Once again, kovane has been busy in his secret lair, this time researching and understanding trade relations, so you won’t have to. I’m being flippant because it’s all I know, but I have to say it is a very good primer on international trade relationships. It makes them easy to understand, which is a remarkable achievement because there’s a lot more to it than you might think, and there are strong opinions on both sides – some of them, unfortunately, accompanied by zero knowledge. I can’t promise this will make you an expert, but I think I can safely say you’ll come away at the end of it knowing a good deal more than you did at the beginning. Kovane?
Hello, everyone. On 23 July 2012, Russia at long last notified the World Trade Organization about the ratification of accession protocol. That officially means that after 30 days Russia will become a member – the 18-year journey is coming to an end. But the sentiments in Russia are very far from unanimous support. Earlier, over 130 MPs filed an appeal to the Constitutional Court, contesting its accordance with Russian law. Polls data also show substantial ambivalence – 32% believe that the entry will be beneficial for Russia, and 18%, harmful.
The resulting change in tariffs and legislation will directly affect almost every Russian company and the economy as a whole. Some sectors will gain billions of dollars, others will lose even more. And as with all matters concerning such amounts of money, there’s no shortage of lobbying, hysterical advertorials and misinformation. These disagreements by themselves are nothing new – it’s the same old protectionism vs free trade dispute dating back centuries. In order to learn who supports or opposes the entry and why, a clear look at the inner workings of the WTO is required.
The precursor of the WTO came into existence during the post-war overhaul of international economic relations, along with the IMF and the World Bank. The General Agreement on Tariffs and Trade (GATT), which was initially intended only as a stepping stone to the functioning organization, provided the regulation of international trade for almost 50 years. In 1994, it formed the core of the newly established WTO. What gave rise to GATT was a rethink of the Great Depression and reasons behind it. During its worst years, governments tended to raise tariffs in order to protect the domestic industry. This caused reciprocal measures from other countries, thus aggravating the world crisis.
The WTO’s stated goal is boosting the global economy by lowering trade barriers, thus helping poorer countries to develop their economies through export growth. It is achieved through a number of agreements which all the members are bound by. They set rules for international trade and intellectual property, define methods for resolving disputes, and encourage countries to adopt clear and unified laws. Through the agreements the WTO implements basic principles that lie at the foundation of trade between members.
The principle of most-favoured-nation (MFN) treatment means that all members of the WTO can’t normally discriminate against their trading partners. Thus, any favourable trading condition granted to one country must be provided for all other members as well. The principle of national treatment obliges countries to treat imported and local goods and services equally. The principle of transparency ensures that every member maintains institutions that publish their trade regulations, presents them for review and notifies the WTO about any changes. And the principle of reciprocity prevents new members from getting all the advantages from the MFN status without making reciprocal concessions in tariffs and regulations. The list of these concessions is drawn up during the accession procedure as a result of negotiating with every interested party. All commitments made by a new member are binding in nature – the country can’t normally raise tariffs beyond the agreed level or has to negotiate compensation with its trading partners. Thus, the conditions of accession greatly differ from country to country depending on the outcome of the initial negotiations.
The WTO agreements go much further than that, of course, and deal in detail with many other aspects of international trade. Particularly, exceptions for trade unions – thus, the WTO entry is not an obstacle for the EurAsEC. Special measures for protecting domestic industry in case there is evidence that imports are actively harming it, like the temporary steel tariff the USA imposed in 2002. Clear requirements for non-tariffs limitations – technical or sanitary – that a country can place on imports. Any such limitations that don’t conform to international standards and appear to be imposed only to provide unfair advantage to domestic industry can be contested in the WTO dispute settlement system. Bad, very bad news for Gennadiy Onishchenko, indeed. Also the WTO differentiates between developed, developing and least-developed countries and practices a more lenient approach to economically weaker countries.
The basic premise of the WTO is David Ricardo’s theory of comparative advantage , which is almost 200 years old. It states that a country should specialize in producing those goods and services for which it has a relative cost advantage compared to other countries, export a portion of those goods and services, and use the proceeds from those exports to import goods and services for which it has a relative cost disadvantage. It’s certainly true – most economics textbooks usually prove it in the first hundred pages, and Nobel Laureate Samuelson hailed it as “both true and non-trivial”. But as with all assumptions, it ignores so many complex issues that it at times seems hardly relevant to the real world.
