Russian Accession to the World Trade Organisation: the Slow Road to Trade and Reform Opportunities

Kim Van Der Borght, Visiting Professor, Shanghai Institute of Foreign Trade; Professor of International Economic Law, Vrije Universiteit Brussel; Reader in Law, University of Westminster

1.       A Lengthy Accession Process.

The Russian Federation applied for full membership of General Agreement on Tariffs and Trade (GATT) in 1993. A Working Party was established on June 16, 1993. In December 1994, Russia changed its application to request membership of World Trade Organisation (WTO). The request was approved in January 1995. The Working Party on Russia’s accession to the WTO met for the first time in July 1995[1]. Initially, good progress was made, but it was mainly limited to an effort to educate Russian decision-makers and officials on GATT/WTO rules and disciplines and to an information gathering exercise[2]. From 1995-1997, Russians negotiators answered about 3500 questions on its trade system from WTO Members every six months[3]. The following years saw little progress. Two causes can be indicated for the pause in the accession process. The 1998 financial crisis in Russia meant that the focus of attention was not on WTO. Consequently, Russia was not very forthcoming in formulating what it would offer. It was even feared that the crisis would signal a return to a more protectionist policy. A consistent reiteration of Russia’s commitment to become a full partner in all major international economic and financial organizations in its foreign policy documents was meant to allay the fears of its partners[4]. Russia stated it was a “reliable partner in international relations”[5] The second setback in Russia’s accession process was the sudden death of its prime negotiator, First Deputy Trade Minister Gabunia. A new chief negotiator was appointed, Vice-Minister Medvedkov. The changing of key people in the process is a recurring theme that hampered the accession process[6].

In 1999 the accession was resumed in earnest. Russia submitted an offer on tariffs on goods and in late 1999 on the liberalization of services[7]. An improved offer on tariffs was submitted in March 2000[8]. The Working Party had not met since 1998 and held its first meeting after this interlude in May 2000 with an agreed date for the next meeting in December 2000. The increased attention for WTO Membership coincides with the policy priorities of its new President Putin. Putin’s interest in acceding to the WTO had both a domestic reason and an international motivation. Accession would mean a strengthening of the process of domestic economic reform to prepare Russia for a stronger economic future that would be less dependent on hydrocarbon exports. Internationally, Putin wanted to set Russia on a path of restoring its international stature. The fact that Russia was the only in the Group of Eight (G8) country, the only G20 country and the only permanent member of the UN Security Council that was not a WTO Member and the realisation that China was speeding ahead in its economic development, as well as in its accession process to the WTO, added additional fuel to Putin’s ambition for accession without delay.

Despite hesitation and hostility in earlier decades, support for Russia’s accession to the WTO was now readily forthcoming and was expressed at several occasions: the US pledged support for Russia’s application in 1997 and again in 2000[9]. The G8 followed this by a joint declaration welcoming Russia’s request for membership[10]. In June 2000, President Clinton, said ‘We will support you’ in his remarks concerning Russia’s accession to the WTO during his visit to the Duma[11]. In November 2000, the APEC leaders made a joint declaration expressing support for the “advancement of the accession processes of Russia”[12].

In September 2000, the EU published a document relating to the implementation of the EU/Russia Common Strategy[13]. In this document, the EU pledged to encourage and to support Russia’s efforts to accede to the WTO and to meet the associated requirements. As part of the Common Strategy, the EU reaffirmed its readiness to maintain and, if appropriate, to enhance its existing support for the Russian efforts to meet WTO requirements at the earliest possible time[14]. It was stressed that membership of WTO was not an independent objective of the EU/Russia partnership but an inherent element in the further development of the partnership[15].

2. Preparations for WTO Membership in Russia.

The actions undertaken as part of the preparations for WTO membership for a country such as Russia can be divided in two groups.

