Bloomberg News

Russian Industries May Rile WTO by Undermining Trade Pledges

November 15, 2011

(Updates with comment from U.S. president in 25th paragraph. For more on the APEC meetings see {EXT2 <GO>})

Nov. 11 (Bloomberg) -- Russia may struggle to implement its World Trade Organization pledges after an 18-year slog to win entry as economists say some local industries will seek to shield themselves from competitors.

A working party on Russian membership yesterday approved a package of documents that include obligations on goods and services and an accession protocol. Membership for the largest nation outside the 153-member WTO will now be put to a vote at a Dec. 15-17 meeting of trade ministers in Geneva.

Russia’s entry will be the biggest step in global trade liberalization since China joined a decade ago, and will boost the country’s $1.5 trillion economy, according to the World Bank. Still, some manufacturing and agricultural companies fear an influx of foreign competition and want time to adjust, potentially delaying adherence to WTO rules.

“Correct implementation of its commitments will remain a major issue and cause continued frictions with Russia’s trading partners,” said Iana Dreyer, an international economy analyst at the Paris-based Institut Montaigne.

Russia’s economy, which expanded 4 percent last year after a record 7.8 percent contraction in 2009, will benefit from WTO entry on the whole, the World Bank said in a report last year. Joining may add 3.7 percent to gross domestic product within five years and 11 percent within a decade, it estimates.

The dollar-denominated RTS Index may jump as much as 20 percent on news of Russia joining the WTO, Ovanes Oganisian, equity strategist at Renaissance Capital in Moscow, wrote in an Oct. 28 report. The gauge has lost almost 15 percent this year.

‘Bad Manufacturing’

Aside from energy and metals, few Russian goods are competitive, according to Anders Aslund, a fellow at the Peterson Institute for International Economics in Washington. Joining the WTO may wipe out “bad manufacturing,” he said.

Opposition initially arose from “old Soviet industries that should have been closed down anyway,” said Aslund, an adviser to the Russian government in the early 1990s. This includes aviation, which is “close to dead,” and car production, he said by phone on Nov. 4.

The agriculture industry isn’t fully behind accession either, because of a WTO rule that caps state aid to farmers and fears over sanitary requirements for importing chicken, pork and beef, Konstantinos Adamantopoulos, a trade lawyer at Holman, Fenwick & Willan in Brussels who advised the Russian government on accession said by phone on Nov. 4.

Protective Measures

Russia’s main task will be to prevent a surge in low- quality or excessively cheap imports, according to Andrei Danilenko, head of Russia’s National Milk Producers Union.

“Joining the WTO really won’t be good for Russian agriculture if officials don’t use all possible measures under WTO rules to protect our market,” he said by phone yesterday. “Our agriculture sector gained during the last few years thanks to various protective tariffs, and we shouldn’t give up those results now.”

Increased competition will trigger the downfall of less- efficient companies, according to Sergei Mikhailov, chief executive officer of meat producer Cherkizovo Group. Farm subsidies “shouldn’t be reduced and should even increase after accession,” he said Nov. 9.

In an early sign of friction, U.S. lawmakers said this week that Russia’s government may be backing away from a promise to join the Information Technology Agreement, which eliminates tariffs on many high-technology goods, as part of its accession.

Consumers to Benefit

Russia sees little trouble in implementing its WTO pledges.

“Will it be difficult for us to implement our commitments? I don’t think so,” Russia’s chief WTO negotiator, Maxim Medvedkov, told a news conference in Geneva yesterday. “Most of our businesses are in favor of accession.”

With oil and gas, which account for more than half of Russian shipments overseas, not subject to export tariffs, metals and chemical producers will gain as levies to sell their products abroad decline, according to the World Bank.

Russian consumers also stand to benefit as import barriers are reduced, a step that will spur the flow of goods into the country, weakening the ruble and further helping exporters, the World Bank said.

Shares in natural-gas producers such as OAO Novatek, OAO Rosneft and OAO Lukoil are likely to advance as entry may spur a possible removal of state-run OAO Gazprom’s monopoly on exports of the fuel, Renaissance’s Oganisian said.

‘Raise Their Game’

Rather than fail, Russia’s less-efficient industries may accelerate their development as a result of WTO accession, according to Chris Weafer, chief strategist at Troika Dialog in Moscow, who cited other members’ experiences.

“Local companies have had no choice but to raise their game to compete with established international operators,” he said on Nov. 3.

The auto industry, which first resisted membership, has dropped its opposition as Russia sought to encourage carmakers such as Ford Motor Co. and Renault SA to start local production. Entry may be a “tipping point” for modernization in Russia, where car production will triple to about 3 million annually within five to 10 years of accession, Aslund said.

While membership won’t bring a “massive gain” to Russia, it sends a “vibrant and significant message to the global community” that the country meets WTO standards, said Christine Lagarde, managing director of the International Monetary Fund.

“It’s a plus economically and, more importantly, politically,” she said in a Nov. 7 speech in Moscow.

Last Obstacle

The U.S. and the European Union have repeatedly voiced their support this year for Russia’s WTO membership, with the EU reaching a final bilateral agreement on entry last month. The final barrier to joining, approval by Georgia, the former Soviet republic with which Russia fought a five-day war in 2008, was overcome this week.

“Russia’s membership in the WTO will lower tariffs, improve international access to Russia’s services markets, hold the Russian government accountable to a system of rules governing trade behavior, and provide the means to enforce those rules,” U.S. President Barack Obama said yesterday.

Obama meets his Russian counterpart Dmitry Medvedev during the APEC summit today in Honolulu.

While there may be long-term benefits to accession, the immediate consequences for companies’ operating environments aren’t clear, Anton Bazulev, spokesman for Russia’s third- largest steelmaker, OAO Novolipetsk Steel, said yesterday.

Quotas limiting Russian rolled-steel exports to Europe to 3.2 million tons a year will be abolished upon entry, he said by telephone. At the same time, “the EU will be free to impose other trading restrictions, including anti-dumping measures,” Bazulev said.

--With assistance from Henry Meyer, Marina Sysoyeva, Ilya Khrennikov and Alena Chechel in Moscow. Editors: Andrew Langley, Balazs Penz, Paul Abelsky

To contact the reporter on this story: Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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