RD Exclusive: With the West seeking to decrease its dependence on Russia's oil and gas and looming economic and trade sanctions on Russia's energy exports to Europe, is there anything the WTO can do to help?

Russia needs to use WTO rule-making in its own interests in order to promote its position and national producers' interests. Photo: Russia Direct

As ongoing efforts to resolve the Ukraine crisis show little signs of making progress, a growing number of experts are becoming concerned about the impact of sanctions on Russia's economy. Some even worry that Russia could lose some of the benefits it enjoyed from joining the WTO. That begs the obvious question: How can Russia leverage its membership in the WTO in response to any economic sanctions the EU, Canada and the U.S. might impose?

Given the West’s attempts to decrease its dependence on Russia's oil and gas, the threat of any energy-related sanctions against Russia should be taken seriously. As a result, if economic sanctions begin to affect Russia's energy exports to Europe, hypothetically, Moscow might use mechanisms of the WTO (such as the Dispute Settlement Mechanism) as a way to protect its interests. 

Theoretically Russia can rely on the WTO as a tool to defend its economic interests. However, it is unclear whether WTO rules can extend to issues such as trade sanctions, as participants at a week-long workshop for journalists on the WTO organized by the Friedrich Ebert Foundation (FES) in Geneva, Switzerland, at the World Trade Organization’s headquarters found out this week.

The WTO considers itself above politics and is viewed by experts as unwilling to negotiate political issues. Primarily, it focuses on commerce and international trade and officially adheres to the principle of neutrality. So, the Ukrainian turmoil is hardly likely to affect Russia’s position in the WTO, some experts close to WTO officials argue.

Likewise, WTO Director General Roberto Azevêdo sees the organization as “a forum where members negotiate and talk to figure out solutions” that doesn’t necessarily act as a political institution.

“If there were sanctions and a member complained about the legality of a particular measure or something like that, I suppose they could… but it could depend on the nature of the complaint and on the defense that would be invoked by the party that is being complained about,” he said at the workshop in response to a question from a Vedomosti reporter whether the WTO can deal with economic sanctions and help withstand them. “So, it’s difficult to predict what would be the challenge and what would be the defense.”         

Meanwhile, independent experts interviewed by Russia Direct are also hesitant to draw a correlation between economic sanctions, European energy diversification, Russia’s WTO membership and the Russian investment climate.     

Tatiana Isachenko, an expert on the WTO with a Ph.D. from Moscow State Institute of International Relations (MGIMO-University), argues that there is not any connection between European energy diversification policy and the WTO’s dispute settlement mechanism (DSM).

“In fact, DSM is used to dispute the unfair or discriminatory use of WTO instruments and norms covered by the WTO agreements,” she said. “The idea and the intention of the EU mainly to diversify its energy supply doesn't contradict any WTO rule.”

As Isachenko points out, there is not any commitment that provides that the EU will buy its oil and gas only from Russia. Energy contracts are ordinary contracts and nobody could force any European company to sign contracts only with Russia. That automatically means that there is not any subject for dispute since WTO rules are not violated.      

According to Isachenko, Russia needs to learn how to use WTO rule-making in its own interests in order to promote its position and national producers' interests. “Once we have strong producers, the investment climate will improve,” she said.

It remains to be seen when Russia will benefit from its WTO accession? Photo: AFP

Ukraine’s crisis, the WTO and Russia’s investment climate

When asked about the possibility that the Ukraine crisis might erode some of the benefits of Russia’s accession to the WTO, experts were hesitant in making any future predictions. 

“It is still far too early to make that assessment,” said Chris Weafer, senior partner with Macro Advisory, a Moscow-based consultancy providing research services to macro hedge funds, venture capital investors and foreign companies looking at investment opportunities in Russia and Central Asia. “For now, that seems to be off the table.”

As he told Russia Direct, the impact on the Russian economy from current sanctions will be modest if their list stays as is and is mostly directed against individuals without involving any trade or financial transaction flows affecting the broader economy.

