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Impact of Russia's WTO Entry on U.S.

Interviewee: Stephen Sestanovich, George F. Kennan Senior Fellow for Russian and Eurasian Studies, Council on Foreign Relations
Interviewer: Bernard Gwertzman, Consulting Editor, CFR.org
November 10, 2011

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A deal between Georgia and Russia (RT), helped by Swiss mediation, has opened the way for Russia to join the World Trade Organization (WTO). "The Russians are the largest economy not in the WTO," and their accession is important both in economic and political terms, says CFR's Stephen Sestanovich. But for the United States to benefit from Russia's membership in the WTO, he says, Congress must "graduate" Russia from the terms of the 1974 Jackson-Vanik Amendment, which links trade to human rights practices, mainly emigration policies. Economic considerations make it likely for Congress to take this step, Sestanovich adds, but at the same time many members in Congress would like Jackson-Vanik to be replaced with something else that expresses continued U.S. support for democracy and human rights in Russia.

Russia is all set to enter the WTO. Is this a major development for the world economy? Is it a major development in Russia's relations with the rest of the world?

The Russians are the largest economy not in the WTO. Their accession is important in economic terms; it also has significant political interest. A few months ago, I would have predicted that it would be quite hard to solve the big remaining obstacle, which was a political one. And that was that Georgia objected to Russian membership because, in brief, Russia is occupying its territory. It wanted arrangements made that would indicate that South Ossetia and Abkhazia--the Georgian provinces that Russia has recognized as autonomous, independent states following the brief Russian-Georgian war in 2008--are still part of Georgia. And the Russians of course, were in no mood to grant this. So, it looked as though it would be very hard to broker a deal.

In the end, both sides have agreed to a monitoring system (AP) on the Russian-Georgian border across from Abkhazia and South Ossetia, in which an independent contractor, hired by the Swiss government, will monitor and report on trade flows. It's a jerry-rigged arrangement, but the real interest of it is that the Russians agreed to something that does, in fact, imply that there's something fishy in the status of South Ossetia and Abkhazia. And that's what the Georgians wanted. They wanted even the mere suggestion, the merest practical compromise that these were not real countries, and they got it. So it's interesting that the Russians agreed to do this.

Why did the Russians agree?

It suggests both a desire for the economic benefits of WTO membership--recognition that on the question of the status of these two provinces the Russians are totally isolated in the world--and suggests a desire to move beyond the impasse on this question.

The United States has used trade as a weapon against the Russians going back to the Cold War, as with the Jackson-Vanik Amendment to the U.S. Trade Act of 1974. How does Jackson-Vanik get affected by Russia's entry into the WTO?

In the next phase, the [U.S.] administration is going to be pointing out that to get the benefits of Russian membership in the WTO, the United States has to graduate them from Jackson-Vanik. The United States and Russia will not have a full WTO relationship unless the trade is unconditional, and the fact that Jackson-Vanik involves an annual review of Russia's compliance means that it's not unconditional. So what will have to happen in Congress is a vote to remove Russia from the coverage of the Jackson-Vanik Amendment as has happened with most states of the former Soviet Union already.

What will have to happen in Congress is a vote to remove Russia from the coverage of the Jackson-Vanik Amendment as has happened with most states of the former Soviet Union already.

That vote is an awkward one politically for a lot of members of Congress because on the one hand, they hate to cast a vote that implies that things are going well on the human rights and democracy front in Russia. On the other hand, the economic benefits for the United States are real, and my guess is those economic considerations are likely to prevail. Members of Congress will be hearing from their constituents and lobbyist friends that jobs are involved and exports are involved, and that will probably be a persuasive consideration for them.

Which economic sectors in the United States would benefit the most?

The United States has always exported a lot of chicken and pork, and Russian regulation of those exports was one of the difficult issues to be resolved in reaching an agreement on the WTO. The Russians will now have less basis to complain about the chemicals put into American food products, and so those exports have more of an opportunity to grow.

In general, Russia will be obliged to reduce its agricultural subsidies over the next several years; to reduce its import duties on consumer goods; to reduce tariffs on heavy equipment for agriculture, construction, scientific purposes; and to reduce tariffs on pharmaceuticals, and to make it easier for foreigners to own Russian banks and insurance companies. The United States has an interest in all of these areas and an opportunity to expand its trade and investment in Russia because obstacles will have to be reduced. So the economic benefits for the United States are real here.

