beyondbrics

A few centuries ago, travelling from Moscow to Siberia took two summers and a winter. Even by that standard, Russia’s journey towards membership of the World Trade Organisation has been a slog. Negotiations started in 1993 when Boris Yeltsin was in the Kremlin and Russian troops were in Poland. Seventeen years later, Russia is the largest economy and the only Bric country not to have joined the organisation.

Now the end may be in sight: US and Russian officials have suggested (optimistically) that accession will happen in 2011. But given that Russia’s economy is focused on oil and gas, which are exempt from tariffs anyway, how much does membership of the WTO actually matter?

The other Brics – for whom manufacturing is the largest component of their exports – have garnered benefits from the WTO. China, which joined in 2001, saw foreign direct investment jump in 2001, 2002 and 2003, even though global FDI was falling. What’s more, a high proportion of FDI went into manufacturing, bolstering the country’s export base.

Brazil and India joined in 1995, and have used the dispute resolution facility to counter western protectionism. Brazil won key rulings against US policies on sugar and cotton, leading President Luiz Inácio Lula da Silva to describe the US as an elephant trembling in the face of a mouse.

Russia, however, remains unconvinced. Although the government of Dmitry Medvedev has spoken of modernising the economy, the lobby of economic liberals in favour of WTO accession has actually been shrinking, says Fredrik Erixon, director of the European Centre for International Political Economy, a thinktank.

Among business people, the mood is broadly hostile: carmakers and other manufacturers fear the WTO would restrict their ability to receive state support. There are geopolitical risks too, Erixon says: should Russia join the WTO, Kazakhstan and other former Soviet countries are likely to follow – thereby increasing their trade with the rest of the world, and reducing their dependence on Russia.

For foreigners, the benefits of Russia’s accession are unclear. Key parts of the Russian economy have designated “strategic” by the government, and it’s unclear how WTO membership would increase foreign investors’ access and security. Moreover, Russia has pledged to keep using export duties, effectively subsidising domestic companies; the WTO’s head has admitted that such duties in general fall beyond the organisation’s remit.

However, a 2006 study by the World Bank concluded that Russia and foreign investors would benefit massively from WTO membership. According to the study, led by David Tarr, the country’s GDP would rise 4.3 per cent, with most of the gain – 3.7 per cent of GDP – attributable to increased FDI.

The remaining growth would come from Russian exporters’ increased market access. Although Russia already has tariff agreements with many trade partners, joining the WTO would reduce the vulnerability of its exports – such as steel and timber – to anti-dumping and other restrictions. And the hope is that Russia’s economy will diversify into manufacturing, benefiting ever more from WTO-induced openness.

The World Bank figure may be exaggerated. But, as Kingsmill Bond of Troika Dialog says, even if the boost from WTO membership is as little as 1 percentage point of GDP a year, it would still be significant, given that Russia’s natural growth rate is only around 5 per cent.

The problem, says Erixon, is that the WTO accession process has been a missed opportunity:

Ideally Russia would look to accession in the same way that China did. It would use accession as a general reform vehicle … But I don’t believe this is going to happen.

Katinka Barysch, deputy director of the Centre for European Reform agrees, but takes a glass-half-full approach:

[Russia's] elite benefits so handsomely from the current structure that I’m not even sure thorough economic reform is possible. But in an economy that is as inefficient as Russia’s, even small changes can make a big difference.

The significance of WTO accession is, of course, partly political. It would confirm Russia’s integration into the international trade architecture, says Domenico Lombardi, an expert on global governance at the Brookings Institution.

In the context of the financial crisis, the IMF may have seemed like the key international institution. Yet Lombardi argues that, in the long run, the WTO is the platform for ensuring global growth.

For now, the focus is on tying up multiple loose ends in the negotiations. The EU wants further concessions on timber export tariffs; the European Commission this week also accused Russia of being “clearly engaged in an import substitution policy”. Georgia is demanding customs concessions from Russia in exchange for not vetoing its accession. The journey is not yet over – but so far along the way, it may be easier to limp on than to turn back.

Related reading:
Let Russia join the WTO, Foreign Policy
Russia: the state gets serious about share sales, beyondbrics