Russia and the WTO and/or a Customs Union


When Russia President Dmitry Medvedev had a hamburger lunch with President Obama two weeks ago, Russia joining the WTO was among the top items on their agenda. President Obama said afterward, “Russia belongs in the WTO. That’s good for Russia, it’s good for America and it’s good for the world economy.” President Obama directed U.S. negotiators to accelerate the process and set September 30 for completing negotiations on the ascension agreement because the U.S. is the last major WTO country to work out an agreement with Russia.

That fast timeline had a setback when Russia, Belarus and Kazakhstan announced the implementation of a customs union they have been working on for the past year. In May of 2009, Russian Prime Minister Vladimir Putin announced efforts to form the customs union. A customs union has common external tariffs and few internal barriers to trade. A few months later Russia was again talking about entering the WTO alone, but continued work on the customs union.

Russia has been on a 17 year quest to join the WTO and as the eighth largest economy and 15th largest trader has logical reasons for wanting to gain low-tariff access to markets. They also have reasons to not join if the costs of internal adjustments are too high. Two-thirds of Russian exports are petroleum and natural gas. Many of its heavy industries are old and not competitive, state capitalism has concentrated resource in government protected companies, corruption is rampant in government and companies and the population is declining due to alcoholism, traffic accidents and lack of medical technology. Well trained scientists work in outdated research facilities and production workers are in short supply.

President Obama and leaders in the EU have many non-economic reasons for wanting Russia, a G8 and G20 country, to join the WTO. The U.S. needs Russia’s help to isolate Iran and North Korea, some EU countries rely on Russian energy, particularly natural gas, and the WTO needs a win with the Doha Round of trade talks stalled. Problems like high export taxes on timber, using natural gas as a political tool against WTO members and intellectual propriety rights violations that have not improved in recent years are being pushed aside to get an agreement.

The customs union is an attempt to reestablish supply chains that were prominent 20 years ago before the demise of the Soviet Union. With Belarus to the west and Kazakhstan to the south, Russia would be the center of the customs union with little direct trade occurring between the other two countries. Leaders of Tajikistan and Kyrgyzstan, a WTO member, have expressed interest in joining the customs union to avoid being squeezed out of regional relationships. Kyrgyzstan officials estimate that 70 percent of its trade is with Russia. It also serves as a supply chain link for products moving from China to Kazakhstan and Russia. Ukraine, also a WTO member, has not expressed interest in joining the customs union.

Russia has a population of 139 million people declining by 0.5 percent year with GDP on a purchasing power parity of $2.1 trillion in 2009, $15,100 per capita. Belarus has 9.6 million people declining 0.4 percent per year, with a 2009 GDP of $116 billion, $11,600 per capita. Kazakhstan with 15.5 million people is growing 0.4 percent per year, with GDP in 2009 of $182 billion, $11,800 per capita. Russia and Belarus can generally be described as moving away from market opening efforts of the 1990s to more government control of economic activity. Kazakhstan has focused on developing its energy and minerals for sale internationally. Petroleum and products account for 60 percent of exports with metals and chemicals another 25 percent.
This confusing trade policy situation appears to have its roots at the highest levels of the Russian government. President Medvedev has repeatedly stated in recent months that Russia must make internal reforms in its economy to improve competitiveness, open markets to world trade and become less dependent on petroleum and natural gas as its only growth industries. Prime Minister Putin, who served eight years as President and handpicked Medvedev to succeed him when term limits prevented him from running for a third consecutive term, seems to be more interested in reestablishing old economic relationships along its borders. Putin said in 2008 that he did not see any advantages to joining the WTO.

U.S. agricultural trade will not be impacted much by what happens in Belarus or Kazakhstan. Exports to Belarus were only $18 million in 2009 and $3 million in 2008. Imports from Belarus were only $3 million in 2009 as were imports from Kazakhstan. Exports to Kazakhstan were $11 million in 2009 and in previous years were about $30 million. Exports to Russia are clearly an ongoing issue with $1.5 billion in 2009, with $750 million of chicken meat and pork at $260 million. The two countries have just come through a six month discussion about pathogen treatments on poultry meat that should allow trade to resume. U.S. agricultural imports from Russia in 2009 were about $400 million with fish and seafood products three-fourths of the total.
Creating a customs union and encouraging regional cooperation in supply chains are not reasons to reject Russia for WTO membership. Some Russian officials say they are using the EU as the model for their customs union. The South African Customs Union has existed in various forms since 1910. NAFTA has certainly encouraged regional supply lines as has the CAFTA-DR. The ten members of ASEAN in Southeast Asia will likely gain efficiencies through their agreement. All of these relationships have developed over many years and time will be needed to see if the new customs union is compatible with WTO rules and procedures.

Russian government actions in recent years have not indicated that it is interested in becoming part of the WTO on terms consistent with commitments of current members. An argument can be made that the U.S. should continue its support for Russian entry to bolster efforts by President Medvedev to open up Russia’s economy. Despite the possible political benefits of accepting Russia into the WTO to achieve a broader political agenda, the Russian government has issues it must resolve internally and with Russian industries before achieving WTO membership.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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