The impact of Russia's accession to WTO on its industries

Executive Summary

The World Trade Organisation represents the unifying global association that brings divergent economies, legal systems, customs, internal policies and political systems into a sphere whereby a common ground in terms of a level playing field is established for all member nations. Favouritism, special interest, and other imbalances are eliminated to bring the term globalisation into a uniform as well as universal context. As is expected, the World Trade Organization has defined rules, regulations, procedures and processes to ensure this level playing field remains level, regardless of the size, influence or resources of its differing members. And therein lies the reason as to why it has been effective. And while there are critics who have their individualistic opinions and comments, some well-founded, and others not, no one has proposed another forum to improve upon and or replace the WTO, which dispute its imperfections, functions!

The preceding represents the organisation that the Russian Federation is seeking admission to. Such has been a process that has entailed over a decade and is still not concluded. The reasons for the aforementioned shall be examine herein, as well as the changes, modifications and other facets that the country is being called upon to modify in accordance with accession rules. Given the past history of the Russian Federation, the transition to a market economy has and does represent substantive changes with regard to internal policies and practices impacting upon all areas of the country’s economy. Such transitional changes have been successfully broached by China as well as Vietnam and other former communist states, so the challenge facing the Russian Federation has precedent. This examination shall delve into the aforementioned accession process with respect to the Russian Federation, looking into the country’s most dominant and important industrial sections to gauge the impact the process has, is having and will have in terms of impact.

Chapter 1 – Introduction

In order to understand the context of the World Trade Organisation as well as its impact on Russia, and its industries, notably oil, gas, and construction, one must delve into the broad area of world trade in general as a foundational understanding for this examination. Globalisation has been utilised as a format to discuss as well as explain many issues, world trade of course being a major component of the foregoing. Mann (1993, p. 9) provides a broad understanding of the complexities and context of globalisation through his statement “In major transitions the fundamental interrelations, and very identities, of organisations such as ‘economies’ or ‘states’ become metamorphosed. Even the very definition of ‘society’ may change.”

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The broad reference in terms of globalisation as provided from the preceding points to the need to clarify this catch phrase as used by academia, politicians as well as journalists, and economists concerning its reference in terms of this examination to distinguish it in the context of utilisation. In its general sense, globalisation represents a short method “…of describing the spread and connectedness of production, communication and technologies across the world” (Smith and Doyle, 2002). The context that we utilise globalisation in this examination refers to the processes “…of reducing barriers between countries and encouraging closer economic, political, and social interaction” (Tabb, 1999). Globalisation is also described as “…the creation of international strategies by organizations for overseas expansion and operation on a worldwide level.” (BNET, 2007). As a word, and concept it, globalisation, entails the technological achievements in the fields of travel and shipping, airplanes, communications and data transfer, production and outsourcing, marketing and communications, regional trading organisations and trade blocks as well as economics that has called for the increased recognition of expanding the visions of countries, governments and multinational corporations to include the world view (Berger, 2005, pp. 33-38). It, globalisation, is the processes that refer to increased global interconnectivity as well as integration with respect to economic, social, cultural, political, technological, and ecological practices as countries and companies must utilise a common ground to make their products, goods, services, and ideals acceptable on the world stages in response to other countries and companies competing to expand their influence and economic power (Raskin et al, 2002, pp. 15-13).

Theodore Levitt is generally credited with coining the phrase ‘globalisation’ in 1983 through his book “The Globalization of Markets” (Harvard Business School, 2006), however, the term, globalisation, can be traced as far back as 1944 with the ending of the Second World War. There are historians as well as economists who indicate that the process of globalisation is a centuries old phenomenon that tracks the process of human expansion, and civilisation which over the past fifty years has intensified dramatically, taking on a more structured foundation that is underpinned by economics, and the needs for uniformity (O’Rourke and Williamson, 2001, pp. 1-7). An while globalisation, and politics are interrelated, as a result of governmental involvement, Shaw (1999, p. 1) advises that “…politics has been seen as secondary to globalisation; political institutions, forces and ideas are generally believed to be responding to phenomena which are located primarily in other social realms”. This view is also shared by Gray (1998, pp. 34-54) as well as Hirst and Thompson, 1996, pp. 23-41). They explain that globalisation is a reflection of economy, sociology as well as culture, along with philosophy, which has been demonstrated through history in terms of expansionism in the ancient as well as medieval worlds, with politics as the secondary facet. Nicholson (1999, p. 23) amplifies the foregoing in stating that “…there were big population moves from Europe to America, both North and South, followed by the equally large but involuntary movements of Africans to the Americas (prior to 1770, more African slaves than Europeans went to the Americas …”, and that “…Europeans opened up sea routes to India and interactions began even if they were not always welcome …”. The point of the preceding as well as what follows in terms of globalisation, is to illustrate how deeply embedded it is in the global economy as an historical fact that has taken on increased intensity in the twenty-first century.

