Economic and Legal Analysis of Consequences of Russia’s WTO Accession

V.S. Belykh, Doctor of Law, Professor, Head of Enrepreneurial Law Department, Ural State Law Academy, Yekaterinburg, Russia

1. On the question of Russia’s WTO accession. The negotiation process of Russia’s WTO accession has a long history. In 1995, this process focused on multilateral consideration within the framework of the working group organized in the Russian establishment. Experts noted the process was slow-moving for a variety of reasons: political, social and economic, organizational and technical, legislative, etc. However, starting from 2000, the negotiations became full-sized as all the aspects of Russia’s accession began to be considered.

And only on August 22, 2012 (after 18 years), Russia became the 156th WTO Member. Paraphrasing one proverb (one ruble is paid -to enter; two rubles – to exit), it can be said: “One ruble is paid to enter the WTO (the same is true about the NATO), two rubles to walk - out”.

2. Basic directions of the negotiation process. There are four basic directions of the negotiation process:

Tariff negotiations. Within this direction, the main aim is to define the maximum level of rates of import customs duties that Russia will have the right to apply after its official WTO accession.

Agriculture negotiations. The basic question (besides the tariff one) is volume determination of domestic support for the agricultural sector. One of the consultation rounds on this theme was held in Geneva on September 24, 2004, when countries on the whole preserved the demands for calculating the government support level on the basis of the previous years.

Negotiations on access to the services market The aim here is to settle the terms of access for foreign service suppliers to the Russian market.

Negotiations on systemic issues. The aim of negotiations is to define the measures that Russia will take on in the sphere of legislature and its application for the performance of Russia’s obligations as a WTO member. The draft report of the working group will be the basis for the negotiations. It will contain all the rights and obligations which Russia will take upon as a result of all negotiations. Regular meetings in Geneva, for example, were devoted to the discussion of the draft report[1].

3.Economic analysis of consequences of Russia’s WTO accession. There are two forecasts: 1) optimistic (even radiant); 2) pessimistic (also dramatic). Great optimists are the World Bank experts. They analysed the consequences of Russia’s WTO accession on the basis of the input and output tables, using alsoa comparative statistic model of the general Russian economic equilibrium that includes 35 sectors of economy. Basic factors in the model were the capital, skilled and non-skilled labor, sectoral workers, etc.

On the whole, in the World Bank’s opinion, the WTO accession ensures considerable benefits for Russia. And the most important source of benefits is the reduction of barriers for direct foreign investments in the sphere of service supply (according to the Bank’s calculations, it constitutes about 73% of all the advantages). This should lead to the reduction of entrepreneurial (business) expenses and the rise in productivity of enterprises (companies) that enjoy such services, which, in its turn, will stimulate the development of the Russian export in various sectors[2]. The said is also true for the sphere of financial services.

Tariffs reduction will also result in considerable advantages (18% of all benefits) and more efficient resource allocation in Russia as the resources will move to sectors where their cost will be higher (at the world prices). According to the World Bank experts, tariffs reduction will make it easier for the Russian enterprises to import products containing advanced technologies. This will ensure the rise in productivity and, probably, the export enhancement.

As the improvement of the investment climate should lead to the increase in capital assets, the long-term increase in consumption may be 3-4 times higher than the medium-term increase. This World Bank forecast is rather attractive.

There is also a pessimistic approach. There are certain concerns of the Russian entrepreneurs. Russia’s WTO accession will not in itself lead to any dramatic increase in domestic export or even to its significant immediate increase.

First, the WTO basically stimulates trade in manufactured goods and knowledge intensive products, but the main items of the Russian export are raw materials and fuel (which are allowed to be sold at foreign market practically without any restrictions). Russia is the country with the mono economy.

Why is there more pessimism than optimism? There are serious reasons for this. For more than a decade, the Russian economy has been going around in circles (at best). Anatoly Chubais said, “Unique external economic conditions that Russia enjoyed in the last 6-7 years could have been used better. Many great steps could have been made”[3]. He also added, the “ Putin’s era in the life of Russia is a fantastic combination of circumstances in the economy. The situation with oil is fantastic”. As a result, the fantastic situation is in the history of the state, and the diversification of production is another utopia.

