Russia, One Year After WTO Accession

July 16, 2013. Russia became a member of the World Trade Organization in August 2012, after 19 years of negotiations. It was the richest BRIC economy at the time, boasting a gross domestic product per capita (PPP) that was 50% higher than that of Brazil and almost twice of China’s. Analysts however, were divided in their opinion of the effect of its accession into the WTO. Would the largest European economy (by GDP at PPP) grow by over 10%? Would the domestic production of value-added goods fall drastically? Would foreign investors pull out or rush in?

What has been the real impact and what are the real implications for foreign businesses nearly one year later? We ask ALT R&C, an M-Brain (formerly GIA) Member company for their comments.

Alexander Pechersky

Managing Partner of ALT R&C
(M-Brain (formerly GIA) Member company)

What has been the general sentiment and impact in Russia?

Senior managers in Russia either express negative views towards the WTO membership or don’t expect any impact at all. Some expect WTO membership to “destroy domestic competitors” while others say it is “just politics” with no real business value.

In our opinion, this overestimation and underestimation demonstrates the absence of a realistic view of the true picture. Russia’s WTO accession is neither a huge step towards open trade nor purely a demonstrative act. Rather, it is a means to boost existing efforts at creating systematic improvements in the economy.

The most direct impact on existing businesses in Russia is in the area of import customs duties reductions. On average, duties have fallen by 2.2% to 7.3% for manufactured goods and by 2.4% to 10.8% for agricultural goods. In some sectors, the changes have been even more visible. For example, duties significantly decreased for civil aircraft, pharmaceuticals, pork, and wine.

Areas_with_significant_customs_duty_decreases_small

The most significant long term change will have to be in non-tariff regulations.

Both foreign and local businesses now enjoy broader access to service markets such as telecommunications, banking, insurance, franchising, retail and wholesale. Mandatory licensing in sectors such as drugs, alcohol and electronics have been partially cancelled. A number of sanitary, phyto-sanitary and technical barriers have been weakened, while the allowable levels of domestic producers support, such as subsidies, special economic zones and government purchases, have been reduced. There is also obligation for stronger enforcement of intellectual property rights, such as anti-pirate policies regarding movies, music, computer games, and software.

Since Russia became a WTO member, it is the metallurgy and chemistry/petrochemistry industries that have done well, growing by nine and two percent respectively. The pulp/paper/timber, light industry, and mechanical engineering industries on the other hand, have shrunk by seven, four and three percent respectively.

Russia’s eight-year transition accession phase into the WTO will speed up the decline of the share of locally produced finished goods in the short term, but is expected to have positive effects on transparency and competition, resulting in the acceleration of economic growth in the long term.

How have some neighboring CIS countries been affected?

Set up in 2011, the Customs Union of Belarus, Kazakhstan, and Russia removed all customs borders between these three countries and they became a single economic space in 2012.

With almost 50% in total trade with Russia, particularly in the areas of mechanical engineering, agriculture, food, and light industries, Belarus has been the most severely affected by the WTO accession. It is likely to suffer from increased competition from other WTO countries.

The share of trade with Russia in Kazakhstan trade is less than 20%, so it is not likely to be influenced so strongly.

Ukraine is already in a WTO member and will not witness significant changes.

How has the automotive industry been impacted by Russia’s WTO accession?

Foreign players are under pressure to localize more of their production.

With zero import tariffs for automotive parts and other attractive localization requirements in pre-WTO Russia, almost all of the world’s leading automotive brands established industrial assembly status in Russia, with most agreements ending in 2014. The conditions were relatively easy: a minimum of 25,000 cars per year and 30% localization of parts. Moreover, localization calculation rules were vague.

As a result, the share of localized foreign cars grew to 65% of local production in 2012, from just 15% in 2005.

Shortly before WTO accession, the Russian government proposed new six-year agreements on stricter conditions. In general, these agreements do not comply with WTO rules, but as a result of negotiations, they became an exception until 2020. Foreign brands are now required to produce a minimum of 300,000 cars with 60% local parts, set to more rigorous localization standards and an obligation to open a research and development center in Russia.

WTO accession has already decreased customs fees for imported cars from 30% to 25%, and this fee will gradually decrease to 15% in 2019. However, just a month after accession, Russia introduced utilization fees, which negate the effect of decrease for importers. On the other hand, local producers will receive subsidies to compensate for these fees.

OEMs now need more local supply chain partners, particularly for either engine or transmission parts, in order to avoid customs duties for imported parts of three to five percent. This opens up new opportunities for local auto parts manufacturers, including foreign manufacturers with local plants.

What advice do you have for foreign businesses interested in market entry into Russia?

WTO-related regulations are just one factor influencing your company. There are other well-known issues of doing business in Russia, such as its non-transparent regulatory regime, the role of the state in its economy and complications in law enforcement within the country. These factors must be evaluated carefully.

Do not decide to invest, based purely on today’s post-WTO regulatory environment. Take for example, moves by local regulators to defend the domestic market from a surge in imports. Regulators have introduced a 27.5% protective import duty for harvesters, antidumping duties of 23-30% for light weight commercial vehicles (LCVs) from Germany and Italy and utilization fees for foreign cars, trucks, buses, and LCVs. There are also plans to introduce utilization fees and additional technical restrictions for agricultural, construction and earthmoving equipment.

All these steps are questionable from the point of view of the WTO, but proceedings, if started, will take months or even years, while the barriers may be applied immediately.

We stress that it is your market size, growth, and structure that are still the most important factors to consider. Next are the tariffs and quotas across your product lines. Then you have to find out if there are special conditions that matter: technical regulations, subsidies, industry development programs, etc. Possible changes in the regulatory framework may significantly alter the situation for your industry, and often rumors may say more about the future changes in the rules of the game than official statements. Moreover, the same assessment should be performed on your customer and supplier industries, to understand their problems and perspectives.

Only with this understanding can you model different options for market entry in Russia. Things haven’t changed the need for good market intelligence work on the ground.

In short, we believe the WTO membership in not a big turning point for Russia, but rather a logical development of one of the most promising markets in the world.

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