Russia Profile
June 19, 2009
Russia Profile Weekly Experts Panel:
Farewell to the WTO
Introduced by Vladimir Frolov
Contributors: Vladimir Belaeff, Stephen Blank, Ethan S. Burger, Vlad Ivanenko, Sergei Roy
Last week Russia, Kazakhstan and Belarus announced that they have completed talks on forming a customs union, and would therefore abandon their bids to join the World Trade Organization (WTO) as individual members, filing a collective membership application in January of 2010 instead. The customs union is also a convenient excuse for Moscow to drag the WTO accession issue into the indefinite future. Is WTO accession no longer a policy priority for the Kremlin? Or is it a reaction to Western unwillingness to treat Russia as an equal partner during the multi-year WTO accession talks? Will Russia benefit from staying away from the WTO? Will the WTO be better off without Russia as a member?
This marks the end of a long and tortuous negotiating process for Russia’s accession to the WTO, a process that began as an ideological imperative under President Boris Yeltsin and ended in mutual disappointment and recriminations between Russia and its major trading partners.
Both Presidents Vladimir Putin and now Dmitry Medvedev have emphasized Russia’s interest in joining the WTO (but not at any price), and have sought to secure favorable terms for entry that would have maintained tariff protection for the key Russian industries (like aircraft, autos and agriculture).
It appears now that the negotiating process has run its course and arrived at a dead end: the terms offered to Russia by key WTO members, including the EU and the United States, are not acceptable to Russia either in terms of market access or the transition period. The United States continues to tie Russia’s WTO accession to unimpeded U.S. meat and poultry exports to the Russian market (a killer for Russia’s own meat and poultry industry), while citing the improvement in intellectual property rights protection in Russia as the most significant condition for Russia’s WTO entry. Some countries, like Georgia, for example, seek to hold Russia’s WTO entry hostage to outstanding political disputes with Moscow (such as Russia’s recognition of Abkhazia and South Ossetia as independent states) to force a change in Russia’s stance. All of this has led to deep disappointment among the Russian leadership with the WTO. Both Putin and Medvedev have stated that Russia has been kept out for political reasons, and that the negotiating process has become a sham and a cover for extracting political concessions from Russia.
Then the global economic crisis arrived, and Moscow suddenly saw its lack of WTO membership as a blessing in disguise for Russia, since protectionist measures have been applied across the globe to salvage tanking domestic industries (last year, Russia significantly raised tariffs on imported vehicles to help bolster domestic carmakers). Putin openly stated that it was a good thing that Russia was not bound by any WTO obligations.
A customs union between Russia, Belarus, and Kazakhstan is a good thing in and of itself, as it seeks to preclude the introduction of effective customs barriers between the three countries (a costly proposition during an economic crisis) and will basically expand the already existing customs union between Russia and Belarus within the Union State (though this did not prevent Moscow from imposing a blanket ban on 500 Belarusian dairy products last week in clear retaliation for Alexander Lukashenko’s earlier brazen and unprovoked verbal attack on Moscow). Is WTO accession no longer a policy priority for the Kremlin, since it sees few benefits in joining the club (Russia’s primary export earner is energy, which is not regulated by the WTO)? Or is it a reaction to Western unwillingness to treat Russia as an equal partner during the multi-year WTO accession talks? What has really prompted such a drastic reevaluation of Russia’s interests with regard to the WTO? Will Russia benefit from staying away from the WTO? Will it benefit more from setting up a customs union with the two former Soviet states? Will they be able to negotiate WTO accession as a trading block, or is it an utterly unrealistic proposition? Is it Russia’s farewell to the WTO? Will the WTO be better off without Russia as a member?
Vlad Ivanenko, Ph.D., economist, Ottawa
Before I express my opinion on the Russian WTO policy, I should explain its logic. Generally, I accept a new proposition if it does not contradict previous information, and I verify its arguments empirically when the time comes to act on its basis.