Second, the structure of the Russian export is very inertial and cannot be changed very quickly in favour of the processing industries as the production facilities (and transport) of the Russian home industry are extremely worn-out and underused, and the technological advance is very slow.

Third, as the crisis is being overcome, there is an increasing demand for domestic products on the internal market. This fact leads to a number of export restrictions.

Fourth, even now, Russia is enjoying main tariff preferences set by the WTO through its bilateral trade agreements with the WTO member states.

The second concern is about the import of goods and services.The enlarged access of foreign producers to the domestic market is said to be able to aggravate competition in a number of positions. Russia is not prepared for this competition yet. The said is especially true for the food, pharmaceutical, chemical, automobile, and aircraft manufacturing, light and electronic industries; sectors of insurance, financial services and retail trade; small and medium businesses, etc. That is why only 10 % of the Russian enterprises that have participated in a poll are ready to work within the WTO rules and standards. The abundance and the cheapness of foreign goods could certainly be good for a domestic consumer. But this could happen only in a situation when there is efficient domestic competition and the consumers’ rights and interests are ensured, which is not happening in Russia yet.

There are two polar views on the problem of Russia’s WTO accession and the consequences for the insurance business. The optimists say that there is no danger. Mikhail Delyagin, the Russian economist, thinks that there is no fear in the fact that the western insurers will be allowed to enter the Russian insurance market, though the statement of Russian Finance Minister Alexey Kudrin made many insurers speak about the coming end of the Russian insurance business. Delyagin says, “The form in which the western insurers will be allowed is a different matter. They cannot be allowed to work in the sphere of life insurance. But why not let them work in the sphere of property insurance?”

Yury Danilov, the senor economic advisor of the Stock Exchange Development Center, has dire forecasts. He thinks that, except for two or three insurance companies, all other insurers are engaged in money laundering and tax minimization, but not in the insurance activity. We have banks, though they are weak, but there is no insurance business[4].

The real sticking point in negotiations on Russia’s WTO accession became the USA’s demand to open direct branches of foreign insurance companies on the RF territory.

As a result, after the WTO accession, Russia will take on an obligation in 116 sectors of services ( out of 155 from the WTO Service Sectoral Classification List). However, in the overwhelming majority of cases, the obligations do not provide for any changes in the current regulatory system. The main exception to this rule is the insurance sector, where the general quota of foreign participation has to be raised from 25% to 50%; and the 49% limitation for the participation of the foreign capital in the property (assets) of the Russian companies that are engaged in life insurance and compulsory insurance is to be transformed into the 51% limitation from the date of the WTO accession and then annulled in 5 years. There is another important circumstance: in 9 years after Russia’s WTO accession, direct branches of foreign companies will be allowed to conduct their activities in Russia with the restrictions stipulated by our obligations.

The third concern is that Russia is not ready to join the WTO at the national level. The government does not have a clear and well-grounded industrial (sectoral) policy, i.e., the idea of which branches of the domestic industry and to what extent need the protectionist protection or stimulation. Without this policy, the parties in the negotiations on the WTO accession were mostly groping their way. There is no state system of external economic information for business, which is why its foreign operations have no necessary informational support, and the exporters violate rules and make mistakes. The system of state and social support practically does not operate.

4. There is no doubt about the competence of the World Bank experts, but the presented report can hardly pretend to be an independent comprehensive analysis of consequences of Russia’s WTO accession. First, such an accurate analysis of benefits and losses in certain branches of the domestic economy can be possible only when it is made on the basis of specific circumstances in which Russia joins this international organization. But there is no open access to the information on the circumstances of Russia’s WTO accession. Second, there is no indication of losses unavoidable in such a complex process. The report actually describes only benefits and ignores any negative effects. The World Bank keeps silence about other branches of the economy that are not rated as successful. What will happen to them?

On the contrary, Russian scholars and experts name a number of negative effects for the development of the Russian national economy, e.g. N. Volchkova and N. Turdyeva, the economists of the New Economic School. They believe that Russian producers will have to reduce prices because of the intense competition. But not all the producers will be able to handle this reduction. According to a research, the negative effects in a short-term period will be felt by the food, pharmaceutical, and textile industries. The possible output reduction in these sectors may be 0,5 - 2%[5]. However, the greatest output reduction is expected in the sector of mechanical engineering (up to 12%), in the food and light industries and the industry of construction materials (up to 7%).

