Political Economy of WTO: Russia’s accession problems.
By Dmitry Shevchuk
Introduction
In this paper we try to address the problem of apparently stuck negotiations on Russian
accession to WTO. According to the leader of Russian negotiation team, M. Medvedkov,
it is very unlikely that Russia will join WTO this year, as government targeted before,
more realistic date is 2006-20071. There are several positions on which Russians cannot
reach agreements with main players in WTO (EU and US), in particular regulation in
energy, agriculture, service industries (banking and insurance) and civil aviation.
Below we discuss major disagreements and argue that current situation is a political
economic equilibrium and to join WTO Russia needs to accept substantial part of
economical or political demands or defend its position until situation in Russia or US and
EU changes. If we assume low probability of significant changes in the short or medium
run, postponement of Russian accession is inevitable.
Paper starts with brief description of the WTO, its political economy and main players.
Then we present Russian economic and political situation and characterize internal
equilibrium concerning joining the WTO to explain why Russia applied for membership.
The third section explains why blocking Russian acceptance by two main players, US and
EU, is an internal equilibrium for them. And finally we conclude with observations on
how stable the current equilibrium how it may be shifted.
Political economy of the WTO
There are several theories in economics and international relations trying to explain
trading behavior of countries as well as creation of bilateral and multilateral agreements
like WTO (GATT).
In the field of economics Grossman and Helpman (2002) made significant progress
during the last few decades by formalizing the two-level game of international trade. The
idea of the two-level game is often attributed to Putnam (1988) and builds on a general
political-economy equilibrium of international disputes being a result of the interactions
of internal equilibriums within each negotiating country. Grossman and Helpman show
that this joint equilibrium could be considered as one hypothetically combined from
negotiating countries as one big country, where industries lobby for protection and
politicians maximize their reelection chances through the function of the weighted sum
of the welfare of the average voter and campaign contributions from lobby groups. This
approach, in IR often called public choice theory, is used as a guideline for this paper,
though we feel important to give some details on other major theories too. But before we
do that, let us outline the main assumptions and results Grossman-Helpman framework
provides.
First, it is usually assumed that economy is small, so that without lobbying optimal
protection is zero, and consists of N sectors, each produces own good with labor and
1
(In Russian) http://www.opec.ru/news_doc.asp?d_no=37278
1
specific factor, so that specific factor owners constitute N interest groups. Groups
contribute to politician’s campaign funds taking other groups contributions as given and
assuming known politician utility function. Policy under consideration is the level of
import tariff (import subsidy) as a mark-up for the world price. If the import tariff is
introduced, owners of specific factor in this industry enjoy higher prices and profits, so
that part of these extra profits may be transferred to politicians as contribution. Of course,
this demands perfect labor markets also, so that increase in price won’t be shared
between labor and specific factor in industry.
Thus we can think about industries with high possible import penetration lobbying for
higher protection for their local markets. Exporters will be lobbying for lower protection
in target countries, what could be traded for lower protection at home. For example,
Lavergne (1983) finds that US tariff cuts were the largest on the markets where Canadian
exporters have the highest US shares. We can also think, that all industries will lobby for
lower protection of their local inputs markets, and multinationals, exporting into home
country, will lobby for lower protection against their products.
In terms of the average voter, it is usually assumed that higher prices make her worse
off, but personal costs are very small and not enough for coordinated action, though dead
weight loss grows quadratically with the level of protection. However, modern research
show that general equilibrium and inter-temporal effects of protection may be uncertain
and significantly depend on particular conditions, for example the distance of the industry
to the world’s technological frontier (Acemoglu, Aghion and Zilibotti (2003)).
On the Chart 1 we present a Nash equilibrium in non-cooperative game between
politician and contributor j, who lobby for price Pj on her market.
Chart 1. Nash equilibrium in non-cooperative game between politician and contributor j,
who lobby for price Pj on her market.
Cj
L
G
C
G
E
C
L
Pj
Cj-contributions of group j, Pj-domestic price, GG-government indifference curve taking
into account changes in the welfare of the average consumer, contributions of group j and
2
holding contributions of other groups fixed, LL – j interest group indifference curve and
CC- its contribution schedule.