The statement that free trade, the WTO’s raison d’être, benefits every participant is the one that economists accept wholeheartedly. However, in 2003, when I commented for the first time on the benefits that WTO accession was going to bring to Russia, I felt compelled to analyze trade data. The analysis, published in a leading Russian journal, has indicated that the process of negotiation has a larger economic impact than the accession itself. Thus I have recommended Moscow to concentrate on the details rather than on the speed, contrary to the established policy at that time, namely that Russia should become a WTO member as soon as possible.
Both for professional and intellectual reasons, I have watched closely the latest, as yet unsuccessful, round of global trade negotiations. These observations have led me to envision the process of decision-making at the WTO as a two-stage one. First, the U.S. negotiation team agrees with its EU analogue on a common stance on the issues of joint interest. After that, the two parties individually approach other members, soliciting their loyalty in exchange for perquisites granted on an ad hoc basis.
This approach worked fairly well until the end of the 1990s, when India, Brazil, and later China challenged the established status quo. In essence, it is the inability of the two sides to come to a consensus that has stalled the negotiations in the 2000s.
And now Russia comes into play. Being a non-member, it is nevertheless a force that the world of WTO politics reckons with. Arguably, Russia belongs to the same “non-Western” club led by the other three countries in the latest revolt. Would it be beneficial to the United States and EU to have Russia inside under the circumstances? In fact, in the long run, the answer is “yes,” since the Russians’ stance may not be as “anti-Western” as many fear, recalling that the main point of discontent, agricultural trade, is not where Russia has a significant stake. However, in the short run problems are inevitable and, unfortunately, it is the near-term consideration that mostly determines politics. Thus, I am not surprised if the Russian negotiation team feels that the other side is dragging its feet.
Still, virtually abandoning the process of accession in favor of a new bloc-building approach is a bold move with uncertain consequences. From outside it is impossible to say if Moscow has a “plan B” in case its policy falters because, say, Belarus pulls out of the proposed customs union at the last minute. It seems to be a gamble, but one that the combined West should meet with an adequate response, if the latter intends to prevail.
Ethan S. Burger, Adjunct Professor, Georgetown University Law Center, Washington, DC
The Russian political leadership is insisting that the WTO accept the existence of a free customs agreement among Russia, Belarus and Kazakhstan as a condition for their joining the organization, as if the WTO really needed Russia as a member. Perhaps, president Medvedev and prime minister Putin believe that this demand demonstrates the close nature of relations among the three states. At first glance this may appear as an act of altruism, but more careful analysis suggests otherwiseMoscow is simply looking to gain control over Belarusian and Kazakhstani foreign policy.
It has been 17 years since the collapse of the Soviet Union. Rather than striving to achieve a genuine sense of "fraternal relations" among these countries' populations, the people of Azerbaijan, the Baltic States, Georgia, Moldova and Ukraine do not always see significant benefits from forging closer ties with Russia. Maybe there are some areas where greater cooperation would make sense, but some people may be against establishing closer links to Russia, since they could represent the first step on a path toward giving up sovereignty.
While Russia might think it can buy some goodwill by selling energy to its neighbors at reduced prices, such "gifts" are often viewed with apprehension in the capitals of the neighboring states. Even if desirable in the short-term, these benefits may not be of lasting value. While segments of the ruling elite may see gains from accepting Russia's offers, in complex societies the elite does not have uniform interests.
Undoubtedly, there are those who would benefit from energy sold below market prices in the near-term. This situation, however, would reduce incentives for domestic entrepreneurs (including government officials) to create future opportunities. It is becoming increasingly apparent that what represents the national interest in a particular sphere of activity may not do so in another.
Russia has just imposed a ban on the import of Belarusian milk. The timing of this move seems odd, given that Russia was apparently about to pay the final $500 million tranche of a $2 billion loan to Belarus. How will the Belarusian officials and the population react? Very few individuals want to be reminded of their weakness and vulnerability.
Would it not be a normal response for Lukashenko to question the value of close ties with Russia, as opposed to other countries? Even the mercurial Lukashenko may prove less problematic for Moscow than possible alternatives. If he is not propped up with subsidies and cheap loans, what will be the consequences?
