Saturday, November 12, 2011

12/11/2011: Russia's accession to the WTO - opportunities for Irish exports & investment

This week, finally, with much delay, there is a full agreement for Russia accession to WTO, clearing the few issues that remained the stumbling block to the country membership. It is now expected that Russia’s membership will be approved at the WTO Council meeting on December 15-17. The decision is expected to go for ratification to the Duma some time in early 2012. Following the ratification, Russia will be formally admitted to the WTO within 30 days after the vote.

Under the core conditions for entry, import tariffs will be reduced from the average of 10% to 7.8% with at least 1/3 of all tariffs reductions to take place on the date of formal accession. 25% of the rest of tariffs reductions will take place after 3 years of transition. The balance will take effect after 7 years of transition (these focusing in the 'sensitive' areas of car manufacturing and aircraft manufacturing) and 8 years for some agricultural tariffs (e.g. poultry).

One core achievement will be in the area of customs clearance, with maximum customs fee to be reduced from the current Rb90,000 - or ca USD2,900 to Rb30,000.

Another core development is that the previously-announced major privatisations programme will be subject of reporting to the WTO

More specifically, in the areas of importance for irish exporters:

  • Agricultural imports will see average tariffs falling from 13.2% current to 10.8% post-adjustment period. Cereals tariffs will declined from 15.15% to 10% and dairy tariffs will fall from 19.8% to 14.9%. Domestic agricultural supports - subsidies - will be reduced from USD9bn in 2011-2012 to USD4.4bn in 2018. 
  • Russia will privatise 100% shareholding in the United Grain Company in 2012, as well 50%+1 share of the Rosagrolizing (by 2013).
  • Overall, agricultural measures can be expected to drive significant change in the sector in Russia post-2020, with some expected capex growth in advance of these as domestic enterprises re-tool to enhance competitiveness.
  • Manufacturing tariffs are to fall from 9.5% average to 7.3%. While automotive manufacturing imports tariffs are to declined from 15.5% to 12% over 7 years period. 
  • In chemicals sector, average tariffs are to decline from 6.5% current to 5.2%.
  • In telecoms sector, by the end of 2016 there will be lifting of the restriction on foreign ownership from the current 49% to allow full ownership of enterprises.
  • Similarly, there will be no restriction on full foreign ownership of banks. However, foreign banks combined market share of the Russian market will remain capped at a maximum of 50%. In addition, by 2021 foreign insurance companies will be allowed to open fully-owned subsidiaries and branches in Russia.
  • In transport sector, there will be equalization of treatment of foreign-made aircraft to that of the Russian-made aircraft in terms of leasing, eliminating current preferential treatment of Russian manufactured aircraft. By mid 2013, Russian railways will phase out price differentials for shipments of Russian-made and foreign-made goods.
  • In services, the restriction on share ownership for wholesale, retail and franchise companies will be lifted immediately after the accession.

It is unlikely, however, that the accession will have an immediate impact on Russian trade and investment relations with the rest of the world, as compliance period relating to the accession is long, especially in the more 'sensitive' areas, such as car industry, transport industry, agriculture etc. However, we can expect an improved drive toward domestic (Russian) enterprises increasing their competitiveness and the Russian Government to accelerate efforts to improve institutional frameworks and enhance institutional capital. More active Government drive to secure key internal markets reforms is expected and this is likely to shape forthcoming Presidential elections.

On the net, I expect significant changes in the markets for Irish exporters into Russia and a long-term process of reforms and investment growth for Russian markets as the result of the accession. This is hugely positive development. The market potential for Irish trade with Russia is in the region of €1.3-1.5 billion or roughly double the current levels of exports.  The market potential for Irish investment into Russia is in the region of €1 billion per annum, although achieving this potential requires significant changes in the supply of auxiliary services to Irish investors (access to functional banking and investment advice).

Lastly, there is also a huge potential for Russian investment into Ireland. In recent years, Russian investments into EU have been increasing from about €3 billion annually in 2008 to the expected volume of €4.1 billion in 2011. But Ireland remains off the map for Russian investors with just two Russian-owned companies being clients of the IDA.

Note: Russia is currently the largest economy in the world outside the WTO, with GDP in excess of USD1.9 trillion expected in 2011. The World Bank estimates that joining WTO will add 3.7% to the country GDP between 2012 and 2016 and 11% within 2012-2021. See a follow up note summarizing the Russian economy.

1 comment:

Jack Costello said...

It will be great to finally see Russia in the WTO. Granted, the slight reduction in tariffs which you have described hardly counts as an enormous advance towards properly free trade, but any moves to liberalize trade are always welcome.

That said, I've heard of several instances where foreign firms, which were eager to deal with Russian companies, are deterred from investing in or trading with Russia by the incompetence or corruption of government agencies and officials.

These views are mirrored in the WEF's Competitiveness Report for this year and I would humbly suggest that removal of this inefficient state bureaucracy would be of greater benefit for Russians and their trade partners than this modest reduction in tariffs.