Playing around with the WTO?

26.02.2013 — Analysis

Russia may rescind its agreement to join the World Trade Organization. The country's first months in the international trade club have led to budgetary losses and red ink for various industries, as well as social tensions. Top government officials are proclaiming that domestic manufacturers are more important than the WTO. The government is demonstrating its readiness to protect business owners. But as the columnist for RusBusinessNews has determined, it is unlikely that this will amount to anything: the archaic and corrupt state is only offering empty words of support while burying business ever more deeply.

Russia spent 17 years arranging its entry into the World Trade Organization. The negotiations were difficult - in part because the Russian establishment held divergent views about that step. Some economists and businessmen believed that the WTO would make it possible to "protect their interests in an orderly manner" - for example, by opening foreign markets for steel products. Their opponents predicted serious problems for number of sectors: the aviation industry, agriculture, machine building, and a few others. Experts at the WTO-Inform analytical center even calculated the potential economic losses by region: perhaps the Sverdlovsk region would see a reduction of 160 thousand jobs by 2020 and 16% less production in the Chelyabinsk region.

In 2011, the Russian president at the time, Dmitry Medvedev cut the arguments short by speeding up negotiations and leading the country into the WTO by hand. He called the signing of the agreement to join the organization an important event, "I believe that Russia's membership in the WTO is a true victory - it has been a long road for us and we have all worked very intensely. But this will bring our country into a different league. I hope that this will be a good driver for improving the investment climate."

Six months later, experts decided to see how the WTO was helping manufacturers defend their interests. Vyacheslav Pronin, the deputy head of WTO-Inform, says that the analytical center's pessimistic predictions have been fully borne out: imports have increased dramatically, while the number of exports is unchanged, draining cash from the budget. Under pressure from foreign firms, the Russian authorities are refusing to support domestic manufacturers. For example, the automobile disposal fee was initially to be charged only on imported cars, but it was then extended to include all varieties.

According to Aleksander Gordeev, the deputy general director of ChTZ-URALTRAC, the price-to-quality ratio of tractors from Chelyabinsk now lags behind foreign brands. With support from their own government, Chinese firms can keep their prices low and are actively expanding their service networks in Russia. This is causing difficulties for ChTZ: in 2012 that company's share of the domestic market fell from 35 to 28%, and the situation is only getting worse in 2013.

A senior manager claims that the WTO has not brought any benefits to that machinery-manufacturing firm. Russia's membership in the trade organization has not even helped to cut costs or modernize: the plant cannot afford to import equipment, since value-added tax and import duties are still in place. The federal government is compiling a list of equipment that is not subject to duties, but the machinery needed by ChTZ isn't on it.

But even the companies that prior to WTO membership paid no import duties on foreign-made equipment are not in the best position.

A representative from ChelPipe, OJSC told RusBusinessNews that there was no significant change in production in 2012 and early 2013. Pipe imports to Russia, which affect the workload of domestic businesses, did fall 10% in the fourth quarter of 2012, but that happened only because of the sharp decline in supplies from Ukraine, after Gazprom ended up not needing large-diameter pipes. But supplies from other countries increased by 8% overall. In the fourth quarter of last year China increased its sales by 25% in comparison with 2011, and imports of stainless-steel pipes from Malaysia, previously an insignificant amount, rose substantially.

But the WTO has not helped Russian steel products break into the overseas market. On one hand, exports from Russia to any member country of the WTO are currently unlimited. But on the other hand, overseas sales are not possible because the anti-dumping measures taken by the EU and Ukraine with regard to Russian pipes prior to Russia's membership in the WTO are still in force.

V. Pronin noted that the World Trade Organization is not helping Russia increase its exports. The West has learned very well how to protect its markets by going around the WTO - they erect barriers in the form of technical regulations that are too expensive to overcome, adding hidden subsidies for domestic producers and many requirements for importers. For example, anyone wishing to sell combine harvesters in Germany must open a plant there that employs at least 1,000 people.

Obviously Russians aren't going to be building combine factories or any other type of machine-building plant in Germany in the next few decades - the manufacturing culture is just too different. A representative from the URAL Automotive Plant, OJSC explained to this columnist from RusBusinessNews why trucks like the Ural aren't (and won't be) found in the West, "They have roads there and don't need our "hard-as-nails" all-terrain vehicles. And they wouldn't be able to service them: they use electronics, while we use sledge hammers and mallets. But that's why we have a niche in the Third World, where roads and highly qualified service personnel are scarce."

Consequently, businesses such as the Ural Automotive Plant have no strong opinions either for or against the country's membership in the WTO: sales have not grown, but nor have they fallen. With regard to modern technology as well, everything has remained as it was, meaning pretty bad. The Coordinating Committee for Multilateral Export Controls (CoCom), which was designed to control exports from the developed countries to the USSR, factually ceased to exist, but its restrictions on high-tech sales were retained. Although the Ural Automotive Plant does not need them: one can't pour new wine into old wineskins.

Experts suggest that the main problem is not Russia's lack of competitive trucks, but that the country entered the WTO without knowing how to make them. But the logic of the World Trade Organization is only to obstruct bad dancers. During those 17 years of negotiations, Russian machine builders could have learned to "dance," given the appropriate level of investment, but now they cannot because the WTO opposes the stockpiling of investment funds.

It's not business so much as the state that bears responsibility for those wasted years. The politician Ivan Starikov suggests that it was primarily the archaic and cumbersome system of state power that was not prepared to exist within the boundaries of a global trade organization. According to Vyacheslav Pronin, everyone - including officials - anticipated the aftermath of joining the WTO, but a goal had been set and it was met. And then they got what they expected. Business went nuts. Dmitry Medvedev, who now heads the government, sensed this and proclaimed that the WTO is not an end unto itself and promised to support manufacturers.

But the reality of what is happening is just the opposite. Vladimir Gutenev, the first vice president of the Russian Union of Mechanical Engineers, accused officials of destroying the labor market. According to him, authorities in the Russian regions continue to increase the quotas for migrant workers, who number almost in the tens of millions. And this is during a time of economic slowdown and rising unemployment among the indigenous population, whose consumption of goods is precisely what fuels the expansion of production. By increasing quotas for foreign workers, officials are slashing domestic consumption, since migrants send their very low wages home to their native countries.

Under these conditions no serious person could possibly hold out hope that the WTO will become "a driver for improving the country's investment climate."

Vladimir Terletsky