With ratification of the agreement for Russia to join the World Trade Organization, it becomes the last major economy to join the planet's premier trade club. But some are already asking who will get the most out of this deal - Russians or foreign investors?
Depends on your perspective. In the short term, by making imports cheaper and easier, it will hurt the Russian economy more than it will help. But the Kremlin was careful to negotiate a phased accession that lends the weakest sectors some protection over the next seven years, allowing them to restructure before they are hit by the full force of unfettered trade.
Foreign investors, on the other hand, win from day one. In joining the WTO, the Kremlin has made a number of concessions that will significantly increase competition from foreign investors in nearly all sectors of the economy.
In the short term, benefits for Russia are also marginal. Because Russia is primarily a commodities exporter, the government says it will earn just US$2 billion extra from reduced tariffs. At the same time, billions of dollars' worth of new imports will hit the Russian market. So the Kremlin appears to have ceded much of the domestic consumer market to importers. But the bet is that importers will quickly turn into producers with local facilities, bringing badly needed technology and management.
The Kremlin's commitment to allowing more foreign competition is clearest in retail, as 100 percent foreign-owned subsidiaries will be allowed to open forthwith.
Russia didn't need to join the WTO to attract international retailers, though. Russia is already a top European consumer market, worth $649 billion in 2011, according to the Ministry of Finance; it grew 7.2 percent year-on-year, when most of the rest of the developed world is in recession. Foreign producers have made a string of high-profile deals, starting with PepsiCo's US$3.8 billion acquisition of leading dairy producer Wimm-Bill-Dann.
Foreign manufacturers have also benefited in strategic sectors, but the concessions are being made on the Kremlin's terms. The Kremlin has used the seven-year exemption to WTO rules to force foreign manufacturers to accelerate their commitment to Russia.
Five of the major international carmakers have made investment pledges that will exempt them from high non-WTO imports duties in exchange for dramatically increasing their output and sourcing 60 percent of their components domestically. Foreign car production jumped by 90 percent in the first quarter, reports Rosstat.
The Kremlin has had an easier time protecting national interests in the financial sector. The financial crisis has cut bank-asset growth in half to 20 percent, which has significantly increased competition. The four biggest state-owned banks, including Sberbank and VTB Bank, already dominate the sector. So many late arrivals in Russia, such as HSBC and Barclays, have sold their retail arms and scaled back their operations.
Still, even here the Kremlin has conceded that 100 percent foreign-owned banks will be allowed to operate in Russia in the future, something it has resisted for years. This will allow them to tap their parents' cheap financing. The Kremlin has kept a cap on foreign-bank assets in the sector at 50 percent (it is about 25 percent at the moment), but foreign insurance companies will be able to open fully-owned branches without restriction, although only nine years after accession.
The biggest change will be in agriculture. Development is a high priority for the Kremlin. Agriculture import tariffs will be cut from 13.2 percent to 10.8 percent, but products in which Russia is trying to become self-sufficient, such as poultry and pork, are exempt from WTO compliance for eight years.
Russia is already a major export destination for European producers and has attracted significant foreign investment. Local producers have been complaining about the impending competition. But that's the point, and it is working. Leading producers, particularly of pork and poultry, are rushing to build new factories. Analysts expect production to double over the next eight years, although profitability will fall as prices come down.
Russia's biggest payoff will come from the more basic aim of WTO membership: bolstering trade so member countries can make more of their comparative advantages. In Russia, that advantage is clearly its geography.
Globalization means international trade has been exploding over the last decade or so. The total volume of global trade in 1990 was equivalent to 39 percent of global GDP, but that has shot up dramatically to 61 percent in 2010 and will probably top 84 percent by 2030. That's according to a recent report issued by Citibank.
Global trade volumes are expected to grow from US$37 trillion in 2010 to US$371 trillion in 2050, according to a report by Goldman Sachs. And Russia finds itself in the middle of the Europe- Asia trade corridor - the fastest-growing of the planet's supply lines. So the big picture behind Russia's inclusion in the WTO is in the end as much about logistics as import duties.
The Kremlin has increased investment in infrastructure, which has gone from US$7 billion in 1999 to US$100 billion a year since 2008. That will continue until 2015. Investing in Russia's burgeoning transport role is where the most opportunities will be in the coming decade.