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. Last Updated: 07/27/2016

EU Backs Russia's Bid to Join the WTO

APPresident Vladimir Putin and European Commission President Romano Prodi embracing after announcing the trade deal at a news conference in the Kremlin on Friday.
The European Union has thrown its backing behind Russia's bid to enter the World Trade Organization in exchange for a promise from Moscow to gradually liberalize gas prices and trade and perhaps ratify the Kyoto Protocol.

"The EU has met us halfway in talks over the WTO and that cannot but affect positively our position on the Kyoto Protocol," President Vladimir Putin told reporters after the two sides signed a more than 400-page trade deal at a summit Friday.

Putin stressed that Russia "did not package the issues of WTO and the Kyoto Protocol" -- as many observers have suggested it was doing in an attempt to obtain better WTO entry terms from the EU.

"I cannot say how things will be 100 percent, because ratification is not an issue for the president but for parliament," Putin said of the 1997 Kyoto Protocol on global warming. "But we will accelerate this process." (Story, Page 3.)

The trade deal is vital because the EU, which recently enlarged from 15 to 25 members, is Russia's top trading partner, accounting for more than half of the country's foreign trade.

Bilateral trade talks began six years ago, though the bulk of the work took place in the last two years. They grew increasingly intense over the past month, after European Trade commissioner Pascal Lamy and Economic Development and Trade Minister German Gref met in Luxembourg on April 27 as negotiators scrambled to get something ready to sign at Friday's summit.

"We've worked around the clock for the last three days," Gref said.

The resulting compromise clearly pleased the two sides. "Both sides gave way in order to accommodate the delicate political and economic issues important to each," EU Commission President Romano Prodi said.

Under strong pressure from the EU to raise low domestic gas prices for industrial users, Russia agreed to increase the price to $37 to $42 per 1,000 cubic meters by 2006 and $49 to $57 by 2010, from the current $28.

But Gazprom will remain the export monopoly, while the EU will gain limited access to Russian pipelines, not transit rights. Export duties on gas will be capped at 30 percent.

Despite the wishes of recently reinstated Telecommunications Minister Leonid Reiman, Rostelekom will lose its monopoly on long-distance telephone calls by 2007.

"The monopoly in this country is going to give way to a European-accepted mechanism of cross-subsidization of the local operators at the expense of the more profitable long-distance operators," Gref said.

Russia will by 2013 revise the fees that EU airlines pay to fly over Siberia, which the EU calls discriminatory.

Russia secured a seven-year transfer period for lowering tariffs on new cars, although the complete details have yet to be worked out, Interfax reported,

citing unidentified officials at the Economic Development and Trade Ministry.

Russia agreed not to exceed tariff levels of 7.6 percent for industrial goods, 11 percent for fishery products, 13 percent for agricultural goods and tariff rate quotas of 600 million euros ($720 million) on meat and poultry. It also said it would cut industrial import tariffs from 18 percent to 8 percent within eight years.

But Russia made only vague promises to liberalize telecommunications, transportation, construction, tourism and financial services sectors and refused to lift a ban blocking foreign banks from opening branches.

"If you have red lines of your own" on which no compromise is possible, "sometimes you have to accept that the other side has red lines, too," Lamy said, explaining the EU's acceptance of a deal without Russian concessions on foreign bank branches or greater gas market liberalization.

"I'm happy with the deal as it is. If I weren't, there would be no deal," Lamy said. "This is the final document. We're not going back to the table," as happened in similar talks with China.

The Europeans promised to defend Russia's demand to keep subsidizing its farmers to the tune of $13 billion per year.

Gref said agricultural tariffs might even grow if necessary to protect the hard-hit sector.

The EU farm policy is among the most generous in the world, and is condemned by some economists for aggravating the plight of Third World farmers by artificially lowering world prices on their crops.

The centerpiece of the summit, however, was the agreement on gas prices -- although here, too, Russia did not appear to give up much.

The agreed prices "fully match those already approved in the government's energy strategy," Gref said.

Industrial users in the EU have been paying more than $100 per 1,000 cubic meters as of 2002, or nearly four times as much as Russian corporate users, said Peter Westin, an economist at Aton Capital.

"The whole initiative for restructuring Gazprom has to be accompanied by an increase in tariffs because the split-off companies have to become self-sufficient," Westin said.

Noncompetitive domestic firms say low gas prices help offset the higher costs of doing business in Russia, including dealing with crumbling infrastructure, a colder climate and greater transport distances.

The one company most affected by higher gas prices will be electricity monopoly Unified Energy Systems, which consumes almost 40 percent of domestic gas sales. Its head, Anatoly Chubais, however, welcomed the deal.

"They are sensible, economically justified prices for gas that correspond to our view," he told Reuters.

The idea behind higher gas prices is to give industry an incentive to use energy more efficiently -- and thus reduce emissions.

"The efficient use of energy fits with the EU line to have Russia ratify the Kyoto Protocol," Lamy said.

"What Putin said about the ratification of the Kyoto Protocol means that today's summit was not Russia's diplomatic victory at all," said Mikhail Delyagin, chairman of the Institute for Problems of Globalization and a one-time economic adviser to former Prime Minister Mikhail Kasyanov.

"In fact, Russia has paid for its accession to the WTO by giving up its positions on Kyoto,'' Delyagin was quoted by the Los Angeles Times as saying.

Russia hopes to secure a seat at the WTO table by the time the trade body next meets in 2005. It still needs to sign bilateral agreements with China and the United States.

"When Russia and the EU act together, we can have a far-reaching influence globally," Prodi said. With the WTO agreement "we've done precisely this. We've shown the way forward" for U.S. and Chinese deals.

China, a WTO member since 1995 and currently facing a crisis as its rural labor force moves into the coastal areas, is likely to object to onerous labor migration restrictions put up by the Russians.

The Chinese also want Russia to lay a pipeline to Daqing instead of approving a rival Japanese-backed plan to deliver oil to the Far East port of Nakhodka.

U.S. Embassy officials declined to comment on Friday's agreement. But U.S. negotiators have said a main sticking point in WTO talks is Russia's failure to crack down on the theft of intellectual property, which they claim costs the U.S. media industry some $1 billion per year.

The United States also may be displeased with the hazy commitments Russia made Friday on the entrance by foreigners into the telecommunications and financial services sectors, as well as its steadfast determination not to cut hefty import duties on foreign aircraft, said Andrew Somers, president of the American Chamber of Commerce in Russia.

EU negotiators may be hoping to leave it to their U.S. counterparts to resolve those sticky issues, said an American business official, who asked not to be identified.

"The U.S. and Europe are looking to each other to carry the weight on different issues," the official said. "It seems ... the Europeans are trying to get the Americans to take the heat."

U.S. trade officials have said they hope to come to consensus with Russia by the end of this year.

"Agreement with the EU ... is an important step but is not the end of the process," said Chris Weafer, strategist at Alfa Bank. "Russia now needs to strike a similar deal with the U.S., and those negotiations are likely to be tough."