To Russia With Love: Opportunities From Russia’s Accession To The WTO
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At a difficult time for the world economy, Russia, the world’s sixth largest – and third fastest growing major – economy has opened up for trade. After 19 years of negotiation, Russia finally received membership to the World Trade Organisation on August 23rd 2012 – opening up major new trading opportunities in the process. What are some of the impact and opportunities emanating from Russia’s WTO membership?
At a difficult time for the world economy, Russia, the world’s sixth largest – and third fastest growing major – economy has opened up for trade. After 19 years of negotiation, Russia finally received membership to the World Trade Organisation on August 23rd 2012 – opening up major new trading opportunities in the process. What are some of the impact and opportunities emanating from Russia’s WTO membership?
On August 23rd 2012, Russia became the last member of the G-8 to be admitted into the World Trade Organisation, after 19 years of negotiations following the break-up of the Soviet Union. The accession meant not only that the last major economic power was set to join the global trading system, but it also opened up new trading opportunities for the rest of the world – at a time when most other markets are experiencing decline.
As per the WTO agreement, Russia must now reduce tariffs, quotas and other barriers against foreign goods and services. Equally, foreign countries must also reduce the same barriers against Russia.
As a result, the greatest immediate impact of Russia’s accession for the time being will be a huge boost in demand for lawyers experienced in international trade disputes. Not all the changes Russia made on August 23rd will satisfy other countries that wish to sell goods and services to Russia. Equally, not all foreign countries will immediately lift barriers to Russian goods. In particular, non-tariff barriers in service industries and government contracts will be hard to identify and remove. So, there will be a demand for lawyers to resolve these disputes.
But on the whole, compared to other recent WTO entrants like China, Taiwan and Saudi Arabia, Russia has had a favourable deal; So in most cases, legal disputes will be limited, with the exception of those with the U.S., who are a minor trading partner and has not yet removed Soviet-Era legislation setting up barriers of trade.
Nonetheless, the opportunities derived from Russia’s entry are huge. To put this into context, one has to first examine the nation’s economic size, growth and potential.
According to World Bank statistics, Russia is the world’s 8th most populous country, besides being the world’s largest country geographically. With 143 million people, it has the population of the UK, Germany and the Netherlands combined; and of the top eight most populous countries in the world, only the U.S. can claim to have a higher standard of living. The Russian consumer market, as such, cannot be overlooked by any firm seeking to grow internationally, as it is both large and well off by international standards.
For business-to-business companies, the size of the total economy matters as well. Russia is the sixth largest economy in the world by GDP (PPP) – $1.858 trillion – just behind Germany but ahead of France and the U.K.. With 4.3 percent GDP growth, Russia was also the third fastest growing major economy in the world in 2011 – with only China and India having grown faster.
The nation also now has the fourth fastest growing manufacturing economy in the world. In fact, contrary to popular belief, manufacturing and agriculture drove Russian growth last year – not oil. In 2010, Russian imports grew by 26 percent, while 2011 figures still await.
Related: Russia Economy
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Impact & Opportunities By Sector
The impact and opportunities of Russia’s entry to the WTO will vary by sector. Important sectors in which Volga Trader has active experience are reviewed below –
Agriculture:
Agriculture is heavily protected by most trading blocs. Russia and its trading block the Commonwealth of Independent States is no exception. The average tariff on agricultural goods before Russia’s WTO entry was 13.2 percent. This will fall to 10.8 percent.
Russia will be allowed a transitional period until 2018 to remove protection from agriculture – including a $9 billion spend on price support. But the most important issue for the world is Russian cereal production. In previous years, Russia had introduced an export ban on cereals to keep prices low for its pig farmers and other meat producers, but this will no longer be acceptable by WTO rules.
[quote]There will be no export ban. Access to high world prices will provide large profits to Russian commercial farmers (there are also many less than commercial farmers) who will have large sums to reinvest in production resources and new land. This is an opportunity for suppliers of agricultural inputs – such as machinery, fertilizers and seeds – to move into the market; this though may be moderated by a shortage of railway capacity to move all the available cereals to port to the advantage of local processors.[/quote]The meat industry is another area of change. Meat production is the most heavily protected sector of Russian agriculture, particularly pork production. The most immediate impact of removing trade barriers is that it has become possible to import live pigs into Russia without paying heavy import duties. This will assist the growth of slaughtering and processing industry, which is also being assisted by direct government grants for modernisation.
Tariffs are falling on pork from 15 percent to 0 percent for shipments inside the maximum quota, which will remain until 2018. Outside the quota, tariffs are 65 percent. These measures will ensure that large Russian pig farmers have to compete at international prices while providing a spot market at higher prices for smaller producers. Not all large Russian pig farmers can match international prices and foreign suppliers now have a 15 percent advantage compared to previously.