There are credible estimates that trade between the United States and Russia could double over the next five years. I should say it doubled between 2005 and 2010 but did take a hit in response to the international economic crisis. It's still not very big, but we have a $20 billion trade deficit with Russia, which we have a chance of closing because WTO accession will give us access to the Russian market.

I assume we're importing mostly Russian oil.

Absolutely. Russian minerals, metals, chemicals are more than 90 percent of their overall exports.

Is this part of the "reset" that was announced by Vice President Biden in the beginning of the administration?

It is part of reset in the sense that the goals that both sides set out when Dmitry Medvedev and Barack Obama became presidents included things like a new START treaty, a WTO accession, and cooperation on a number of other issues. But of course, the WTO problem has been one of very long standing. The Russians first applied to join the WTO in 1993, so this has been an eighteen- year project.

Has Prime Minister and former president Vladimir Putin been behind this? I've read that he's fluctuated.

There's a lot of understandable sentiment in Congress that Jackson-Vanik should be replaced with something else that expresses continuing American support for efforts to democratize Russia, to defend human rights, and so forth.

Putin has been more receptive to the concerns of Russian manufacturers and companies that felt they were going to take a hit as a result of WTO accession. He has always had sort of a nationalist line that we're not going to join the WTO if they insist on a one-sided deal that is tougher than what's imposed on other countries. He did the biggest single backtracking on WTO two years ago when he announced that Russia would only join as part of its customs union with Kazakhstan and others. This set the whole process of accession back more than any other single action in the past eighteen years. The Russians have primarily themselves to blame for the delay. Putin had said more recently that it's a close call, it's sort of fifty-fifty but with the balance tipped in favor for Russia, and that seems to be the way he's playing it now.

So Kazakhstan would not come in on their shirttails?

The whole question of accession for the customs union has been put aside.

To help end Jackson-Vanik, will Georgian President Mikheil Saakashvili have to come to Congress and make a pitch on Russia's behalf? That seems to be the issue, whether the Georgians are happy?

No, the Georgians are now happy because their concern has been that Russian membership should not in any way imply that trade across the border from Russia into South Ossetia and Abkhazia is not trade into Georgian territory. And they've gotten the mechanism now that satisfies them on that point. They want other things from the United States, and they are going to be pushing their case for closer security cooperation between now and the NATO summit next spring in Chicago.

The hard question for Russians and the administration will be whether Congress is prepared to do a so-called "graduation vote"  that is clean, meaning simply to "graduate" Russia from Jackson-Vanik and take no further action. There's a lot of understandable sentiment in Congress that Jackson-Vanik should be replaced with something else that expresses continuing American support for efforts to democratize Russia, to defend human rights, and so forth.

There are disagreements in Congress about what that replacement legislation should be. There is this so-called Magnitsky bill, which would impose restrictions on entry into the United States and even on assets in the United States of Russian officials who are considered to be human rights abusers. There has been some consideration to setting up a fund which would support civil society groups in Russia. Something of this sort is meant to ease the anxiety that members have when they "graduate" Russia from the coverage of the single most important piece of legislation from the Cold War relating to human rights. They want to feel that there is somehow an expression of continuing concern, a modernization of that policy. They haven't figured out what it should be, but there's a strong interest in taking some steps along these lines.

What happens now? Does the president waive the provisions of that bill each year to allow trade to go on?

No. This is a common misconception. There is a waiver by the president only if a country covered by Jackson-Vanik is not allowing free emigration. Since Bill Clinton, all American presidents have found Russia to be in full compliance with the requirements of Jackson-Vanik. Meaning that there's no waiver, there's merely a report every year to Congress that Russia is in full compliance. But even that report is inconsistent with normal WTO relations.

So right now Russia gets normal tariff treatment but not permanent?

It's called NTR [Normal Trade Relations], as opposed to PNTR, or Permanent Normal Trade Relations (PDF). You may remember the vote that Congress had to take on the question of Chinese accession when they joined the WTO. They were voting essentially in favor of PNTR for China because it too was covered by Jackson-Vanik.

Russia's human rights record is certainly better than China's.

That's true. But of course, Russia pretends to be a democracy and the Chinese are not hypocrites on that point. There's another difference between the Russian and Chinese case. In economic terms, China represented a much more complex and troublesome issue for Americans because essentially what we were looking at was a potential big surge in Chinese exports to the United States from PNTR. What we're looking at from PNTR for Russia is hopefully a surge of American exports to Russia. So the economic benefits are probably a little simpler to describe and more one-sided in our favor.

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