Russia's Global Trade Agenda

Russia’s accession to the World Trade Organization in 2012 marked its full and final acceptance into the international trade regime. For the United States and other WTO-member countries, the rewards of Russia’s entry are immediate; they now will receive increased access to the Russian market and will be able to rely on recognized rules and procedures to settle future trade disputes. Russia, in contrast, perhaps wisely remains much less sanguine about the benefits of joining the WTO, especially during the initial transition period. Why hasn’t Russia greeted its WTO membership with a greater sense of celebration? More generally, what does Russia want from trade, and how might it pursue its goals within the existing international trading system? Will the WTO live up to its implicit economic bargain, namely that short-term pain will be followed by long-term gain?

“We should understand that the initial period in WTO will require a serious adjustment of our economy,“ Putin warned in November 2012. He went on to identify animal husbandry, agricultural machinery, medical equipment, cars, pharmaceuticals, textiles, and the food sector as being particularly vulnerable to enhanced foreign competition. He further highlighted the threat that WTO membership posed to Russia’s mono-cities, Soviet-era towns built around single industries that often cannot compete on an international level.

Russia has run through a series of slogans over the past 20 years—“diversification,” “innovation,” “modernization” – in an effort to address the country’s overall lack of global competitiveness. These buzzwords, however, still must be reduced to real products before Russia can tap into foreign markets and reap the true benefits of WTO membership. In the interim, several domestic industries will now be subject to intense pressure from imports that will render them either more competitive or obsolete.

Putin still insists that Russia will gain more than it loses through joining the WTO, and he has come out forcefully against protectionism on several occasions. And yet, within the first few months of WTO membership, Russia has imposed a recycling fee to limit car imports, introduced a ban on the entry of live animals, proposed quotas on foreign films, and expressed zero tolerance for meat imports containing the feed additive ractopamine (directly hitting U.S. exports). It is too early to call this a protectionist trend, and consultations are already underway to address some of these disputes. Nevertheless, viewed collectively these actions constitute a less than auspicious beginning for Russia’s WTO membership.

In the long-term, Russia and its fellow BRICS countries (Brazil, China, India, South Africa) aspire to rewrite the governing rules of global commerce. In the short-term, however, it is the everyday practice of international trade that most upsets Russia. In his December 2012 state-of-the-nation address, Putin introduced the term “deoffshorization” into the Russian vocabulary. He highlighted “the high degree of offshore investments and ownerships” in the Russian economy, noting that as many as 9 out of 10 major transactions made by Russian companies (including state companies) were governed by foreign, not Russian, law. This observation echoed previous discussions within the Russian Duma that questioned the right of Russian companies to choose a foreign jurisdiction to litigate contract disputes. According to the speaker of the Duma Sergei Naryshkin, the widespread use of such tactics posed risks both for the domestic economy and Russia’s national sovereignty.

Putin recognizes that the best way to reverse the prevalent use of offshore companies is to create a legal system that business has confidence in and can impartially resolve commercial disputes. Russia has introduced an independent system of commercial courts over the past two decades that is reasonably well-regarded by disputants. Even the court’s own chairman, however, recently admitted that the enforcement of court decisions remains highly problematic. In light of such negative pronouncements and persistent legal uncertainty, both Russian and multinational companies are reluctant to invest in Russia without the option of litigating – and moving money - abroad.

In his state-of-the-nation address Putin demanded greater transparency in offshore transactions. Later, he also asked the Russian owners of TNK-BP, who received $28 billion for their share of the company, to invest their proceeds in Russia; all this money, it has been reported, will be directed to the owners’ overseas companies. Putin appeared relatively restrained in making these requests, but any determined attempt to push major transactions onshore would undoubtedly upset the rules-of-the-game and send Russian businesses scurrying for cover so as not to expose their assets to the capricious Russian state. A concerted effort against offshore Russian entities would have a chilling effect on major multinational corporations as well, since they also rely on such offshore structures to invest in Russia. Russia, of course, is not alone in criticizing the role that offshore companies play in facilitating global commerce. Any significant step against such established practices, however, would have major negative consequences for foreign investment and potentially Russia’s underlying political stability as well.

It remains unclear how aggressively Putin will pursue this campaign of deoffshorization. In the meantime, Russia continues to search for new overseas markets. Europe already is Russia’s number one trading partner and seemingly the most desirable place for expansion, but once again, the rules of international trade do not appear to be working in Russia’s favor, especially in the lucrative energy market. Gazprom already is under investigation by the European Commission for violating anti-monopoly rules, and Russia is now seeking an exemption from the EU’s third energy package for the $12.7 billion South Stream pipeline project. The EU and Russia still cannot even agree on a visa-free travel regime, a seeming prerequisite for increased trade.

Russia confronts trading blocs almost everywhere it turns in the world, so not surprisingly, it has gone in search of one of its own. Russia still hopes that the BRICS or the Shanghai Cooperation Organization ultimately will promote joint trade amongst their members, but Russia clearly is not in control of these efforts. Therefore, Russia has turned to the former Soviet republics as a foundation for a new Eurasian trading bloc. The Customs Union between Russia, Belarus, and Kazakhstan – which has successfully lowered tariffs and increased trade between the three countries – is seen as the start of a larger Eurasian trading space that would serve as the bridge between Europe and Asia. Russia touts various grandiose plans for the Eurasian Union, including a common currency and greater political integration amongst its members.

Russia ostensibly wants to follow the EU example in forging the Eurasian Union, although why Russia would want to follow this model in the aftermath of the Euro crisis remains a mystery. The Customs Union currently is thinking about expanding to include Kyrgyzstan and Tajikistan, not the most dynamic and transparent economies in the world. Meanwhile, Belarus has become expert in exploiting Moscow’s grand Eurasian vision for its own purposes. In requesting an additional round of financial credits from Moscow, Belarusian President Alexandr Lukashenko wryly observed: “If we are blood brothers, [Russia] must help us.” The big catch for the Customs Union would be Ukraine, the largest former Soviet republic currently outside the Union’s jurisdiction. Ukraine, however, so far has resisted the entreaties of Russia (and the prospect of cheaper energy) so that it can still pursue its free trade agreement with the EU.

A unified customs space makes some economic sense, since countries are more likely to trade with their neighbors than anyone else. Russia further has promised that the Customs Union and any future Eurasian Union will be WTO-compliant, indicating a long-term commitment to follow the rules of international trade. Nevertheless, in practice, one gets the impression that a larger Eurasian Union would saddle Russia with several failing states that would be more interested in handouts than actual trade.

WTO membership means that Russia is no longer on the outside looking in when it comes to international trade. Yet despite being the newest member of the club, Russia brings an established trade agenda and firm grasp of its national interests to the table. Thus, while Russia may have accepted WTO rules and opened its markets to foreign competition, it appears quite willing to test the outer limits of these rules in defense of certain domestic industries. Russia’s overall trade strategy also is not without risk. Any concerted campaign against offshore structures, for example, could produce significant collateral damage for inbound foreign investment, as such offshore entities are the preferred means by which foreign companies (and Russians themselves) invest in the country. Alternatively, Russia’s ambitious pursuit of its own trading bloc may just breed more dependency among its constituent members than genuine trade opportunities.

This article was originally published on The National Interest website on January 23, 2013.