First of all, it treats comparative advantage as something inherent, set in stone. But it’s clearly not. China was known as a producer of cheap, shoddy goods and poorly-made knock-offs just two decades ago. But nowadays, while much of it still applies, most major companies don’t hesitate to locate factories there. So what happened? Obviously, China refused to embrace the comparative advantage of the time, and through active economic policy, changed it. Aggressive protectionism was its key element, following in the footsteps of the post-war Japan and Asian Tigers. Investment in education, the fixed yuan rate, the system of government procurement and the active support of small business created a favourable environment for local entrepreneurs and foreign investors. Owing to these measures, local companies were able to hold or even expand their markets, refine their technological process and implement staff training programs. And when China entered the WTO in 2001 they were not crushed by lower trade tariffs, but benefited from it. The results are pretty clear – the Chinese are much better off now than then.
Another consideration is the completely different nature of markets for different goods and services. For example, RosAtom holds the first place in the number of nuclear plants being constructed abroad and 40% of the world uranium enrichment market. With only one major competitor, Rosatom has considerable freedom in its price policy, and obviously gets extra profit from that. Considering the almost impenetrable entry barriers that exist in this business, it’s safe to say that the situation is very unlikely to change in the near future, and RosAtom will hold its superior market position. Meanwhile, it provides thousands of high-tech and well-paid (one would hope) jobs for Russians. A similar situation exists in the world arms industry, where Russia dominates the market along with the USA. Maybe the Russians have some kind of special knack for weapons and nuclear technology? While many jokes say so, the reason for these successes is quite simple. The USSR was among pioneers in the respective technologies and had to stay competitive there, as opposed to many other sectors. The same story of success applies to many Western companies in other sectors.
On the other hand, developing economies whose trade barriers have been breached by the WTO find themselves in a serious predicament. Having no chance whatsoever to compete with transnational corporations in most sectors, they are stuck with the “comparative advantage” imposed by the global market. The primary sector and labour-intensive manufacturing are basically their only options. And the market for those products is vastly different than the one RosAtom operates in. The multitude of producers makes it as close to perfect competition as it’s possible, meaning that the profit margin is quite slim. In addition, the crippling feature of the primary sector is costs growing with the total output, as opposed to manufacturing, where costs fall due to the effect of scale. But this turns out to be the least of their woes.
The UNCTAD Trade and Development Report for 2002 shows that the massive growth in exports has not added significantly to developing countries’ income. The reason behind this is that developing countries lack technologies and money to develop their resources or build factories, and have to seek external help. The intense competition for FDI leads to a weakened bargaining position for them and, in the end, developing countries compete with each other on the basis of wage levels and special preferences for foreign companies. Moreover, profits from these sectors tend to flee the country as further investment opportunities are few.
There is another significant advantage that economies with high-tech sectors have. Technologies and specialists from them tend to flow into other sectors, increasing productivity or, sometimes, creating completely new products. For example, having a cutting-edge electronic industry can contribute to such a traditional sector as agriculture. Devices for soil-testing and complex sensors still look like an oddity, but more and more farmers adopt them into their day-to-day operations. On the other hand, biotechnology promises to revolutionize modern agriculture, and the lion’s share of profits from that will be reaped by countries that are leaders in that area. Not by ones with sweatshops and open-pit mining.
Yet another obstacle for developing countries is the WTO TRIPS agreement, regulating intellectual property rights. It is best exemplified by India’s pharmaceutical industry. In the 1970’s, the country adopted a quite lax patent law which allows generic medicines to be marketed there even if the product remains under patent protection. As a result, the burgeoning pharma industry now employs hundreds of thousands of people and makes affordable drugs for the poverty-stricken population. Since its accession to the WTO, India came under growing pressure to change the law. Moreover, when an Indian company launched a project for exporting a cheap AIDS drug to Africa, the USA intervened and threatened sanctions. Also, China’s frivolous treatment of intellectual property is a kind of open secret even today, so such a policy is practically a staple of successful catching-up development. Acknowledging the need for patent legislation, nevertheless, it’s obvious that the TRIPS only widens the already bottomless chasm between poor and rich countries.
