Benefits for all to be enjoyed if Russia can tie the knot with WTO

By Peter Chapman

Date: 20/055/04

LEADERS of the European Union and Russia are trying to wrap up a date in Moscow for entry of the former Soviet Union's biggest country into the World Trade Organization (WTO).

As courtships go, this one lacks romance, what with Russia's dodgy human rights record, legacy of cronyism and organized crime, not to mention flagrant abuses of intellectual property.

But if you turn a blind eye to such matters - and let's face it, these days even the US is not exactly immune to such criticism - experts agree there will be benefits for all if the Russians finally make it down the aisle to WTO membership.

Last-minute hitches could still thwart progress later this week.

But, on paper, there is no wonder that Trade Commissioner Pascal Lamy and his Russian counterparts, including Trade Minister German Gref, are keen to press ahead.

The EU and Russia are made for each other. Russia is the Union's fifth largest trading partner, after the US, Switzerland, China and Japan - with trade in 2002 worth €78 billion. The EU, for its part, is Russia's main trading partner accounting for 40% of its total trade.

The EU, which runs a trade deficit of around €17bn, sells mainly machinery, chemicals, agriculture, transport material and textiles eastwards.

EU investment at around €1.1bn is seen as ripe for expansion once Russia tackles poor protection of property rights.

In turn, cheap energy and fuels alone accounted for more than half of Russia's exports to the Union.

EU enlargement means Russia just got closer to the edge of the Union - and vice versa.

So what additional benefits would WTO membership bring?

"There are lots of pluses for all sides," says James Searles, a partner with Washington law firm Steptoe & Johnson.

For Russia's partners, the country would for the first time be subject to a wide number of regulations and trade rules.

Disputes could be solved at the WTO rather than through diplomacy - seen as a considerable improvement.

"Over time," says Searles, "this would bring about significant liberalization in the market."

The EU currently has a raft of trade measures targeting supposedly 'dumped' Russian products covering everything from aluminium foil, 'seamless steel pipes and tubes', 'urea and ammonium nitrate solutions' to steel ropes and cables.

Subsidized natural gas is often the root cause of Russian trade trouble in many of these areas - such as the chemicals used in fertilizers. Dirt-cheap energy inevitably leads to far cheaper prices in many commodities - where fuel costs are a big proportion of total production costs.

The EU, for one, is keen to ensure undertakings on energy market liberalization as part of the price of WTO entry, to make sure Russian companies can no longer benefit from this export advantage.

Commission trade spokeswoman Arancha Gonzalez said: "We are keen to see prices gradually move up to cover costs and a profit margin." Russia itself also seemed to be moving towards this in its domestic policy on Gazprom, she added.

"What we need to discuss is how gradually this can be done and how it can be locked into the negotiations."

This is one of the EU's key demands, along with calls for a cut in the hefty charges for EU airlines that want to fly to Asia via Siberian airspace.

More realistic energy markets will be good for EU firms competing with Russian rivals on a level playing field.

For Russia, WTO membership would boost economic growth by acting as a catalyst for competition and liberalization in domestic industry and inward investment.

"They recognize it is a two-way street," adds Searles, veteran of scores of trade rows between Brussels and the ex-Soviet bloc, including a fresh battle to convince the Russians - with a little help from Pascal Lamy - to axe plans to raise the duties on imported EU cars to 35% from 25%. If Russia makes the WTO cut, more of its industry will also win from bestowal of so-called market economy status. Currently companies in Russia suspected of dumping goods into many WTO member countries are compared with firms selling similar products in other countries.

That means, if the Russian export prices are a lot cheaper than their 'proxy' equivalents, then they are likely to face the full force of duties - even if they insist the price differences reflect genuine cost disparities.

The EU already granted Russia market status in 2002. It means European trade officials use market data gleaned from Russia itself - a better indicator if the market is genuinely open. Searles said market status is vital for the Russians - though he believes the status would tend to be given in small chunks to individual companies rather than all in one go.

Russia's market economy experience is likely to be the same as for China - which partly explains why Chinese Prime Minister Wen Jiabao was touring EU capitals earlier this month.

Like China, Russia might not be the finished article. Its transition to free markets has been so messy that many of its more impoverished citizens look back with fond memories of Stalin's times.

But inviting 'the big bear' into the WTO marks another positive change from the bad old days, when the country had countless nuclear missiles pointing at cities in the western hemisphere.

And, to misquote former US president Lyndon B. Johnson slightly: "It's probably better to have Russia inside the tent pissing out, than outside the tent pissing in." Quite.