Beware of the WTO

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Russia's 15-year flirtation with the World Trade Organization intensified this week as multilateral consultations on accession resumed in Geneva. Although Russian WTO negotiators stumbled over still-unresolved issues -- farm subsidies, export taxes on wood and Gazprom's pricing policies -- they were optimistic about its impending membership. Since Russia's main trading partners, the European Union and the United States, now support Moscow's accession, it seems that there are no serious roadblocks remaining for official entrance -- that is, unless the Kremlin, after weighting all of the risks more thoroughly, decides that Russia is not quite ready to be part of the WTO.

Up until now, Russia's leaders have been blinded by a naive euphoria regarding their self-proclaimed economic miracle. At every opportunity, they claim that Russia has become an island of stability among the global financial turmoil. The Kremlin's top decision-makers are reluctant to face reality.

Although Russia has shown impressive growth based on natural-resources exports, the country is not yet fit for membership in this global trade club. To join it now would be to ignore the symptoms of the country's dominant economic malady, known as the Dutch disease. All the classic symptoms are present -- the windfall revenues from natural-resources exports, consumption-driven growth, huge foreign capital inflows, uncompetitive manufacturing sectors, an appreciating national currency and accelerating inflation. WTO accession would only aggravate these problems, as the overwhelming majority of domestic businesses are not yet able to compete with foreign companies. In addition, the country is crippled by mounting labor shortages, poorly developed infrastructure and inadequate social safety.

Nonetheless, the diarchy of President Dmitry Medvedev and Prime Minister Vladimir Putin feeds public expectations that the economic miracle will continue forever. But WTO membership in the near future will only exacerbate Russia's existing problems. Imports, which already account for about half of the country's consumption spree, and the strong ruble are a huge blow to domestic manufacturers. WTO membership would mean an even higher influx of imported goods.

At a recent foreign investors' conference in Moscow, Marco Franco, head of the European Commission's delegation to Russia, offered a sobering analysis of Russia's economic vulnerability. "If something goes wrong, the Russian growth machine might well grind to a halt, or even reverse," he said.

Igor Yurgens, vice president of Renaissance Capital and head of the Institute of Modern Development, which is Medvedev's think tank, believes that there are still disagreements between the Finance Ministry and the Economic Development Ministry on the road map for economic development. Finance Minister Alexei Kudrin believes that financial stability must not be jeopardized by inflationary growth, while Economic Development Minister Elvira Nabiullina insists on boosting government spending to improve infrastructure and social safety nets while there are still windfall oil revenues. The debate between these two ministries involves a fundamental question of the country's basic economic strategy, and until this is resolved, the issue of WTO membership is premature.

There is no doubt that Russia needs to be more deeply integrated into the global economy, which eventually means membership in the WTO. But this must be accomplished at a time and in a manner that best suits the country's long-term strategic interests.

There is still hope that Russia will take a sober and calculated approach to WTO membership. Before it runs hastily to the WTO, thinking that the organization will provide the magic potion for its economic ills, Moscow should look to Kiev as a test case. It should wait and see whether its neighbor's marriage to the WTO will be a happy one and draw the necessary conclusions.



Felix Goryunov is a Moscow-based business journalist.