First, Russia as a formerly planned economy has to review its economic policies with a view to adapting the policies to fit the WTO requirements. The revised economic policies have to be reflected in appropriate legislative measures to underpin the economic policies and to implement the WTO rules in domestic legislation. These developments will be reviewed by the Working Party that is established to prepare Russia’s accession to WTO. The efforts of the Working Party should lead to a Protocol of Accession that will be proposed to the entire membership of WTO at a Ministerial Conference and needs a two-thirds majority to be approved[16]. However, Art. XIII of the WTO Agreement allows an existing WTO member to refuse the application of any of its WTO commitments to the new applicant-member (known in WTO parlance as ‘non-application’).

This leads to the second element in the accession process, namely the bilateral negotiations with economically significant WTO members who use the non-application strategy to increase the benefits they can obtain from the applicant[17]. The tactic is reciprocal and can be used by the applicant-member as well as by the existing member[18]. This second stage proved to be a major challenge for Russia. Because Russia was the last major economy that was not a member of the WTO, its accession offered an opportunity for new trade opportunities for existing members. Existing members came out in droves to request bilateral negotiations with Russia and wanted to get a ‘good deal’ out of these bilaterals. Initial talks with, amongst other, the EU revealed that high expectations would have to be met[19]. Russian officials were reportedly somewhat irritated by these high expectations singling out Russia[20].

A bilateral agreement on market access was signed with the European Union on May 21, 2004[21]. On November 11, 2006, the US and Russia announced they had reached a bilateral agreement that the United States described as a good deal[22]. However, the US Congress would question whether this was sufficient in the light of the Jackson-Vanik amendment[23].

China emphasised that its bilateral market access agreement with Russia was an important expression of the strategic cooperative partnership between the two countries. This partnership was described as being based on the principle of mutual respect, equality and mutual benefit. That the World Trade Organisation could offer opportunities for reciprocal advantage in this relationship was materialised in the agreement through a mutual recognition of the other side’s full market economy status[24].

The deal with the WTO was done on 16 December 2011, giving the Russian Federation six months to ratify the agreement after which it would enter into force within thirty days[25]. The Russian Federation formally acceded to the World Trade Organization on 22 August 2012 after 18 years of negotiations from its application for membership of the WTO and 19 years from its initial request to become a signatory to the GATT treaty.

3. A process of internal reforms

After the Russian Federation had succeeded the Soviet Union, a process of liberalization of the economy and decentralization of the administration was started. The state monopoly on foreign trade was abolished and the Russian economy was opened to foreign investors in 1991.

To further facilitate trade and investment, the Russian currency was made convertible to foreign currencies in 1992 and since 1998 floats freely in accordance with the market appreciation of its value[26].

However, the introduction of a market mechanism, especially price liberalization led to high inflation and started a period of economic hardship for many of Russia’s citizens[27]. By 1997, certain stabilization seemed to occur but soon Russia was hit by an economic and financial crisis in 1998. After overcoming the 1998 financial crisis, the Russian government reformulated its economic policy. On June 28, 2000, the new economic programme was approved. The programme incorporated a short term (18 months) and a long term (10 years) strategy. The long term programme seeks to reform Russian society as a whole, the rationale being that economic reform has to be accompanied by a reform of the state and the implementation of a ‘new social contract’ to unite government and society[28].

The short term objectives were directly related to the preparation for WTO membership. The objectives identified include bringing Russian law in conformity with WTO rules, lowering barriers to participation in external economic activity and investment and optimize the structure of import tariffs[29]. In joining WTO, Russia was seeking to strike a balance between improved access to third country markets for its exports and maintaining a reasonable level of protection of its domestic market[30].

But Russia also wanted to look to balance its economic development to avoid sole reliance on oil and gas exports. The internal economic reforms had led certain industries becoming more competitive in international markets, particularly steel and certain chemical industries including fertilizers[31]. So there was also a growing domestic support from certain industrial sectors for WTO accession despite strong resistance from others including processed foods, pharmaceuticals, electronic industries, car manufacturing and agriculture as well as various service industries[32]. Some of these industries seemed to be highly influential in Russian politics.