The impact, in terms of increased trade, brought about by globalisation is illustrated in the decrease in poverty rates as shown by the following:

Table 1 – Decrease in Global Poverty Rates
(World Bank, 2006)

Area Demographic 1981 1984 1987 1990 1993 1996 1999 2002 Percentage Change 1981-2002
Less than $1 a day 57.7% 38.9% 28.0% 29.6% 24.9% 16.6% 15.7% 11.1% -80.76%
Less than $2 a day 84.8% 76.6% 67.7% 69.9% 64.8% 53.3% 50.3% 40.7% -52.00%
Less than $1 a day 9.7% 11.8% 10.9% 11.3% 11.3% 10.7% 10.5% 8.9% -8.25%
Less than $2 a day 29.6% 30.4% 27.8% 28.4% 29.5% 24.1% 25.1% 23.4% -29.94%
Less than $1 a day 41.6% 46.3% 46.8% 44.6% 44.0% 45.6% 45.7% 44.0% +5.77%
Less than $2 a day 73.3% 76.1% 76.1% 75.0% 74.6% 75.1% 76.1% 74.9% +2.18%

The preceding represents a critical facet in understanding the contribution of globalisation to the increase of living standards through trade, and increased economic activity, which benefits developed as well as under developed countries.

Within the context of this examination, the following points to the importance of world trade in terms of Russia in comparison with the rest of the world:

Table 2 – Growth in the Value of World Merchandise Trade by Region, 2000 – 2005
(World Trade Organization, 2006)

As shown by the above, the annual global percentage change in terms of exports during 2000 through 2005 averaged 1 percent, with Russia recording an average growth rate of 18 percent. More telling is that during 2004 and 2005, Russia recorded a percentage increase of 35 and 33 percent, respectively, while the global average increase during those years was 22 and 13 percent. The following Table provides closer insight into the foregoing.

Table 3 – World Merchandise Exports by Region
(World Trade Organization, 2006)

Russia’s share of world trade between 2000, and 2005 increased by 18 percent in comparison with a global increase of 10 percent, with the country’s increases during 2004 and 2005 recording increases of 36 and 28 percent respectively compared against global trade increases during those years of 22 and 13 percent. The foregoing is the backdrop in terms if understanding the importance of global trade as well as its impact on the country’s economy as shall be further discussed in following chapters.

Chapter 2 – Literature Review

2.1 The World Trade Organization

The World Trade Organization (WTO) sets forth governing principles and uniformity regarding “… the rules of trade between nations at a global level …” (World Trade Organization, 2007a). It represents the primary international organisation to aid in the promotion of free trade through its foundation of rules governing the process on an international level to provide an equitable playing field that is applicable as well as just, and fair to all nations (Free Trade and Globalization, 2007). Organized in 1995, the WTO is the outgrowth of understandings as well as practices that began from the failed International Trade Organization in 1948 (World Trade Organization, 2007b). That attempt was a result of the ‘General Agreement on Tariffs and Trade’ that was created as a result of the Bretton Woods Conference representing a segment of the larger plan for economic recovery in the aftermath of World War II (Hoekman and Kostecki, 1995, p. 1).

