Posted: March 1, 2013 |  AUTHOR: KEN FOX | CONTACT ME

 

Russia was finally admitted as the 156th member of the World Trade Organization (WTO) on August 22, 2012. Russia has contemplated membership for the past 18 years. It had applied for membership, then rescinded its application and applied again. Russia’s WTO entry was blocked this time by the country of Georgia because it had fought a war with Russia after the iron curtain fell. Finally, a Swiss company acted as a mediator and Georgia backed down. Russia had been the only major country and the only UN Security Council member or G20 member not part of the WTO. Its membership in the WTO has significant implications for the people and industries of Russia, as well as global markets which want to increase trade.

Historically, Russia has implemented high tariff barriers to protect its home industries and defer the importance of other country’s imports. Based on WTO membership, Russia will have to gradually lower its average import tariff ceiling to 7.8% from the current 10%, with the agricultural import tariff down from 13.2% to 10.8% and the tariff for industrial products reduced from 9.5% to 7.3%.

There are many potential trade concession benefits from Russia joining the WTO, but the U.S. cannot currently enjoy any of those. Stated simply, this is because Russia must be declared by the U.S. to have “permanent normal trade relations” (PNTR). Under WTO rules, every member country must grant other members unconditional PNTR (formerly known as most-favored nation status). This rule mandates that any advantage granted by one WTO member to another member must be afforded unconditionally to all other members. Because Russia is subject to the provisions of Jackson-Vanik Amendment,* it has to receive annual U.S. certification of its compliance with the terms of that law to receive normal trade relations status. The U.S. will be in clear violation of WTO rules if it does not “graduate” Russia from Jackson-Vanik and afford it the PNTR status it gives to all other WTO members. As such, Russia is fully within its rights to follow through on its pledge to withhold the benefits of its accession-related reforms from U.S. companies. This gives U.S. competitors a head start in tapping the valuable Russian market.

American manufacturers and agricultural producers will be in a much better position to expand their exports to Russia if the U.S. can fully participate in Russia’s WTO membership. Although many members of the U.S. Congress want to erase the Jackson-Vanik provision and give Russia the PNTR status, it has been held up for a vote. Hopefully, this will be resolved by Congress in 2013.

2013 represents a year when Russia can change its image in world trade. The majority of Russia’s major exports to the U.S. are in five categories: 1. precious stones and metals, 2. inorganic chemicals, 3. mineral fuels, 4. aluminum, iron and steel and 5.fish and other seafood. The major U.S. exports to Russia in 2010 included: aircraft, machinery and meat.

A country’s government can refuse to trade with Russia due to its not supporting the UN in facilitating the removal of Bashar Al Asad in Syria or its high corruption levels or human rights violations. However, the potential for increased trade between Russia and the U.S. is significant. Russia’s middle class population and incomes are growing. Russian citizens are aspiring to utilize Western products and services.

Some facts on the current status of Russia:
1. U.S. trade with Russia grew significantly in the past decade. From 2000 to 2010, U.S. goods exported to Russia increased by 187% and U.S. imports from Russia increased by 235%. Some of this was due to the increasing world prices of natural resources, such as oil and natural gas
2. U.S. manufactured exports to Russia totaled $8.3 billion in 2011 and consisted of construction machinery, automobiles, aircraft, chemicals, and medical instruments.
3. Nearly two thirds of Russia’s medical equipment is obsolete. 60% of its medical products are imported with a high import tariff of 15%, which will be reduced to 7% based on WTO membership.