Industries:
Exports by the extractive industries are very important for Russia. Oil, gas, coal, mineral ores and lumber are all important. As the rest of the world wants these, there are few barriers to Russian exports; and no large change due to WTO membership is expected.
The rush to extract gold, which is fuelling demand for mining equipment, will continue. The export duty Russia imposed on lumber to give local sawmills an advantage in material costs will be lifted. Protection in the past did not grow the industry and Russia remains short of sawmill capacity.
The picture is different in metal processing. Russia is an important producer of metals such as aluminium, nickel, titanium and steel. These processed metals have faced barriers to export from other countries. These barriers must now be removed with immediate effect. This will deliver increased profits to the Russian metallurgical companies who will be able to continue their existing reinvestment. Most have already completed a recent round of reinvestment.
The increased local smelting will also create additional demand in the mining industries. There will be new demand for mining equipment from grab-lines to washeries. The WTO lift to the smelting industry will keep the metals extraction sector dynamic in contrast to other extraction based economies such as Australia or Brazil where the top of the commodities cycle has been seen and who are now threatened by renewed Russian exports.
Manufacturing is largely a story of new opportunities for foreign suppliers, especially in engineering. Russia has protected its transport equipment manufacturing industry in the past including Spacecraft, aeroplanes, ships, automobiles, trains, trams and trolleybuses.
Foreign assembly plants, such as Ford – near Saint Petersburg – where the Focus and Mondeo are assembled, were set up to avoid new car tariffs. The average tariff on manufactures is now falling from about 9.5 percent to 7.3 percent.
However there are sectors where tariffs have fallen or are about to fall rather more substantially include: Aeroplanes and aero-engines, motor vehicles, construction equipment, agricultural equipment, medical devices, instrumentation, chemicals, advanced pharmaceuticals, heavy electrical engineering equipment and consumer goods from furniture to footwear are in this category.
Russia has Europe’s largest car market, so the fall in duty on new cars from 15.5 percent to 12 percent will stimulate further significant volume growth not only for importers but also local assemblers, as reduced prices stimulate overall demand. Aftermarket suppliers for foreign makers have renewed opportunities too.
Russia has a home grown IT and electronics industry that was protected by 5 percent tariff. This is dropping to about 2 percent. Most local manufacture is for the large home grown IT services industry and will be barely affected. Electronics is driven by telecommunications where there already exists very little protection and defence, which is outside the scope of the WTO. Russia has already embarked on a substantial programme to renew its energy infrastructure. The tarriff reductions will give suppliers of electrical generators, transformers, switches and other such equipment a new edge.
Services:
Changes in the ownership of service industries will have the biggest effect on the Russian economy. This will be overwhelming positive for both consumers of the services and company shareholders. The main measure now in place due to WTO membership is that complete foreign ownership of service industries such as banking, telecommunications, electricity generation and distribution is allowed.
Russia’s service industries are very inefficient by international standards and contribute to an overall lowering of efficiency in the Russian economy. Foreign owners will improve operational efficiency and enhance the whole Russian economy. In the medium-term, improved services are expected to provide 11 percent improvement in the output of the economy – irrespective of other events.
There are already strong effects. A wave of Russian service industry companies is heading for the London stock market in order to improve their costs of capital to resist foreign takeover. Initial Public Offers are already in progress for firms such as Megafon, a mobile phone network operator or a bank and Promsvyazbank. Sberbank is selling more shares in London.
[quote]These are the first. Service companies that do not improve their cost of capital and operating efficiencies will be vulnerable to new owners who will. Changes of ownership will go both ways. Russia’s excellent mobile phone networks are now better able to expand abroad as they also face fewer barriers to acquisition overseas.[/quote]Conclusion
Russia may be the the 6th largest economy in the world, with a 14-year record of rising imports punctuated only briefly by the credit crisis, but it still has a relatively low level of trade. It is the 12th largest exporter and 18th largest importer in the world.
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The opportunity for trade growth, not simply economic growth, as such is still very substantial. The story of exporters and investors exploding into an unfilled niche, such as Scottish and Newcastle with Baltika beer is not yet over. The prospect for businesses ready to build a position in the Russian market look good. Trade and investment consultancies like Volga Trader can offer more detailed analyses of specific markets and help new entrants reduce the costs of learning about the Russian market and speed up the entry process.
By Philip Owen
Philip Owen ([email protected]) is a Chartered Engineer and Principal Consultant with Volga Trader – a Trade and Investment consultancy specialising in Russia with offices in the UK and Russia.
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