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Russia’s WTO entry a big boost to world economy
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December 7, 2012
A Postcard from Europe
Russia’s WTO entry a big boost to world economy

Moscow

Now that Russia has become the WTO’s 156th entrant, the doors have opened wide to a $1.9-trillion economy and a 143-million-strong consumer base, the world’s ninth largest and Europe’s biggest

It is not every day the entire world celebrates a club membership, and this one in particular has been a long time coming. On August 22, when Russia finally joined the World Trade Organization (WTO) after 18 years of negotiations, economies across the planet raised a glass of vodka in toast, cheering better access to an enormous export market.

Since its founding in January 1995, the WTO has been working as the global body in charge of supervising and liberalizing international trade. Its primary objective is to eliminate import restrictions, resolve trade disputes, and truly make the world one big marketplace. In that sense, the WTO has been the cornerstone of economic globalization over the past two decades.

So, it is remarkable how an economy as large and important as Russia stayed outside the trade group for nearly two decades. In fact, until its entry in August, it was the only G8 and G20 country that was not a WTO member.

Be that as it may, now that Russia has become the WTO’s 156th entrant, the doors have opened wide to a $1.9-trillion economy and a 143-million-strong consumer base, the world’s ninth largest and Europe’s biggest. What’s more, Russia is a country with rapidly rising income levels and a steadily expanding middle class. According to the terms of its WTO membership, the BRIC nation will cut import tariffs – from an average of about 15% now to less than 7% – across all sectors of its economy. This will make imports cheaper in Russia, potentially benefiting overseas firms that sell their goods and services in the eastern European country. Foreign companies will also get a chance to enter previously heavily protected sectors in the Russian economy.

Indeed, Russia has already started implementing its WTO obligations, having reduced import duties on several kinds of meat and food products as well as on automobiles. For a specific quantity of some goods like pork, Moscow has even reduced the import tariff to zero from 15%. It is no wonder then that countries and major economic blocs are rejoicing the accession of Russia into the WTO. For example, the European Union (EU) has declared that Russia’s WTO entry will “provide an important boost to European companies.” A BBC article says Russia is the EU’s third biggest trading partner and EU members export goods worth $134 billion to the country.

Russia too stands to benefit much from its WTO membership. For one, with imported goods becoming cheaper, the purchasing power of Russian consumers has increased significantly. Secondly, the emerging economy has often been criticized for not adequately focusing on improving transparency and corporate governance. But as the WTO Director General Pascal Lamy has told CNBC, “Joining the WTO is sort of getting a quality label which investors worldwide usually see as a reduction in risk premium.” So, Russia is now hoping to see a spurt in foreign direct investments (FDI). This is a key priority for the country’s president, Vladimir Putin, who has pledged to ensure that FDI increases from the current level of 20% of GDP to 27% of GDP by 2018.

Russia’s exporters will gain as well, in two ways — access to new markets and fewer restrictions from importing countries. The World Bank estimates that the Russian economy is set to gain an additional 10%-11% in annual GDP due to increased trade. Further, Russian exporters are now in a better position to settle their trade disputes and have their complaints remedied. According to a Deutsche Bank analyst quoted in rt.com, “there are almost 100 restrictions now in existence against Russian exports,” especially in the global steel and chemicals markets.

Nevertheless, the WTO accession will likely cut both ways for Russia. In the short term, foreign competition and a steady flow of higher-quality imports may stifle some segments of the Russian economy, such as agriculture and automobiles, which are already struggling to stay afloat despite being propped up by state subsidies. Fortunately, though, Moscow has negotiated well with the WTO and has gotten the organization to agree to a less painful transition. In effect, the WTO has allowed the Russian government to open up its markets in a phased manner. The other good news is that any short-term pain is expected to translate into long-term gain as foreign competition will only make all Russian industries more productive over time.

Throughout history, Russia has often been described as the last frontier in various contexts, either for its extreme climate, once impenetrable markets, or complete alienation from the Western world for much of the 20th Century. If the 21st Century is about dismantling borders in international trade, it can be said today that with Russia’s WTO membership, the last frontier in economic globalization is about to be conquered.

 

Image Credit: IntelFreePress’ photostream on Flickr under a Creative Commons License

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