Its origin, GATT “…can be traced to the U.S. government’s Proposals for the Expansion of World Trade and Employment …” that was subsequently forwarded to all countries (Srinivasan, 1998, p. 9). The Soviet Union represented the notable exception in terms of accepting the preceding invitation, which had also elected not to join the World Bank (Srinivasan, 1998, p. 9). The council oversaw deliberations that resulted in a total of 123 bilateral agreements covering 50,000 items that were negotiated in over 1,000 meeting, which resulted in the General Agreement on Tariffs and Trade being adopted on 18 November 1947, and signed by 23 countries (Srinivasan, 1998, p. 9). The foregoing was formalised in 1947 at the first meeting of the Economic and Social Council of the United Nations held in Havana, Cuba, and said Proposals for the Expansion of World Trade and Employment were adopted unanimously (Srinivasan, 1998, p. 9). At that meeting the Economic and Social Council of the United Nations “…appointed a preparatory committee for the conference consisting of the United States, Norway, Chile, Lebanon, and the fifteen countries invited by the United States for tariff-reduction negotiations. The Soviet Union again chose not to participate in the deliberations of the preparatory committee” (Srinivasan, 1998, p. 9).

Between 1948 and 1994 GATT represented the only multilateral regulating body covering world trade in terms of uniform rules, requirements and measures, until it was replaced by the World Trade Organization in 1995 (Hoekman and Kostecki, 1995, p. 36). For the sake of clarity, GATT represented a set of rules for the conduct of international trade that operated without a solid institutional basis, having no provisional secretariat (UNESCO, 2007). In understanding GATT it is important to be cognizant that it, GATT, was a provisional agreement in terms of its legal status whereas the World Trade Organization, along with its agreements are permanent as well as mandatory (UNESCO, 2007). Another important distinction between the two is that GATT concerned itself only with the trade in goods, whereas the World Trade Organization covers trade in services, termed General Agreement on Trade of Services, trade related to intellectual property, which is called TRIPS as well as the trade in goods under GATT 1994, an updated version of the original GATT agreement of 1947 (UNESCO, 2007). In the World Trade Organization, its agreements are multilateral covering all member states, whereas under GATT the agreements were plurilateral, meaning selective (UNESCO, 2007). Finally, the World Trade Organization has a dispute settlement system that operates in a faster as well as more automatic methodology than the system under GATT, importantly, the WTO rulings cannot be blocked by any member states (UNESCO, 2007). The following provides a summarised illustrative timeline of GATT and the WTO:

Table 4 – Timeline of GATT and the WTO
(Crowley, 2003, p. 43)

Consisting of 150 member nations, from its original 23, the World Trade Organization oversees an estimated 97 percent of all global trade (Crowley, 2003, p. 42). The progress of the organisation in aiding in the increase of world trade as a result of the uniformity of its agreements, measures, and dispute resolution is shown by the following:

Diagram 1 – Growth of Trade Among WTO Members and Tariff Decline, 1946 through 2001
(Crowley, 2003, p. 44)

Reasons that are attributed to the foregoing success are found in the fact that the World Trade Organization represents reciprocity as well as non-discrimination. Reciprocity is the procedure in GATT negotiating rounds whereby a country offers to reduce a trade barrier, and a second country reciprocates through offering to reduce one of its trade barriers (Crowley, 2003, p. 44). Non-discrimination refers to equal treatment. The preceding means that if one country offers a tariff concession, and or benefit to another member of GATT, said tariff concession, and or benefit must be offered to all GATT members (Crowley, 2003, p. 44). The foregoing two principles, reciprocity and non-discrimination, are termed by Bagwell and Staiger (2001) as the key reasons why the WTO has been successful in its role as the international arbiter of trade.

In understanding the importance of the preceding, a brief discussion of tariffs within the WTO is in order. Tariffs are another form of tax, which raises the price consumers must pay for an item (goods), and either brings an imported item into price parity for a country’s domestically produced goods, or raises its price to make it more expensive in relationship to domestically produced goods (Adams et al, 1979, pp. 35-49). In the instance of smaller countries, they benefit from unilaterally lowering their tariffs as they are unable to affect the price of goods sold on the global market (Adams et al, 1979, pp. 35-49). In fact, raising tariffs for a small country would result in its being worse off as a result of the loss of welfare to consumers as transmitted by the higher prices resulting in a loss of efficiency in the market as a result of consumption distortion. In the instance of larger countries whereby their goods comprise a goodly share of the global market, a change in tariff pricing upward constitutes a different effect. This is reflected in the following figure:

Diagram 2 – Impact of a Tariff on a Large Country
(Crowley, 2003, p. 45)

The resulting scenario is more complicated. In the instances of a large country import demand represents a large share of the global market (Crowley, 2003, p. 45). As a result, the imposition of a tariff by a large country reduces import quantity demand, and causes global prices to fall (Crowley, 2003, p. 45). In terms of trade the preceding makes a country better off as it now can purchase imports at a lower price on the global market (Crowley, 2003, p. 45). While the consumer pays a higher price on the imported good, the total welfare of the importing country is better off as government earns tariff revenues, and import competing producers thus earn higher profits (Crowley, 2003, p. 45).