Each group finds such an equilibrium as a part of a general equilibrium and from which
resulting policy is implemented. Properties of this equilibrium are following:
 As lobby members benefit from an increase in the domestic price of their output
and decrease of the domestic price of other goods they consume, in equilibrium
we have non-zero protection for lobbied sectors and import subsidy (export tax)
for non-lobbied sectors. Protection is higher in non-elastic supply and demand
sectors.
 The higher the share of the sector in the national output, the higher income from
protection for interest group and thus, their contribution and voter power.
 The smaller the weight government places on a dollar of aggregate welfare
comparing to campaign contributions, the larger all trade taxes and subsidies.
 When a government doesn't care about aggregate welfare at all, free trade will be
a solution if each agent is to be represented by an interest group.
 A Small number of groups will care only about their own sectors and will not
oppose each other, in other words groups will not lobby for reduction of prices of
other sectors because of the free rider problem.
 In the model with intermediate goods, intermediate producers will be underprotected as compared to producers of final goods, because the latter face less
opposition.
When
play a


two countries face the opportunity to bargain over a tariff agreement, they may
non-cooperative Cournot-type game and then
Each country has a tariff/subsidy reaction function based on internal equilibrium.
The more inelastic the foreign import demand (export supply) curve, the higher
probability of export tax (import tariff). So each country will try to exercise their
monopoly power.
 If a government cares only about aggregate welfare, equilibrium policy will have
lower tariffs and lower export taxes or even subsidies.
Or they may cut a deal and then new equilibrium will be
 Identical to choice of a common government for two countries responding to
lobbying of all industries, i.e. the same home and foreign industries bid against
each other, if they are equally strong - free trade prevails. This also means that
bigger industries and countries will have more bargaining power.
 Such that, in general, the population and the politicians gain from international
cooperation, but as some groups loose and some gain, their relative power
determines the country’s willingness to cooperate.
We will keep in mind all these properties while analyzing WTO interactions.
Now we start brief description of alternative views on the political economy of trade with
direct democracy approach, which considers trade policy as an outcome of direct voting
over tariffs (see for example Mayer (1984)) and the consequent non-cooperative game
3
with a trade partner country. Though a median voter theorem is an important tool for
contemporary political economy (Person and Tabellini (2000)), it is clearly just a first
approximation, as political decisions usually cover multiple dimensions and role of lobby
groups is empirically shown to be significant, at least in the US (Baldwin and Magee
(1998)).
Another extreme is to consider only interest groups’ interplay where public welfare is
protected only to the extent it is represented by a lobby, see Findlay and Wellisz (1982).
Such a view might be plausible if politicians did not care about elections or rely to a
great extent on money in campaigning and shaping voter’s choice. Though we didn’t find
any empirical tests of insignificance of voter welfare in political decisions, it looks
against common sense, especially in the publicly open cases and more or less
independent democratic voting.
International Relations Science produced several theories on international interactions
and trade in particular. In the following brief discussion of IR theories we borrow from
Barfield (2001). Realism treats states as unities, maximizing their political and military
security, and using international law as a tool to favorably preserve their power structure.
With the language of the new political economy, politicians maximize their reelection
chances and military security, which is clearly part of the utility function of average
voter. Institutionalism or regime theory extends realism state utility function to include
wealth, cultural independence, distributive justice and other issues population may want
to protect through the state actions. International law here (as in economics) is a tool to
reduce transaction costs of interactions, specifically as protection from myopic behavior
(for transaction costs approach to international politics see Dixit (1996)).
Liberalism goes further and assumes that private actors influence state decisions
according to their material and ideological preferences. Two-level game of GrossmanHelpman framework is explicit part of this theory, though IR scientists use different
terminology and don’t provide general description on how exactly state integrate
different domestic positions in the official state one.
Knowledge-based or constructivist theories attribute important role in shaping the private
preferences to knowledge, ideas and beliefs. For example, norms of society may induce
the state to comply with an international treaty even if it’s not rational to do so. The idea
primarily based on possible actors’ costs from abandoning a norm as an institution
through its change or braking (for review of rational choice institutionalism in political
science see Weingast (2000)). Such costs play important role in institutional dynamics
and, of course, have an impact on politician’s election chances, especially if we consider
publicly observed decisions. Also it is hard to deny that current institutional designs are
limited by our knowledge about public policies, and thus learning may shape
international relations in great extend without diminishing role of selfish politicians,
lobby groups and popular elections.
