Time for Russia to Join the WTO?

MOSCOW—In the depths of the coldest winter in more than a generation, Russian youth can certainly be excused for spending more time than usual curled up cozy and warm in front of their computers, surfing the Web. It is what these young people do when they are online—illegally download American music at such popular sites as allofmp3.com, the world’s largest commercial pirate site—that has some members of Congress threatening to block Russia’s bid to join the World Trade Organization. And then there are the pirated

DVDs of the latest Hollywood movies available on nearly every Moscow street corner, and the Russian government’s failure to do much about the copyright thefts.

Of course, such piracy is rampant in many nations, notably China, that already belong to the WTO. But US movie companies and music makers claim that theft of intellectual property in Russia is unparalleled. In fact, a wide spectrum of American businesses, including beef, poultry, and pork producers, and banks and insurance companies, have problems in the Russian market. And these unresolved trade issues have long blocked Russia’s aspirations to join the WTO.

But oil revenues are now making Russia an ever more attractive place to do business.

And bringing Russia into the WTO is an oft-repeated foreign-policy goal of Russian President Vladimir Putin and President Bush. Little wonder that cynics in Moscow and Washington say that this may be the year that Russia finally gets its seat at the trade table in Geneva, regardless of the obstacles.

Analysts in Russia say a deal resolving American objections to Russian WTO accession could come soon. That would enable Congress to vote later this year on granting Russia permanent normal trade relations – the same tariffs and rules that Washington grants other trading partners – which is the final impediment to Russia’s WTO membership. Arguing that the new strength of the Russian economy or that larger and more important geopolitical goals are worth a compromise on trade issues to get Russia into the WTO could be a high-takes gamble for the Bush administration. Moscow’s tariff on imported aircraft, for example, may seem like a petty issue to Russians seeking their “rightful” place among the leading nations of the world, but it’s a big deal to U.S. airplane manufacturers. Bush administration diplomats desperate for Moscow’s cooperation in dealing with Iran may get frustrated over such commercial disputes, but resolution of trade problems is important in building solid justification for WTO membership and increased support for the deal from the US business community.

President Bush wants Russia’s assistance on big foreign-policy issues. U.S. businesses say now is the time to press for Russian concessions on trade. And American movie companies, music makers, meat producers, and banks are unhappy.

If the White House sells Russian membership in the WTO club to Congress as a

quid pro quo for getting Russian cooperation on other foreign-policy issues—as

both officials here and business lobbyists in Washington expect—that rationale

could blow up in Bush’s face the next time Putin acts like Putin. Recall that the

Russian president recently blocked gas shipments to Ukraine and clamped down

on nongovernmental organizations working on behalf of democracy in Russia.

Russian aspirations to formally join the family of trading nations reflect a growing self-confidence in the state of the country’s economy. The late-1990s financial crisis, which set off capital flight and economic contraction, is a distant memory. With oil revenues filling government coffers and consumers jingling more money in their pockets, Russian

business leaders are upbeat. Their boosterism is drowning out the economic Cassandras who see problems ahead.

The Russian economy ended 2005 stronger than expected and is forecast to grow 6 percent in 2006, according to Troika Dialog, Russia’s largest and oldest investment

bank. Inflation, at 10 percent, is expected to be half what it was in 2000. Unemployment, at 6.7 percent, will be down 2 percentage points from 2003. Foreign debt as a percentage of the economy will be 25.3 percent, half what it was in 2001. And the government is running a tidy budget surplus. The real economy, where average people actually live and work, is also performing well. Labor productivity is up 45 percent since 1998. Manufacturing output is up 30 percent since 2001. And both personal consumption and disposable income after inflation are expected to grow by about 10 percent this year.

But ordinary Russians, unlike business leaders, are wary. Half of the people think

the government’s inability to control inflation is the Kremlin’s biggest failing, according

to a survey by the Levada Center, Russia’s most reputable polling organization.

Similarly, more than two-thirds of Russians think the government has failed them on the jobs front, even though unemployment is down.

Admittedly, Russian economists warn that the good times are precarious. “If oil remains relatively high and the political situation more or less predictable and stable,” said Evgeny Gavrilenkov, Troika’s chief economist, “the economy shouldn’t go wrong. If oil prices fall, however, this would be a serious problem.”

One danger is that stable or falling oil prices would trigger a rise in interest rates.

Now, thanks to the oil boom, banks have so much wealth coming in that they are

shoveling loans out the door. The inflation-adjusted cost of borrowing money

is close to zero. “Once companies can no longer borrow cheaply,” Gavrilenkov

cautioned, “some business activity will decelerate.”

Rampant corruption further clouds the economic horizon. Russia ranks 126th out

of 159 nations, according to the corruption index published each year by Transparency

International, a business watchdog based in Berlin. Bribery is endemic. An informal National Journal survey of Russian university students found that many had paid bribes to a high school principal to ensure scholastic success or had slipped money to a doctor to obtain faster medical service. Moreover, Russians widely believe that the cost of corruption is on the rise, and they blame the government.

On the other hand, the public broadly supports Putin’s seizure of Yukos Oil in 2003 and his favoring of ill-defined “strategic industries.” Russians have a growing distrust

of Big Business and they think the country needs a president with “a firm hand.” Still, Putin’s policies unsettle investors. “The major internal risk is the lack of transparency involved in decision-making by the Kremlin,” said Gavrilenkov, who thinks that business

will rapidly adjust to the vagaries of Putin-style state capitalism. But he worries about the effect of state economic intervention on overall efficiency in the long run.

