Russia & the WTO
Russia joined the WTO in December after 18 years of negotiations. Time will tell whether this proves to be a shot in the arm for free trade or whether economic imperatives will continue to take precedence over global trade agreements. John Whittaker, a partner with international commercial law firm Clyde & Co, assesses whether membership will make much difference to Russia’s economy, and looks at the likely impact on global trade flows.
IT’S SAID THAT good things come to those wait. On 16th
December 2011, after 18 years of protracted
negotiations, agreement was at last reached on Russia’s accession to the World Trade Organisation (WTO). The Russian Federation is due to become an effective member of the WTO by the middle of 2012, which WTO Director General Pascal Lamy hailed as “cementing the integration of Russia into the global economy”.
WTO Impact
Impact on Exporters Limited Russia is the last of the G20 countries to join
the multilateral organisation, and is the only remaining major economy not to be part of the WTO. Estimates of the likely economic impact of WTO membership suggest there will be a positive influence on domestic growth. In a 2010 paper, Russian Trade and Foreign Direct Investment Policy at the Crossroads, the World Bank forecast that, in the medium term, Russia would gain about 3.3% of the value of its GDP per year, rising to 11% in the long-term. However, such estimates
attribute less than 10% of the gains in GDP to improved market access for Russian exporters. This is largely because, prior to joining the WTO, Russia negotiated ‘most favoured nation’ (MFN) status with all of its major trading partners. Nonetheless, WTO accession accords permanent MFN status between members, and as a result, regular renegotiation of such agreements will no longer be necessary. Establishing MFN status with foreign nations has
not been without difficulties. MFN status between the US and Russia, for example, has required the US President to waive the Jackson-Vanik amendment each year – a US law passed in 1974, which restricts trade flows with non-market economies that do not allow free emigration rights. This relic of US Cold War legislation is now in place only with North Korea, Cuba and Russia and the US ambassador to Moscow, John Beyrle, has stated that securing
70 March 2012
the cancellation of the amendment by Congress, with respect to Russia, is a priority for the Obama administration in 2012.
Oil & Gas A further significant reason not to expect dramatic
changes for Russia’s exporters is that oil and gas, which are the country’s main export commodities, have not hitherto featured prominently in the WTO. Under the terms of the accession treaty, however, Russia has agreed that its producers and distributors of natural gas will operate based on normal commercial considerations, i.e. they will pursue the profit motive. This agreement, if adhered to, should prevent Russia adopting a strategy, which has been used in the past, of cutting off supplies to neighbouring countries for political purposes.
Russian domestic gas
prices, meanwhile, which throughout the post- Soviet era have been kept at relatively low levels to protect the Russian economy, will not be equalised with (far higher) international prices as a result of WTO
accession. Under the treaty, Russia will continue to regulate gas prices to households and other non- commercial users based on “domestic social policy considerations”. In 2006, then president Putin introduced a target of achieving parity between domestic and international prices by 2011, but this was subsequently put back to 2015 after the doubling of oil prices. According to a recent research paper by the
Oxford Institute for Energy Studies, Domestic Gas Prices in Russia – Towards Export Netback? this deferred target is also highly unlikely to be met given the scale of the domestic price increases it would imply. Ultimately, the future holds the prospect of a gas market regulated by supply and demand, in which overseas buyers compete for Russian gas with domestic users, which could imply a different pattern of trade flows.
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