4
In the following analysis, as we stated before, we will use Grossman-Helpman logic of
two-level game for ex post rationalization of trade negotiation positions of countries as
well as for short run predictions assuming knowledge to be constant in this period.
According to Grossman and Helpman’s (2002) results, industries which gain from
specific trade policies, will lobby by contributing to politicians or parties’ campaign
funds, as the amount of contributions positively correlated with the amount of gains the
interest group obtains from the policy. Thus the higher the value and diversity of the
national trade the higher possible benefits or cost from trade policies, so that main traders
will have more bargaining power and stronger positions. From the data in table 1 we
should expect the EU (formally European Communities: recently 25 members of EU), the
US, Japan and Canada (so called “Quadra group”) to be the major players in the WTO.
Table 1. Shares in world trade of merchandise and commercial services for leading
traders and Russia.
Merchandise
Merchandise
Services
Services
Exports, %
Imports, %
Exports, %
Imports, %
EU
32.1
35.1
40.3
40.9
US
11.9
18.3
18.1
13.0
Japan
6.6
5.4
4.4
7.4
Canada
4.2
3.6
2.4
2.9
Russia
1.7
0.8
0.7
1.5
Source: http://www.wto.org/english/res_e/statis_e/its2002_e/its02_bysubject_e.htmleading_traders
This conclusion is supported by case statistics of WTO: from 1995, where a new dispute
settling system was adopted,.Up to now 290 cases were filed to the Dispute Settlement
Body for consultations and resolution; the EU was involved directly (as compliant or
defender) in 101 cases (35%), the US was involved directly in 88 cases (30%) and Japan
in 30 (10%)2. Busch and Reinhardt (2000) studied 654 bilateral disputes from 1948 to
2000: the US was involved in 52% of the cases and the EU 36%, though this number
doesn’t include cases where EU courtiers acted alone which could be substantial. At the
same time, developing countries during the first five years of WTO existence used the
dispute settlement system less than previous GATT system: developing countries (80%
of WTO members) together brought 29% of WTO complaints and all the rest being equal
to one-third less likely to file a case against developed country under WTO than under
GATT regime. This may suggest, that institutional formation of the WTO is biased
towards the interests of those countries with higher bargaining power. It is hard to argue,
for example, that developing countries benefited from agreement of intellectual property
rights protection (TRIPS).
At the same time, countries react on this misbalance by grouping and bargaining
collectively. For example, the CERN group (Canada, Australia, New Zealand and 14
Latin American and Asian countries) during the current round is demandingreductions
from 62% to 15% of average tariffs on agriculture, and a ban on export subsidies and
2
Source: http://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm2002
5
financial support of agriculture for all members of the WTO. 3 (Dmitri, The exclaimation
point adds your opinion/feelings, making it look biased) Such groupings may eventually
make even small countries play median voter role and identify future policies.
Why Russia wants to be a member of the WTO
According to statistics from 2001 Russia is a middle income country with GDP per capita
about 9000 US dollars, real growth 5.6% and trade accounting for 50.6% of GDP; World
Economic Forum overall competitiveness of Russian economy was ranked as 58. 4 Being
uncompetitive may lead to huge losses after reducing tariff protection according to the
WTO agreements, as well as no gains from export increase, as there are no competitive
products to export. So, why would Russia want to join the WTO?
To answer first let us note, that the overall losses for Russia from joining the WTO are
usually estimated to be very small or none because the current tariff level is already very
low and will not be significantly affected. According to the elaborate study of possible
consequences of accession by National Investment Council and Russian Academy of
Science “Economic Consequences for Russia of Accession to the WTO” the Russian
negotiators offer a scenario of tariff reduction after entering the WTO prepresented in
table 2.
Table 2. Current and possible average tariff levels for Russian industries after accession
to the WTO.