All that being said, it’s extremely easy to portray the WTO as an agent of enslavement and colonialism, but that would be a gross oversimplification of the complex reality. However ugly some facets of globalization can be, sweatshops that are opened in third-world countries don’t lack workers. A 14-hour workday, the virtual absence of safety standards and child labour are surely a much better prospect than malnutrition, illness and death. No amount of tariff barriers alone can lift a country from poverty; the only way out is a sound economic policy over a period of several decades. And that task is a tall order for developing countries with weak government institutes, low human capital and squabbling elites. It is no coincidence that most instances of successful catching-up development occurred during the reign of authoritarian or semi-authoritarian regimes. The irremovable Liberal Democratic Party in Japan, Gaullism in France, and the two-decade dominance of the Christian Democratic Union in post-war West Germany – the list goes on and on.
Protective trade tariffs can be a boon or a bane, depending on the situation. Provided that they are applied in a timely fashion to sectors that have a potential to become competitive, tariffs give local companies both time and money in order to adapt to the world market. In time, the tariffs have to be gradually lifted, or the companies would have little incentive to develop. Consequently, the correct use of such a policy can bring a country’s level of industrial development to a completely new level. However, tariffs and other protectionist measures can be easily abused, especially where local businesses have excessive lobbying power. If, hypothetically, some clever entrepreneur opened a banana farm in Chukotka and managed to lobby a very high tariff on imported bananas under the slogan “Buy Russian!”, he could successfully compete with Ecuador and Philippines on the local market. But consumers would end up paying exorbitant prices for nothing. It’s obvious that no matter how much time the farm would have, it would never bring the costs down enough to an acceptable level. In essence, protective tariffs are nothing more than a transfer of money from customers to producers, and any government should be very careful when using them. History has demonstrated the perils of economic isolation countless times, and to forget it for former citizens of the USSR is doubly a sin.
What is extremely baffling about Russia’s accession is the way the government covered it. Such an important and controversial event that will affect the vital interests of virtually every citizen is routinely treated as a no-brainer. Details about the course of negotiations itself hardly got to the media, and in the end the government couldn’t allocate money to translate the entry conditions into Russian. As a result, they appeared as late as May of 2012, a whole 5 months since Russia’s application was approved.. It’s very hard to call such coverage something other than abysmal – many small and medium companies were faced with them as a fait accompli, without being able to express their views. That, weak awareness of WTO rules even in business circles and the drastic lack of specialists on them gave rise to a number of bogeyman myths.
Unfortunately, arguments usually cited in support are of a declarative nature, such as “the WTO is an objective need”, “the WTO will bring more foreign investments”, etc. Even Putin, who is rarely at a loss for words, fudged the direct question about what sectors will benefit from the WTO directly, referring to some “majority of experts”. A more or less good explanation was provided by Maxim Medvedkov, the head of Russia’s negotiation team, in his article.
According to the data of another poll, people who support the KPRF tend to view the WTO entry as harmful to the interests of Russia, while those who sympathize with other parties are more favourable to it. During the ratification in the Duma, the KPRF, the LDPR and “Just Russia” voted against it, representatives of the same parties disputed it in the Constitutional Court. Even more vocal in their opposition are sundry left political figures and activists – Delyagin, Kagarlitsky, Kurginyan, who don’t hold back on black paint when drawing the future of Russia in the WTO.
But however fiery the rhetoric of the opponents or however unconvincing the arguments of the supporters are, they are not a substitute for a detailed analysis. Fortunately, some interesting reports and resources are available as well, and they can help to shed light on this complex issue. A pro-WTO site, maintained by the Higher School of Economics – the true alma-mater of the liberal thought in Russia. The pro-WTO site of the working group on the WTO accession under the Russian Union of Entrepreneurs and Industrialists. And two anti-WTO sites: WTO-inform and stop-WTO. The World Bank prepared a research paper at the request of the Russian government to assess the potential impact of Russia’s accession to the WTO. The Accounting Chamber provided an informative report analyzing possible measures for increasing effectiveness of trade regulations. Two comprehensive papers are of a particular interest – “The economic consequences of Russia’s WTO accession” and “The Industry analysis of Russia’s WTO accession”. Although both the papers are outdated, many points are still relevant today.