In terms of the preceding illustration, a key point that needs covering is the burden of the tax (tariff) resulting. The consumers in the subject large country pay a higher cost for the goods that are imported in this instance when the illustrative tariff is imposed, however they do not pay the full burden of the imposed tariff (Crowley, 2003, p. 45). The imposed tariff created a condition whereby the falling world price of the good impacts the foreign exporters who receive a smaller payment, thus the exporting country loses a portion of its purchasing power in terms of the global market in this scenario that worsens its trade (Crowley, 2003, p. 45). As a result some of the cost of the indicated tariff is off loaded onto the foreign producers in terms of the lowered price they receive (Crowley, 2003, p. 45). The foregoing is termed a ‘beggar tariff’ as the foreign producers suffer losses (Crowley, 2003, p. 45). The utilisation of this type of tariff by a large nation results in the importing country being better off, and thus the exporting country being worse off (Crowley, 2003, p. 45). Furthermore, the preceding produces what are termed as ‘inefficiencies’ in the global trading system that overall cause the net effect of said tariff to become negative as it produces inefficient distortions in production in both nations (Crowley, 2003, p. 45).

The net / net of the foregoing is that the imposed subject example tariff is not good for the global economy as a whole, however, it benefits the importing country. The end of World War II provides an example of the preceding as many countries had high tariffs, which did not benefit the countries, and or consumers (Crowley, 2003, p. 45). Cooperative action on the part of countries as found under the WTO has increased the balance of good actions in terms of the foregoing dilemma. GATT, represented and represents the mechanism via which the short sighted self-interest equation has been balanced. GATT, and its reciprocal tariff reductions provided and provide such a mechanism (Narliker, 2003, pp. 12-14). In understanding the picture of global trade flows Hoekman and Kostecki (2001, p. 9) advise “Global trade flows are dominated by exchanges within and between the three major regions of the global economy (the so-called triad): Europe, North America, and East Asia. The principles and disciplines of the GATT helped governments to liberalize trade and to resist pressures for protection” the foregoing has aided in fostering increased integration of the world’s economy as a result of heightened trade levels.

The centrepiece of the preceding is the World Trade Organization, which also works with the International Monetary Fund, the World Bank as well as Regional Trading Blocks, and member government nations. The complexities of world trade, developing nations, and nations ascending to membership in the WTO brings with it economic, social, institutional, policies, and monetary ramifications whereby the WTO does not operate in a vacuum. The process of globalisation in today’s terms means closer cooperation between various multilateral institutions in the critical roles of policy formulation as well as the differing elements constituting economic policy frameworks. The preceding means the participation and support along with assistance from the World Bank as well as the International Monetary fund in aiding developing, and ascension countries in meeting the rules, and policies to become a member of the WTO.

In understanding the role of the World Trade Organization it is important to note that it does not define, and or specify outcomes for trade policies, it establishes a framework (Srinivasan, 1998, pp. 38-41). An example of the foregoing is provided by Article XXIX, Article 4 of the WTO, which aims “…to clarify the conditions under which a regional arrangement, free trade area, customs union or interim arrangement that, after a transition period, may give rise to a customs union or free trade area that is compatible with the GATT” (Landau, 2004, p. 88). The Article continues “…any preferential agreement between developed countries or between the latter and developing countries containing tariff preferences on a defined number of sectors is, on principle, compatible with the WTO. These arrangements must satisfy Article 4 of Article XXIV, in that they have been created in order to facilitate trade and not to form new trade barriers against non-member countries” (Landau, 2004, p. 88). It, Article XXIV, aims at ensuring regional trade arrangements result in the creation of trade as opposed to diverting it, and seeing that adverse effects are reduced to their minimums (Landau, 2004, p. 88). In addition Article XXIV “…stipulates that customs duties and restrictive trade rules must be eliminated substantially on all sectors of trade originating from the territories of the regional area” (Landau, 2004, p. 88). The main objectives of the World Trade Organization are, 1). Transparency, 2). Coherence, and 3). Tariff Negotiation via which it guide the process.

