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. Last Updated: 07/27/2016

Assessing the Pros and Cons of Joining the WTO

We asked industry leaders to forecast when Russia might join the World Trade Organization, and what would be the implications for their sector.

For MT
Pavel Shapkin, chairman of the National Alcohol Association:

"It is not worth discussing Russia's [WTO] entry seriously in the short-term. Negotiations will last a minimum of five years -- assuming interest doesn't fade over this period.

"If we imagine that Russia joins the WTO in 2003, then such a fantasy would cost the alcohol sector dearly. In the event that the present customs duties on strong spirits -- 200 euros per hectoliter [100 liters] -- is dramatically reduced and the established output price of vodka is changed, then Russian distilleries will lose up to 50 percent of the market, as was the case in 1995-96. At the same time, virtually no additional advantages in respect of promoting alcohol-containing goods on the market will be received.

"The changed standards will require the recertification and reregistration of products. Manufacturers will need to revoke a number of drink names currently used, such as cognac and champagne."

For MT
Dmitry Ivanter, deputy managing director of AVK Securities & Finance Ltd.:

"If Russia is granted a system of benefits for traditionally noncompetitive branches of industry -- such as agriculture and communications -- then it may become a member of the WTO in the near future.

"Reaching this agreement is an exceptionally laborious task and entry may take 10 to 15 years. Russia has no reason to rush: The positive effect of entering the WTO is long-term, while in the short term support for noncompetitive sectors of the economy may become a priority policy.

"As far as the investment sector is concerned, Russia's entry into the WTO will not considerably affect the arrival of investment banks and companies."

For MT
Dmitry Zelenin, Norilsk Nickel first vice president and deputy general director:

"First it must be decided under which conditions and by what date this process [joining the WTO] will happen, since a number of Russian manufacturers are not prepared for the open goods market. In the first instance, we are talking about agriculture and small businesses. A state program to support these sectors of the economy is greatly needed.

"It would be wrong to set tight deadlines for Russian negotiators to enter this organization within the time specified and at any cost. It must remembered that adapting to the new competitive conditions will require a certain transfer period. This period must be used to attract investments for updating domestic production facilities in particular.

"By far the most significant effect from the point of view of big business is the opportunity to improve internal legal foundations and the practice of its application as well as to adapt Russian legislation to international norms.

"World-class Russian companies principally working in the raw materials sectors are less sensitive to Russia's entry into the WTO compared to, say, the farming industry or auto sector. Holding companies like Norilsk Nickel are influential participants on world markets and 'play' them according to the generally accepted rules of international trade.

"As far as Norilsk Nickel's position goes, for us membership would be particularly beneficial, as our product is competitive at an international level and corresponds to international standards."

For MT
Anatoly Karachinsky, president of the IBS group of companies:

"Russia has optimistic prospects for entering the WTO.

"If a number of conditions are observed, this event may become a serious stimulant for developing the IT market and will be reflected favorably in the economy of the country as a whole.

"The most important condition for developing the local IT market is the establishment of equal conditions for all. It was specifically the absence of such conditions that the McKinsey company named in 1997 as the prime hindrance to economic growth in Russia. Unfortunately for the high-tech sector, the absence of this condition has been particularly sensitive and critical.

"In order to create equal conditions for competition on the market, the customs tariff policy must be made more logical as a matter of priority. Not just new laws, but a powerful and effective instrument that can control their performance must be created.

"The agreement on information technology is an important condition for Russia to enter the WTO. This agreement is a mandatory part of the WTO package for regulating the processes between countries joining it. This agreement provides for the removal of any tariff duties on IT equipment and technology -- in other words, it annuls any tariff barriers on their movement between member countries.

"I believe that we must join with this agreement as quickly as possible after entering the WTO, because this will lead immediately to tangible results: First, the prices for equipment and software entering Russia will fall as a result of the removal of customs duties. Information technology will become more accessible for the country, which will increase the effectiveness with which business, the economy and the country as a whole are managed. Second, competition will increase: After all, in order to compete with Western producers, the equipment made in Russia must be made better.

"The only means for Russia to enter the international IT market is for it to produce a better-quality product. And if the protection of Russian manufacturers in other industries that are traditional to Russia is considered a justified and sensible policy, then for the IT sector it is unacceptable.