Even a cursory glance at the most radical arguments (like the Kurginyan center’s report) raised by the opponents causes a slight feeling of perplexity. First of all, the ranks of WTO members include 156 countries which control around 95% of world trade (with Russia’s membership). Secondly, the Marrakech Accords stipulate a withdrawal procedure, but so far no countries have opted for that path. So, should Russia find the economic consequences of the WTO membership completely unacceptable, it can always leave the organization. In general, it’s still unclear how such a harmful organization (according to Kurginyan) manages to stay so popular.
The number of inaccuracies and outright mistakes in the report completely distorts the perception of the WTO that the reader might get. Several references suggesting that the WTO will force on Russia some agreements that undermine its sovereignty or will deprive it of rights on natural resources run completely counter to the accepted rules of the WTO. All decisions are made in fact by a consensus of all members, and Russia will be bound only by those agreements that it accepted before the accession. The consensus principle applies even to the Dispute Settlement Body. A country can refuse to implement a ruling and then the DSB will try to negotiate compensation or will set the criteria for retaliation. This practice is unfortunately often abused by strong countries like the US, as was the case with the cotton subsidies. And moreover, it can’t veto a parliament’s or a government’s decision.
Considering the economic impact of the WTO on Russia, it is worth noting that its level of import tariffs is not very high to begin with. In addition to that, high transportation costs form natural trade barriers. But what’s much more important is the sad state of the Russian customs service. In 2011 Medvedev called the level of corruption in customs “exorbitant”, and he’s not mistaken (1,2). Unfortunately, smuggling and understating customs value are part and parcel of importing operations and that has a significant effect on Russian companies. In effect, for many markets effective tariff rate is much lower that the official rate, and Russian companies have been competing with imported goods on very unfavourable terms. While to expect that the WTO magically eliminates corruption in the customs service is naïve at best, implementation of WTO international practices can be a stimulus for change.
As it has been already noted, entry conditions vary greatly from country to country, and the effect of WTO membership mostly hinges on them. Russia has spent 18 years on negotiations, after all, and one would expect extremely favourable conditions, would one not? Well, comparing them (a short overview, a very detailed report) to those of other countries, they are much better than entry conditions of developed countries, but fall short of the protection level enjoyed by other BRICS members. Russia has to lower its average tariff rate from the present level of 10% to 7.8% by 2018. China, for example, is bound by an average tariff ceiling of 10.4%, Brazil 10.9%. Also, Russia managed to uphold some specific law and practices like internal gas pricing, the high export tariff on oil and gas and limitations on foreign presence in some sectors.
Kommersant prepared an excellent infochart demonstrating what changes lie ahead for different categories of goods and services. When assessing the impact of the WTO on a particular industry, both direct and indirect effects should be factored in. If, for example, a company gets some advantageous conditions, but the whole economy tanks, the total effect could vary. If the company derives most of its profit from export, then the advantage will be magnified, due to the falling costs and devaluing currency. In case of orientation toward the internal market, the effect would be sharply negative. Also, it is important to take into consideration the sector cost level. By doing so, it’s possible to separate the wheat from the chaff – companies that will go below the break-even point from companies that are taking advantage of the high tariff barrier and are able to compete with imports on more even terms.
So what consequences will the WTO membership bring? The immediate and most obvious one is the decline in budget revenues due to the cuts in trade tariffs. The ministry of economic development’s estimates are 188 billion rubles in 2013 and 257 billion rubles in 2014. It’s not hard to guess where all that money will go – importers and trade chains. They are among the biggest winners of the WTO entry. Considering the relatively low level of competition, it’s safe to assume that consumers will see only a portion of this money and definitely not immediately.
The much-touted access to the WTO dispute settlement system that Russian companies will get is not likely to resolve all discriminatory measures against some products. The estimates for their extent range within $2-2.5 billion. Those among the most aggrieved are steel and parts of chemical industries. They are also considered the main force behind lobbying the WTO entry. The problem of discrimination was especially acute in the beginning of the 2000’s, but steel companies mostly found a way to circumvent those barriers. But having an official tool to deal with discrimination is undoubtedly very useful for any company planning on entering the global market.
