More than 19 years after it had expressed its intention to join the multilateral trading system, the Russian Federation formally became the 157th member of the World Trade Organization (WTO) last week. Although members of WTO had agreed to allow Russia to accede to the organization last year, the process of domestic ratification took several months before the sixth largest economy could join WTO. Coming as it does at a time when the future of WTO is being questioned, this development should enable all major economic powers to re-group to strengthen the basis for multilateralism in trade.
Accession to WTO, at least in theory, brings with it a slew of benefits to the Russian Federation stemming, in particular, from the application of the most favoured nation (MFN) principles. The enjoyment of MFN benefits under WTO implies that other members of the trade organization will no longer use discriminatory trade measures against Russia. In other words, countries such as the US that had refused to grant normal trade relations status will now have to amend their legislation. The US has denied normal trade relations to Russia since the introduction of the Jackson-Vanik amendment in its Trade Act of 1974. This amendment, intended to alter US trade relations with countries with non-market economies that restrict freedom of emigration and other human rights, required the latter countries to comply with specific free emigration criteria for better trading ties with the US. This amendment was considered a response to the Soviet Union’s “diploma taxes” that were levied on its Jewish citizens attempting to emigrate. Repeal of this legislation seems round the corner as President Barack Obama has issued an appeal to the US Congress to do so.
Like all new members of WTO, the Russian Federation has had to pay a higher entry ticket to gain membership of the organization by agreeing to a greater degree of liberalization. The real market access opportunities offered by the Russian economy as a member of WTO is in the area of services. Of the 12 broad sectors over which the General Agreement on Trade in Services (GATS) of WTO has jurisdiction, Russia has taken commitments in 11 sectors. Again, of the 161 sub-sectors included under GATS, the country has commitments to liberalize 112 sub-sectors.
Photo: Fabrice Coffrini/AFP
At the same time, Russian negotiators were able to protect the interests of their domestic firms/individuals in some important sectors, more prominently banking. Unlike most new members of WTO that had allowed liberalization of their banking sectors by setting up branches of foreign banks, Russia has agreed only to allow subsidiaries of foreign banks. While there will be no cap on foreign equity in individual banking institutions, overall foreign capital participation in the banking system of the Russian Federation will be limited to 50%, not including foreign capital invested in potentially privatized banks.
Another significant bargain that the Russians have been able to secure is in their automobile programme, which imposes local content regulation and minimum production requirements on foreign investors for obtaining preferential tariff treatment on imported inputs. Although these constraints are considered violations of WTO’s Trade Related Investment Measures, Russia succeeded in obtaining a transition period of six years before it is obligated to terminate these rules. There are expectations that by the end of the six-year transition there will be a substantial increase in Russian automobile assembly and parts production, and therefore, the negotiated transition period could contribute handsomely to the consolidation of the country’s industrial sector. This is not the only concession that Russia was able to secure—its tariff commitments on goods include substantial transition periods, so that it will have to effect reductions in tariffs in several products only seven or eight years after accession.
The ability of the Russian Federation to negotiate a deal, which has several positive features for its domestic sector, should encourage a vast majority of the countries that have been trying to change the rules of the game in WTO. For these countries, the Doha Round was expected to be a game changer, as it had made significant promises to introduce new disciplines in several key sectors such as agriculture that were more “development friendly”. What this, in effect, meant was strengthening the domestic capacities of developing and the least developed countries, which can enable the relatively disadvantaged small farmers and the small- and medium-enterprises to stand up to competition. It will be clear to many that at this juncture the Doha Round needs a political push and Russia’s accession to the organization may, in fact, provide the much-needed impetus.
Apart from local pressure, the Russian Federation’s accession to WTO can help bring the pressure from forums such as the Group of 20 and BRICS (Brazil, Russia, India, China and South Africa). These forums have emphasized the need to break the logjam in the Doha Round to enable an early conclusion of the negotiations. What difference Russia makes to the dynamics of these forums will, therefore, be watched with immense interest.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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