2.2 The Russian Federation

The Soviet Union, now known as the Russia Federation, represents a landmass that is four times the size of Europe, but having less than half of Europe’s population, and by comparison it is as large as the entire continent of North America (Summer, 1943, p. 1). The Union of Soviet Socialist Republics came into being in 1917, signalling the “…Stalinist revolution of planned industrialization and collectivisation …” (Summer, 1943, p. 48). And while the change in regimes was dramatic, many things stayed essentially the same (Summer, 1943, p. 48):

the “… great centralisation of power …”,
the “… enormous range of state action …”,
the “… massive bureaucracy …”,
the “… extreme emphasis on the army …”,
the “… drastic use of force and the secret police …”, and
the “…semi-deification of the leader or sovereign …”

In understanding the Soviet Union, one must be cognizant of four major facets that aid in the explanation of the preceding (Summer, 1943, p. 49):

“…the problem of governing an immense area and a multitude of peoples with relatively low material and cultural standards …”
“… the problem of defence …”
“… the impossibility of a complete break with past customs, attitudes of mind and feeling, and ways of doing things …”, and
“… the communist view of the state …”.

Lenin’s contribution to Russia was the doctrine of communism that provided “…the goal of communism and the vision of man new made – and a revolutionary method – the dictatorship of the vanguard of the proletariat organized through the Communist party and linked up with the masses through the soviets” (Summer, 1943, p. 49). “The idea both of party and of soviets was new to Russia in 1917, but they are the two institutional bases upon which the revolutionary regime has been built up” (Summer, 1943, p. 49). One of the outgrowths of the new Russia was the development of the largest militarised economy ever seen (Gaddy, 1996, p. 1). The preceding is important in understanding the context of the former Soviet economy, and the implications inherent in its ascension to the World Trade Organization. The military represented a “…process that affected the very nature of the system in both its political and economic dimensions” (Gaddy, 1996, p. 1). The foregoing is explained by Gaddy (1996, p. 1) as supported and fed by “Continual references to a military threat from without, intensified immensely by the campaigns of glorification of sacrifice and patriotism surrounding the victory in World War II, played a major role in creating and perpetuating the climate of secrecy and control that was necessary to justify unquestioning acceptance of Communist rule”. It is important to understand that the militarist nature of the Soviet Union severely impacted, affected and underpinned the economic system within the country.

The post – Soviet era in Russia has changed that underpinning, most notably the removal of restrictions on individuals (Gaddy, 1996, p. 1). The military industrial sector of the economy has been drastically reduced, with the armaments sector producing a very small portion of what it did in 1991 (Gaddy, 1996, p. 1). The importance of the preceding is that two out of three Russian workers who were engaged in military, and or weapons production in a system whereby militarisation represented the manner in which the State restricted free choice and allocated the country’s resources into its priority sectors (Gaddy, 1996, p. 1). While the foregoing is seemingly an issue of the past, the fact is in economic terms it is very much a part of the present, and thus germane to this examination of Russia’s economy, and its accession into the World Trade Organisation. The foregoing understanding with regard to the lingering effects of public debt was brought forth by Shutaro Matsushita (1929, p. 5) in the late 1920s through his analysis of “The Economic Effects of Public Debts”, where he brought forth the concept of ‘forced loans’ or obligations. The preceding represents when the state undertakes to pursue a path of economic debt. The following reference does not specifically apply itself to the status of events in the Soviet Union, yet its implications in terms of economic consequences is apparent (Matsushita, 1929, p. 85):

“When these government notes are suddenly issued, there is an increase in the medium of exchange, without any commercial necessity for such an increase, — in other words, there, is an inflation of the currency. Prices will rise, commercial relations will be disturbed, and creditors will suffer severely. Prices rise because there is an augmented supply of money to carry on exchanges, without any necessary increase in the commodities to be exchanged. Commercial relations are disturbed because merchants and manufacturers must readjust themselves to the, sudden rise in the prices of goods. Creditors suffer, because the same nominal amount of money does not have as much purchasing power as before. Moreover, as is always the case in a period of rising prices, wage-earners suffer because the rise in wages always lags behind the rise in prices.”

