Trade

Don't Get Too Excited About Russia's WTO Deal


Customers at a Moscow fruit and vegetable market.

Photograph by Misha Japaridze/AP

Customers at a Moscow fruit and vegetable market.

Quick, everybody into Russia! After 19 years of negotiations, a period that pretty much spans the entire post-Soviet years, the Russians have finally gained access to the World Trade Organization. Which means Russia is no longer the only G-20 nation without a WTO Members Only jacket. Pop that collar, guys.

As a result, Russia’s trade barriers will begin to fall, along with the price of most foreign goods available to Russian consumers. The temptation is to compare this with China’s 2001 acceptance into the WTO, which set off a bonanza in global trade and ushered in a golden age of export-led growth for China. But this is an entirely different ballgame. Russia is not so interested in boosting its exports as it is in stimulating its economy through more consumer spending, higher income, and increased efficiency. Russia currently has a huge foreign trade surplus, about $115 billion at last count, due to oil and natural gas.

While its new WTO membership will certainly open opportunities for Russian businesses to export more, the big benefits will come from companies selling into Russia’s $2 trillion economy at more competitive prices. In the long run, Russia stands to gain an extra 11 percent annually in GDP ($162 billion) due to increased trade, according to a World Bank study from March. That equates to about 7 percent more income a year for the average Russian household. Good news for foreign exporters, who can now sell their stuff at lower prices to (presumably) wealthier Russian consumers.

In 2011, the U.S. shipped $8.3 billion worth of goods to Russia. Factoring in services such as finance, tourism, and health care, the U.S. did about $11 billion of business in Russia in 2011. According to a report by Anders Aslund, a senior fellow at the Peterson Institute for International Economics, that amount could double over the next five years. Aslund sees Russia increasing its already healthy appetite for American goods, such as pork, poultry, and advanced machinery, which could translate into strong revenue growth for such companies as Tyson Foods (TSN), Boeing (BA), and General Electric (GE).

This is all predicated, however, on the U.S. Congress permanently scrapping a piece of Cold War legislation called the Jackson-Vanik amendment, which denies normal trade relations with Russia. That probably won’t happen until after the November election, possibly in the lame duck session that follows. Until then, U.S. companies will be subject to higher tariffs in Russia than European and Asian manufacturers. “It certainly gives them a head start, but it should only be temporary,” says Charles Kupchan, a senior fellow at the Council on Foreign Relations.

Kupchan is cautious about how big an impact Russia’s WTO deal will have on global trade. “I think the economic implications should not be overstated,” says Kupchan. “Russia is not China.” That’s for sure. While its economy, like China’s, is fueled by exports, Russia’s is much more commodity-based, one that lacks China’s low-wage structure. And while the state has increased its hold over bigger pieces of the economy, particular the oil and gas sector, “the Russians don’t have a fleet-footed economy that will embrace these reforms quickly,” says Kupchan.

While foreign investment is likely to increase, Russia is still a tough place to do business. It comes in at No. 120 on the World Bank’s ranking of countries for their ease of doing business, right behind Cape Verde and just ahead of Costa Rica. Russia’s support of embattled Syrian President Bashar Hafez al-Assad, allegations of election rigging, and its recent imprisonment of the punk band Pussy Riot for their political protests have not helped its global reputation.

On the other hand, it’s not like Russia’s going from zero to 60. Russia has made a lot of progress toward opening up in the past decade. “Basically, Russia has had a market economy for the last eight or nine years,” says Aslund of the Peterson Institute. The U.S. granted Russia market-economy status in 2002, meaning it plays by the rules of supply and demand, something that China still doesn’t do, at least not in the eyes of the U.S or European Union.

Russian industry still has its work cut out for it, some sectors more than others. According to Aslund, the sector with the highest tariffs on foreign imports is the commercial light truck industry. Tariffs will fall from 25 percent on imports to 15 percent. Overall, though, Russia has slowly been lowering tariffs on foreign products. According to Aslund, the average tariff in Russia on all products will be 10 percent. That still gives an edge to Russian businesses, though as those tariffs slowly fall, Russian industry will either have to evolve or die.

For many sectors, like the Russian automotive industry, that process is well under way. “The most vulnerable sectors have already died out,” Aslund says.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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Companies Mentioned

  • TSN
    (Tyson Foods Inc)
    • $39.01 USD
    • 0.66
    • 1.69%
  • BA
    (Boeing Co/The)
    • $127.12 USD
    • 2.81
    • 2.21%
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