August 23rd, 2012
12:55 PM ET

A rocky start to Russian WTO membership

By Stewart Patrick, CFR

Stewart M. Patrick is senior fellow and director of the Program on International Institutions and Global Governance at the Council on Foreign Relations. This entry of The Internationalist originally appeared here. The views expressed are his own.

After the longest accession negotiations in the history of the WTO, Russia has finally joined the World Trade Organization. This is an important milestone for the WTO – and for Russia, which according to the CIA possesses the world’s seventh largest economy, with a GDP of $1.9 trillion. For Moscow, it’s certainly been a long road. The Russians first submitted an application for WTO membership back in June 1993, under the newly democratic government of Boris Yeltsin.

So what took so long? A baby born in 1993, after all, would now be a legal adult. Russia’s political system, alas, has matured more slowly. During the 1990s, Russia’s political volatility, the slow pace of domestic economic reforms, a devastating ruble crisis, and opposition from (still) influential communists conspired repeatedly to delay WTO negotiations. During his first presidential term, Vladimir Putin began a concerted push for WTO accession, implementing necessary customs reforms. But his subsequent retrenchment on state control over the oil and natural gas sectors, as well as persistent frustrations over inadequate protection of intellectual property rights (IPR) damaged Russia’s candidacy. By 2009, Putin had abandoned Russia’s individual WTO application and proclaimed that Russia would apply as a customs union with Belarus and Kazakhstan, an arrangement that subsequently fell apart.

Things began to turn around only after a June 2010 meeting between U.S. President Obama and President Medvedev, during which the leaders pledged to support Russia’s WTO bid, including through U.S. technical assistance. In October 2010, the office of the U.S. Trade Representative announced that outstanding issues, including Russia’s treatment of IPR, transparency questions, and Russian agricultural subsidies had been resolved. On December 16, 2011, WTO ministers approved the Russian accession package at their Eighth Ministerial Conference, giving Russia 220 days to pass relevant domestic legislation. The Russians did so last month, at the eleventh hour, enacting legislation in the Duma  (lower house) and Federation council (upper house). Putin signed the accession papers, sending them to the WTO on July 23.

Accession should have a salutary impact on Russia’s policies and institutions, accelerating the modernization and liberalization of an economy that continues to rely heavily on “inefficient import substitution and heavily subsidized industrialization.” All things being equal, adherence to WTO standards should lead to reduced tariff and non-tariff barriers, greater market access for foreign goods and services, more consistent and secure rules for the treatment of foreign investment, improved IPR protection , a reduction in trade-distorting agricultural subsidies, more transparency in public procurement, and more efficient customs administration.

In the short term, the growth of imports may bring dislocation, threatening uncompetitive Russian factories and farms. But the overall result should be to “lower prices for consumers and help shift resources to more efficient methods of production.” The World Bank suggests that WTO membership could boost Russia’s annual GDP by 3.3 percent ($49 billion) in the medium term and 11 percent in the long run, while wages could rise some 4 percent to 5 percent, benefitting the vast majority of the population. (Russia’s growth rate is currently 4 percent, down from 7 percent before the 2008 global recession, and fluctuates with fossil fuel and other commodity prices). Domestically, opposition to WTO membership has been largely confined to the Communist Party, whereas the bulk of Russian citizens appear to regard accession  as an essential step “towards badly needed global economic integration.”

Russia’s trading partners are also likely to benefit. Under the new regime, average import tariffs will drop from 10 percent today to 7.8 percent, and then to 6 percent by 2015. Moscow has also committed to limit agriculture subsidies, opening up this politically sensitive sector to increased foreign competition. Foreign investors should also have cause to celebrate: The new deal will scrap current limits on foreign ownership of telecommunications and banks. Foreign companies will be allowed to apply for government contracts. Finally, the Russian government has pledged greater enforcement of IPR (though many international experts remain skeptical, given the power of illicit networks in the Russian economy).

The United States, which exports some $9 billion of goods and services to Russia annually, could double that figure, resulting in “thousands of new jobs”, according to Senators Max Baucus and John Kerry. But one big hurdle remains in the normalization of U.S.-Russian relations: the four-decade-old Jackson-Vanik amendment. A Cold War provision inserted into the 1974 Trade Act (Title 19, Chapter 12, Subchapter IV, Part 1, § 2432), Jackson-Vanik was intended to punish the Soviet Union for placing restrictions on Jewish emigration. The legislation prevents the U.S. president from establishing normal trade relations with any country that refuses to allow its citizens to emigrate or taxes them too heavily when they attempt to do so. The amendment does contain a waiver provision, however, and every administration since 1994 – Democratic and Republican alike – has availed themselves of this has discretion to declare Russia in compliance. Moreover, as Democratic Senators Max Baucus of Montana and John Kerry of Massachusetts recently noted, “the American Israel Public Affairs Committee, the National conference on Soviet Jewry, and even Israel now support the repeal of Jackson-Vanik for Russia.” Influential conservatives also support its repeal.