Despite a domestic public rhetoric that seemed to backtrack from supporting fast accession to the WTO, Putin maintained supportive in his second term as president[33]. Finally, it was clear from the eventual results and commitments that domestic lobbies would not hamper progress once the political decision was made to push forward with accession[34].

4. WTO Commitments

As part of its accession negotiations, Russia had to make commitments that would be found sufficiently attractive for existing WTO Members. As many WTO Members requested bilateral negotiations with Russia, the commitments requested were quite substantial.

Quantitative Restrictions. The basic principle of GATT/WTO is that all quantitative restrictions (quotas) should be abolished and replaced by ever-decreasing tariffs[35]. In Russia, this principle was recognized in 1995 by the State Regulation of Foreign-Trade Regulation[36].

The 1995 law prohibited the use of quotas save in a few exceptional cases. The exceptions were based on the exceptions of the GATT Treaty itself. It concerned an exception for the use of quotas for the protection of the domestic market (referring to Art. XIX GATT: emergency action on imports of particular products); an exception for the fulfilment of its international obligations (based on Art. XX(h) GATT: exception in the context of intergovernmental commodity agreements) and an exception for the maintenance of national security (based on Art. XXI GATT: security exceptions)[37].

The import restrictions in the 1995 law were regulated by a system of import licenses. In a reply to a question from the Working Party, Russia explained that its licensing system was not intended to restrict the quantity or value of imports[38].

Russia stressed that all exceptions were based on GATT rules. The GATT articles referred to were however slightly different from the ones relied on in the State Regulation. Specifically, they did not refer to Art. XX(h) GATT but extended the legal basis of these exceptions by referring to the life and health of the country’s population and its fauna and flora (i.e. Art. XX(b)) and by referring to the environment (Art. XX(b) and XX(g) GATT). The decision of which products were placed on the list of products requiring an import licence was made by special federal laws. The procedures for the importation of precious stones, precious metals and nuclear materials were further established by presidential decree[39]. Finally, if Russia’s national security interests are involved or when it concerns the fulfilment of international obligations, then the procedures were laid down by the Government of the Russian Federation[40].

Tariffs and Market Access in Goods & Services. The World Trade Organization is partly based on the commitments made by the Contracting Parties under the General Agreement on Tariffs and Trade[41]. As the name suggests the main concern of GATT was the ways in which tariffs on goods restricted international trade. The aim of the Agreement was to safeguard and extend the benefits of the tariffs negotiations that had been conducted alongside the negotiations for the establishment of an International Trade Organization (ITO)[42]. Firmly entrenching the tariff commitments in schedules of concessions was to ensure that a worldwide depression caused be highly increasing tariffs and consequently quickly diminishing international trade could be avoided in the future[43]. The countries therefore committed themselves (i.e. a binding) not to raise their tariffs (i.e. their actual tariffs) higher than the maximum they had agreed to (i.e. bound rate). The current tariffs are the result of years of negotiations between the Contracting Parties of GATT and later the Members of WTO. An applicant-member when accepted receives the benefits of the concessions made by the existing members. However, to be accepted as a member, the applicant has to make such concessions as to make the application credible and acceptable to the existing members. The concessions proposed by the applicant-member are called offers. These offers are made in the framework of the working party (multilateral negotiations)[44].

In March 1997, the Russian Minister for Foreign Economic Relations, Oleg Davydov stated that Russian tariffs would be decreased with 10% by 1998. However, when Gabunia succeeded Davydov the strategy changed markedly. Gabunia refused to freeze tariff levels at the existing levels[45]. It was made clear that Russia would not yield all power to determine tariffs to WTO. Maintaining extensive control over the tariff level was intended to leave Russia with a tool to pursue public policy objectives. One of these objectives was to attract higher level of foreign direct investment. Higher import duties were seen as an incentive to invest directly in Russia[46]. Russia had in other words become rather reluctant to relinquish control over tariff levels to an international organization[47].