Oil and oil based products
Coal
Ferrous Metals
Non-ferrous Metals
Chemicals
Machinery
Timber and paper
Construction materials
Light manufacture
Food stuff
Other industries
Agriculture
2001
5.0%
5.0%
16.1%
6.9%
8.1%
18.7%
16.0%
5.0%
22.1%
35.5%
20.9%
14.1%
2010
5.0%
5.0%
10.7%
7.5%
6.8%
21.2%
13.6%
5.0%
18.7%
29.0%
18.1%
31.1%
In this study researchers used general equilibrium model of Russian economy estimating
elasticities of production from changes in import tariffs on the data of real exchange rate
devaluation in 1998. Real devaluation may be considered as an effective tariff increase
and data allows to see reaction of Russian producers on it after the crisis in 1998. Results
are given in table 3.
Table 3. Results for the most affected industries up to 2010.
3
4
Source: http://www.opec.ru/news_doc.asp?d_no=37237 (in Russian)
Source: http://www.weforum.org
6
Tariff level
Imports
Output
Chemicals
83,9%
100,3%
99,9%
Machinery
113,6%
99,5%
99,9%
Light manufacture
84,6%
100,8%
99,6%
Food Stuff
81,7%
101,7%
99,5%
Agriculture
220,2%
96,4%
100,1%
100,5%
99,9%
Whole Economy
This important fact allows us to expect the Russian government to rely on around zero
short-term consequences for the average voter’s welfare, who will benefit from only a
little bit with lower prices, but lose from the small reduction in output and job loss. Of
course, particular sectors may experience huge changes in employment, and this is used
as an argument by lobbyists and can not be neglected by government. What are these
sectors we discuss below.
Let us look at the industries, which could be lobbying for and against accession to the
WTO. On the chart 2 we present Russian export structure by commodity groups for 2000,
non-CIS trade.
Chart 2. Russian export structure by commodity groups (2000, non-CIS trade)
Source: Hare (2002).
7
Using this chart we may form a list of possible gainers from better access to the world
markets, especially US and EU ones, where Russia still has no MFN trade status.
Mineral goods, mostly oil and gas are not subject to tariff protection by developing
countries and are not even regulated by WTO agreements. At the same time Russian oil
companies are trying to increase the level of added value in their products, specifically by
producing more high quality gasoline, though export gains for them rather in the distant
future. They could lobby for reduced tariffs on machinery they use, but as we see from
table 2 average level of machinery tariff is actually quite low and it is much easier to set
on aero specific kinds of oil and gas machinery tariffs than to enter the WTO for that.
Thus oil and gas industries will feel from slightly positive to indifferent towards WTO
accession, but not very intense and easily able to wait.
Metal industries have much more to say about the WTO. As a case we may look at the
aluminum industry (here we draw on Ustenko (2002)). In 2000 Russian companies
produced 15% of the world aluminum market and 3% of the total Russian industrial
output. Competitiveness of Russian aluminum is based on low electricity price, as
electricity accounts for one-third of all cost of aluminum production (table 4).
Table 4. Electricity prices in countries producing aluminum (2000).
Country
Price in US cents Difference
from
per kilowatt/hour
Russian price in %
Russia
1.36
0
USA
3.9
286
Canada
3.8
279
UK
6.4
470
Germany
5.7
419
Japan
14.3
1051
Source: Ustenko (2002).
Such differences in costs allow Russian companies setting lower prices, so that developed
counties have to initiate anti-dumping cases to raise tariffs. As Russian Ministry of
Economy and Development estimated, there is more than 500 anti-dumping cases against
Russian producers initiated in the world, and losses reach 3.5 billion dollars annually.
Substantial part of these cases deals with metals, chemicals and textile products. These
producers should lobby for accession then, as within WTO they will be able to dispute
anti-dumping measures. It is possible, that they even agreed to lower tariff levels for
import on their markets (table 2).
In the long run, of course, relatively open markets of developed countries should foster
exploitation of Russian comparative advantages in production of machinery and hightech products, including by means of attracting FDI, and Russian government may hope
on that, putting so much efforts in the negotiating process.
8
On the import side (chart 3) machinery sector is pushing for increase of tariffs (table 2),
here lobby leaders are auto and aviation industries. Auto industry produces 4.3% of
industrial output, employs 602 thousand people (5.6% of industrial employment) and
demands 35% tariff on all imported autos and parts, as well as is interested to block
accession at all. Being highly concentrated (4 factories produce 94% of industry output)
and owned by small number of private owners, the industry succeeded to lobby
government using its financial resources and unemployment threats.