Did the Russian leadership decide that this is an appropriate response to get Lukashenko to make Belarus an active member in the Collective Security Treaty Organization? Who within Belarus is harmed as a result of Russia's actions to limit its imports of milk? What does milk have to do with national defense (other than it is needed to make butter and most countries cannot afford both guns and butter)? What stick can Moscow use against Uzbekistan, which has shown a similar reluctance to enter into the Collective Security Treaty Organization? What is the risk that it might backfire?
The more the Russian leadership uses its "hard" power, the greater the harm it is causing to its long-term interests. For the lower and mid-level officials in the governments of the Soviet Union's successor states, an appreciation of independence and autonomy are far more important than the faded memory of a shared external threat or socialist solidarity. The many senior government officials who might recall working together before 1992 and who have common experiences and attitudes are getting less rigorous in carrying out their duties (if not thinking actively about retirement -- often not due to their own wishes).
Every week, new cell phones and computers hit the market place. Perhaps the current financial crisis is leading to greater technological innovation. Those who hang on to the past do so only at their own peril. The other former fraternal republics are likely to examine the benefits of all aspects of their relationship on a case-by-case basis. The past is not always going to be a good indicator of the decisions that will be made in the future.
Sergei Roy, Editor, guardian-psj.ru, Moscow
The announcement that Russia is going to seek WTO membership only along with two other members of the customs union of Russia, Kazakhstan and Belarus, was both unexpected and puzzling.
The most unexpected element here was not the fact that Russia chose to virtually put the issue of WTO entry on a very distant backburner. After all, we have a history of 15 years of negotiations in which Russia’s accession to the WTO has been the focus of aggressive pressure on the economic front by the United States and Europe, and of at times indecent political games, like the statement by Carlos Gutierrez, U.S. trade secretary, in the wake of the August 2008 conflict in the Caucasus, to the effect that Russia’s actions endangered its entry into the WTO, to name just one instance of such one-upmanship.
Well, something had to give, and Russia made it clear in a series of statements that it was quite comfortable without WTO membership and, while seeing it as a long-term objective, it could go on discussing the conditions of its entry as long as it would take to achieve a resolution of the issue that would suit its national interests. This position is all the more fitting given the strong opposition to Russia’s accession to the WTO within the country (on very sound grounds), and the need to achieve a consensus inside Russia’s political class. So far, so good. What was really unexpected was the stratagem by which Russia has relegated the whole issue to some indefinite future by announcing its latest decision. As far as we are aware, there has been no precedent for collective membership in the World Trade Organization, but this formal obstacle could be overcome if there was the will to do so. Which is questionable, to say the least, in view of the above-mentioned history of the process.
The really puzzling elements in this latest development are the position of Kazakhstan and the inclusion of Belarus in the trio. Without a direct line to the decision-making agencies of these countries, much of the discussion of the realities behind their declared motives must be in the nature of guesswork.
Kazakhstan first. It has been fairly pro-Western, or rather pro-Chevron and other multinationals that have gained a firm footing there. It could have gained access to the WTO much earlier than the neighboring Kirgizstan, which has a mere fraction of Kazakhstan’s potential but has already been accepted in the organization. However, accession to WTO holds the same dangers for Kazakhstan as for Russia, i.e. a veritable death to its agriculture, machine-building, metallurgy, and other industries. It may be surmised that Nursultan Nazarbaev fell in with the Russian plan to join (or rather not to join in the foreseeable future) the WTO collectively for much the same reasons as Russia.
Belarus now. Belarus’ proposed entry in the WTO is a bit of a joke; however, one may look at the issue. Given its Soviet-style economy that is incompatible even with Russia’s, and its maverick leader prepared to throw tantrums over economic (as well as any other) matters at the drop of a hat and ready to serve his country “as long as the people want it” (and he will take good care that they do so as long as he lives), Belarus is the surest obstacle to the trio ever achieving membership in the WTO.
This may very well be the big idea behind this latest happening: Russia working toward greater cohesion within the customs union and thus solidifying its positions within its natural sphere of influence, while at the same time avoiding unprofitable involvement with the world organization which for the present promises little but headaches.