Russia made the first tariff offer on goods in 1998[48]. The offer was judged far from acceptable as the bound rates proposed were considerably higher than the actual tariffs currently applied. The revised offer of March 2000 went some way at improving the initial offer. However, the EU considered it sill represented “no real basis for negotiation”[49]. Nevertheless, the negotiations proceeded and led to bilateral agreements with the EU and the US after which, in December 2006, the main tariff reduction were revealed including an average tariff for manufactured goods to 7.3% and substantial reductions in medicines, medical equipment (0%), paper, paper products, shoes, consumer electronics, computers and computer parts, car import and civilian aircraft[50]. In most instances, the lower tariffs were to become operational after a transition period.

The market openings in the services industry offered by Russia were aimed at maintaining a large measure of control over foreign companies operating in Russia. These measures were explained as necessary to maintain quality and to protect consumers[51]. The limitations included curbs of foreign control of service sectors. The limits were not imposed on individual companies but were geared towards maintaining a least 50% of the banking and insurance sectors in Russian hands. Similar arrangements were put in place for stockbroking and share registries but at a higher threshold of 75%[52]. For banking, there was an additional requirement to open a local subsidiary and not branch offices of the foreign bank. The same requirement was imposed on foreign insurance company for an initial period of seven years. In several service sectors, Russia keeps substantial to complete control, including telecommunications, audio-visual services, transport, distribution and energy[53]. A broad measure of liberalization was on offer in professional services, including management consultancy, computer services, market research and advertisement, as well as in legal and auditing services, albeit with restrictions for the last two[54].

Intellectual Property Rights. Russia was a member of the main treaties relating to intellectual property and its legislation was thus to a large extent in conformity with TRIPS. However, the implementation and effective enforcement of these rules was a matter of concern during the WTO accession talks. As a result, Russian courts and police took a firmer stance on IP infringements in 2007 and a new law was enacted[55].

Agriculture. A sensitive area for many WTO Members and for the organisation as whole, agriculture also posed some challenges for Russia. The final deal on agriculture led to an average import tariff of 10.8% (down from 13.2% in force at the time)[56].

Apart from the tariff rates, Russia included the right to maintain subsidization including for export[57]. As both the EU and US offer support to their agricultural sector, massive opposition did not come from these WTO Members. But depending on the level and modalities of the support, it could have meant that Russia would strengthen the membership of this agricultural protection club and would be likely to make future deals in the WTO as a whole even more complex. Consequently, strong opposition came from the Cairns Group, in terms of the level and modalities of support that Russia was proposing. Although in recent years support levels of Russia to its agricultural sector would be largely acceptable to WTO Members, even to the Cairns Group and would be in line with the Uruguay Round Agreement on Aggregate Measures of Support, a strong domestic lobby in Russia wanted to keep the door open for increased levels of support in the future. The compromise that was achieved started from the Russian figure of $9 billion of support in 2012 going down to $4.4 billion by 2018 close to the expectations of the Cairns Group[58]. The figure of $9 billion is largely fictitious as current support for Russian agriculture is nowhere near this figure and in fact, Russia is unlikely to be able to offer such support if it wanted to.

5. Political Hurdles

South Ossetia & Abhkazia. Russia has recognised these territories as independent states as well as Nicaragua Venezuala, Nauru and Vanuatu[59]. Both the United States and the European Union made unambiguous statements calling for respect of the sovereignty and territorial integrity of Georgia.

Georgia saw in Russia’s accession to the World Trade Organisation a tool offering political leverage to include respect for the territorial integrity in a peace agreement. Georgia, therefore, requested that Georgian customs officials would monitor the border crossings between Russia and the territories of Abkhazia and South Ossetia. Georgia maintained this demand as a way of asserting its jurisdiction over the territories that Russia had recognised as independent states and thus made Russia’s acceptance of Georgian territorial integrity comprising these territories a condition for Russia’s membership of the World Trade Organisation[60]. The problem was overcome through Swiss mediation that established a “Mechanism of customs administration and monitoring of trade in goods”[61].

