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. Last Updated: 07/27/2016

WTO Can Make Economy More Competitive

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The bilateral agreement with the United States on Russia's accession to the World Trade Organization is an achievement on par with the repayment of Russia's Paris Club debt and the practical elimination of debts to Western countries. Russia has ceased to be a debtor nation, and can now open a new chapter in foreign relations. From now on, the country will compete not for loans, but for increased trade. And this will require Russia to use every possible means to increase its economic competitiveness, including entry into the WTO.

Among the various mechanisms of external economic liberalization, WTO entry occupies a particularly important place. Such an enormous country will find it hard to integrate fully into regional alliances. The global nature of Russia was noted by British historian Arnold Toynbee, who held that Russia was composed of so many different peoples that it amounted to a model of the world as a whole. For a country as big and diverse as Russia, an exclusive focus on regionalism in trade and economic policy would inevitably tie its hands. In this situation, domestic products are best promoted abroad within the liberal, multilateral framework of the WTO.

The WTO has done much to liberalize Russia's foreign economic policy even before accession. The business climate has already improved noticeably as a result of steps taken to smooth WTO entry, including the removal of contradictions between federal and regional laws, the optimization of import tariffs, the gradual elimination of numerous export restrictions and the recognition in the business community of the necessity to compete with foreign companies.

None of the these achievements would have been possible if accession to the WTO did not hold out the prospect of truly significant advantages, such as access to institutions that regulate trade disputes, which would make Russia less vulnerable to other country's protectionist policies. Another plus would be the chance to begin influencing the movement toward liberalization of trade on the multilateral level, which would strengthen Russia's hand as it negotiates regional and bilateral free trade agreements.

At the same time, a number of factors make it difficult for Russian foreign policy to focus exclusively on the WTO. First among these is the weakness of international institutions, including the United Nations and the WTO itself. Reliance on international institutions alone could lead to isolation on the international stage. Another limitation is Russia's vulnerability under WTO rules and standards, particularly concerning intellectual property rights and government subsidies for businesses.

Despite the long debate over the need for Russia to join the WTO, there is still no agreement on the subject in Russian business circles. Perhaps more attention should have been paid to the losses suffered as a result of isolation and the stagnant growth of Russian trade with WTO member countries. It's enough to note the stability of the share of Russian exports sold to the founding members of the WTO. For eight years running, 70 percent of exports have gone to these countries. The rising share of Russian exports sold to WTO members is largely a function of the admission of new members to the organization.

This suggests that Russia has suffered restrictions and losses because it has not been a full-fledged WTO member. If this is true, then accession should definitely yield dividends for the economy.

Research into this issue shows that in the long term, Russian exports could increase by 50 percent after accession. Membership could also lead to growth in direct foreign investment, which would improve the business climate. But it's not that simple. The big pay-off of increased trade and foreign investment will only come our way if companies and the business elite are prepared for greater openness toward the outside world, increased competition both at home and abroad, and more active cooperation with Western companies in the form of joint ventures, alliances, and so on.

The is why raising corporate management standards is the central issue as Russia enters the WTO, and the one that would maximize the benefits derived from integration into the world economy. Whatever progress might happen at the macro level, it is significant change at the micro level, within individual companies, that could open the floodgates and allow direct investment to begin flowing into the country.

In other words, Russia would benefit significantly more from WTO membership if the groundwork for investment were laid beforehand in the form of greater transparency, increased professionalism of managers, and improved reporting standards to company shareholders. The latter is especially important, as it would do much to encourage foreign companies to cooperate with their Russian partners.

During the liberalization of the Russian economy, the government must take pains to protect consumers -- the same consumers who have suffered repeatedly from currency reforms, fraudulent pyramid schemes, default, "minor" banking crises and the like. Consumers' interests are served when they can choose from a wide selection of products and acquire them at lower prices because of competition among producers. This would be the most important result of WTO membership for Russia.

Speaking before the British Parliament, Winston Churchill said that protectionism was the art of doing business at a loss. His use of the word art was not accidental. At times, politicians need remarkable talent to convince the public that for all the benefits of trade liberalization, the national interest demands a rise in import tariffs to protect domestic producers. The argument for protectionism in such cases refers to economic security, the need to develop new sectors of the economy or the diversification of foreign trade. In the end, protectionism is an art for special interest groups, not for ordinary consumers.

The time has come for Russia to consider the role it might play within the WTO. After accession, Russia should not focus exclusively on building any single alliance. It could join any number of blocs and groupings within the organization, which would give it added weight.

Entry into the Cairns Group, which unites leading agricultural exporters such as Canada and Australia, could prove difficult if it requires wide-scale liberalization of Russia's agricultural sector. The Cairns Group countries were among the most uncompromising during negotiations on Russia's entry into the WTO. At the same time, Russia may be interested in joining groups that unite countries with transitional economies, as well as new WTO member countries. Alliances with developing countries are also possible within the Group of 20, although it might somewhat contradict Russia's growing focus on cooperation with the G8. Russia could initiate new regional alliances within the WTO, including members of the Commonwealth of Independent States.

Building such alliances within the WTO would undoubtedly stimulate development of bilateral and regional alliances with Russia. It should be noted that the negotiation process has already to talk about the possibility of bilateral agreements on trade liberalization. EU representatives announced in 2006 that Europe was ready to enter into negotiations on the creation of a free trade zone with Russia after it joined the WTO. Following accession, Russia can expect a flurry of activity on bilateral and regional alliances, which would in turn do much to allow the country to overcome the remnants of its isolation on world markets.

Yaroslav Lisovolik is chief economist for Deutsche UFG. This comment was published in Vedomosti.