Tuesday, August 21, 2012

Russia officially joins the World Trade Organization

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.