Russian civil aviation industry is currently in crisis, producing 10 planes annually on 3
major plants with aggregate capacity of 150-180 planes. Here major problems are in high
interest rates making leasing programs hard to sustain, cheap used aircraft coming from
developed countries and high economy on scale of innovations. To compete producers
have to invest in development of new aircraft models, but if production is low, prices will
have to be too high. Thus, industry lobbies for long-term tariff protection or other kind of
support, like subsidized credit.5
Chart 3. Russian import structure by commodity groups (2000, non-CIS trade)
Source: Hare (2002).
Next strong lobby group from chart 3 is agriculture. Industry employs 13.3 % of the work
force and produce 7.5% of GDP (1999). According to Csaki et al. (2000) OECD
estimates subsidization level in Russia through low fertilizer and fuel prices to be 75% of
the final price, quite high comparing to the average level in OECD – 41%. Within WTO
5
Source: interview with Russian aviation industry expert, http://www.opec.ru/point_doc.asp?d_no=18364
(in Russian)
9
all these subsidies will be endangered, so it is no surprise that Russian accession proposal
in table 2 includes 100% increase in tariffs on agriculture, as well as 13.2 billion allowed
level of direct subsidies. Of course, the group would be happy to postpone accession
either.
Chemicals could lobby against WTO, though the industry is not so concentrated and thus
should experience free rider problems of lobbying (table 5).
Table 5. Share of employment on 8 largest plants in industry for 2000.
Industry
Energy
Ferrous metals
Non-ferrous metals
Chemicals
Machinery
Share in %
43.2
57.5
48.6
22.9
19.1
Industry
Timber and paper
Construction
Light manufacture
Food industry
Share in %
28.4
10.2
10.1
10.5
Source: “Russia in figures”, Goscomstat, 2002.
So, as we saw there are powerful industries as agriculture and auto lobbying against
accession to WTO and only metal industry which can be positive, though it has its own
problems with secondary products, such as foil, where Russia still is a net importer.
There should be then some political reasons to counterbalance protectionist lobbies.
Richet (2002) points out one political and several long term economic reasons for
Russian government to join the WTO. In our Grossman-Helpman framework, “political”
means an option to increase popular support for the president and government. Russian
public still has strong identity as an ambitious and internationally important nation and
may substantially value diplomatic and military might even at expense of some economic
losses.
The political reasons are the following:
 The WTO has 146 members accounting for 97% of world trade. Russia, Ukraine
and Saudi Arabia are the3 last big countries that remain outside the WTO. This
means Russia plays in the ”second division” despite being an important player in
world security issues (UN Security Council, Russia-NATO relationships, antiterrorist cooperation). At the same time growing self-confidence of US allowed
them to act unmilitary without support of UN or even NATO in the last campaign
in Iraq, moreover, US punished for non-support (recent refusal of the Congress to
give Russia MFN trade status for position on Iraq). This put Russian importance
even in the world security issues in doubt and makes trade and economy the last
chance for the country to stay in the club of great powers.
A number of long-term economic reasons:
 As we noted above, collective bargaining is small in trade terms for countries
playing important role, this gives a chance to Russia, being weak in bilateral
bargaining, to protect its trade interests, though most of them will come to
existence only with substantially increased competitiveness.
10



Commitment in terms of binding tariffs and industry support policies that will
“lock in” the market reform process in Russia and secure developments towards
economic efficiency. Of course, this will also produce social and political
challenges, especially if it happens, that the most efficient way to use resources in
Russia is to produce oil and gas only.
Foreign investments may help to fill empty spaces on the markets, as it is stated in
Hare (2002), Russia has only one-fifth of firms it should have to resemble
developed economy. This, of course, produces low competition pressure and low
productivity.
And finally, the WTO requirements will add to the federal incentives to bring
order in regional economic policies and federal public administration, bureaucrats
will have less space to maneuver and extract rents, so economy will gain in
general.
This all shows, that the internal political-economy equilibrium comes from strong
lobbying pressure for overall protection and especially in several machinery sectors and
agriculture, while the metal industry’s pressure is hardly enough to compensate
protectionism. But political and probably long-term economic reasons pushed
government to intensify the process of accession in 2000, when Putin won the
presidential election. In such a situation any special concessions to Quadra group and
especially US may undermine political reason and intensify protectionist lobbying and
political activity bringing short-term losses way above gains for the government and the
president.
