Russian reform. Mixed signals

A big step towards WTO membership, but sidesteps elsewhere

AFTER years of deadlock, the main obstacle to Russia's admission to the World Trade Organisation (WTO) vanished with mysterious ease. On May 21st Pascal Lamy, the European Union's trade chief, and German Gref, the Russian economy minister, struck a deal. Among other things, the Russians promised to raise gas prices for domestic industry from around $30 per thousand cubic metres to $49-57 by the end of 2010.

This was a big win for Russia. The EU's original target - that domestic gas prices be raised to match export prices of over $100, which Europe pays for most of its Russian gas - is so far in the future as to be out of sight. Russia also secured relaxed timetables elsewhere. It has until 2007 to liberalise its telecoms market, and it may well take longer before competitors to the state-owned Rostelecom get licences and set up shop. It also has until 2013 to clean up or scrap its over-priced and murky system of over-flight fees for foreign airlines.

What did the EU get in return for its sudden generosity? The answer is unclear. On the day of the announcement, President Vladimir Putin seemed to come out strongly in favour of ratifying the Kyoto protocol on climate change, because “the EU has met us halfway in talks over the WTO.” The protocol needs ratification by Russia if it is to come into force. If it happened, it would be a huge coup for the Europeans over the Americans, who have refused to ratify Kyoto.

Yet EU officials say that the Russians never raised Kyoto as a bargaining chip. And Mr Putin left a big loophole by saying that ratification still depended on the exact conditions. His chief economic adviser, Andrei Illarionov, continues to rail against Kyoto, which he says will hold back Russia's growth. “My opinion has not changed,” he said this week, adding cryptically “and it's not only my opinion.” He would not be drawn further, saying only “when I am free to add something, it will be loud and clear.”

Russia must still negotiate WTO entry with other members, including America, which will push for a crackdown on software and music piracy. But the EU was the biggest problem. If it does collect all the necessary approvals for WTO entry, late next year or in 2006, headline promises will matter less than the general framework that membership imposes. “Russia will need to change lots of laws to bring customs codes and other things in line,” says Al Breach of Brunswick UBS, a Moscow investment bank. Although some bits of Russian industry, such as cars, will struggle to stay afloat in the WTO, others that Russia has barely developed, such as telecoms and financial services, will benefit from an influx of foreign investors drawn by the promise of clearer rules. “Russia wants foreign entrants more than most WTO countries,” says Mr Breach.

So it is strange that, in his annual speech to an increasingly docile parliament this week, Mr Putin made no mention of the breakthrough with the EU, and only a fleeting reference to the WTO. He spent more time talking of Russia's proposed economic union with other ex-Soviet states, a far-off prospect with dubious economic benefits. The speech disappointed those hoping for signs of bolder reforms in Mr Putin's second term.

Mr Putin promised that there would be no “radical revision of economic policies”, but said little as to what the policies would actually consist of. That was taken as a sign that Russia's business magnates, cowering after the attacks on Yukos, an oil company, need not fear an all-out assault. But, as with his promise on Kyoto, it was commitment-free. He also dwelt on the need to improve housing, health and education, but seemed to lose touch with reality by saying that the goal of doubling GDP in a decade, which he set last year, could now be achieved by 2010 if the 8% annual rate of growth in the first quarter of 2004 were sustained. (This was not even mathematically true, but his ministers burst into applause anyway. “That must mean they agree,” he joked.) He dropped all mention of slimming down and professionalising the army, a previous obsession of his, and instead bowed to the generals by promising that the armed forces and above all the strategic nuclear forces - which earlier this year publicly embarrassed him with a round of failed missile launches - would be lavished with the latest equipment.

Moreover, although Mr Putin talked at length of the need for democracy and civil society, two bills now before parliament undermine those very things. One makes calling a referendum by popular petition virtually impossible; the other brings the state audit chamber under the president's control and prevents it from examining the presidential administration's accounts. If Mr Putin has not yet lost touch with reality, he certainly seems to want to.

Feature looks at Russia under President Putin and see progress on issues like WTO membership, but sidesteps elsewhere.

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