In July, after an eighteen year effort, the Russian
Parliament finally approved the country’s entry into the World Trade
Organization (WTO). This week, Russia
will formally join the 150+ member trade organization. Upon gaining entrance, customs duties on
imported manufactured goods such as clothing and consumer electronics will be
reduced, thus opening the Russian market to foreign competition.
With an economy of about $1.9 trillion, Russia was the
largest country not part of the WTO. However, the economic size of the country
is perhaps a bit misleading as two-thirds of its exports is oil and about half
of the federal revenue is derived from oil.
Still, the World Bank has estimated increase exposure to
foreign competition will improve Russian business effectiveness and could
result in GDP growth of as much as 11%. Although this anticipated growth in GDP
would be welcomed, it may be difficult to achieve because Russia is among the
least-densely populated countries in the world – only about five cities
actually have the critical mass of people and income to attract global brands.
Perhaps one of the biggest benefits of joining the WTO is
the possibility of increased foreign investment. This is much needed in this
expansive country - the possibilities are immense. From an infrastructure
perspective, its geographic location – between Asia and Europe – offers many opportunities
to connect the two regions by road. In fact there have been several projects of
this type over the years as logistics providers such as DB Schenker and
Panalpina have established various partnerships to create cargo transport
options to air and sea.
However, like most of the country, infrastructure appears to
be deceptive. For example, a modern high-speed rail system connects Moscow and
St. Petersburg for a four hour trip while traveling the same distance from
Moscow to Kazan is a thirteen-hour journey. In fact, for most of the country,
the average age of trains in the Russian railway fleet is over 20 years. Another
example is one of road improvements needed in and around Moscow despite auto
sales increasing at a double-digit pace.
Although Russia will be expected to lift its trade barriers,
it still faces numerous obstacles such as bribery, corruption and other varying
inefficiencies along with government control of strategic sectors such as oil
and gas. In order to attract the foreign investment necessary to create a
global, competitive country, reforms within the country will need to be made.
