Russia Summary

Last updated October 2004

Since the election of President Vladimir Putin in 1999, Russia has focused intently on the goal of joining the World Trade Organization (WTO). It is now in the final stages of membership negotiations and has announced hopes to complete bilateral negotiations by 2005, [1] which may be possible in light of the amount of progress has been made in the last year. Russia stands to benefit from accession in the future on several fronts, including obtaining a means to challenge discriminatory measures held by 30 countries against Russian steel exports. Its demonstrated commitment to the rule-based WTO system might also attract more foreign investment. However, complying with the privatization and liberalization demands that will be imposed through WTO membership will mark a significant and likely difficult adjustment for the still highly-regulated Russian economy.

Before it can officially join the WTO, Russia must complete bilateral agreements with several more WTO countries, including Japan, South Korea and the United States. It has already signed a FTA with the European Union. In October 2004, China officially endorsed Russia’s WTO membership, hoping to gain cooperation with the building of the Angarsk-Daqing oil pipeline to supply Russian oil to energy-dependent China. [2] A US-Russia FTA seems to still be an unlikely possibility in the near future due to US concerns with Russian music piracy, as well as displeasure with President Vladimir Putin’s recent crackdown on government opposition since the U.S. has tried in the past to use favorable trade policies as a reward for stable governance.

Energy and Agriculture

Russia's bid to join the WTO continues to stumble on the issues of artificially low rates for domestic energy consumption and the openness of markets to foreign competitors. Moscow's reduced energy prices are considered a subsidy for manufacturers, and WTO member countries have expressed the view that Russia should charge equivalent prices domestically for oil and gas as it does abroad, where prices are as much as six times higher. Russia’s position has been that this requirement is not written down in the WTO rules; therefore, Russia should be under no obligation to comply with the demand that would serve to effectively destroy its competitive advantage in energy-consuming products.

Russia worked out its disagreements with the EU on energy prices and agricultural subsidies in their bilateral trade deal, which gave a boost to Russia’s entire WTO ascension process. Since agricultural subsidies have become a focal point of disagreement between developed and developing countries within the WTO’s Doha negotiating round, Russian agricultural support may become another focal point of criticism, although it has not received much attention in light of bigger concerns about energy and intellectual property protection. Considering Moscow's reduced energy prices to be a subsidy for manufacturers, the EU wants Russia to charge equivalent prices domestically for oil and gas as it does abroad, where prices are as much as six times higher. Medvedkov maintained that this requirement is not written down in the WTO rules; therefore Russia should be under no obligation to comply with the demand that would serve to effectively destroy its competitive advantage in energy-consuming products.

Telecom, Aircraft and Automobile Industries

Russia has identified a long list of strategic industries that it is not prepared to bring under binding WTO rules, some for which it is hoping to secure longer transition periods from the rules upon entry. The primary industries on this list are financial, banking, securities, telecommunications, and distribution services. On telecoms, Russia's proposals for WTO accession include several points that go against the grain of Member States' aims in terms of liberalization. Russia would demand the extension of an existing monopoly on international telecommunications traffic and a mandate that only Russia-based subsidiaries operate in the country. It would cap foreign companies ownership of local telecommunications companies and require a minimum percentage of Russian citizens sit on the board of directors for firms operating in the country.

Russia is also highly resistant to liberalization in services and wants to shelter most of its civil aircraft manufacturing sector, to give producers time to modernize their capabilities. It is seeking a long transition period for the automobile sector to adjust to WTO rules. The government says that high tariffs on imported vehicles after WTO accession would be necessary in order to protect investments and re-structure the industry, which employs 1.2 million people. Russia currently levies a 35% tariff on foreign-imported automobiles. [3] This policy has been of great concern to Japan, impeding progress in negotiations on other issues pertinent to Russia's WTO accession.

Intellectual Property, Sanitation and Customs

Among the many issues that US trade officials believe Russia still needs to address, it emphasizes intellectual property rights and enforcement, citing music and video piracy as particular concerns. The US estimates it loses $1 billion each year due to pirated music CDs manufactured in Russia. [4] It also points to Russia's technical barriers to trade and sanitary and phytosanitary measures, which it says must be brought into compliance with WTO rules to prevent the nullification of any market access concessions it would receive upon becoming a member. Other WTO member delegations have flagged concerns about Russia's problematic import licensing and customs valuation and over its highly protected farm sector.

Insurance Market

Foreign-owned insurance companies are demanding access to Russia's vast market of nearly 200 million people. The demands include dismantling all barriers of entry against international companies into the Russian life insurance sector, as well as opening up access to some types of compulsory insurance markets. The government's recently formulated position on these issues holds that the insurance sector has strategic importance for Russia and that only gradual liberalization of its insurance market will be possible. Leading domestic insurers emphasize a need to protect the interests of the fledgling industry, which has only been developing on its present form since 1991. The May 2004 bilateral deal with the EU did not include provisions for European banks and insurers to open direct branches in Russia, to the disappointment of these industries.[5]

Regionalism Among Former Soviet States

In September 2004, Russian Prime Minister Mikhail Fradkov called on the states of the Euro-Asian Economic Community (EurAsEC), the former Soviet republics of Russia, Belarus, Tajikistan, Kazakhstan, and Kyrgyzstan, to work together on advancing WTO accession talks. He encouraged the countries to work together to increase intra-state business in order to improve the regional investment climate and decrease international fears of “capital flight” from Russia. He also claimed that the economic focus of the EurAsEC economies on their natural resources sectors seems inappropriate, given the potential for industrial and scientific specialization of the well-educated workforce. He also proposed making the Russian rouble the principal EurAsEC currency.[6]

Conclusion

According to WTO estimates for 2003, Russia was ranked the 17th among the world's largest exporters, shipping $134.4 billion in goods.[7] Its trade minister estimates that its economy could gain billions of dollars in new trade and investment once it has access to world markets that WTO membership would allow. Its government is intent on continuing to reach out to as many countries as possible to establish formal trade relations, and pursuing its ongoing dialogues with the US and Japan. The EU’s May 2004 FTA with Russia was a huge boost for Moscow's progress toward WTO accession, and in the absence of any unforeseen obstacles in the next year, Russia may well be the next significant player in the WTO as early as 2005.

• World Bank Country Profile

• State Committee on Statistics of the Russian Federation

• Asia Pacific Economic Cooperation (APEC)

• Central Bank of Russia

• Ministry of Foreign Affairs

• Ministry of Agriculture and Food of the Russian Federation

• Russia links from Stockholm School of Economics

• Russian Federation and the IMF

• US State Department Report on Economic Policy and Trade Practices