Russia – China Border Disagreements. There are longstanding disagreements between Russia and China over the exact boundary between the two countries[62]. The unclear demarcation of the border could have hampered the accession of Russia to the World Trade Organisation as China could have raised objections to the accession. The unclear delineation could also have been a cause of border trade disputes. However, the issue was resolved before it became a stumbling block. In 2004, the third and final Complementary Agreement between the People's Republic of the China and the Russian Federation was signed on the Eastern Section of the China-Russia Boundary. Together with the two boundary agreements signed earlier, it finalises the complete identification of the trend of the over 4,300 km-long China-Russia border line[63]. In the same joint statement, China expressed its support for Russia’s membership of the World Trade Organisation.

Jackson-Vanik & Magnitsky. The United States and the Soviet Union granted each other most-favoured-nation status in 1972 as a result of the Commercial Agreement. The Jackson-Vanik amendment changed the Trade Reform Act in 1974 by tying conditions denying most-favoured-nation status to countries that deny ‘its citizens the right or opportunity to emigrate’ or imposes a more than nominal tax, levy, fine, fee, or other charge on migration or the desire to do so[64]. The amendment’s effect could be suspended year by year on the basis of a waiver for an individual country after an annual report reassured Congress of the country’s good intentions and practice[65]. Even though by then the Soviet Union had already started to lessen the restrictions, it was perceived as an unacceptable meddling in the internal affairs of the Soviet Union[66]. In response, the USSR repudiated the 1972 agreement and thus the reciprocal most-favoured-nation treatment was ended when the Jackson-Vanik amendment[67].

This inefficient and ineffective anachronism endured until 2012 despite being heavily criticised for being ineffective in achieving its goal and undermining the United States’ economic and security goals[68]. The focus of the amendment was freer emigration and was mostly concerned with the free emigration of Jews from the USSR but failed to have an impact on the issue[69]. It seemed little concerned with the broader issue of free emigration on from communists countries that seems to have been its broader and stated objective[70].

For United States trade law policy to be in compliance with the law of the World Trade Organisation, it had to accord unconditional most-favoured-nation treatment to Russia from the moment of its accession to the organisation. Jackson-Vanik denied this treatment and had to be removed. However, members of Congress also saw opportunities to link the change of Russia’s status with several other issues related to Russia[71]. A bipartisan group sought and succeeded to link the campaign related to Sergei Magnitsky to the permanent normalised trade status for Russia[72]. The Magnitsky Bill was tagged onto the Jackson-Vanik repeal. The Russian Foreign Minister Sergei Lavrov made clear Russia’s interpretation of the Bill: ‘We perceive it as replacement of an anti-Soviet law with an anti-Russian one’[73]. The first list of 18 individuals targeted by the Magnitsky Bill was announced on 12 April 2013[74]. On 14 April 2013, Russia published a list of 18 individuals including US National Security Advisor Tom Donilon scheduled to arrive in Moscow on 15 April 2013[75].

6. Conclusion.

In August 2012, the Russian Federation joined the World Trade Organisation after a period of negotiations that fell slightly short of two decades. This accession is important as it was the last large country absent in the membership of the World Trade Organisation that aspires to universal membership.

The accession was also important for existing World Trade Organisation Members not simply because Russian accession offered an opportunity for new trade opportunities but because accessions are the only new trade opportunities that have been created in the World Trade Organisation as the organisation has not seen any successful negotiations inside the organisation leading to further trade liberalisation since its establishment in 1995.

