WTO Can Place Russia on the Right Track
by Anders Aslund, Peterson Institute for International Economics
Op-ed in the Moscow Times
July 31, 2008
© Moscow Times
The World Trade Organization's Doha Round on further trade liberalization has just fallen apart in Geneva. Does that mean that Russia's application for WTO membership is now a nonissue? On the contrary, the WTO remains relevant regardless of whether or not further liberalization proceeds.
About 96 percent of world trade is undertaken among members of the WTO, and Russia is the biggest economy outside this organization. As a consequence, it is not a part of any negotiation on world trade and the rules of global trade are set by other countries. What nation—let alone a rising global power—wants to be in that situation? In the last five years, the Russian government has pursued less of an economic policy than it has a fiscal policy. During this period, Russia has adopted hardly any economic legislation. In a recent column, I complained over the central bank's neglect of the rampant inflationary crisis.
Since 2004, Russia has lived on the Yeltsin-era reforms and high oil prices, but the good times may be coming to an end. The country's economy is overheating, as evident from its high inflation, high real estate prices, and a labor shortage, particularly in qualified staff. Although the growth rate remains high, the backlog of reforms is mounting.
For these reasons, Russia should focus on finally becoming a member of the WTO. This should be one of its most important strategic priorities. In the debate surrounding Russia, one view is that it is part of the world and should be fully integrated. The other is that it is special and must be kept apart. WTO membership could help defeat that isolationism for good.
The impact on the Russian economy of accession to the WTO would be quite substantial. The World Bank sponsored a series of authoritative studies by David Tarr, Jesper Jensen, and Thomas Rutherford. They assessed that WTO membership would give Russia a 0.7 percentage point higher growth rate for the next five years. The gains would mainly come from the liberalization of barriers to foreign direct investment in services, better resource allocation thanks to a reduction on tariffs, and greater access for the country's products in foreign markets.
Russia's current problems underline its need for WTO membership. The biggest concern is corruption, and it is well known that kickbacks for major procurement orders amount to one-third to half of a public contract. What anticorruption measure would be more effective than international standards for procurement, which may be part of the country's WTO accession?
Another issue is inflation. Even if the prime problem is exchange rate and monetary policy, liberalization of foreign trade would enhance competition that over time drives prices down. That Moscow is the most expensive city in the world shows the lack of competition.
So far, Russia's exporters of metals and chemicals are not suffering from limited access to export markets. But metals prices have been soft recently, and we are at the end of one of the greatest booms of world history. Metals and chemicals account for one-fifth of the country's total exports. Therefore, their continued market access is vital for the country. At present, any nation can prohibit imports from Russia without any legal repercussions because the WTO is the only effective arbitration court for world trade. Unfortunately, Moscow has no seat at that table.
On May 16, Ukraine became the 152nd member to be accepted into the WTO, beating Russia to the punch. Ukrainian steel exporters understood their weak position in world trade and asked their government to secure their future market access.
Moreover, it is impossible to speak about Russia ever becoming a world financial center as long as it is not part of the WTO. True, Russia is a member of the World Bank and the International Monetary Fund, but these organizations have lost much of their significance in recent years, while the WTO remains important.
Russia is very close to gaining admittance into the WTO, but three significant obstacles remain.
The first and most complex impediment is a bilateral agreement with Ukraine that demands months of negotiations. Each new member of the WTO has the right to ask for a bilateral protocol with applicants on market access. Recently, the United Arab Emirates, Saudi Arabia, Cambodia, and Vietnam have done so with Russia, which has been compelled to offer each of them some benefits. The WTO is a club, and its members can demand applicants to comply with all of the rules of the club before they join.
Bilateral trade between Russia and Ukraine is huge—nearly $30 billion a year—and Moscow has had a habit of imposing protectionist measures on Kiev. The Ukrainians might be polite, but their trade negotiators are rather clever, as they have shown through their entry into the WTO. They will kindly request that Moscow abandons all trade barriers that do not comply with WTO rules, and Russia should meet this demand immediately. Otherwise, other new members will enter the trade group and pose new difficult demands. Like all current WTO members, Ukraine wants Russia to join the organization.
The second impediment is Georgia, which is politically more difficult. Although Russia has imposed multiple trade embargoes on the Georgians, Tbilisi has focused on one single issue—border controls in Abkhazia and South Ossetia. This may seem political and beyond the range of trade policy, but the Georgians have successfully defended their position. This issue can be resolved, and the Kremlin had better realize it is in its own interest to do so.
The last obstacle might seem prosaic by comparison. Finland and Sweden, and thus the European Union, do not accept that Russia has decided to impose prohibitive export tariffs on lumber from January 1, 2009. The European Union will just veto until Russia succumbs.
Sure, other issues exist. The last working party session in Geneva did not subtract but added open issues. Agricultural restrictions and poor defense of intellectual property rights may flame up again, as well as export tariffs and the role of state corporations in the economy. Yet Russia has hardly ever been so close to entering the WTO as it is now.
President Dmitry Medvedev has said good things about the WTO, while Prime Minister Vladimir Putin ignored it during his last term as president. Russia's accession to the WTO could be Medvedev's signal that he is putting Russia on the right economic track again.