The Russian Federation requested membership in the General Agreement on Tariffs and Trade, now the World Trade Organization (WTO), in June 1993. At various points along the way, accession appeared imminent. In recent months it appeared that Russia — the largest economy not yet admitted — could be given the green light in 2008. But if current U.S.-Russian relations remain cool, and certain issues are not remedied, this could be well off the mark.

Interest Has Dwindled

Soon after Vladimir Putin became president of Russia in 2000, he undertook substantial market reforms, notably the introduction of a 13 percent flat tax and major judicial reforms. He also made WTO accession a key priority, establishing a self-imposed deadline of 2003. After his re-election in March 2003, however, his policies appeared to change, the pace of reform slowed, and his level of power increased, analysts say.

In October 2003, the arrest and confinement to a Siberian prison camp of Mikhail Khodorkovsky, formerly one of Russia’s richest citizens and CEO of the Russian oil company, Yukos, was widely perceived as the silencing of Putin's political opposition, as well as the liberal business lobby. And in the December 2003 Russian Parliamentary elections, liberal parties and most independents lost their seats, leaving less resistance.

Analysts say that efforts to solidify the rule of law, the bedrock of a modern economy, have decreased while restrictions on domestic freedoms have increased. This is reflected in Russia's 2007 Freedom House ranking of six on political rights and five on civil liberties. The independent organization that supports world freedom utilizes a scale of one (most free) to seven (least free).

Business Ambivalence

Although many Russian business sectors would benefit substantially from WTO accession, resistance by others has grown. Calls for protection from the auto and civilian aircraft industry, as well the Russian Chamber of Commerce and Industry, have affected accession momentum.

Commodity and energy products, which represent the bulk of Russian exports and are a major driver of the country's growth, enjoy easy access to most foreign markets and will not incur significant changes after WTO membership. High energy prices, which have significantly boosted Russia's economy, also have lessened the country's economic need to join the WTO and face subsequent international monitoring. And many Russian goods manufacturers, who are attempting to satisfy large domestic demand, as well as many food, pharmaceuticals, chemicals, and electronic producers, prefer to stave off outside competition that accession brings.

On the other hand, Russian welfare gains from WTO membership equal 3.3 percent of that country's gross domestic product (GDP) in the medium term, and perhaps 11 percent in the long run, the Worlds Bank says. Plus, Russian steel exports, which currently incur U.S. and European Union (EU) quotas, likely would be lifted after WTO accession. And EU antidumping actions, which negatively impact Russian chemicals, would become less of a problem according to the Peterson Institute of International Economics.

Issues at Hand

Although major U.S.-Russian economic bilateral issues may be satisfied, multilateral issues involving intellectual property rights, agricultural subsidies, and problems with neighboring countries need to be solved for WTO admittance. Once achieved, however, the U.S. Congress still must grant Russia Permanent Normal Trade Relations (PNTR) status or lose the benefits that Russian accession brings. But given the fact that TPA — which allows Congress a yes or no vote without making amendments — has expired, the current U.S.-Russian relationship has become cool, and the U.S. is approaching an election year, it's unlikely that PNTR will come for a vote soon.

Economic Growth

A Goldman Sachs report predicted that by 2050, Russia could become the world's sixth largest economy, exceeding Italy's by 2018, France's by 2024, the United Kingdom's by 2027, and Germany's by 2028. These estimates, however, are based on assumptions that may not prove correct, namely that Russia would implement sound macroeconomic policies, build stable political institutions, achieve greater openness to trade and investment, and continue investment in education.

Nevertheless, since the Russian financial crisis of 1998, the country has made significant economic improvements, reduced poverty and expanded its middle class. From 1999 through 2005, Russia achieved real GDP annual growth of 6.7 percent, according to the Organisation for Economic Co-operation and Development. This year, it is anticipated to dip to a still-impressive 5.8 percent.

Foreign direct investment (FDI) in Russia continues to climb. Annual inbound global FDI flows averaged $2.4 billion from 1990 through 2000. However, in 2005 Russia attracted $14.6 billion, the United Nations reports. And this likely would have been higher had the government not imposed investment restrictions on foreign energy companies.

Last year, U.S. merchandise imports from Russia reached $19.8 billion, up nearly 30 percent from 2005. U.S. merchandise exports climbed 19 percent to $4.7 billion in 2006, resulting in a trade deficit of $15.1 billion.

WTO Accession Will Accelerate Global Integration

The Russian population of 141 million is projected to decline to 132 million by 2020, the U.S. Census Bureau reports. In turn, the country's workforce will continue to diminish. And at 68 years of age, the low Russian average life expectancy — which lags well behind the developed country average of 76 — presents other problems.

Although WTO membership may not affect some of these problems, it certainly will help alleviate others. And, as the country further integrates into the world trading community, the reform process is expected to get a boost, opening that country to new ideas, as well as expanded trade and investment.

This article appeared in September 2007. (CM)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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