Russia Changes Course on WTO Accession

Op-ed in the Project Syndicate

July 1, 2009

Russian Prime Minister Vladimir Putin recently announced that Russia, Belarus, and Kazakhstan have abandoned their separate talks to join the World Trade Organization (WTO). Instead, they will seek to enter the world trade body as a single customs union. In effect, this means that Russia seems to be casting aside its accession to the WTO-a major reversal of Russian strategy.

Putin's statement hit like a bolt from the blue. Two days earlier, United States Trade Representative Ron Kirk and European Union Trade Commissioner Catherine Ashton had completed successful talks on Russia's accession to the WTO with Putin's first deputy, Igor Shuvalov, Finance Minister Alexei Kudrin, and Minister of Economy and Development Elvira Nabiullina. As late as June 3, Putin had declared himself sure of Russia's "swift joining of the WTO."

The leaders of Belarus or Kazakhstan seemed equally surprised by Putin's statement, especially as Russia had just prohibited almost all imports of dairy products from Belarus in a protectionist ploy. After 16 years of negotiations, Russia appeared poised to join the WTO within a couple of months.

Indeed, only three difficult hurdles remained. First, Ukraine demanded a bilateral protocol on market access, which would have forced Russia to abolish roughly 100 trade sanctions, primarily in agriculture. The second obstacle was border controls with Georgia, a mainly political issue: whether Abkhazia and South Ossetia are independent, as Russia maintains, or are part Georgia, as the rest of the world believes. Finally, the European Union insisted that Russia abolish planned prohibitive export tariffs on lumber. Only the Georgian issue was really serious.

A customs union with Belarus and Kazakhstan is no alternative to Russia's WTO accession. No countries have ever entered the WTO collectively, nor is this legally possible, according to WTO head Pascal Lamy. Moreover, while the customs union was proclaimed in 1995, the earliest it can be formed is in July 2011, which is unlikely.

Predominantly a commodity exporter, Russia has less need for the WTO than a manufacturer like China. Even so, one fifth of Russia's exports comprise metals and chemicals that are sensitive to antidumping measures. A series of World Bank and Russian studies have estimated that Russia can gain 0.5-1.0 percentage points in economic growth for half a decade if it joins the WTO.

Membership is also important for Russia's international standing. It is the only G-20 country outside of the WTO, which accounts for 96 percent of global trade. The WTO also represents a choice of economic and political strategy. Before Putin resigned as president in May 2008, he presented his "Russia 2020" program. Its heart was an "innovation strategy" based on more market reforms and investment in human capital, leading to annual growth of 6-7 percent. In their rhetoric, President Dmitri Medvedev and his technocrats embrace this vision.

But Putin and his siloviki (political allies whose power-base is in the security apparatus) seem to prefer an "inertia strategy," the worst of the Russia 2020 scenarios. This strategy amounts to state capitalism, living on Russia's energy wealth, and doing nothing to curtail Russia's massive red tape and corruption.

By reversing course on the WTO, Putin has again shown himself to be Russia's master. He did the same thing last summer by lashing out against a successful mining and metallurgical company, Mechel, and provoking the war in Georgia.

During the winter, Putin's poor policy choices on the financial crisis undermined his power. Rather than shielding Russia's private enterprises, he engineered a domestic liquidity freeze, which led to a sharp drop in GDP of 9.5 percent in the first quarter of 2009, despite Russia's huge foreign reserves. The pragmatic technocrats took over, but the subsequent doubling of oil prices signals that the danger for Russia's economy is over for now, so the siloviki are resuming command.

The question is what their next step will be. The prominent Russian military analyst Pavel Felgenhauer insists that their prime aim is to finish off Georgia and its president, Mikheil Saakashvili, who remains in power and defiant. Georgia has received no military support and is virtually undefended. The Kremlin continues its propaganda offensive against Georgia and has vetoed prolonging the mandate for United Nations observers in Georgia and Abkhazia. A major Russian military maneuver, Caucasus 2009, is underway. The last such maneuver, Caucasus 2008, was followed by the invasion of Georgia.

During the latter part of this maneuver, July 6-8, US President Barack Obama is supposed to meet President Medvedev in Moscow. Medvedev obviously hopes to reach out and improve Russia's and his own standing in the world. The siloviki, however, prefer Russia isolated and authoritarian, with power securely in their hands.

The Kremlin wants a new strategic arms control agreement, but the siloviki desire nothing more. The Obama administration had hoped for a final breakthrough in Russia's WTO talks, but Putin's actions have eliminated the prospects for such an outcome. The United States also wants progress on the territorial integrity of former Soviet states, such as Georgia, but that too is unlikely. Putin or his collaborators seem to be setting up Medvedev for failure, suggesting that their jealousy of Medvedev's limited power is greater than their interest in defending Russia's national interests.

Yet there is still hope that Putin will encounter a sufficiently negative reaction that he changes his stance on WTO accession. After all, he suspended Russia's WTO accession talks after the August 2008 war in Georgia only to allow them to restart this spring.