The size of the Soviet Union provides the country with a broad breathe of natural resources. At 22.4 million square kilometres the Soviet Union is almost four times the size of Europe, and only slightly smaller than North America (countrystudies.us, 2006). Given its vast expanse of land the country traverses a broad range of topography, thus providing it with exposure to differing types of natural resources as a result of the preceding. The country accounts for an estimated 20 percent of the global production of oil and natural gas, with large reserves of both (countrystudies.us, 2006). These reserves generate hard currency for the country, along with its vast reserves of “… iron ore, manganese, chromium, nickel, platinum, titanium, copper, tin, lead, tungsten, diamonds, phosphates, and gold …” as well as huge timber reserves located in Siberia (countrystudies.us, 2006). This underpinning of vast natural resources is the core from which Russia is able to build its new economy in the face of the collapse of the Soviet Union.

From 1927 through 1987, the economy of the Soviet Union operated under the foundational premise as set forth by Joseph Stalin, “…with only incidental modifications made between 1953 and 1987” (countrystudies.us, 2006). The control of the Soviet economy under Stalin represented the utilisation of the ‘Five Year Plan’ that represented the means for the country to marshal its vast resources into materials for production (Ilin et al, 1931, p. 18). It was a backward country compared to Europe, primarily Britain, France, and the United States with relatively no internal infrastructure, factories, transportation systems, cities, and industry. The policies of the ‘five year plan’ have been argued as being one of the most effective means for pulling the then backward Soviet Union out of the eighteenth century, and into the twentieth century as it was such a vast undertaking (Ilin et al, 1931, pp. 27-31). In order to solidify their power the socialists had to find a means to implement real progress within the country as a demonstration of the vision, success, and foresight of their system in addressing the massive problems of the country In addition to the pressures from within, there were external pressures as represented by capitalists countries which were impacting upon internal pricing structures as a result of Russia’s inability to compete in terms of productivity, and market efficiencies (James, 1937, pp. 197-207). The ‘five year plan’ represented a means via which the state could plan the progress of the country as well as administer its control policies, and solidify its absolute power. It, the five-year plan, represented “…the chief mechanisms the Soviet government used to translate economic policies into programs” (countrystudies.us, 2006).

For over sixty years the Russian economy was controlled by the state under the principles of centralised planning, which represented virtual control over all aspects of production, investment as well as consumption (countrystudies.us, 2006). The central planning concept also served to enable the country to marshal its resources quickly, as demonstrated by the invasion by Nazi forces. But, the problems of centralised planning, and its abuses were also evident in that Soviet industry was able to purchase raw materials such as oil, coal, and natural gas at prices that were below the global market levels, thus encouraging waste, and inefficiencies (countrystudies.us, 2006). The appointment of Mikhial Gorbachev as the General Secretary of the Community Party in 1985 is hailed as the beginning of the demise of the Soviet Union as a result of his reform policies of glasnost, democratisation and most of all perestroika (Graham, 2007). Glasnost (1990) represented a policy that called for openness, maximisation of publicity, and transparency concerning the activities of the state, along with the implementation of freedom of information (Bettaux et al, 2004, p. 8). The preceding was put into effect by Gorbachev in an effort to reduce the internal corruption at the head of the Communist Party as well as government, and Central Committee (Bettaux et al, 2004, p. 10-14).

Democratisation in Russia, as brought forth by Gorbachev, implied increased public discussions, primarily on cultural as well as economic issues, along with the increased interaction of leaders of the Communist party with the populace, and some liberalisation of personal freedoms and censorship relaxation (Ross, 2002, pp. 18-20). Gorbachev stated in 1989 that the“… republics’ rights of sovereignty were largely formal in nature. Up to now”, and he noted, “Our state has existed as a centralized and unitary state and none of us has yet the experience of living in a federation” (Kux, 1990, p. 2). Of all of Gorbachev’s policies, perestroika is credited with becoming the unintended cat.