"The question of whether to work with out-of-date technology is a question for the whole country, since out-of-date technology reduces the effectiveness of labor, business and the Russian economy, with the result that the competitiveness of the whole country is reduced, which is absolutely inadmissible.

"Entering the WTO and signing the agreement on information technology could become a serious stimulus for the development of the Russian IT-market and with it the economy as a whole."

Russian Meat Union president Musheg Mamikonyan:

"Until the specific conditions for Russia's accession to the WTO are announced, it is hard to forecast how the [meat] sector will develop.

"The specific nonmarket character of the agricultural business in the majority of Russia's partner countries is a major problem that could be accentuated in the event of more liberal access to the country's food market. Trade relations in the WTO between Russia and countries whose governments support the 'false' competitiveness of their products will suffer as Russian society becomes aware of the discriminatory conditions already existing in relation to Russia. Of course, this will only be the case if Russia's negotiating position is not adopted in the form currently being discussed.

"There are risks inherent in possible attempts by trade partners to focus state support in various branches of agriculture -- leading to a growth in the export of these goods into Russia and the destruction of profitability and the possibility for developing whole sub-sectors, in particular animal breeding. Poland may stimulate production and export of pork into the Russian Federation, for example. At the same time, the Russian government cannot afford to support pig-breeding locally. In this event, Russia must be able to apply a tariff of 100 percent or more; otherwise the artificial competitiveness of Polish pork could wipe out the equivalent branch in Russia.

"That Russia is being pushed by its trade partners toward further liberalizing access to the food market is setting a time bomb, with predictable social and political consequences affecting not just Russia. Russia is, by definition, an agrarian country with vast resources and opportunities. Appropriate agreements confirming Russia's place in the international agricultural business must be drawn up. If Russia loses the opportunity to implement its own agricultural and food strategy, and if this happens with the participation of international companies, then economic tensions will escalate unavoidably.

"It is wrong to say that receiving subsidized, cheap foodstuffs is a boon for Russian consumers. The creation of jobs to ensure consumers' sufficient income is much more important."

For MT
Vladimir Labinov, executive director of the Russian Dairy Union:

"If one considers the progress already made, we are looking at about two more years before Russia enters the organization.

"It still has to be decided how much funding agriculture will receive from the government. In developed countries agriculture is highly subsidized, and we will have to decide how to go in the same direction under our current conditions.

"The situation in the dairy industry is such that the share of imports is the lowest of all food industries. Our tariffs are 5 percent to 20 percent, and in a market economy Russia's entrance into the WTO will not have a negative effect on us. On the contrary, we will become more attractive to investors."

For MT
Yevgeny Kurgin, general director of insurance company Rosno:

"Russia's entry into the WTO affects the interests of insurance companies, since for Russia to qualify for entry it must liberalize the market. In my opinion, foreigners are very unhappy with the limitations the Russian government has come up with for them. But the process of what I would call developing an agreed position is under way, one that will not toughen requirements for foreigners, but rather liberalize them.

"Foreigners are waiting not just for the liberalization, but the development of the insurance market. Whether the market is closed or open is not important to them. What matters is the volume of this market -- its qualitative and quantitative indicators, insurance companies' realistic turnover.

"I think that the presence of foreign competitors on the Russian insurance market will stimulate the market, since this will lead to a reduction of prices and an increase in standards."

For MT
Alexander Vinogradov, president and CEO of Golden Telecom:

"WTO membership will have an overall positive effect on the economy. First, it will ensconce us all the more firmly in the international trade relations system. Foreign investors will be confident about the rules of play on the Russian market, which will certainly permit growth of foreign investment. Furthermore, WTO entry will have a favorable effect on the development of specific guidelines for our legislation.

"In the telecommunications market, as in other key areas of the country's economy, the question of obligations to be undertaken by Russia on accession must be resolved. First, this applies to opening local telecommunications markets to WTO member countries. How and on what basis can this be done? Will there be limitations for foreign companies, and, if so, then for how long? Negotiations are currently under way to resolve these and other questions.