And that’s it for the list of sectors that stand to gain something from the WTO directly. The explanation for that is very simple – the disappointing structure of the Russian export. More than 80% of it is comprised of natural resources, raw materials and production of low processing level. Such categories of goods are rarely discriminated against. More than that, developed economies are interested in their continuous flow, as without raw materials the factories and plants stop, and rearranging supply lines can be a tedious and costly process. The conventional wisdom is that the WTO is an organization for advancing production with high added value. Even the most optimistic experts acknowledge that the Russian government’s best bet is the expected improvement of laws and investment climate. Needless to say, this is a lot of ifs and maybes.
The main cash cow of the Russian budget – the oil and gas industry – will remain largely unaffected by the WTO membership. Gazprom may benefit from the accelerated leveling of internal gas prices for industrial customers, while the whole industry will be able to import machinery at lower prices due to the import tariff cut. Roughly the same applies to the energy sector. The extent of import-export operations there is insignificant, while the purchase of equipment comprises a hefty portion of the costs.
The market of financial services also expects some changes. The Russian negotiators managed to defend the limitation on foreign capital in the banking sector. Foreign banks will be still forbidden from opening branches in Russia. Their only option is a subsidiary bank, with a 50% limit on total participation of foreign capital in the banking system. The sector could use a little competition – long-term interest rates remain prohibitive and seriously limit investment options for Russian companies. Foreign insurance companies will be allowed to open branches after 9 years from accession. The telecommunication sector will be also opened for foreign investments – the existing limitations will be lifted.
Earlier, a group of companies addressed a collective letter to the government asking to revise the entry conditions. The make-up of signatories broadly reflects the sectors of the Russian economy for whom the WTO membership can bring only trouble. That’s various companies of mechanical engineering, especially producers of agriculture machinery, automotive industry, light industry, parts of the chemical industry oriented to the internal market, agriculture and food-processing industry. Babkin, the chairman of the RosAgroMash association, issued a sobering analysis of their plight. While far from being an impartial observer, he nevertheless highlights important points.
Sectors that are supposed to represent the modernization campaign so much extolled by the Russian government now face sharp reduction of import tariffs, loss of markets and, worse of all, uncertainty. The heavy mechanical engineering industry is plagued by a 50% degree of equipment wear, low workload and a 60% prevalence of imports. Even the delayed tariff reduction will be a serious blow to the industry, and WTO regulations will prevent the state from implementing direct protectionist measures. Taking into account a large number of companies that operated at a loss in 2009, the damage may be critical for the industry.
Very similar troubles will be experienced by the producers of agricultural machinery. With very strong foreign competition, imports constituted more than 50%. But in 2009, the government introduced a subsidized loan program for domestic machinery and raised the tariff from 5% to 15%. That and the devalued ruble resulted in the sharp drop in imports. The WTO accession will bring an end to this window of opportunity for the industry – the tariff is to be lowered back to 5%, and the program doesn’t conform to WTO practices.
For light industry, the defining characteristic is the extremely high level of counterfeit production – its share is estimated at 42% of the market . So even the appreciable decrease in the tariff on clothing – from 10-20% to 5-7% – and textiles won’t change the balance in any meaningful way. Only the most efficient companies were able to compete with “grey” imports before, and they probably will be able to do so after the WTO accession. Although for certain companies, it could become a definite turn for the worse. The main potential loss is in the increased difficulty of realizing any state development programs.
The most controversial debates are raging about the agricultural sector. WTO opponents predict mass impoverishment, famines and Russia at the whim of Western capitalists. Traditionally, WTO negotiations on agriculture remain one of the most time-consuming and arduous parts. And Russia’s party managed to defend the existing quotas on pork, beef and chicken meat, although on worse terms. The quota sizes are to be changed, and tariffs both inside and outside the quotas lowered. The expected decrease of the tariff on live pigs from 40% to 5% will also appreciably affect the pork market. The tariffs on dairy products, cereal crops and fish will be lowered as well.
All this change will certainly put extra pressure on agriculture producers, and will affect the profitability of existing and planned projects. While large agribusiness will be able to withstand it, the WTO will push many small farmers past the breaking point. And their future will be determined by how well the state will soften the blow. Many existing state support measures and benefits will be overhauled in accordance with the binding concessions. In particular, Fertilizer pricing for farmers and preferential VAT tax rate will be reformed in the following years.
