After 19 years Russia Finally Joins the WTO

After a 19-year wait for membership the Russian Federation officially joined the World Trade Organization (WTO) becoming its 156th member on August 22nd. Russia’s accession process lasted for 17 years. The talks were held in the Working Group, which includes states which have unresolved trade issues with Russia.

The most difficult were negotiations with the US, the EU and Georgia. Georgia's acquiescence was the most difficult to achieve as it had been blocking Russia’s membership since long ago and particularly the 2008 war between the two countries. Georgia cited Russian violations of the 2008 ceasefire plan regarding international observation missions in Abkhazia and South Ossetia as its reason for blocking the latter's accession to the WTO.

After several months of being significantly pressed by the US and the EU, Georgia finally agreed to allow Russia to join the WTO on certain conditions that were proposed by the mediating Swiss side. The Swiss plan envisaged international monitors at border crossing points, which would monitor cargo between Russia and Georgia’s breakaway regions.

There were hopes that the agreement would bolster trade relations between the two countries, and provide an opportunity to resume Georgian exports, such as wine, to Russia. However, no steps has been made by Russian Federation to withdraw its politically motivated embargo.

Georgian analyst Shota Murghulia hopes that soon the Russian leadership will have to liberalize its trade relation with Georgia. “Indeed nothing has changed so far, however, I hope that in the near future Russia will withdraw its politically motivated embargo. Russia realizes how important its market is for Georgia, at the same time Georgia is not a significant competitor in the huge Russian market.” Murghulia said.

Unfortunately, the kind of export and investment miracle enjoyed by fellow-BRIC member China after it joined the WTO club is likely to remain well out of its reach, Reuters reported.

China waited 15 years on the WTO's doorstep. But for Beijing, joining in 2001 set the stage for a decade that quintupled its exports and propelled its economy from sixth place globally to the world's second largest.

Russia's commodity-based economy is less suited to enjoy that kind growth. And with trade and investment flows both scarcer than a decade ago, it will struggle to attract investments on a similar scale to its Far Eastern neighbor.

First, though, there are plenty of positives.

Foreign tariff barriers are estimated to cost Russian exporters $1.5 billion to $2 billion a year. The WTO confers lower trade barriers and equal treatment for all members.

Moscow will have to haul up its own barriers, with average tariffs set to fall by a third - tariffs on foreign cars for instance are to halve by 2019. So cheaper imports should leave consumers and companies with more money to spend.

And while some uncompetitive sectors could sink - Russia's auto industry is a much-cited example - others such as banks and communications will be opened to foreign investment.

Furthermore, Russia is hobbled by a reputation for crony capitalism, red tape and disregard for investors' rights. Optimists hope WTO entry, which has the blessing of President Vladimir Putin and is bound by strict previously agreed timetables, will instill a sense of urgency into the Kremlin's half-hearted reform efforts.

Ed Conroy, a fund manager at HSBC Global Asset Management, reckons Russia, like most new WTO entrants, will enjoy a growth and investment pickup if it dismantles protectionist barriers and finally shows a clear commitment to free-market policies.

"WTO is not a magic wand they can wave to create an investment haven but if you create a less restrictive framework, you automatically create opportunities. Don't expect a revolution but an evolution towards a more open, competitive economy." says Conroy, who invests in Russia.

Conroy is betting bank shares will be the prime beneficiaries in a WTO Russia. Others such as Chris Weafer at Moscow brokerage Troika Dialog advise loading up on shares in some retailers and airlines that stand to gain from lower import tariffs.

All this gels with the view of the World Bank which has calculated the short-term value of WTO membership to Russia at $49 billion a year or over 3 percent of gross domestic product at 2010 prices. That would rise to $162 billion annually when the longer-term impact on the investment climate is factored in.