Russian Prime Minister Vladimir Putin recently announced that Russia, Belarus, and Kazakhstan have abandoned their separate talks to join the WTO. Instead, they would seek to enter the world trade body as a single customs union. In effect, this means that Russia seems to be casting aside its accession to the WTO — a major reversal of Russian strategy.
Putin’s statement hit like a bolt from the blue. Two days earlier, US Trade Representative Ron Kirk and EU Trade Commissioner Catherine Ashton had completed successful talks on Russia’s accession to the WTO with Putin’s first deputy, Igor Shuvalov, Finance Minister Alexei Kudrin and Minister of Economy and Development Elvira Nabiullina. As late as June 3, Putin had declared himself sure of Russia’s “swift joining of the WTO.”
The leaders of Belarus or Kazakhstan seemed equally surprised by Putin’s statement, especially as Russia had just prohibited almost all imports of dairy products from Belarus in a protectionist ploy. After 16 years of negotiations, Russia appeared poised to join the WTO within a couple of months.
Indeed, only three difficult hurdles remained. First, Ukraine demands a bilateral protocol on market access, which would force Russia to abolish roughly 100 trade sanctions, primarily in agriculture. The second obstacle is border controls with Georgia, a mainly political issue: whether Abkhazia and South Ossetia are independent, as Russia maintains, or are part Georgia, as the rest of the world believes. Finally, the EU insists that Russia abolish planned prohibitive export tariffs on lumber. Only the Georgian issue is really serious.
A customs union with Belarus and Kazakhstan is no alternative to Russia’s WTO accession. No countries have ever entered the WTO collectively, nor is this legally possible says WTO Director-General Pascal Lamy. Moreover, while the customs union was proclaimed in 1995, the earliest it can be formed is in July 2011, which is unlikely.
Predominantly a commodity exporter, Russia has less need for the WTO than a manufacturer like China. Even so, one-fifth of Russia’s exports comprise metals and chemicals that are sensitive to anti-dumping measures. A series of World Bank and Russian studies have estimated that Russia can gain 0.5 percentage points to 1 percentage point in economic growth for half a decade if it joins the WTO.
Membership is also important for Russia’s international standing. It is the only G20 country outside of the WTO, which accounts for 96 percent of global trade. The WTO also represents a choice of economic and political strategy. Before Putin resigned as president in May last year, he presented his “Russia 2020” program. Its heart was an “innovation strategy” based on more market reforms and investment in human capital, leading to annual growth of 6 percent to 7 percent. In their rhetoric, Russian President Dmitri Medvedev and his technocrats embrace this vision.
But Putin and his siloviki (political allies whose power base is in the security apparatus) seem to prefer an “inertia strategy,” the worst of the Russia 2020 scenarios. This strategy amounts to state capitalism, living on Russia’s energy wealth, and doing nothing to curtail Russia’s massive red tape and corruption.
By reversing course on the WTO, Putin has again shown himself to be Russia’s master. He did the same thing last summer by lashing out against a successful mining and metallurgical company, Mechel, and provoking the war in Georgia.
During the winter, Putin’s poor policy choices on the financial crisis undermined his power. Rather than shielding Russia’s private enterprises, he engineered a domestic liquidity freeze, which led to a sharp drop in GDP of 9.5 percent in the first quarter of this year, despite Russia’s huge foreign reserves. The pragmatic technocrats took over, but the subsequent doubling of oil prices signals that the danger for Russia’s economy is over for now, so the siloviki are resuming command.
The question is what their next step will be. The prominent Russian military analyst Pavel Felgenhauer insists that their prime aim is to finish off Georgia and its president, Mikheil Saakashvili, who remains in power and defiant. Georgia has received no military support and is virtually undefended. The Kremlin continues its propaganda offensive against Georgia, and has vetoed prolonging the mandate for UN observers in Georgia and Abkhazia. A major Russian military maneuver, Caucasus 2009, is underway. The last such maneuver, Caucasus 2008, was followed by the invasion of Georgia.
During the latter part of this maneuver next Wednesday and Thursday, US President Barack Obama is supposed to meet Medvedev in Moscow. Medvedev obviously hopes to reach out and improve Russia’s and his own standing in the world. The siloviki, however, prefer Russia isolated and authoritarian, with power securely in their hands.
The Kremlin wants a new strategic arms control agreement, but the siloviki desire nothing more. Obama’s administration had hoped for a final breakthrough in Russia’s WTO talks, but Putin’s actions have eliminated prospects for such an outcome. The US also wants progress on the territorial integrity of former Soviet states, such as Georgia, but that, too, is unlikely. Putin or his collaborators seem to be setting up Medvedev for a failure, suggesting that their jealousy of Medvedev’s limited power is greater than their interest in defending Russia’s national interests.
Yet there is still hope that Putin encounters a sufficiently negative reaction that he changes his stance on WTO accession. After all, he suspended Russia’s WTO accession talks after war in Georgia last August, only to allow them to restart this spring.
Anders Aslund is a senior fellow at the Peterson Institute for International Economics.
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