"Russia proposes limiting foreigners' participation in the equity of telecommunications companies and in their management. Also being discussed is the question of giving Rostelecom exclusive rights to manage international and inter-city telephone traffic before 2010.

"As a manager of a non-state company, I anticipate WTO entry will bring alternative operators an unavoidable sharpening of the competition and must result in the opening of new market segments as well as the creation of beneficial conditions for foreign investment. This gives impetus to implementing the latest telecommunications technologies.

"It is important for Russia to find the optimal form for WTO integration. In doing so there is no need to rush. Rather, negotiations should be conducted as required to develop positions that on the one hand satisfy international requirements and on the other are entirely in keeping with Russia's national interests."

For MT
Jack Kelleher, managing director at real estate company Noble Gibbons/CB Richard Ellis:

"Clearly, WTO accession means a material lowering of country risk and corresponding costs of capital. A reduction in Russian Eurobond yields has occurred already and property investment yields will follow this compression during the run-up to WTO membership.

"If I was a betting man, which helps a bit if you work in Russia, I'd offer 60/40 odds on Russia joining the WTO sometime in 2004. It seems clear that [President Vladimir] Putin considers WTO accession critical for moving Russia fully into the modern economic world.

"For the real estate industry, the effects will be many. As the cost of capital comes down and its availability increases, it will broaden the type of supply brought to market and the type of investors active in the marketplace.

"The possibility of WTO entry, and positive international press about Russian economic stability, has raised the interest of traditional institutional real estate investors in Russia. Many of these institutions are active in the Central European markets, and real progress on the WTO front will certainly augur well for their full entry into Russian assets.

"Lastly, on the demand side of the marketplace, WTO accession would presumably drive demand upward, with both more expansionary planning from multinationals and Russian corporates already active in the marketplace, as well as market entry for a litany of multinationals not yet in Russia."

For MT
Peter Necarsulmer, president and CEO of the Coalition for Intellectual Property Rights:

"As Russia prepares for entry into the World Trade Organization, the country must confront a problem of growing magnitude: The violation of intellectual property rights. Infringers today cost trademark owners and government coffers billions of dollars each year.

"Effective IP protection and enforcement require a three-pronged approach: A solid legal foundation, a strong and transparent enforcement regime and the political will to get the job done.

"Russia's legal regime is poised to take a gigantic leap forward. Recent legislation introduced in the State Duma puts Russia in line with international standards and norms of IP protection and enforcement. If enacted, Russia's legal protections for IP rights will not only meet, but also exceed, the minimum standards for WTO entry.

"But laws alone won't solve Russia's troubles with patent violations, trademark hijacking, counterfeits and lookalikes. Enforcement of existing laws and strong penalties for infringers are required if Russia is to stem the tide of IP violations."

Dmitry Ushakov, president of the Agros agricultural-industrial holding:

"The main problem of joining remains the same -- on what conditions?

"After joining the WTO, we expect the level of competition to intensify, which we believe is positive from the point of view of efficiency. We are in favor of an equal and just competitive environment for all the parties involved.

"For agricultural producers, the lowering of customs tariffs may result in the import of investments being replaced by the import of products and consumer goods, which will inevitably hamper the renovation of fixed assets.

"On the top of that, the situation and living standards in rural areas are quite different from those in the cities -- we've got the adverse impact of climatic conditions, poor infrastructure and a volatile social atmosphere. Ruining small agricultural businesses in rural areas might fuel social tensions and lead to consolidation of anti-market forces. In a sense, agriculture is the biggest political issue in joining the WTO.

"To minimize the major social and economic risks, Russia from the start has to secure equal competitive grounds in the WTO. For example, liberalizing the market in sugarbeet production will bring about its total collapse in Russia. And government-subsidized meat exports from Western states should be compensated by higher tariffs and non-tariff measures, such as the introduction of quotas at the initial stages, to prevent market imbalance.

"On restricting or even banning government subsidies, we may find support from several influential WTO member states. But to combine our efforts effectively, we should be in, not out.

"As president of the company that is the largest grain market operator in Russia, I am fully aware of the fact that without joining the WTO we will not be able to take full advantage of the international trade regimes and legal protection available to the member states.

"And I am sure that isolation will not bring prosperity to my country."