Views | The Biggest Game In Town

With Russia joining the WTO, the last of the world's potentially massive markets will start opening up

Around the time that a Moscow court was sentencing the three members of the punk band Pussy Riot to two years in prison, the World Trade Organisation (WTO) was accepting Russia as its 156th member. (Iran is now the largest economy that is not yet a member.)

Russia had negotiated for 19 years with the WTO, the longest in the organisation’s history, before it agreed to sign up. As for Pussy Riot, on 21 February, the band had entered Moscow’s Cathedral of Christ the Saviour and offered a so-called punk prayer to the Virgin Mary: “Holy Mother, Chase Putin Away!"

“By extending those trading relations, we can create new markets for our people and support the political and economic changes that Russia’s people are demanding," said US secretary of state Hillary Rodham Clinton. “These reforms will ultimately make Russia a more just and open society as well as a better partner over the long term for the US."

photoA more just and open society. Sure. Like China.

A few days after the Pussy Riot court verdict, in Washington DC, Amnesty International delivered two cardboard boxes with 70,000 protest petitions to the Russian embassy. A Russian official dumped the boxes on the sidewalk outside.

China has celebrated its WTO entry with a decade of blazing export-led economic growth. But Russia’s story will be different. The world’s sixth largest economy (by purchasing power parity; ninth by nominal GDP) is already an export fatcat with a foreign trade surplus of about $115 billion in January-June 2012. Its principal reason for joining the WTO is to raise domestic consumption and attract foreign investment. It has promised to lower average import tariffs from the current 10% to 6% by 2015. Import tariffs on automobiles will be lowered from 30% to 15% over the next seven years; on household appliances and electronics lowered from 15% to 7-9%. Russia will also limit agricultural subsidies and abolish current limits on foreign ownership in the telecommunication and banking sectors. Russia could just become the country where the global action is in the next few years.

The World Bank has estimated that WTO membership could boost Russia’s annual GDP (currently growing at 4%) by more than 3 percent in the medium term and 11 percent in the long run, while wages could rise 4-5%, benefitting the vast majority of the population. Lower tariffs on capital equipment and consumer goods imports would bring prices down, increase consumption. Foreign investment would lead to greater competition and create both more jobs and higher wages.

Successive US presidents—including Barrack Obama—have been trying hard to get Russia and WTO to agree on the terms of membership. US trade with Russia is currently about $9 billion a year (about the same as India-Russia trade). Now, this could potentially double in five years time. But the US has a not-so-slight problem it has to tackle first. It so happens that its 1974 Trade Act, enacted at the height of the Cold War, has a clause forbidding the US from establishing normal trade relations with Russia. US administrations have usually found ways to sidle around this, but the clause is a clear violation of WTO rules, which mandate that every member must grant all other members unconditional permanent normal trade relations (PNTR) status. American firms like Caterpillar, Deere and GE, which are major exporters to Russia, have already begun hectic lobbying to amend the law, fearing they will lose their business to non-US competitors, specifically the Germans, Japanese and South Koreans. After all, under WTO rules, Russia has the right to deny US companies the benefit of lower tariffs and other reforms. But US politicians are too busy with the presidential election, and no one knows when Congress will get down to amending the act. And there are enough Congressmen who keep mentioning Putin’s general attitude towards any dissent, and his support for the current Syrian and Iranian regimes.

But while the Americans sort out their heads and hearts, Russia can rest somewhat easy in the knowledge that if it spent 19 years negotiating with the WTO, the years have been well spent. The country has managed to put in several clauses in the agreement that will hopefully give its indigenous industry time to adjust to new realities. For instance, foreign automotive manufacturers will have to source a certain percentage of their components from Russian companies. These and other similar conditions will be in place for six to seven years, which, Putin feels, is enough time for Russian industry to get its act together, and let nature and competition take their course.

So what’s in it for India? India and Russia have been talking of more than doubling trade to $20 billion a year by 2015. Phrases like “massive untapped potential" have been bandied around for quite some time. But the truth is that, even after five decades of “warm bilateral ties", trade between the two countries remains confined to essentially government-controlled areas such as defence equipment, space, energy, metals and minerals, and commodities. Large Indian private sector firms have preferred to avoid Russia as an investment destination. And the one big Russian private sector investment in the Indian consumer market is in big trouble. Sistema JSFC invested a reported $2.5 billion through its subsidiary MTS to set up wireless services in India. But the Supreme Court’s 2G verdict revoked 21 of its 22 licences.

So, post-WTO, it’s entirely up to the Indian private sector whether it wants to take part in what could be the biggest game coming to town. Russia’s market remains hugely undervalued at a price-earnings ratio of six. And a friend who traveled across the country a couple of years ago tells me that the average Russian is still hopelessly in love with Hindi films.