Some expected benefits and trends from joining the WTO:
1. U.S. exports to Russia could double in five years
2. Russia will need 960 civilian aircraft in the next twenty years. The proposed reduction in import tariffs from 20% to 7.5% for wide body aircraft would benefit U.S. aircraft, engine and component part manufacturers. .
3. Russia remains one of the top 10 markets for U.S. poultry exports. Russia is also a strong buyer of U.S. pork and beef products. Exports of U.S. beef to Russia were valued at $102 million in 2010.
4. Russia will also allow internal securities trading and 100% bank ownership by foreign firms.
5. Russia is expected to become the world’s fifth largest automotive market by 2015. Currently, Russia requires foreign manufacturers to use 60% local Russian products in cars manufactured in country, along with high tariffs on auto imports.
6. Foreign direct investment in that country will increase.
7. There will be with potential recourse for intellectual property protection.

Russia has the rotating presidency of the G20 in 2013. As a reminder, the Group of Twenty or G20 consists of finance ministers and central bank governors from 20 major economies,** 19 countries plus the European Union. The EU is represented by the President of the European Council and by the European Central Bank. Sergei Ivanov, the Kremlin’s Chief of Staff stated at a recent G20 steering committee:
“Our main task is to concentrate the G20 efforts not simply on discussion of the most important problems. Our aim is to make practical decisions aimed at healing (the) global economy and finances, stimulating economy growth and job creation.”

In its new G20 role, Russia will hold a joint meeting of the finance and labor ministers to assess the global economic problems from the angle of employment. Moscow plans to organize a separate conference of the BRICS’ leaders (Brazil, Russia, India, China and South Africa) to discuss strengthening the bloc’s role in IMF (International Monetary Fund) policy-making. The next G20 summit is scheduled for September 2013 in St. Petersburg, Russia.

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Russia’s opportunity to shine globally in 2013 is hampered by its population of discontent and government corruption. Many of its educated people have and want to emigrate from Russia. They seek better education, better career opportunities and better medical care. Vladimir Putin, an ex KGB officer, has led Russia for 14 years as Prime Minster or President. Published reports from WikiLeak refer to Russia as a “mafia state.” Putin sits on vast reserves of oil, natural gas and metals to fund his desired efforts.

Joining the WTO offers Russia opportunities to open its market to new companies and products. It represents a potential friendlier market. Assuming Russia will be compliant to WTO rules, the WTO represents a mediator for any complaints regarding unfair trade practices. If Russia opens its markets as planned, the country’s population should be rewarded with more product and service choices, new jobs and upgraded medical equipment. I hope the U.S. negates the Janik-Vanik Amendment and the Russian population recognizes and feels the benefits of WTO membership sooner than later.

*The Jackson-Vanik Amendment restricts trade with countries that limit their people’s emigration rights, and was adopted by the U.S. Congress in the early 1970’s to help thousands of Jews to leave the Soviet Union. It long ago achieved its purpose.

**G20 nations represented in addition to the EU include: United states, South Africa, Canada, Mexico, Brazil, Argentina, China, Japan, South Korea, India, Indonesia, Russia, Turkey, Germany, France, UK, Italy, Australia and Saudi Arabia.

Major Sources:
1. Political Wrangling Denies U.S. Companies the Benefits of Russia’s WTO accession, Frederick T. Stocker, MAPI (Manufacturers Alliance for Productivity and Innovation), October 2, 2012.
2. WTO Accession puts Russia in a better position to address its Domestic Challenges, Speech by Pascal Lamy, Director-General, World Trade Organization, January 18, 2013.
3. Russia Eyes Healing Economy as G20 Priority, November 27, 2012, www.global times.com.
4. Trading with the Bear: Why Russia’s Entry into the WTO Is in America’s Interest, Daniel Griswold and Douglas Petersen, Free Trade Bulletin, The Cato Institute, December 6, 2011.

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©2017, The Global Galaxy blog is produced by The Soundings Group, LLC, Charleston, South Carolina, USA, www.thesoundingsgroup.com. The company is an international business consulting firm, specializing in new market assessments, market entry strategies and marketing guidance. The scope of Global Galaxy is to cover timely international trends, issues and business building ideas. Its purpose is to educate, inform and stimulate thinking for business opportunity analyses.

 

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