO will have a minimal impact on the telecommunications sector: it is unlikely that foreign telecoms carriers can be competitive because domestic rate plans are more attractive than what the largest foreign companies can offer, and the market has already been cornered by existing players. A slight positive effect will come from the reduced duty on imported telecommunications equipment.

High technology production

Theoretically, Russian high-tech production will be hit the hardest, because this sector will see a maximal reduction in tariffs on foreign imports. But there are several factors mitigating a possible adverse impact. First, Russian high-tech companies use foreign-made computers and production equipment; consequently, reduced tariffs must result in lower costs. Second, domestic producers often make licensed copies of foreign products, which eliminates the adverse impact of reduced import duties. Third, Russian high-tech companies make medium-value-added products, and it is more profitable to produce them domestically. Forth, a considerable part of Russian high technology production is connected with the public sector and public procurement that are not covered by the WTO agreements.

Summary

It is possible to say that except certain segments of the Russian market, accession to the WTO either will not change the situation or will improve it. When it comes to the segments exposed to the risk of Russian manufacturers finding themselves in a worse situation, the government continues to be able to support them by imposing special tariffs or implementing public procurement measures. As far as consumers are concerned, accession to the WTO will almost definitely have a positive effect on them: prices will have a smaller import tariff component; it is, of course, unlikely that this will lead to a fall in prices, but this will make it possible to slow down their growth.

Sergey Kulikov,
Exclusively for Russian Survey