Russia: overview and historical context

¶ … Russian commenced their discussion with the officials of World Trade Organization since 1995. The federation is already in the process of developing an understanding and deal with the other members of World Trade Organization, the discussion is based on issues related to reduction of tariff and non-tariff barriers and 'restrictions on good as well the liberalization of the trade activities' (Oliver, 2002). The World Trade Organization has generated 'multilateral agreements, norms, and regulations' which are applicable on the major proportion of the world trade. The Organization established Working Part on Russia, on the recommendations by the General Agreement on Tariffs and Trade in 1993; the task force was assigned to evaluate the 'conformity of Russia's economic policies in relation to the norms and rules of the organization' (Mehmet, 2002). It has been observed that the country has certain reservations towards the operations and expansion of the foreign companies in Russia, the country has expressed its concerns towards provisions for open and unrestricted access of the Russian domestic commodity markets and services, and therefore the country is involved in a transition period to secure benefits by means of conformity to international legal regulations and protection against the discrimination of Russian exports. The Russian authority has justified its policies with reference to the custom tariff on the basis of the legislatives approved by 'the President of the Russian Federation, decisions of the Government of the Russian Federation and legal acts issued by enforcement authorities' (Oliver, 2002), i.e. Decree on Custom Duties promulgated on May, 1993 and Decree on State Regulations of Foreign Trade Activities approved in October, 1995. The legislatives have defined 'the Order of formation, change, and application of the Russian custom duties', the Russian government has levied Import custom duties on the goods on different proportion i.e. Raw materials 0-5%, Semi-processed 5 -15%, Finished articles 15-30%. The Russian government has proposed that the reduction of tariff protection that is to be implemented on long-term basis should be compensated, and the compensation can be sought through implementation of the protective measures towards the selective system 'in the form of quantitative restrictions and specific duties' (Oliver, 2002). Russia has favored the adoption of the self-regulating system; the system incorporates enough provisions for the preferential treatment of the developing countries. According to the regulations of the WTO, the system of preferential treatment is revised after very five years by the Ministries of Foreign Economic Relations and Foreign Affairs. In the WTO meeting conducted in Geneva in 2005, the Russia government proposed 50% rise in the imposed tariff, the government also requested the imposition of the 100% tariff on the agricultural goods, however at the end of the discussion the Russian government agreed to the '13% tariff for total goods and a 12% tariff for goods of agricultural origin'. The Russian government has tried to secure the interests of the foreign companies and has pledged the average import tariff at 7.5% after its accession to the WTO, the government also agreed to levy 5% tax on the industrial goods, 'the Russian government has also promised to reduce the tax on export goods and nullify export taxation within four years after its membership to the WTO', the taxes on oil, fuel, electronic goods, iron, and colored metal waste are unexpected to shuffle. In 2001, the Russian President Vladimir Putin stated that, 'We shall not agree, under any circumstances, to joining the WTO on non-standard conditions', and reaffirmed the government's commitment to accept such policies and measures beneficial to the Russian economy. The Russian authority is still reluctant to provide the foreign investors with open opportunity for the exploration of the Russian market, and is cautious enough not to damage the growth and performance of the local Russian production units due to the intervention of the foreign companies. Russia's economy is mainly based on petroleum products and exploration operations. The country drifted to market economy, and launched privatization processes of different industries. At present there are eleven 'vertically integrated oil companies' (Mehmet, 2002), and together the consortium is able to compete with leading international petroleum companies. The country has launched privatization process of its enterprises in phases, in the initial phase the country privatized more than forty percent of its stake in the oil companies to the local companies, in the second phase the government offered ownership rights to the foreign investors. The accession of Russia into WTO has provided the international oil companies to expand their operations, but it is expected that the accession will still fail to break the monopoly of Yukos and Gazprom. The local petroleum companies in Russia have been able to develop their regional monopolies, in particular Luke oil and Rosneft, and have rather penetrated their operations and network into neighboring countries. It is expected that the foreign companies in particular those that are affiliated with the petroleum sector are expected to achieve good results, the Russians are already seeking the assistance of the international petroleum companies, to enhance their productivity and exploration operations, 'foreign capital and technology are needed in the oil sector to help stop the decline in production, which peaked at 12.5 million barrels per day in 1987 and fell to 6.2 million barrels per day by 1995, which is based on management and production inefficiencies, outdated and inadequate infrastructure, lack of investment, declines in domestic demand, low domestic prices, an inability to export, and uncertainty surrounding property right issues' (Marin, 2003). According to reports, more than 29 refineries within Russia are either non-operational, or producing below mark level, and have failed to comply by the international standards. The accession to the World Trade Organization is expected to excite the participation of the international companies in Russia, and will further compel Russian government to provide required assistance to the foreign investors. Although the foreign investors have expressed their concern over the ownership of majority stakes by the local and national companies, and have forwarded their serious reservation to the World Trade Organization and the Russian government for the implementation of the pro-local and national policies within the country. According to analysts, the federation require greater factor mobility to emerge such successful global economy, 'export oriented Russian producers will become more attractive for FDI after WTO accession' (Mehmet, 2002), therefore the local companies have kept their hopes high.