The Jackson-Vanik amendment is a clear violation of WTO rules, which mandate that every WTO member must grant all other members unconditional Permanent Normal Trade Relations (PNTR) status. And yet, perversely, the provision lives on, thanks to an unusual constellation of political forces in Congress and a failure of White House leadership. American labor unions support Jackson-Vanik for protectionist reasons, and it’s unclear how many Democrats are prepared to break ranks with this constituency.

Meanwhile, Republicans have little interest in tackling this politically charged issue themselves, particularly during a presidential election year. Republican legislators blame the president for failing to mobilize his own party behind repeal, and accuse Obama of meekness towards Russia (given his lack of support for the Magnitsky bill that would blacklist Russian human rights violators ). Senator Orrin G. Hatch, Republican of Utah and a member of the Senate Finance Committee that unanimously recommended the repeal of Jackson-Vanik, charged that the administration was asking “Congress to simply pass permanent normal trade relations and remove Russia from long-standing human rights law, while ignoring Russia’s rampant corruption, theft of U.S. intellectual property, poor human rights record, and adversarial foreign policies.” Thanks to these partisan differences, Congress declined to repeal the amendment and approve PNTR with Russia before taking its summer recess.

At this point, it’s uncertain exactly what effect this action (or inaction) will have. Under WTO rules, Russia would be “within its rights to withhold the benefits of its accession-related reforms from U.S. companies.” American business leaders have vociferously called for the repeal of Jackson-Vanik since they stand to lose the most. For now, Moscow has pledged to apply its new WTO trade rules consistently to all members, including the United States, despite Jackson-Vanik. But it certainly doesn’t make for a smooth start to Russia’s tenure with the WTO, and could easily have an impact on broader U.S.-Russian relations. More generally, the amendment serves as an enduring landmine any future administration or Congress could exploit for nakedly protectionist purposes.

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Topics: Russia

soundoff (15 Responses)
  1. Quigley

    Is Russia making a wise decision here? Somehow I don't think so, seeing what's going on in Europe these days with their economies severely depressed. Globalization has never been a good idea, except for the elitists and big business!

    August 23, 2012 at 1:43 pm |
    • Nigerian Scammer

      Globalization has always been a scam to allow the rich elites to depreciate their workers, loot economies, and stash the wealth elsewhere. If the British Empire had not forced globalization on the world, the disasters of World War I & II would not have happened. At some point during the 20th century, the US went from noblesse oblige (promoted by Henry Ford) to a copy of the British Empire.

      August 23, 2012 at 6:11 pm |
      • Old Man Clark

        Very well posted, Nigerian Scammer and so very true! Most people are just too ignorant to see that!

        August 23, 2012 at 7:04 pm |
  2. Old Man Clark

    Well put, Quigley. I agree.

    August 23, 2012 at 2:11 pm |
  3. Joseph McCarthy/Quigley/LyndsieGraham/krm1007©™/Joe Collins/J.Foster Dulles/Marine5484/OldManClark

    I am the same guy. I am a useless piece of camel dung. I post anti-American, anti GB, anti-Semite, anti-India, anti-modern anything because I am a good Moslem. I have stolen Patrick’s moniker because I am so ashamed of myself and I post the most stupid comments because I am an imbecile. When people get angry with me, I claim they are the stupid ones. If I am not careful, my brain will explode because it is so full of hate.

    August 23, 2012 at 6:23 pm |
    • Old Man Clark

      Here goes our ignorant, redneck, hillbliie Tea Partier from the South again to annoy the rest of us! These Tea Partiers can never post anything intelligent here themselves.

      August 23, 2012 at 7:07 pm |
  4. George Eccles

    It is somewhat bizarre that, in making the decision to admit Russia to the WTO, no account was taken of her abuse of human rights law, rampant corruption, and aggressive foreign policies. As I reveal in my new novel 'The Oligarch: A Thriller', the level of political and business corruption in Russia remains astounding. How can that be compatible with membership of the WTO?

    August 24, 2012 at 4:35 am |
    • Quigley

      Hey George, what makes you think that we Americans are any better than the Russians? First of all, the M.I.C. runs almost everything in Washington today as it owns the majority of our politicians and the White House and as for human rights abuses, look at Gitmo! And finally, our foreign policies are far more aggressive than theirs! Just look at what's going in the Middle East and Central Asia!

      August 24, 2012 at 11:36 am |
  5. j. von hettlingen

    No doubt Russia will benefit greatly from joining the WTO. However, Russia will have to do its share by clamping down on corruption, reducing bureaucracy and improving the rule of law. How the U.S.-Russian relations will look like, depends on the personal chemistry between leaders of the two nations. Putin awaits the result of the presidential election in November, before dealing seriously with the US:

    August 24, 2012 at 8:06 am |
  6. Molecule

    Russia's already breaking agreement increasing the customs duties. Check the Uniform customs tarif issued July 12 on printing board. Is it a joke ?

    August 27, 2012 at 9:48 am |
  7. onlyboyjohn

    I know that this is well past the publication date, but I came across this while doing research. How did Russia apply to the WTO 1-1/2 years prior to its creation? The WTO was not formed until January 1995, but this article states that Russia applied in June 1993. The WTO replaced GATT, and is not a renamed version of the old guard. This should have been stated as an application to GATT, which was contiued with the WTO.

    September 7, 2013 at 7:44 pm |

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