Source: Moscow Times

Recent events show that Russia's need for membership in the WTO is rapidly growing. One reason is the structural changes that have taken place in the Russian economy: Ninety percent of what the Soviet Union exported to the West was oil and natural gas. Now these raw materials account for just over half of Russia's exports, while intermediary goods such as metals (comprising one-quarter of exports) and chemicals take their place.

But intermediary goods are often subject to protectionist measures. Russia's steel industry has been consolidated and restructured, with the four biggest and best companies now producing four-fifths of Russia's steel. They are improving and expanding output, but Russia's exports both to the European Union and the United States are strictly regulated by import quotas, which would not be legal if Russia were a member of the WTO.
Russia's major competitors on the steel market are steelworks in Poland and the Czech Republic, which will soon benefit even more because of their countries' imminent accession to the EU. Little surprise then that Alexei Mordashov, CEO of steel giant Severstal, leads the industrialists favoring early Russian accession to the WTO.
Russian chemicals are often subject to anti-dumping actions in the EU, and the penalty rates tend to be twice as high as those for EU accession countries, but Russia has no means to complain. As one industry after another takes off, such examples will multiply.

In the 1980s, the Soviet Union imported on average 37 million tons of grain each year. This year, Russia, Ukraine and Kazakhstan together will export more than 25 million tons of grain. Shocked to see this remarkable revival of Russia's agriculture, the EU clamped down with strict import quotas for grain starting Jan. 1. Russia's export of grain to the EU will probably be restricted to 500,000 tons in 2003, compared to some 5 million tons in 2002. The EU could not have imposed this draconian protectionist measure if Russia had been a member of the WTO.
In fact, Russia has much to benefit from freer agricultural trade. It offers few subsidies to its agricultural sector, which is developing swiftly. Russia should consider membership in the Cairns group of agricultural exporters opposing protectionism. Since the liberalization of agricultural trade is one of the main issues in the current Doha round of WTO negotiations, Russia has a vital interest in joining the WTO soon.

The so-called free trade area between CIS countries does not work. As soon as one CIS country successfully exports any good to another CIS country, the importing country tends to impose severe protectionist measures. Last year, a veritable trade war erupted between Russia and Ukraine, in which successful exporters in both countries were penalized at a social cost of hundreds of millions of dollars.

No country should be blamed for this unfortunate situation. The CIS free trade area lacks legal sanctions. Every CIS government can do as it pleases, leaving the field open for arbitrary retaliation, which is sometimes resolved through prolonged bilateral haggling. Most other free trade areas in the world function well on the basis of WTO rules and standards. It makes no sense for CIS countries to reinvent this complex wheel. Instead, they should all become members of the WTO, but they should start using WTO rules and standards immediately.

Russia's problems with entering the WTO are often exaggerated. After all, Russia is a rather open market economy, unlike China. While China had to make some 200 commitments, Russia should get away with about 30, and many of its problems have already been sorted out.

The most difficult issue of principle is the EU demand that Russia raise its energy prices to the high EU level. Russia, however, has an evident comparative advantage in its abundance of cheap energy, while EU energy prices are most probably kept too high by inefficient state monopolies. The obvious solution is the gradual liberalization of Russian energy prices over a few years, and last December Russia and the EU agreed accordingly.

Russia's car industry has the most fervent protectionist lobby, but it appears to be satisfied with the tariff protection that Russia has introduced. Whether you like it or not, it is only temporary and it should be possible to get through the WTO.

Various countries have demanded that Russia open up its banking sector to unlimited foreign participation. Through a simple decision, the Central Bank solved that problem late last year by abolishing the ceiling of 12 percent on foreign ownership in the banking sector.

Several Russian concerns are too tiny to merit serious discussion. Foreign companies, such as Norwegian Telenor, Swedish Telia and Deutsche Telekom, already own a large share of Russia's mobile phone companies. Even so, the Communications Ministry wants to limit foreign ownership in the telecommunications sector. Instead, it would be in Russia's true interest to facilitate the international expansion of companies such as MTS and Vimpelcom.

One of the most important side-effects of Russian accession to the WTO will be support for the domestic reform agenda. Everybody complains about Russia's customs administration, which will be forced to improve by the WTO. Russia's insurance industry is rudimentary, but a normal market economy requires well-functioning insurance, which will be greatly facilitated by foreign participation as demanded by WTO negotiators. By contrast, Russia's overgrown and obsolete aviation industry can only be shaken and revived through a radical liberalization.
In short, Russia has overwhelming reasons to join the WTO early. For Russia, the timing of its accession is more important than the exact conditions. The later Russia joins, the more cumbersome the demands will be and the greater the social cost. For instance, as a new WTO member China can now impose additional conditions on Russia's entry. Currently both the EU and the United States support early accession for Russia. Russia should try to accede to the WTO at the important ministerial conference in Cancun, Mexico, in September.

This is still possible if it is made a top political priority.