Impact of WTO Accession on the Russian Economy: A Review of Current Findings
by Ksenia Yudaeva

Recent studies on the impact of Russia’s WTO accession conclude that the effect of tariff changes alone will be small. The studies expect much stronger effects from accompanying institutional changes and the anticipated liberalization of the service sector, especially from the reform of the electric power utilities.

In 1992 Russia abolished its state monopoly of international trade and introduced a liberal trade regime with virtually no official trade barriers. Responding to the massive decline in production, the Russian government began to re-establish both tariff and nontariff trade barriers in 1993. This process slowed down in 1995 when, as part of the framework agreement with the IMF, Russia was required to abolish all quotas.

Trade Barriers on Both Sides

The last major revision to Russia’s tariff schedule was in January 2001, when tariffs in four groups were unified and most tariffs were slashed to 5 to 20 percent. Since then, under increased pressure from protectionist lobbies, Russia has raised its import tariffs for used cars and introduced quotas on imported meat products. Some tariff exemptions exist for goods produced in CIS countries. In 2002-03, however, Russia boosted protection against some imports from CIS countries, such as Ukrainian steel. This growing protection against both CIS and non-CIS goods is expected to continue in 2003.

Because of low administrative capacities and corruption, the revenue from tariffs is lower than the rates would suggest. Nevertheless, tariff collection has improved in recent years, and may improve further after WTO accession. The importation of some goods, such as spirits, sugar, precious metals, and color televisions, is permitted only upon obtaining import licenses, but this requirement is not strictly enforced because of corruption and fraud.

In addition to tariff and nontariff barriers, Russia maintains a number of trade-related distortions that might change after WTO accession. These affect a great many important areas, such as agriculture, intellectual property, telecommunications and other services, government procurement, and markets in which the state is a key or monopoly trader.

In the spring of 2002, the EU and the United States granted Russia market economy status. However, because of state control over domestic energy prices, their rules for antidumping procedures against Russian exporters still allow comparison of costs in third countries. Other protective measures against Russian exports include quotas on Russian steel, envisaged by the Russia-EU agreement on steel, and quotas on Russian grain exports that were recently strengthened.

Accession Hurdles

Russia’s WTO negotiations are currently wrestling with a number of unresolved problems, and when and under what conditions Russia will become a member of the WTO is unclear. These problems include the following:

• Russia initially proposed that after accession it would increase tariffs, and then during a grace period of five to seven years—would slowly return them to the present or a slightly higher level. While the tariff increase could present some problems for commodity groups, such as agricultural produce and automobiles, the tariff proposal seems to be the least problematic compared with other issues on the table, as for a developing country Russia’s tariffs are fairly low.

• Reaching agreement on trade in agriculture turned out to be a significant problem. Frustrated with the high level of agricultural support in neighboring Europe, Russia insists on significantly increasing its own subsidies. The lack of transparency in agricultural support is making the deal even more difficult, as how much regional governments have offered to local producers in the way of subsidies is not clear.

• Negotiations about unhindered access to services are among the thorniest issues. In the service sector strong vested interests are seeking protection using the infant industry argument, in the banking sector foreign banks are barred from opening fully licensed local branches, and in the insurance sector foreigners are not allowed to become involved in the life insurance business.

• Some of Russia’s negotiating partners, particularly the EU, view state control over energy prices as a trade-distorting subsidy and are urging Russia to reform its energy sector. Russia, for its part, argues that its energy prices are lower than in the world market because they reflect Russia’s comparative advantage in energy. Russia refuses to tie WTO accession to a reform of its energy policy.

Winners and Losers

Most studies dealing with the possible effects of WTO accession were sponsored by the Russian government or lobbying groups, and therefore focused primarily on the expected short-term increase in unemployment and the need to reallocate labor. Out of 10 quantitative studies analyzed, 6 addressed WTO accession directly, 2 dealt with the effects of the formation of a free trade area between Russia and the EU, and 2 examined the consequences for domestic industry of reforming Russia’s electric power utilities. Even those studies that concluded that Russia would gain from WTO accession or the formation of an free trade area with the EU claimed that the gains from the trade policy changes would be fairly modest, and noted that most of the gains would originate from liberalization of the service sector or institutional improvements. One of the papers concluded that changes in tariff policy after Russia’s WTO accession would have an almost negligible effect on GDP.

Other findings of the studies include the following:

• WTO accession will have a particularly large effect on the size and composition of Russian imports from non-CIS countries.

• Improvements in the quality of Russian institutions will help to further increase Russia’s trade volume.

• In terms of changes in industrial composition, in the long run metal producers would gain the most from WTO accession, while domestic service providers would experience the greatest losses. (This conclusion did not take the probable effects of energy reform, that is, the expected increase in domestic energy prices, into account.)

• The light industry, machine building, and food industries would be the most probable losers from the accession. At the same time, metals and chemicals would likely be the winning industries. If energy prices had to be raised, the machine building industry would likely lose even more, and thus requires immediate restructuring to make it more productive. Other energy guzzlers, such as the food and nonferrous metal industries, could also face huge losses once energy prices went up.

Overall the studies conclude that eventually, Russia will gain or lose little from tariff changes after the accession. Whether the effects will be positive or negative depends on the type of analysis used. The results differ once institutional changes, productivity gains, or liberalization of the service sector are taken into account.

Weakness and Strength

A number of studies believe that Russia wants to see tariffs go up by the time of accession as proposed last year (see http://www.wto.ru). Officials of the Ministry of Economic Development and Trade revealed, however, that the Russian government considers the proposed tariff rates as the top rates, to be used only in a worst case scenario. Therefore the most probable outcome is that current tariffs will be applied right after the accession, followed by a slow decline during the grace period.

None of the studies dealt with possible changes in government subsidies and other support mechanisms. In Russia most subsidies are provided at the regional level, often via price regulation or other nonmonetary means. More information about the future of various subsidies could refine predictions of the probable effects of WTO accession. The effects of accession on poverty and income distribution were also ignored. One study addressed the issue, but did not provide any quantitative assessments. None of the papers analyzed the macroeconomic or sectoral effects of improvements in intellectual property rights protection, even though the consequences of implementing the Agreement on Trade-Related Aspects of Intellectual Property Rights would be significant for such sectors as the pharmaceutical industry and information technology.

None of the macroeconomic models used in the studies considered the large differences in the economic and social structures of the regions. For a country with such regional diversity as Russia, this weakens the reliability of the forecasts. As statistical information on inter-regional trade in Russia is unavailable, constructing such models requires a serious data collection effort. Nevertheless, the surprising similarity of the conclusions of the different papers suggests that these methodological problems may be less important than they appear at first glance.

Ksenia Yudaeva is a senior economist and director of policy programs at CEFIR and a scholar in residence at the Carnegie Moscow Center. This article is based on her report prepared for the OECD Trade Directorate, which hosted an OECD experts’ meeting on Developing Governmental Analytical Capacities in the Trade Policy Area in Moscow on June 3-4, 2003. For further information you can email george.holliday@oecd.org or blanka.kalinova@oecd.org.