Negative consequences will not get past aircraft and automobile industries, agriculture, and the agrofood complex. Russia committed to reduce customs duties for imported long-haul airliners within 7 years. This will endanger large-scale aircraft building projects that our country is implementing, which will hardly favor the development of Russian airline companies. The negative effects include, among others: а) the loss of the principal competitive advantage of the Russian aerotechnology, i.e. its relative cheapness, because of the WTO price formation mechanism; b) increased competitive environment in the domestic market, including the markets of component parts, spare parts, and repair work; c) the need to reconsider the existing programs and the programs (mainly supported by the state) that are being created for the development of the industry and the creation of new specimen of aerotechnology; d) the need to renounce the existing and perspective plans for market promotion of the domestic aerotechnology because of its incompatibility with the WTO requirements for forms and methods of state support. Moreover, the WTO accession is fraught with the loss of Russian national civil and military aerotechnology as the developers and manufacturers of bomber and transport aircraft are mainly supported mainly at the expense of the implementation of civil aircraft programs (Tupolev and Ilyushin design bureaus, assembly plants in Kazan, Ulianovsk and Samara)[6]. It can also be said that there is no problem about it. On the contrary, tough competition will allow implementing large-scale investment projects for aircraft production in Russia with the participation of the foreign capital. But at what price?

It is not a secret that Russia’s WTO accession will lead to the reduction of state support for agriculture. For our country, the permitted support level will be 9 billion US dollars (i.e. more twice higher than the level that was permitted for Russia in accordance with standard rules). Then the permitted support level will be gradually reduced, and from 2018 it will be at the current level. Then, Russia confirmed that after the WTO accession, it will not use export subsidies to agriculture. In other words, Russia has time to take a necessary respite and make appropriate decisions about state financial support for agricultural producers.

5. Legal analysis of consequences of Russia’s WTO accession. The basic element at the domestic level in the context of Russia’s WTO accession was bringing Russian legislation and law enforcement practice in conformity with the WTO rules and provisions (systemic questions). The RF Government Resolution No. 1054-p dated August 8, 2001 (as in force on June 21, 2002 No. 8320) approved the Plan on bringing Russian legislation in conformity with the WTO rules and provisions. It provides for drafting a number of laws the passing of which could solve the problem of adapting Russian regulatory environment to the WTO requirements. The mentioned Plan was implemented. The following legislation was passed and came into force: the amendment of the RF Customs Code dated May 28, 2003, Federal Law No.61-FZ ; laws No. 165-FZ “On Special Protective, Antidumping and Compensatory Measures While Importing Goods” dated December 12, 2003, No. 173-FZ “On Currency Regulation and Currency Control” of December 10, 2003, No. 184-FZ “On Technical Regulation” dated December 27, 2002, No. 144-FZ “On Introduction of Changes into the RF Customs Code” (in part of customs duties) dated November 8, 2005; and a package of laws on the protection of intellectual property rights.

5.1. The reception of the WTO rules goes beyond the mentioned RF laws. The major influence of the WTO rules was exerted upon the RF Customs Code. Thus, p 6 Art 323 of the RF Customs Code is in line with Art 13 of the WTO agreement on the use of Art, VII of General Agreement on Tariffs and Trade-94. It says that if there is a dispute about the estimation of the customs value, the importer has the right to get goods if the corresponding amount of money was deposited. Chapter 38 of the RF Customs Code “Measures Taken by the Customs Authorities Regarding Certain Goods” is the transformation of Section 4 of the TRIPS Agreement “Specific Requirements Related to Border Measures”. These norms are devoted to the suspension of the release of the alleged counterfeit goods upon the application of the right holder. Besides, Section III of the RF Customs Code contains provisions equivalent to the norms of the WTO Agreement on the implementation of Art VII of the GATT-94 (on customs valuation). The customs valuation is extremely important as the basis for the estimation of customs duties. O.Yu. Bakaeva characterizes it as “a specific variant of the good value that is calculated by three parties: the seller, the buyer, and the customs authority”[7]. On the whole, provisions of the RF Customs Code correspond to the WTO requirements, though I..I. Dyumulen, the noted researcher of the WTO/GATT laws, pointed out a number of potential contradictions in the norms of the RF Customs Code and the norms of the WTO[8].

