Russia and WTO: Is the World Bank’s Optimism Justified?

Russia’s accession to WTO will affect Russian industrial producers, but will at the same time benefit consumers through lower duties and stronger market competition. Therefore, Russia’s membership in the WTO will optimize people’s spending rather than increase their incomes. interview with Vladislav Inozemtsev, Director, Centre for Post-Industrial Studies, Publisher and Editor of the Svobodnaya Mysl monthly, on the latest Economic Report on Russia released by the World Bank

Do you agree with one of the main conclusions made by World Bank economists in its report that Russia’s economic growth is ensured by the country’s accession to the WTO? According to their estimates the economic effect of joining that organization should reach 3.3% of GDP in the medium term, or some $49 billion; and up to 11% of GDP, or $162 billion, in the long run. Are these forecasts realistic?

It would be strange to expect the World Bank to conclude that Russia’s accession to the WTO would have a negative effect. As an international organization, the World Bank always welcomes a country’s involvement in international regulatory systems.

I’m not so sure about GDP growth resulting from joining that organization. I cannot cite any figures now, but if there is growth it will be linked with the deterioration of Russia’s economic structure. In order to join the WTO, Russia agreed to cut customs duties and reduce non-tariff regulatory policies in practically all economic sectors except agriculture. But even at this point, many Russian companies have low profitability, which will become lower still unless they hike prices. The latter move will make imported products more attractive. Paradoxically, the growth of imports can also spur GDP through the development of logistics, wholesale trade and VAT on imported goods. Consequently, from the budget and trade perspective, GDP growth is possible, although it will be accompanied by declining output by Russian companies, which will lose their competitive advantages.

And I don’t believe for a moment that Russia’s accession to the WTO will bring 11% GDP growth in the long term. I do not expect a great inflow of investment either, because production costs are very high in Russia, even by East European, let alone Chinese, standards. Moreover, until recently Russia received enough investment precisely because it was a fairly closed economy. Russia’s automotive industry grew with the help of Western producers, which invested in it because some of the components and technologies could be imported under a preferential regime while prohibitive duties were imposed on imports of market-ready vehicles. Therefore, this move will deal a blow to Russian industry. Even if a drop in GDP is avoided, its structure will deteriorate.

How do you think Russia’s accession to the WTO will affect people’s incomes?

I would ask a slightly different question. Russians at large, as consumers, will benefit from this move. One should have a clear understanding that all Russians are consumers, but not all of them are national producers. Interestingly, Russia’s accession to this international organization will affect Russian industrial producers, but will at the same time benefit consumers through lower duties and stronger market competition. Therefore, Russia’s membership in the WTO will optimize people’s spending rather than increase their incomes.

The experience of many industrialized economies, such as the United States as the most liberal economy during the past two decades, shows some very interesting trends. Prices of locally produced goods and services grow, although they do not face much competition from foreign producers: taxis, hotels, restaurants and so on. At the same time, prices of imported goods remain at the same level or even decrease due to competition.

The same will happen in Russia: housing and utilities bills, including gas and electricity, will grow, as will the prices of gasoline, because they are set by domestic monopolies. At the same time, the prices of imported goods will go down, and these goods will be more affordable. Russia’s accession to the WTO will improve Russians’ consumption levels rather than their nominal incomes. Their incomes will rise and fall depending on the market. At the same time, the purchasing power of their money will be higher.

Although the World Bank, as well as the Russian government, is optimistic about the benefits of WTO membership, the Russia’s Ministry of Economic Development estimated the possible damage to the country’s revenues from cutting import duties at 230-240 billion rubles. What do you think about that?

Their concern is justified, formally speaking. Federal revenues will indeed decrease. But today the federal budget is too dependent on customs duties. Its three main sources of revenue – export duties, import duties and the VAT on imported products – account for 50% of the total. A similar situation developed in the United States five or six years after the Civil War, during Ulysses S. Grant’s presidency. That country has not seen anything like that ever since. In the past few years, the share of customs duties in total U.S. revenue is less than 0.2%, while in Russia it is 50%. In this respect, Russia is closer to countries like Mali and Burkina Faso, shameful as it is. Therefore, if this level drops, the government will have to seek other sources of revenue, and I would gladly welcome that.

The World Bank points out, that industries where export volumes are not large may indeed suffer certain negative consequences such as mounting pressure from competitors and shrinking production. This can affect the food and light industries, the machine-building industry, equipment manufacturing and building materials. What other industries might experience repercussions from Russia’s accession to the WTO?

The underlying question is why Russia decided to join that organization. Initially, during Boris Yeltsin’s presidency, it was an issue of integration with the global trade system, and a matter of ideology. The ideology dimension has faded in the last few years, while no significant economic motivation has emerged. Any country entering the WTO is trying to secure certain benefits for its producers on international markets or assist major foreign counterparts, facilitating their operations inside the country. These benefits can come in various forms.

For example, China is the top global producer of textiles, computer components and household appliances. But before that country joined the WTO it had difficulties with exporting those goods, particularly with supplying textiles to Europe. Even after China joined the WTO, the quotas for textile exports remained applicable for five or six years until they were finally lifted in 2007. China acceded to that international organization in 2002, following long and difficult talks, just like Russia. But they realized they had huge export potential and they needed foreign markets. Therefore, they opened their own market in order to facilitate exports.

Ukraine joined the WTO under strong pressure from local chemical and metal producing lobbies, because that country’s exports are dominated by machinery, metals and chemicals. Ukraine needed to promote its products on the European markets where they had been discriminated against. This was the chief motivation of those who lobbied for joining the WTO.

Kyrgyzstan is in a different situation. That country heavily depends on transit and reselling products. It needed to enter the WTO not to support domestic producers (which it never did) but rather to open its border with China and to get an opportunity to supply cheap products from abroad.

Different countries have different reasons for joining the WTO, but in any case their actions are determined by some benefits to domestic operators. This is not the case in Russia, nor was it expected to be. WTO rules do not apply to oil, gas and refined products, which account for 62% of Russia’s exports. We will see a very small increment in exports along with more rivals on our own markets. Therefore, Russia’s WTO membership will have a negative impact on all sectors, except perhaps communications, trade and logistics.

Last week, when Prime Minister Vladimir Putin delivered his government performance report to the State Duma, he said that joining the WTO will open the way for Russia to the OECD. How long do you think it will take Russia to join the OECD? What are the possible benefits of joining?

This is solely about politics and image. Frankly, I don’t see any sense in joining the Organization for Economic Cooperation and Development. I do not expect any direct economic benefits from that. It is simply a matter of prestige.

Those who visit Paris should see the beautiful park in the 16th Arrondissement, where the OECD headquarters are located: a beautiful old palace complemented with brand new and modern office buildings. But there is no any particular benefit from membership in that organization, except perhaps the high-quality global economic reviews it produces and the many jobs with little responsibility it offers.

Will Russia be able to derive the maximum benefit from its WTO membership, as Putin said?

We could derive the maximum benefit only if we energetically defend the interests of Russian producers. The answer to your question actually depends on how fast and how actively Russian businesses enter foreign markets, and how effectively the government and its bureaucratic machine supports them.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.