To create a Russian economy less dependent on oil and to encourage a more rules-based

society, economists here and abroad advocate bringing Russia into the WTO. By increasing competition and domestic productivity and by opening the Russian market to more imports, WTO accession could boost the economy by 3.3 percent in the medium term and as much as 11 percent in the long term, according to estimates by the World Bank. WTO strictures on piracy, and on government subsidies and regulation, would also

strengthen the rule of law.

But the WTO is a club that countries join at the sufferance of the members. Membership is not a right. Before Russia can realize the WTO’s benefits, it must first resolve outstanding trade differences with the 149 members. Moscow has now largely completed

those negotiations with various WTO members, but Washington, one of the few holdouts, has a number of concerns. Russia is the largest export market for US poultry, in part because Russians love chicken-leg quarters, the dark meat that American poultry

producers can’t sell anywhere else. “The Russian market helps us balance both ends of the bird,” quipped one Washington poultry lobbyist. American poultry producers—

along with US cattlemen—sell into Russia under a quota that assures them a minimum

share of the market. That quota expires in 2009, and American farmers,

who face growing competition from more-efficient Brazilian producers, want

some assurance that Moscow will preserve their share of the market. US poultry, pork, and beef producers also worry about Russia’s past manipulation of health standards

to limit imports and Russian demands to inspect American packing plants. “We want to

be pro-Russian WTO accession,” said a pork lobbyist in Washington, “but we aren’t there yet.”

The American financial services industry also has problems with Russian practices. Because Russian law prohibits foreign banks from opening branches around the country, foreign financial institutions can operate only through Russian subsidiaries. American

officials say that this constraint is inefficient and that it unfairly limits foreign participation in the growing Russian economy. The official Kremlin rationale for this limitation is that bank branches are harder for the Russian central bank to control than are subsidiaries which must raise their own local capital and name local boards of directors. But a strong streak of nationalism runs through the bank issue, which has become a cause célèbre all over Russia. Putin himself has weighed in, telling a conference of Russian bankers in December, according to news reports: “Activities of foreign bank branches in Russia should today be restricted or, in fact, prohibited.” Cynics note that Putin gets much of his political support from Russian bankers, who would face tough competition if foreign banks got greater freedom in the Russian market.Foreign insurance companies also face constraints that could limit them to half the Russian market and might exclude them from offering many insurance products that Russian citizens are required to have. American insurers also worry that any concession the United States grants the Russians on these issues will subsequently be demanded by Malaysia or other nations with lucrative insurance markets; Washington is hoping to negotiate its own free-trade agreements with some of these nations. In November, US insurers sent a letter to US Trade Representative Rob Portman, imploring him “not to give in to Russia’s less-than-acceptable terms.”

In both insurance and banking, the fragmentation of the financial services industry’s

interests undermines its leverage in the accession talks. US giant Citicorp already operates quite successfully in Russia under current restrictions, for example. And American insurance companies are such small players in the Russian market

that many may not be willing to go to the mat for concessions.

Piracy on an unparalleled scale is the problem facing the American movie and

music industries in Russia. Four-fifths of all DVDs sold here are thought to be illegal

copies, while pirated music is estimated to account for two-thirds of CD sales.

More than 40 illegal optical disc plants, which make music CDs and movie DVDs,

are said to be operating here. At least nine of them carry on within government-controlled, restricted-access areas closed to regular law enforcement officials.

Since Russian anti-piracy statutes are actually quite good, said one Hollywood

lobbyist, “this is a question of political will to enforce the law.”

US officials in Moscow note that the Russians have dramatically increased the

number of police raids on pirate factories in recent months. But American movie

producers and music makers say they want to see prosecutions and convictions—

and an end to recidivism. They want Putin to make fighting piracy a priority. They want tougher sentencing guidelines for judges. And they want pirating Web sites shut down. With regard to all of these trade issues, Russians complain that they have already changed hundreds of their laws to comply with WTO rules and that Washington is asking Moscow to meet a higher standard than previous WTO applicants. It may sound like whining, but in a sense the Russians are right. The bar for WTO membership is constantly rising. With each passing year, trade involves more sectors of all member economies and hence requires more changes in members’ domestic regulations. And Russia faces particular scrutiny because some in the American business community feel burned by China’s WTO accession in 2001 and by Washington’s problems in getting Beijing to live up to its commitments. “What we learned from China is that tomorrow is not good enough,” said the Hollywood lobbyist. “It’s gotta be now.”

It is doubtful that American film producers and music makers, or the US financial services industry, or meat producers will get all of what they want. And their lobbyists privately acknowledge as much. As one frustrated banking-industry lobbyist put it, “The administration has bigger fish to fry.” That it does. President Bush has publicly and repeatedly pledged to wind up these WTO negotiations soon. Getting Russian cooperation on a range of international issues—from terrorism to nuclear

nonproliferation—is clearly in America’s interest.

In the past, the Bush administration has subordinated trade policy to larger foreign-policy concerns, such as the broad benefits of keeping the Doha Round of trade negotiations going, the pro-democracy benefits of pursuing free-trade deals with Middle Eastern countries, and the geopolitical benefits of maintaining good overall relations with China, despite some of Beijing’s trade practices. The White House may make the same calculation with Russia’s WTO accession. But counting on Putin to behave until Congress signs off on this deal could prove to be a risky bet.