Vladimir Belaeff, President, Global Society Institute, Inc., United States
It is frequently observed that with regard to developing countries, the WTO has not lived up to the propaganda of its partisans. The presumed notion was that this organization would level the playing field and make the markets of major industrialized nations available to developing economies. This has not happened with regularity, and when such access was obtained, it was of a peculiar nature: the developing countries are able to export their relatively low technology and non-modern products and, under the same WTO rules, domestic industrial producers in developing countries are forced into “doomed to fail” competition with more advanced imports from the First World. As a result, under the WTO regime the developing countries experience a delay of congealment in their modernization.
It is often mentioned that the true effect of the WTO is protectionist for advanced economies in their dealings with developing counterparts. Russia’s impetus to join the WTO started in the early 1990s a period of naïve trust by Russian leaders in economic publicity, which they took at face value. The tendency acquired a coterie of supporters and enthusiasts, who were generally willing to overlook certain difficulties in the cost-benefit analysis of WTO membership for Russia, for the sake of essentially psychological satisfaction, or “acceptance” by beloved ideal partners.
Despite claims to the contrary, accession to membership in the WTO is politicized. Economic light-weights like Albania or basket cases like Ukraine are quickly granted membership, while accession by Russia, with a GDP in the top ten of the world, is held hostage to political grievances or ambitions of WTO members like Georgia. At the same time, analogous restrictions are not applied to countries like China, against whom significant human rights cautions can be raised reportedly, in recognition of the size of their GDP a consideration which does not seem to equally apply to Russia.
So Russian policy makers have finally recognized that their aspirations to fully integrate with the WTO are not presently productive. It must be noted that international trade predates the WTO by several millennia, and the organization is not essential for commerce in very important goods and commodities. Russia maintains very lively trade relations with many countries and evidently does not require WTO membership to succeed in the international marketplace.
The global economic and financial crisis has uncovered profound structural defects in the current economic architecture of the world, of which the WTO is a part. The general decline of international trade in finished goods has driven Russian producers to consider their own backyard their domestic market, with its vast demand, social and geographic proximity and lower delivery costs. At the same time, the Russian consumer, with a weakened ruble, is discovering the new value proposition of domestic goods and services. As a result, import substitution through market mechanisms is taking place in Russia’s domestic market and foreign exporters may find it more difficult to enter the Russian market in the future.
In conclusion, one should remember that membership in the WTO was for a long time a debatable proposition for Russia. It is possible that WTO partisans ignored this aspect, and consider the recent Russian decision as the result of a sudden and profound disappointment but growing disinterest among Russian policy makers was observed even before 2008.
Russia will not disappear from global markets and its domestic market will remain very attractive and available to foreign participants. This is axiomatic. However, there is some harm to the WTO in Russia’s choice: if an important player in the global economy is no longer interested in membership, what is the value and significance of the organization itself?
Professor Stephen Blank, the U.S. Army War College, Carlyle Barracks, PA
The negotiations on entry into the WTO have indeed been long and frustrating for Russia. For example, the United States had demanded that it open up its dairy and meat sectors to U.S. exports that would probably have overwhelmed these sectors. Meanwhile Georgia has long exercised and will probably continue to exercise its right of veto that all members have, making the Russian entry in the WTO impossible. The EU had thrown up obstacles pertaining to Russian import duties on timber and cars. Understandably, these and other obstructions led Moscow to conclude that the game was not worth the candle. This conclusion may well have been reinforced by the belief that the current financial crisis is leading to global protectionism, and that Russia is better off not having to answer for its trade polices to the WTO.
Furthermore, this crisis has only reinforced Russia’s belief that it is ascending while the United States is falling, and that regional blocs are the order of the day in what it believes is the multi-polar world, that is either coming into being or that should be emerging.
But Russian calculations go beyond these factors. First of all, the ruble has taken a beating in this crisis, and Russia has been steadily searching for ways to enhance the ruble's value and international demand for it. Thus it has hit upon the same expedient used by the Nazi regime after 1933 to maximize the value of and demand for the scarce Reichsmark, namely by forcing Germany's neighbors in Eastern Europe to pay for German exports only in marks, necessitating the reorientation of their exports to Germany and thus rendering them dependent upon Germany. Moscow's program for a ruble union is of a similar nature, and aims to force CIS countries to buy and sell mainly to Russia, thereby increasing demand for and the value of the ruble.
