Does Russia really need WTO?

Two weeks ago Russia announced the suspension of its bid to join the WTO and now intends to file a collective membership application as a customs union with Kazakhstan and Belarus. There are multiple reasons why Russia should seek to join the WTO as soon as possible, but there are two reasons why it is not a high time to do so. Namely, they are financial crisis and Russia’s sphere of influence.

A quantitative assessment of WTO accession impact on Russia by the World Bank in 2005 indicated that, despite economic benefits are achievable in the medium and long term, many households may lose during a transition period. Employment will decline in the sectors in which Russia has a comparative disadvantage, namely, light industry, food, machinery and equipment and construction materials. Russia’s GDP shrank by 9.8 percent in the first quarter of 2009 and the World Bank predicts a slow and painful recovery with a weak economic growth until 2012. This means that Russia will have to struggle with rising unemployment and possible social unrest for another 2.5 years. Joining the WTO now may exacerbate these negative effects on Russia’s economy.

Furthermore, Russian government will not be able to impose trade restrictions that seem to have a greater calming effect on Russian people than on the economy. World Bank predictions for the economic growth after WTO accession also indicate that liberalization of barriers against foreign direct investment is the most important component of the impact on the Russia’s economy. Thus, in order to achieve huge benefits from the WTO accession, Russia will have to review a number of legal provisions that regulate FDI in the economy, including the famous Strategic Sectors Law. Joining WTO under such circumstances may further hurt the economy and hamper its weak growth.

Another aspect of Putin’s decision on WTO is Russia’s assertive policies toward its neighbors. Russia believes into a multipolar world and would like to become a center of integration in Eurasia. This requires for establishing a close relationship with its partners and which Russia deems its circle of influence. Kazakhstan is assuming chairmanship of the OSCE in the next year, and is a growing energy power in the Central Asia. Staying outside the WTO allows Russia to use trade barriers in its foreign policy, mainly in regard to its neighbors that act against Russia, for example, Ukraine.

The most important question is whether the customs union with Belarus and Kazakhstan is possible. Just days before the announcement of the customs union formation, Russia has been engaged in a “milk” war with Belarus that clearly showed the scope of the relationship between the two countries. Kazakhstan may also be increasingly reluctant toward Russia’s demands as it is trying to lead its own economic policy and highly values its sovereignty. These tensions may hurt the effectiveness of the Customs Union.

This period of the economic crisis can be a period of opportunities for Russia. It can establish long-needed economic institutions that will enable Russia to mitigate the pain imposed on the industries and population in the period of a downturn, and increase labor productivity and industrial efficiency. Russia has a huge potential to come out of this crisis with stronger economic institutions and checks-and-balances system, that will be enable Russia to reap huge gains from its future WTO accession even in the short-run.