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March 4, 2003
Council on Foreign Relations
[Note: A transcript of this meeting is unavailable. The discussion is summarized below.]
What We Know:
Participants in the March 4 roundtable had the opportunity to discuss the prospects for Russia’s accession to the World Trade Organization (WTO). Russia aims to join the organization by the end of 2003. Progress has been made in a number of key areas and the necessary legislation has been passed. However, a few areas of contention remain, such as energy prices and subsidies for the automobile and aviation industries. They have complicated Russia’s relations with the EU and may be an obstacle to Russia’s entry into the WTO. The upcoming elections in December 2003 have also slowed down the impetus for reform.
Russia’s elite has recognized the importance of joining the WTO for the development of the country’s economy. Membership in the WTO has become one of the major issues on President Putin’s domestic and foreign economic agenda. It is now a hot topic of debate among Moscow elites. Because Russia expressed little interest in WTO accession in the past, the government today has only a handful of foreign trade specialists.
There are several factors that contributed to Russia’s current interest in joining the organization:
WTO membership has a number of advantages for Russia:
Russia is in a better position to join the organization than China. Russia needs to negotiate only 25 to 30 accession chapters, while China had to negotiate about 200. Russia’s agricultural subsidies are already low and the government has agreed to open the insurance market and the banking sector.
The most problematic areas are subsidies for the aviation and the car industries which are not competitive and are poorly managed. They are controlled by powerful oligarchs and negotiation in these areas is likely to face significant opposition.
Energy pricing is another area of contention, especially between Russia and the European Union. Oil and coal prices are free but gas prices are not. The EU maintains that gas prices need to reach market level and be increased up to five times their current price. Disagreement over gas prices could block Russia’s WTO entry, even though Russia has been officially accepted as a market economy.
The dispute over the price of natural gas has further fueled Russia’s disillusionment with the European Union. EU protectionism has hampered Russian trade with the Union. For example, EU decreased grain quotas for Russia by ninety-nine percent. Russia was not able to do anything because it is not a member of WTO. However, by joining the organization, Russia will have the means and the leverage to dispute decisions that cripple its foreign trade.
What We Don’t Know:
How difficult will it be for Russia’s economy to restructure further?
While Russia has achieved more openness than economies of similar size, there are still many problems underneath the surface. Russia’s recent economic growth has not solved the structural problems of the Russian economy. Economic activities are widely dispersed across Russia’s territory and there is not enough border openness and cross-border integration. Parts of the Russian economy are still closed and the hidden economy is still very strong. WTO accession will bring these challenges and other structural problems to the fore.
How strong is opposition to reform, especially at the local level?
The greatest barrier to implementing WTO regulations is latent opposition at the regional and local level. Local manufacturers also enjoy significant local political clout. Highly inefficient manufacturers benefit from low gas prices and non-transparent regulations and transactions. Therefore, WTO membership is not in their interest. In some industries powerful oligarchs could also obstruct implementing WTO regulations.
How will the election cycle affect reforms?
There are already signs that the momentum for reform has been slowed down by the upcoming elections at the end of 2003. Russian political elites are gearing up to win voters and support from different oligarchic groups rather than introducing new laws and more reforms that may be unpopular. Important legislation, such as intellectual property laws and bankruptcy laws, have been put on hold until after the elections.
What are the next steps; what should be done and by whom?
Western countries should facilitate Russian entry into the WTO. Western countries could use WTO membership to encourage Russia to increase transparency, reduce bureaucracy, and introduce key legislation, such as intellectual property laws.
Accession to the World Trade Organization is also an important lever for Putin to push further economic reform. The tough demands of WTO membership will allow the Russian president to introduce legislation pushing for more transparency and legal protection and become more forthcoming in opening the Russian market which may not be popular with certain oligarchic groups and factory managers.
Russia and the WTO countries need to set up a realistic timeline for Russia’s membership. Although the current government would like to see Russia join the organization in time for the elections in the end of this year, it is more likely that Russia will become a WTO member in 2004 or later.
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