For Russia, acceding to the World Trade Organisation was important for political and economic reasons. As the sole remaining member of the G8 and G20 outside the World Trade Organisation, gaining membership was important for its international standing. Economically, Russia depends for its export predominantly on hydrocarbons and raw materials. Its manufacturing industry and its agricultural sector were long protected and face competitiveness challenges. Membership of the World Trade Organisation can lock in place a process of reform that modernises its production and diversifies its exports.

But the WTO is about trade opportunities. In the case of Russia, it is an opportunity to develop more diversified exports and an opportunity to use external leverage to engender domestic change. The success will depend on how Russia deals with these opportunities. Russia would thus be well-advised to take heed of the words ascribed to the Chinese military strategist Sun Tzu (6^th century BC): “Opportunities multiply as they are seized”.

Bibliography:

1. A.E. Stevenson & A. Frye. Trading with the Communists // Foreign Affairs. 1989. № 68 (2).
2. A.S. Alexandroff. Concluding China’s Accession to the WTO: The U.S. Congress and Permanent Most Favored nation Status for China // University of California at Los Angeles Journal of International Law & Foreign Affairs. No. 23, 1998, p. 3.
3. Adlai E. Stevenson & Alton Frye. Trading with the Communists // Foreign Affairs. 1989. № 68 (2). pp. 53–71.
4. Åslund. Why Doesn’t Russia Join the WTO? // The Washington Quarterly. 2010. № 33(2). pp. 52 – 58.
5. C. Clover. Policmakers welcome Russia’s WTO accession // Financial Times. No 16, December 2011.
6. D. Fean. Decoding Russia’s WTO Accession // IFRI: Russie.Nei.Visions. 2012. № 46. pp. 12 – 19.
7. D.A. Dyker. Will Russia ever join the WTO // The Hague Journal of Diplomacy. 2009. № 4. p. 84–89.
8. F.D. Holzman. Reforms in the USSR: Implications for U.S. Policy // The American Economic Review. 1989. № 79 (2). p. 29.
9. G. Dubinsky. The Exceptions That Disprove the Rule? The Impact of Abkhazia and South Ossetia on Exceptions to the Sovereignty Principle // Yale Journal of International Law. 2009. № 34 (1). pp. 241–246.
10. G.P. Deshpand. The Sino-Soviet Border Clash // Economic and Political Weekly. 1969. № .4 (15). pp. 643–647.
11. J. Jensen, T. Rutherford & D. Tarr. The Importance of Telecommunications Reform in Russia’s Accession to the WTO // Eastern European Economics. 2006. № 44 (1). pp. 25–28.
12. J. Quigley. Most-Favored-Nation Status and Soviet Emigration: Does the Jackson-Vanik Amendment Apply? // Loyola of Los Angeles International and Comparative Law Journal. 1989. № 11 (3). pp. 543–548.
13. Kovatch cites John Helmer. Russia Toughens its Stance; Offers Steel Deal to US, Journal of Commerce, 27 June 1997, p. 4A.
14. N. Buckley, A. Beattie & E. Callan. Russia reaches bilateral deal with US for entry to WTO // Financial Times. 2006. № 11.
15. R. Müllerson. Precedents in the Mountains: On the Parallels and Uniqueness of the Cases of Kosovo, South Ossetia and Abkhazia // Chinese Journal of International Law. 2009. № 8 (1). pp. 2–26.
16. Robert H. Brumley. Jackson-Vanik: Hard Facts, Bad Law // Boston University International Law Journal. 1990. № 8 (2). pp. 363–372.
17. T. Miles. Russia's commitments in WTO accession // Reuters. 2011. № 10.
18. V. Krivogorsky & J.W. Eichenseher. Some Financial and Trade Developments in the Former Soviet States // Russian and East European Finance and Trade. 1996. № 32 (5). pp. 16–38.
19. W.J. Kovatch Jr. Joining the Club: Assessing Russia’s Application for Accession to the World Trade Organisation // Temple Law Review. 1997. № 71. pp. 1021–1026, 1031.