Russia’s accession to the WTO was supposed to bring lower prices and increased profits. Instead, it may bring something more valuable: accountability.
Conference Chairman Olusegun Olutoyin Aganga (right) uses a hammer next to WTO Director General Pascal Lamy to complete Russia's accession to the WTO. Photo: Reuters
It is a year since Russia formally joined the WTO, but it appears that only specialists who are short of news to report and comment on at the end of August have remembered this milestone.
The reason is understandable: the event that had been eagerly awaited for 18 years has brought little change. There are several reasons for this. First, by the time Russia acceded to the WTO, the average import customs duty had dropped from 20-22 percent in the early 2000s to 10.4 percent. In the coming years, under the terms of our accession to the WTO, it is expected to drop to just 7.8 percent. In addition, the cut in tariffs for the most overvalued goods, such as alcohol, has been postponed until 2016-2018, so consumers do not feel any change.
Second, the Russian authorities are already doing and will continue to do all they can to prevent imported goods competing with domestic ones. The cut in the duties on cars has already been offset by the “disposal charge,” the cut in alcohol duties will be balanced by a rise in excise taxes, etc. Besides, to limit imports (of pigs, for example) veterinary or epidemiological reasons can always be found.
Third, the trade system today, even if import prices (and, therefore, costs) are cut, has no serious reason for cutting retail prices because consumer demand is high. So, in spite of the growth of imports in the first half of 2013 (by 5-9 percent for food and 12 percent for clothing and footwear), prices are not going down and will not do so in the near future.
Today, it can be said that the only beneficiary (among economic sectors) is retail trade. As of September 1, import tariffs will be cut by a further 1-3 percent on more than 5,000 goods, a move which will bring extra profits of $300 to $400 million to traders. Yet, even that move is unlikely to make a difference to the majority of consumers.
The other sectors of the economy have not yet gained much from our accession to the WTO. Commodity exports are not regulated by its rules and the 100 or so restrictive measures with regard to Russian goods will not be lifted until 2015-2017.
Likewise, there is no visible breakthrough in agriculture, which, considering Russia’s potential for organic farming, might have anticipated changes: our main potential market, the European Union, is largely protected by the Common Agricultural Policy (CAP), and breaking into that market would be a challenge.
To be sure, an undoubted benefit of WTO membership is that it will increase competition on the Russian domestic market and, should the windfall oil profits diminish ever so little, the process might drive prices down (to compensate for some negative effects of the possible crisis). Yet, as long as economic growth continues, that is virtually unnoticeable.
An important positive change is that, under the new conditions, Russia will have to reckon with rules set in some place other than the Kremlin and obey not only the decisions passed by the Basmanny court.
The first test is already looming: the EU has filed a lawsuit against Russia, challenging the legality of the 5% “disposal charge,” which has compensated for the cut in duties on imported cars from 30 to 25 percent. Russia will almost certainly lose the case and then consumers will feel for the first time that the government can no longer get away with everything.
In fact, I consider this to be the only WTO mission with regard to Russia: it should teach our bureaucracy to play by rules different from those it sets itself.
Meanwhile, the WTO – as is evident from the quarrels that have rocked it in recent years – has long ceased to be the leader in promoting the ideals of free trade. Its place has been taken by the numerous regional integration organizations, above all the European Union.
The European Union’s policy is based not on setting up arbitration to resolve trade disputes, but rather, on the possibility of filing all the requisite lawsuits with the European Court of Justice (ECJ), whose decisions are implemented through national courts and are effectively internalized in national legislation. In that case, the free trade zone ceases to be an artificial institution and becomes the “flesh and blood” of the integration organism.
Judging from the speed at which the EU has expanded, from 12 members in 1992 to 28 today, that principle is perceived as very attractive, especially since it can be spread to countries that are not members of the Union’s political structure, such as Norway, Switzerland and even Turkey.
Over the next few months, Russia will be into its second year as a WTO member and we will witness an epoch-making drama: the clash between clear-cut and transparent institutions and the principles of “manual control” and selective justice. In Vilnius, on November 28, Ukraine may sign an Association Agreement with the EU that paves the way towards a free trade zone with Europe.
The Russian authorities are openly flouting WTO principles by restricting trade with this neighboring country as a warning to its partners of what will happen if they lose the Russian market.
Nobody doubts that Russia can deal a heavy blow to Ukraine’s economy by limiting its imports. It is unlikely, however, that our neighbor will renounce association with Europe. First, because strict and transparent rules are always better for business than informal agreements and, second, it is easier to keep Russia at bay, notably through WTO institutions.
To sum up, Russia’s first year within the World Trade Organization is only the first step on a long journey. So far, it has made little difference to the majority of the population and even most companies, but it may induce the Russian elite to reappraise seriously the limits of its own power. And that costs dearly.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.