Year one in WTO: Russian retailers win, producers lose

Only Russian retailers reported a positive effect from the country's WTO membership one year ago. Optimism among foreign businesspeople has faded. Source: AP

Only Russian retailers reported a positive effect from the country's WTO membership one year ago. Optimism among foreign businesspeople has faded. Source: AP

While retailers have benefited from Russia's entry into the World Trade Organization, sectors like agricultural and light industries have lost out.

Experts at Moody’s summed up the results of the first year of Russia’s membership in the WTO. Exporters’ hopes have not been justified yet, as about 100 restrictions are still imposed on Russian companies.

The agricultural sector and light industries are among those affected. However, there is potential for a growth in exports from the Russian Federation, as well as for the protection of the domestic market.

Moody's experts believe that it will take at least 3–5 years to ensure that facilitating easier access of Russian companies to foreign markets and harmonization of legislation have a positive impact on the credit image of Russian businesses. So far, 68 percent of the surveyed respondents have not noticed any changes (17 percent gave a negative appraisal, and 15 percent gave a positive one).

Large retailers, importers and distributors for international chains in the consumer sector primarily have benefited from the country’s WTO membership. The ratings of these companies for this year have improved significantly, says the agency’s report. At the same time, according to Moody's, Russian goods are hindered from entering new markets by the unfavorable external economic situation.

Russia became a member of the WTO (the 157th country) on Aug. 22, 2012, after 18 years of multilateral negotiations. Among the major promises made by the Russian side was the gradual decrease in the average import tariff from 10 percent to 7.8 percent. In regards to this, experts predicted big problems for industries operating in the domestic market. These fears partly came true.

Moody's noted difficulties in the light industry, but the major sector that felt the previous “lack of price competition and dependence on government support” was agriculture, according to experts at Global Counsel. Thus, import figures for individual foods (mainly dairy products) grew by 5.8 percent, while clothing and footwear imports grew by 12.8 percent.

However, there is considerable potential to support this industry. Compensations to the agricultural sector had been agreed upon during earlier WTO negotiations — a maximum of $9 billion per year, with a gradual decline to $4.5 billion by 2017. So far, however, these figures have not been applied.

In addition, the state has other ways to protect the market: For example, this year, a ban has been introduced on the import of live pigs from the U.S., Brazil and the EU, due to claims of antibiotics use in these countries.

The automotive sector, where imports have been decreasing since last September, was significantly less affected than expected. However, this situation may change. In July, the European Commission formally challenged Russia’s introduction of a utilization (disposal) fee on imported cars. If the parties cannot reach a compromise, the WTO is likely to recognize the fee as discriminatory.

The expansion of this utilization fee onto domestic manufacturers could cost just one auto concern, KamAZ, $300–540 million per year, according to Moody's experts. Besides this, the opening up of the domestic market continues: Starting this September, import tariffs on 5,100 products will be reduced by another 1–3 percent.

Experts note that the interests of Russian businesses are not sufficiently protected: They are promoting the rapid accession of Kazakhstan and Belarus into the WTO, as well as dealing with a shortage of qualified personnel able to understand dispute procedures.

“It is obvious that companies and government officials are not fully prepared for all the consequences of the Russian Federation’s membership in the WTO,” says a statement made by the Global Counsel. In particular, Russia has no permanent representation at WTO headquarters.

“All in all, more than 100 restrictive measures are still imposed on Russian goods; these are mainly anti-dumping measures against the products of the metallurgical and chemical industries,” said Vladimir Chikin, a customs practices partner at Goltsblat BLP.

The EU has restrictions on wheat imports; China, Mexico and India restrict the import of pipes and steel; meanwhile, the U.S. and Australia have restrictions on the import of fertilizers. Most of these restrictions, according to Moody's, are imposed on the companies Severstal, NLMK and Fosagro.

First published in Russian in Kommersant.


Experts: Russia has reaped many benefits from joining the WTO

By Artem Zagorodnov, RIR

Three experts say Russia has already reaped many benefits from joining the WTO during its record 18-year accession. All three see it as an important step toward modernizing the economy, but don't expect surprises in the future.

Jon Hellevig, founding partner of the Moscow-based Awara Group

“The point of joining the WTO was never to make any dramatic change overnight, but rather to make another input into the process of modernizing Russia. The negotiation process went on for a record 18 years, and, over that time, Russia’s legislation and business environment had already changed a lot to adapt to the WTO. Right now we are in the transition period following accession for most of Russia’s industries.”

“What Russia’s leaders really did with joining the WTO was make a wake-up call to Russian corporations [about the fact] that they have to modernize in the face of foreign competition. As the Russian economy opens up to the rest of the world, companies have to start improving their own performance or face losses.”

“The most important statistic is unemployment—it’s at a historical low, which means there haven’t been any significant adverse effects from WTO membership. It’s also hard to pinpoint how membership is affecting Russia’s economy, as the poor situation in the EU is having a much greater effect.”

“WTO accession will not lead to a rapid increase in the number of Russian goods in new markets, because the country doesn’t produce many products that are internationally competitive yet — but it is one condition for that to start developing. So the WTO is a good input into the long-term improvement of the business climate, but nothing dramatic has happened or will happen — and Russia’s leaders understand this.”

Ed Verona, former president of the U.S.-Russia Business Council (USRBC)

“The direct trade benefits of joining the WTO are evident, but the psychological component of membership shouldn’t be overlooked. The message it sends to investors is: ‘Russia is prepared to live by a set of rules established by an international organization and, potentially, to submit to decisions made by its independent arbitration panels.’”

“Nowadays, with the globalization of manufacturing, when a company establishes a facility abroad, it’s often looking at markets beyond any single country. That means its products will cross borders—often even during the manufacturing phase—perhaps multiple times. WTO rules provide an assurance that, if a trading partner unilaterally imposes restrictions against the exports of another member in violation of those rules, then there is recourse to an arbitration panel.  This makes it feasible for Russia to become part of the growing network of global supply chains.”

Stanislav Tkachenko, associate professor of the International Relations Department of St. Petersburg State University (Russia) and a visiting professor at Bologna University (Italy)

“Many positive economic steps — such as lowering tariffs on hi-tech and IT products — were already taken by Russia during its long accession process, so there haven’t been any major breakthroughs over the last year. One thing that Russia has not done is reduce the state’s role in the economy: On the contrary, it has increased.”

“Russian diplomacy has not yet learned to lobby through a tough economic agenda to help local producers — especially in agriculture — take advantage of export opportunities to new markets. This will happen over the next seven years, as the country’s various economic industries complete their transition phases.”

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