Russian Federation: WTO Membership Will Provide Needed Boost To Investment Climate In Russia

Last Updated: 22 February 2012
Article by Laura M. Brank

On December 16, 2011, after 18 years of negotiations, the Russian Federation was officially invited to join the World Trade Organization (WTO) during the WTO Ministerial Conference in Geneva. The official invitation marks an important milestone for integrating Russia into the global economy, requiring Russia's adherence to international business and trade standards, while opening its markets in many segments to foreign companies. Once the State Duma ratifies the resolution for accession, trade relations will be normalized under the WTO member framework. Russia is the last major world economy to join the organization.

Timeline

The Russian Ministry of Economic Development estimates that the membership documents will be ratified in July. Once ratified, Russia will be subject to the negotiated rules and regulations after 30 days. However, in order to protect certain segments of the Russian economy, not all of the regulations will take immediate effect, which is typically the case when new members join the WTO.

For certain industries, Russia has negotiated staggered accession of 5–7 years for the WTO conditions to take effect, allowing companies time to adjust to the increased competition and regulations.

Benefits: Reduction of Tariffs and NTBs to Trade

As a member of the WTO, Russia will be subject to WTO rules and procedures for fair trade with member countries, preventing it from arbitrarily raising tariffs and reducing the likelihood of it invoking nontariff barriers (NTB) to trade by subjecting it to the WTO dispute settlement procedures. Russia will also need to follow WTO safeguard, countervailing duty, and anti-dumping duty procedures, observing established procedures with open hearings.

Russia has committed to immediately lowering and binding its tariff rates on over one third of all tariff lines and over 80% of tariff lines within three years of accession. As a whole tariffs will decrease to 7.8% from 10%.1

More specifically, the key industry average tariffs will be cut for:

  • aerospace (from 20% to 8.3%, on the sale of civil aircraft; tariffs on civil aircraft parts will drop to an average of 5%)
  • agriculture (from 13.2% to 10.8%)
  • automobiles (from 15.5% to 12%)
  • chemicals (from 6.5% to 5.3% or less)
  • electrical machinery (from 8.4% to 6.2%)
  • high technology (tariffs will be bound at zero for products listed under the WTO's Information Technology Agreement)
  • manufacturing (from 9.5% to 7.3%) and
  • wood and paper (from 13.4% to 8%) 2

Russia has also agreed to reduce its export duties on steel scrap to 1/3 of their current levels.

In addition to reducing tariffs, immediately after membership, Russia will allow one hundred percent foreign ownership of securities firms and nonlife insurance firms. Wholly foreign-owned companies will be able to operate in wholesale, retail and franchise sectors immediately after membership. By 2016, Russia agreed to open its telecommunications services market to all foreign suppliers and allow companies to operate as one hundred percent foreign-owned enterprises.

Agriculture trade will also be significantly affected. In Russia, consumer spending on food grew by 70 percent between 2002 and 20083 and is predicted to continue its rapid growth. Russia is the world's second largest import market for beef and pork and has historically been one of the largest importers of U.S. poultry, which has led to a number of high profile trade disputes over the years between Russia and the United States. WTO accession will ensure that all member countries will enjoy the same access to Russian agricultural markets as current leading importers such as Brazil and the EU. Imports will be subject to standardized sanitary and phytosanitary (SPS) standards to ensure that any restrictions are based on scientific criteria. Analysts estimate that U.S. agricultural exports to Russia will double or triple within a few years of WTO accession.

Related Agreements

In becoming a member of the WTO, Russia will become a party to a number of agreements which should present more transparent trade and investment in Russia. Among other agreements, Russia will become part to the Customs Valuation Agreement, the Government Procurement Agreement and the Technical Barriers to Trade Agreement.

The Customs Valuation Agreement (CVA), outlines the procedure and principles that countries must use to value imported goods for taxation purposes. Becoming a party to this agreement is important to establishing a system for conforming the pricing and valuation of goods for customs purposes to be applied in all member countries.

The Government Procurement Agreement (GPA), is designed to promote more open and transparent procurement by the government of goods and services, encouraging fairness and non-discrimination with respect to suppliers, goods and services. The GPA requires state-owned enterprises (SOEs) to base their purchases and sales strictly on commercial considerations. Upon accession, Russia would become an observer to the GPA, negotiating membership within four years of joining the WTO.

The Technical Barriers to Trade (TBT) Agreement outlines the standardized regulations, standards, testing and certification procedures for trade. Countries adhering to the standardized regulations ensure to exporters and governments that their technical trade regulations are free from unnecessary obstacles to trade and protectionist measures.

In addition, WTO members will be able to challenge any conflict in respect of Russia's WTO commitments through the WTO's dispute settlement process, which should add greater stability and transparency to trading and investing in Russia. The Dispute Settlement Body of the WTO has clearly defined rules and timetables for settling trade disputes and if a member country is believed to be violating trade rules or not living up to obligations, the dispute will be settled by a third group of countries through the established dispute resolution process. By signing on to join the WTO, Russia is demonstrating its commitment to becoming part of the international trading community and taking steps to increase investor confidence.

Once it becomes a member of the WTO, Russia will need to bring its legislation into compliance with the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, which is the fundamental agreement protecting intellectual property rights for WTO member countries. Intellectual property protection has been one of the main obstacles inhibiting foreign investment in Russia. While Russia has the legislation in place to protect and enforce intellectual property, in practice enforcement has been difficult, especially without international cooperation to help eradicate such violations. Aligning its laws with TRIPS should help boost investment by technology and life science companies, which heavily rely on strong intellectual property protection.

Challenges

In order for U.S. companies to benefit from Russia's accession to the WTO, Congress will need to graduate Russia from the Jackson-Vanik Amendment, and grant Russia permanent normal trade relations (PNTR) status. The outdated Jackson-Vanik amendment was passed by the U.S.

Congress in 1974 as part of the Trade Agreement Extension Act, to restrict normal trade relations with nonmarket and communist countries unable or unwilling to assure free emigration to its citizens; in the case of the Soviet Union this applied to the free emigration of Russian Jews. Passing legislation to grant Russia PNTR status is vital to allowing U.S. companies to enjoy the benefits of Russia's accession to the WTO and to be on the same playing field as their global competitors.

Conclusion

The fact that the Russian government considers joining the WTO an important step in Russia's economic growth and has shown its willingness to subject itself to the WTO rules demonstrates its commitment to becoming part of the international trading community. The Russian government appears to have learned an invaluable lesson from the global economic recession: that it is deeply interconnected with the rest of the world and that its policies and attitudes with respect to business and its application of the rule of law will directly impact investment in the country and, ultimately, its economic security.

Russia will become the 154th nation to join the WTO. Analysts estimate that implementing global trade rules and reducing protectionist practices will lead to an estimated 3% to 4% in additional annual growth to the Russian economy.

Footnotes

1 USRBC, Russia's WTO Accession: What it Means for U.S. Businesses, December 2011.

2 The Peterson Institute for International Economics Policy Brief, The United States Should Establish Permanent Normal Trade Relations with Russia, November 2011.

3 Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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