There are several cases in which the Russian customs legislation grants an even more liberal regime to importers. For example, according to Art 43 of the RF Customs Code, the preliminary decision on evaluating goods origin is valid within 5 years from the moment it was made (to compare it with 3 years stated in the Agreement on the Rules of Origin).

The Russian legislators decided not to transfer the WTO rules into the Russian law at least in one case. The law-maker introduced a reference to the WTO rules into the law as in the Federal Law of December 30, 1995, No.226-FZ “On Decisions Concerning Product Sharing”. For a long time, it was one of the most controversial issues within the limits of negotiations related to Russia’s WTO accession. Art 7 of the said law provides for the compulsory 70% quota for the processing equipment, technology and materials of the Russian origin. Such a requirement contradicts p. 4 Art II GATT and the provisions of the Agreement on trade aspects of investment measures (TRIMs)[9] as it is the discrimination of the comparable equipment, technology and materials of the foreign origin and breaks the national treatment principles.

The Russian treatment of intellectual property coincides with the WTO norms. The explanation lies in common sources. TRIPS makes references to basic international conventions in this sphere: the Paris , the Berne, the Rome Conventions, and the Washington treaty of 1989. Russia is a party to the first three conventions and has a great number of normative acts in this sphere.

It should be agreed that, according to I..I. Dyumulen[10], there is a “Russian” way of harmonizing legislation with the WTO rules of law. The specific nature of this “way” lies in the fact that the harmonization is ensured in three basic directions: 1) the receptions of the WTO rules of law, their transfer into Russian normative legal acts; 2) reference to the WTO rules of law; 3) the existence of normative legal acts that originally doe not contradict the WTO rules of law. So, on the whole, the Russian norms of law in their contentcorrespond to the requirements of the World Trade Organization.

6. Conclusions and Recommendations.

1. Working out and adoption of scientifically substantiated industrial (also sectoral) policy of Russia as a basis for selective protection of domestic producers as well as encouragement of competition on the national domestic market, and the successful implementation of the requirements set out in the Protocol of Russia’s accession to the WTO.

2. Completion and implementation of the state system of industrial export encouragement (without it, Russia will face actual asymmetry of benefits and circumstances in the conditions of the WTO accession) and also in the form of state credits, guaranties and other forms of financing marketing activities. The WTO rules define the permitted forms of such support. The same is true about the agrarian sector of the Russian economy.

3. Creation of a state system of external economic and legal information for enterprises (price, quality, conditions of trade, mechanisms for dispute resolution, etc) without which they will not be able to use the WTO opportunities in the international competition efficiently.

4. Urgent training of personnel for the Russian business and public service that are competent to handle WTO-related issues . Introduction of the special course of “The WTO Law” into the law schools curriculum in the RF.

5. Consolidation and extension of powers of sectoral and territorial business associations (unions) that can competently represent interests of certain levels of business before the Russian authorities.

6. Constant monitoring over certain discriminatory measures taken by our major foreign trade contractors and over all trade barriers created by the policy of these countries. Publication of the monitoring reports.

 7. Regular analysis of the practice in the sphere of the WTO dispute resolution. Generalization of the activities of the WTO Dispute Settlement Body.

 We, the Russians, need not only United or Fair Russia. We need powerful and great Russia that must take a rightful place at the geopolitical world map as one of the Centers of international power (together with the USA, Europe, and China).

Bibliography:

1. I.I. Dyumulen. Novoe tamozhennoe zakonodatelstvo Rossii [New Customs Legislation of Russia] // Vneshneekonomichesky Byulleten’ [External Economic Bulletin]. 2004. № 1. pp. 46–54.
2. I.V. Zenkin. Pravo Vsemirnoi Torgovoi Organizatsii [The Law of the World Trade Organization]. Moscow, 2003. p. 105.
3. O.Yu. Bakaeva. Ischislenie i uplata tomozhennych platezhei: problemy pravovogo regulirovaniya [Calculation and Payment of Customs Duties: Problems of Legal Regulation] // Hosyaistvo i pravo [Business and Law]. 2005. № 2. p. 110.