However, this announcement also shows Russia's contempt for the sovereignty of its neighbors. It is quite unlikely that this announcement was coordinated with Minsk or Astana. Both of those states are in a very different stage of their negotiations with the WTO, neither have they given any warning of their desire to join the WTO only in Russia's wake, even though this could happen under the WTO's rules. Moreover, Moscow is currently waging a trade war against Belarus, blocking its dairy exports to Russia as punishment for signing the Eastern Partnership with the EU and showing signs of inclining to the West. In return, Belarus has boycotted the CSTO summit, and refused to participate in it for now. It is quite unlikely therefore that Belarus either approves of this gambit or was consulted in advance of it.
Russia is also trying to force Kazakhstan to export its gas to Europe exclusively through Russian pipelines. Thus this gambit is an attempt to compel these states to join this customs, currency, and trade union with Russia, and renounce all hope of economic and political independence as a result of that decision.
A third dimension of this Russian decision is that it extends what has become the hallmark of president Medvedev's policies. Those policies represent an intensification of the path already marked out by Vladimir Putin, namely the increasingly aggressive and high-handed efforts to force CIS members into an exclusive Russian-led sphere of influence that would close them off to European and American influence. This drive pertains to energy issues and pipelines, the creation of the CSTO and its deployment in Central Asia, the exclusion of U.S. bases from Central Asia, the demand for a ruble union, and now the efforts to strengthen the trade bloc and customs union. Since it is an article of faith in Moscow that only on the basis of such a bloc can Russia play a great role in world politics and ward off foreign influence, as its ties to the West deteriorate, the pressure for such a union grows.
Fourthly, this decision also marks another example of Russia’s strong preference for international organizations that allow it to have a free hand to do as it pleases, usually in a high-handed manner, rather than having to answer to an international body which it cannot control. Multilateralism only makes sense to Moscow if it can control the direction of the organization that embodies that particular manifestation of multilateralism, e.g. the CSTO or the SCO. Since it was clear that membership in the WTO would elude Russia and that in any case its interests would suffer, even if it became a member given all the concessions demanded of it, it naturally opted for a free hand.
Finally this episode evokes memories of the games played by the Soviet Union with respect to its international status and claims of sovereignty that were chronicled long ago by Vernon Aspaturian. Today's Russia simultaneously claims equality with the United States and China, with the EU and NATO, and with the leading members of those organizations. It also demands preferential status for itself in the WTO and in the CIS at the expense of the sovereignty of the smaller state members of these institutions, which its officials deride. They also publicly deride or even usurp these states' territorial integrity so we should not be surprised at the efforts to suppress their economic sovereignty in practice. In other words, Russia, like its Soviet predecessor, continues to ascribe multiple statuses to itself and claim differing levels of sovereignty in an effort to enhance its status vis-à-vis foreign interlocutors and to secure critical foreign policy interests. This WTO affair is but another example of this now well-established trend.
Not only are the implications of Russia's announcements negative insofar as the WTO and efforts to secure liberal trading regimes and more globally open trade and economies are concerned, they also are negative insofar as Russia's ties to other states are affected. The aggressive efforts to spite the West and consolidate an exclusive bloc that diminishes the sovereignty and independence of CIS states continue without letup, even if it means irrational economic policies like the subsidizing of the empire through purchases of gas at top market prices, or the diffusion of a predatory form of state control over economics throughout the CIS.
It also reflects Moscow's belief that it need not and should not have to account for its deeds to the West, another sign of its relapse into unilateralism and even a certain form of self-imposed isolation. Of course, these policy trends also carry an explicit danger to all CIS states who try to assert their independence, whether it be Belarus or Georgia or a Central Asian state. Naturally, such economic policies are also connected with the growing efforts of Putin's entourage to rely exclusively on energy prices going up to extricate Russia from the current crisis, and their efforts to extend ever more state (i.e. their personal) control over ever more sectors of their own and other states' economies. Closed markets and trade blocs generally accompany closed political systems and neo-imperial policies that can only end in conflict. Georgia may have been the first as we saw last year, but as Belarus shows, it probably will not be the last such example.