The total trade distorting agricultural support will be limited to $9 billion in 2013 and will be gradually reduced to $4.4 billion by 2018. The final level was determined by the average support for the several years preceding the WTO accession, that’s a standard WTO practice. At the same, time critics point out the absolutely incomparable level of support afforded by the EU, the US, China, Brazil and Russia. France alone provides about $15 billion to its farmers. The above level of support excludes indirect support defined by the WTO’s “green box policies” – they can be used without any limitation. Examples are research funding, environmental programs, disaster relief and infrastructure development.
Another sensitive issue for the Russian government during the negotiations was the automotive industry. Due to the existing obligations to foreign investors, Russia bargained for a prolonged transitional period. The final agreement includes the gradual reduction of the tariff from the present 30% to 15% in 2017. An especially hard hit awaits producers of commercial vehicles – the tariff on new trucks will be reduced from 25% to 15%, and an even more dangerous threat presents in the potential inflow of used ones. KAMAZ expects nothing positive from those measures and is already tightening its belt. Also, many initiatives such as the state procurement of only Russian-made cars will become a thing of the past.
The WTO accession promises no easy life for the aircraft industry as well. The tariff on airliners will go down from 20% to 7.5%, although many exceptions to the tariff were already in effect. The share of Russia-produced aircraft is very low – around 10% – and without state support the whole industry is doomed. Although the lowered tariffs on aircraft mean lower costs for airlines, the biggest one, Aeroflot, will probably lose the rights on flight royalties. According to Vedomosti, in 2010 they amounted to $117 million, or around 17% of Aeroflot’s EBIDTA. It’s highly unlikely that the state will throw its flagship carrier to the wolves, and it will probably come up with some compensatory measures.
Despite what many publications in the Russian media say, the WTO doesn’t prohibit all kinds of state support and subsidies. In fact, according to the Agreement on Subsidies and Countervailing Measures, only two narrow types of subsidies are explicitly forbidden – those that are contingent on export performance or import substitution. Most of other subsidies fall in the “actionable” category. That means that other WTO members whose economies experience a negative effect due to some country’s subsidy can challenge it in the Dispute Settlement System and negotiate compensation or implement a countervailing measure. The need to provide the proof of negative effect lies with the complaining member, and at times it can be a very time-consuming and difficult endeavor.
Probably, one of the most inspiring examples of successful subsidy application is the history of Airbus. In the 60’s, when American producers dominated the market, Germany and France joined forces to create Airbus. Through various state support measures, subtle or not, the consortium managed to survive the fierce competition and now equally shares the large aircraft market with Boeing. Meanwhile, Airbus employs 55,000 well-paid workers.
For Russia, a well thought-out system of subsidies can become the primary tool of the state-wide economic policy. The fact that so few sectors actually stand to gain something from the WTO also means that any countervailing measures can’t hurt Russia’s economy much. And therefore, the government can apply subsidies without looking back on possible retaliation from other countries. The main difficulty is in converting the existing state support measures in accordance with the WTO agreement without harming the affected sectors. And of course, the priority is to create such a transparent system of subsidies, so companies would receive strictly defined amounts of money for specific goals. Otherwise, any good undertaking will turn into an endless bonanza of state money for well-connected companies.
Another important factor in the mechanism of international trade is the interaction between a country’s balance of payment and exchange rate. Even in the case of total absence of tariff barriers, the growth of imports is checked by the exchange rate. If the import growth is not balanced out by an equal growth of export or inflow of capital, the country will simply lack foreign currency, and its national currency will depreciate. Thus, any imported goods will become more expensive for local customers, and imports will stop growing. In effect, the exchange rate acts as a trade barrier. For example, depreciation of the ruble by 1% is equivalent to a growth of all trade tariffs by 0.92%.
Russia doesn’t have such a luxury as a fixed exchange rate, which the Chinese use. It makes it possible to keep the Yuan severely undervalued, thus giving the Chinese economy a strong level of protection. But the Russian government can also control the inflow of foreign currency in the country, albeit indirectly. By taxing the export of oil and natural gas and levying an export tariff on it, the government is keeping the ruble undervalued, directing part of the foreign currency into the country’s reserves. That’s why both China and Russia have such a high level of international reserves. According to the Economist’s Big Mac index, the ruble is 43% underestimated. Due to the obligation to lower export tariffs on many goods, in the future the tax on natural resources must become one of the primary tools in protecting the economy. Simultaneously, it will serve as a limitation on undesirable exports and an instrument for keeping a favourable exchange rate. The problem here is the external debt of the Russian economy. Although its level is relatively low – 33% of GDP, China maintains it at 5%, Brazil 20%, India 22%. Any devaluation of the ruble will fall as a great weight on companies which borrowed money abroad.