Yet if the sanctions were to expand to the more damaging Stage 3 list then, “we would see a much greater negative impact on the economy and on investment flows in particular,” he clarifies.

Russia's investment climate had been worsening well in advance of recent events in Ukraine, notes Bernard Sucher, a member of the board of directors at Aton Group, who previously worked in the operations of many financial institutions, such as Bank of America-Merrill Lynch, Troika Dialog, Alfa Capital and Goldman Sachs.

While talking about the implications of the Ukraine crisis on Russia’s investment climate, he agues that Russia's accession to WTO was a notable, positive event, but it brought with it near-term challenges, and its benefits were mostly to be realized over the long-term. 

“That long-term was assumed to be an environment in which Russia continued this generation's march towards closer integration into the structures of global governance and the world economy,” Sucher clarifies, warning against more investment uncertainty for Russia.

As he notes, “Russia's sudden absorption of Crimea throws the fundamental assumptions of integration and convergence into question. Until we have some clarity on the country's likely geopolitical direction, talk of Russia's investment climate will be more speculative than your best guess for Moscow's weather next Christmas Day.”

Isachenko is sure that the gains from WTO membership will be more significant in comparison with political tension and losses.

“WTO is about trade and from this point of view we are a strong and attractive market,” she said. “Yes, our investment attractiveness would decline in the short term, hence, I really hope the political tension will not last long and economic rationality will prevail.”

“The WTO, the accession process, the reforms – they all help, but all of these benefits come together when the government itself is taking steps in order to promote its investment climate,” said Azevêdo in response to Russia Direct’s question about whether the WTO accession will outweigh the geopolitical factors (such as the Ukrainian crisis) in determining the country’s investment climate.

“It’s very difficult to tell how much comes from the accession process, how much comes from autonomous measures taken by the government. I can’t make an assessment based on this basis,” he added, pointing out that both – the WTO accession and geopolitics – will play a role.

WTO Director General Roberto Azevêdo (middle) takling to the Friedrich Ebert Foundation officers. Photo: Russia Direct

Will Russia reassess its role in the WTO?

When asked about Russian hypothetically reassessing its role in the WTO, Weafer saw no evidence of it.

“The issue with the WTO is more that Russia will continuously try to bend the rules for as long as it can in order to gain some advantage (such as the recycling fee on imported cars recently),” he said.  “But I believe that the government remains firmly committed to the WTO.”

Isachenko looks at the problem from other angle. According to her, any country could reassess its economic policy and role: “The question is, what do you mean by ‘reassessment’?”

“If Russia starts violating WTO rules and refuses to comply with WTO commitments it could provoke not only political sanctions, but trade measures as well. If Russia manages to prove that some sanctions are not in compliance with WTO rules, it could be disputed in the WTO.”

Nevertheless, sanctions might be applied in case of political conflicts and there are not currently any examples when countries used the WTO mechanism in order to avoid sanctions. The reason for sanctions is state and political security and they don't fall under WTO competence, Isachenko explains.

“We are free to reassess our positions in the WTO, but I'm not sure it is wise and will not end up harming Russian economic development even more,” she warns. “There are many countries in the WTO - including the BRICS and China - as important partners, and it would be a pity not to use the multilateral mechanism to strengthen our positions and participate in the rule-making.“

Is Russia’s expulsion from the WTO possible?

While Russian experts and economists reassess Russia’s membership in the WTO, some of their Ukrainian counterparts sound more decisive. Andrij Novak, Chairman of Committee of Economists of Ukraine asked Mr. Azevêdo if Russia could be excluded for its controversial policy in Ukraine.

“No member of the WTO has been ever excluded,” Azevêdo said. “Sometimes if a member is not in position to accept that agreement or something like this, it may withdraw from the organization. But [it’s] a very specific and very technical issue. It never happened.”

Mr. Azevêdo also pointed to the fact that any decision in the WTO is taken by consensus. Every member – including the member that is the object of the initiative – will vote as well and, thus, be in a position to block it.

“For a member, in order to be excluded, that member has to agree to be excluded,” Azevêdo clarifies.