Question # 1

The agenda and success of the financial and economic negotiations between the Russian administration, and the EU and United States officials have provided a sense of relief to the local Russian companies. The conclusion of the negotiations led to the recognition of the Russian economy to be Market Economy and this notion and recognition is expected to boost the Russians export, and will also provide relief to the country with reference to the anti-dumping duties. It is anticipated that the 'modernization of the Russian economy' will pave towards 'stable growth in domestic demand, thereby reducing Russia's dependence on the international raw material and oil markets' (Mehmet, 2002), therefore the local Russian companies are able to secure good fortune for themselves, and the accession is expected to provide the local companies with an unrestricted opportunity to access and avail opportunities internally and externally. The accession to the World Trade Organization can not alone provide relief for the local Russian companies, the Russian government has to itself implement and introduce such measures through which the interests of the local investors can be protected, therefore the local Russian companies are not expecting much from the accession of their country into WTO, rather these companies are also looking at Russian government for assistance and support, it is important for the country to 'create conditions conducive towards generating revenue and increasing in-bound investment, and make more effective decisions on how it uses resources and promote goods on the market'. The local Russian companies are extremely critical of the country's economic growth, and wonder whether the accession will improve or deteriorate the current setup, the investment growth of the federation has crossed its GDP growth, but the analysts are still concern that whether the federation has been able to fully avail its investment potential. The local investors are critical about the introduced mechanism for the transformation of the savings into investment, and such measures have been extremely non-profitable, and therefore 'total savings in Russia significantly exceed total capital' (John, 2002). The analysts have criticized the low level of capital flow between the sectors, and it is unlikely that the accession into the Trade Organization will shuffle or improve the condition, the country has already experienced misbalance in 'supply and demand between the export oriented raw materials sectors and the rest of the economy, which is in dire need of capital'. The analysts are hopeful that apart from such concerns, the accession of the federation into WTO will provide a better opportunity for the local investors as the accession will 'complement its internal economic reforms by promoting rule of law, fair competition, transparency and predictability in business and investment' (John, 2002). The Russian leaders have assured the local companies and the investors that the ramification of the accession will improve the economic performance of the country, as the country has the potential to excel in open-market economy, the President Putin has regarded the integration of the Russian economy into Global economy as 'the main current economic priority of Russia'. Some of the local companies have complained that the federation has not been able to resolve their concerns towards the accession issue, and therefore it is believed that the government has failed to exercise comprehensive analysis of the problems expected to be experienced by the domestic industries. The local companies have expressed their serious concerns on several issues, comprising 'the incompleteness of legislative reforms required for membership, such as passing a new Customs Code, law on external trade policy' (Mehmet, 2002). The local companies have raised serious doubts about the lack of exposure of the local companies to the competitive market, and problem with reference to the sluggish pattern of the growth of total factor productivity. It is anticipated that exposure of the local companies to the international market will 'detrimental in the short run to some sectors of the Russian economy such as the food and machine-building industries' (Mehmet, 2002), however the implications of not joining the Trade Organization are more severe and harmful for the economy of the country, the federation needs to restructure its economic polices and business setup, and its accession to WTO will serve many such purposes. Considering the example of Republic of China, the country since its accession have experienced large amount of foreign investment, which have supported the local industrial setup, and has provided the republic with an opportunity to restructure its entire setup, the country experienced growth and expansion of the foreign industrial units within China. In the past, the local private sector performed in the absence of the regulations and framework for 'the investment and business operations' (Marin, 2003), previously the local investors and companies also faced certain barriers. In the current setup, the accession will reduce the political and macroeconomic risks, and is expected to introduce legislative reforms and comprehensive environmental policies; this is expected to provide 'tangible improvements in the investment climate' for the local and foreign investors (Marat, 2003).