LONDON - Russia's 19-year wait to enter the World Trade Organisation is finally over. Unfortunately, the kind of export and investment miracle enjoyed by fellow-BRIC China after it joined the club is likely to remain well out of its reach.
China too waited 15 years on the WTO’s doorstep. But for Beijing, joining in 2001 set the stage for a decade that quintupled its exports and propelled its economy from sixth place globally to the world’s second biggest.
Russia’s commodity-based economy is less well placed to enjoy that kind of spurt. And with trade and investment flows both scarcer than a decade ago, it will struggle to attract investments on a similar scale to itsFar East neighbour.
First, though, there are plenty of positives.
Foreign tariff barriers are estimated to cost Russian exporters $1.5 billion to $2 billion a year. The WTO confers lower trade barriers and equal treatment for all members.
Moscow will have to haul up its own barriers, with average tariffs set to fall by a third – tariffs on foreign cars for instance are to halve by 2019. So cheaper imports should leave consumers and companies with more money to spend.
And while parts of some uncompetitive sectors could sink – Russia’s auto industry is a much-cited example – others such as banks and telecoms will be opened to foreign investment.
Furthermore, Russia is hobbled by a reputation for crony capitalism, red tape and disregard for investors’ rights. Optimists hope WTO-entry, which has the blessing of President Vladimir Putin and is bound by strict previously agreed timetables, will instill a sense of urgency into the Kremlin’s half-hearted reform efforts.
Ed Conroy, a fund manager at HSBC Global Asset Management, reckons Russia, like most new WTO entrants, will enjoy a growth and investment pickup if it dismantles protectionist barriers and finally shows a clear commitment to free-market policies.
“WTO is not a magic wand they can wave to create an investment haven but if you create a less restrictive framework, you automatically create opportunities. Don’t expect a revolution but an evolution towards a more open, competitive economy,” says Conroy, who invests in Russia.
Conroy is betting bank shares will be prime beneficiaries in post-WTO Russia. Others such as Chris Weafer atMoscow brokerage Troika Dialog advise loading up on shares in some retailers and airlines that stand to gain from lower import tariffs.
All this gels with the view of the World Bank which has calculated the short-term value of WTO membership toRussia at $49 billion a year or over 3 percent of gross domestic product at 2010 prices. That would rise to $162 billion annually when the longer-term impact on the investment climate is factored in.
DIFFERENT COUNTRIES, DIFFERENT WORLD
But this does not spell a China-like growth miracle.
A vast pool of cheap labour handed China a post-WTO bonanza, with goods exports rising more than 20 percent a year. Foreign direct investment (FDI) inflows surged five-fold over the decade thanks to foreign companies setting up factories.
That won’t happen in Russia. For one, its exports are dominated by oil and gas, which are not subject to tariff barriers. Second, the manufacturing-for-export model is unlikely to take off because of relatively high Russian labour costs.
United Nations trade body UNCTAD has also admitted that WTO accession “may not have substantial FDI-generating effects” for Russian manufacturing.
Crucially, Russia will suffer from the difference in the world economy that has occurred since China’s 2001 entry. Back then the global economy stood on the cusp of a trade boom fuelled by surging housing and credit markets.
“What China benefited from was that for many years you had a period of debt-driven growth in the West,” said John-Paul Smith, head of emerging equity strategy at Deutsche Bank.
Now, much of the developed world is in recession, with governments as well as consumers slashing spending. The WTO predicts trade will grow just 3.7 percent growth this year, almost half the 6 percent annual average between 1990 and 2008.
The effect, even on established export powerhouses has been profound, with Asia’s aggregate trade surplus in danger of turning into a deficit soon for the first time in over a decade, according to analysts at JP Morgan.
Ironically, Russia’s current exports of metals and oil are most vulnerable to the growth slowdown in China, whose demand has underpinned the decade-long price boom in these commodities. So great is this danger, that it could eliminate any WTO-led boost for Russia, Deutsche’s Smith says,
“WTO is probably going to be dwarfed by what will happen to commodity prices in the wake of what’s going on inChina,” he said. “That’s especially so if you take the view that China’s economy is entering a structural rather than cyclical slowdown.”
One example is the steel industry which, burdened by tariffs and quotas from importers, was fingered as a potential WTO winner. It now faces oversupply and shrinking demand globally.
“Most companies are not filling their existing quotas due to low demand,” Troika’s Weafer said in a note. “The positive tariff removal effect will not be seen until there is a broad economic recovery leading to higher steel usage.”