Unfortunately, Russia doesn’t utilize to a great extent export support measures that don’t distort trade and therefore are allowed by the WTO. State export guarantees, insurance and credit are essential in advancing domestic goods on the global market nowadays, and Russia has only begun to master such instruments. In 2007, only 2 guarantees were issued to the amount of $119 million – that’s 11.9% of the total planned budget. Such a level is absolutely incomparable with the support provided by other countries, and should be addressed in the nearest future. Modern global competition also requires a close interaction between exporters, state agencies and trade missions, and Russia has much to learn in that area as well.
On the whole, the WTO makes a point of providing enough measures to protect the national economy, Undoubtedly, the profitability of many Russian companies will be negatively affected by the more open trade barriers. And it’s really up to the government if it will be able to effectively use them. However, the consistency of Russia’s economic policy doesn’t inspire optimism. The most indicting evidence of that is, probably, development strategies of various sectors, adopted in 2010. The WTO is not mentioned even once there, and many state support programs described there require revisiting. That basically means that in 2010 the Ministry of Industry and Trade had no idea about the state of WTO negotiations. Which is rather telling. A lot of concern is caused by Russia’s inexperience in dealing with the WTO dispute settlement system. An active implementation of state support measures will certainly be met with a stream of lawsuits. And the damage from the inept handling of them can be overwhelming.
The worst case scenario, many of Babkin’s gloomy prediction will come true. If the government fails to organize coordination with the sectors of economy that are in danger and back out of most of the state support programs, bankruptcy and economic recessions awaits many companies. Although the 4.4 million potential job loss voiced in the report seems a bit overboard, even half of that would cause a heretofore-unseen wave of social unrest. The remains of the high-tech industry will be swept away during the course of the transitional period and Russia will firmly become solely a supplier of raw materials.
However, this is a highly unlikely scenario. The Russian government seems to be full of resolve to use all instruments provided by the WTO in order to protect the economy. Moreover, recalling Pikalevo and the protracted support of AvtoVAZ that seemed redundant at the time, it is evident that true social unrest is one of few things that the government is very wary of. And the choice between a membership in the WTO and the potential backlash against poor economic performance is not a remotely real one, considering how only a few years Russia nonchalantly demonstrated that it could do without the WTO just fine. As described before, the state has a lot of leeway in using even the most outrageous support programs, and it has both money and incentive to do so.
The optimistic scenario, hailed by liberal economists, proclaims almost immediate benefits for everyone. Consumer will get lower prices on a wide range of goods, businesses will become more integrated into the world economy, and the WTO will improve Russia’s law system and investment climate. The World Bank’s research forecasts a gain of 3.3% of GDP in the medium term, inflow of FDI and the reduced cost of business services. Moreover, according to the report, 99.9 percent of the households will gain from 2 percent to 25 percent of their household income, poor households slightly more than rich ones. The influence of the WTO on particular industries is presented here.
This scenario also stirs questions. The experience of Ukraine and Georgia shows that any expectation of significant price reduction is somewhat inflated. As a consequence, the described gain of households will be significantly lower. The inflow of FDI due to the lowered administrative barriers is also a very bold assumption. The WTO accession is no magic elixir to such deeply-entrenched ills of the Russian economy. And Russia is certainly not the first choice of foreign investors. But the hope for improvement in the law system is not baseless, and Russia certainly could use it, especially in the customs code and accounting.
The WTO entry is a necessary step for any country aspiring to develop a modern economy, however the timing and conditions leave much to be desired. The problems encountered by Ukraine highlight the dangers of a rash decision to seek membership in the WTO no matter the cost and an inconsistent economic policy. But the Russian government has all means to deal with the challenges of a more open economy. And the way it will carry out the complete revamping of the economic policy will be a litmus test for the ability of Putin’s Administration to modernize the economy. However, the price of error here is very high, and all that remains for the common voter is to wait and watch.