What are demands of US and EU?
Les us now consider the demands of major WTO stakeholders and put the negotiations
regarding the accession of Russia on the table , in order to see how these demands could
be produced by internal political-economy equilibriums in those countries. Because of the
lack of space and time our consideration here will be briefer than that of the Russian
situation.
There are 5 major issues that primarily confined the negotiations:
1. Low energy prices in Russia.
2. Access to gas magisterial network for Middle Asian exporters to Europe.
3. Access to banking and insurance market.
4. Agriculture support
5. Opening the civil aviation market
First, let us note, that generally Quadra countries manufacture exporters are not very
interested in Russian markets, because of two reasons: (1) most of them already open
enough, (2) they are comparatively small (see table 1). Thus we may expect low lobby
efforts from this side, what makes accession less likely.
Energy prices in Russia
As we saw in the case with aluminum, energy prices in Russia are indeed lower than in
Quadra countries and Japan, giving advantage to all energy consuming industries in
11
Russia. Metals producers in US and Canada are very concentrated, unionized and
produce a substantial part of the world output (65% for the aluminum). Clearly, these
producers have to induce anti-dumping quotas and tariffs to protect their market shares
and Russia’s accession to the WTO may complicate this way of survival. So, Quadra
demands that Russia raise its prices up to the world’s average level.
Being more specific, Quadra insists that latent energy subsidy to Russian economy by
means of low prices on all energy sources reaches 1.5 billion dollars a year. Thus, Russia
should increase for example gas prices up to $45 per thousand cubic meters (on more
than 100% from current price). Russians repeat with explaining that such low prices are
the result of economy on scale and low transport costs, - Russia is closer to its own gas
sources, than Europe. Usually the response looks like this: “In Spain grapes are cheaper
than in Russia, but we don’t demand to raise its price. Moreover, latent energy subsidies
in OECD countries are up to $60 billion. In EU there is no country fully liberalized by its
own energy market, and Europeans are not ready to take obligations before the WTO
about reforming this market”6.
Of course, raising energy prices will “kill” one of the only Russian supporters of
accession –the metal industry - and popular support will become tenuous. At the same
time, energy monopolists, like Gasprom and United Energy Systems will gain from such
increase and may be interested to compensate some key losers to push acceptance of this
crucial for Quadra requirement.
Access to gas magisterial network for Middle Asian exporters to Europe
This EU demand is another move by energy consuming industries to lower their costs by
allowing more competition among suppliers of gas on European market. Also they
demand the abolition of export tariffs, which will clearly lower prices. Russia receives an
important part of its budget revenues from export tariffs on gas and oil, so in the short run
it’s hardly possible. Increasing competition is not beneficial for the Russian government
(export tariff revenue will decrease), or for Gasprom.
Access to banking and insurance market
According to Russian Law “About organization of insurance market in the RF” the
aggregate amount of foreign capital in the insurance industry can not exceed 15%, also
companies with a share of foreign capital of more than 49% can not insure life, state and
municipal property, provide medical and car insurance, and principal manager and
accountant in insurance company with any share of foreign capital should have Russian
citizenship.7 Similar problems face foreign bankers in Russia; for example, they are not
allowed to take deposits from firms and the population. This is basically to prevent
foreign banks and insurers to open outlets, they have to set up joint ventures which is not
the most efficient way to work.
6
From interview with the leader of Russian negotiation team, Maxim Medvedkov,
http://www.opec.ru/news_doc.asp?d_no=37278 (in Russian)
7
From interview with the leader of Russian negotiation team, Maxim Medvedkov,
http://www.opec.ru/news_doc.asp?d_no=37278 (in Russian)
12
Banking and insurance sectors lobbies are firm on keeping protection, though largest
companies in the sector are less afraid of capital limit and recently Russia changed its law
and abolished limit on aggregate share of foreign capital in industry for EU companies, as
it was demanded by the agreement on cooperation with EU signed 9 years ago (when in
Russia there were no strong banks and insurers yet).
In general
expansion
companies
population
definitely.
because of the low trust of Russians to local financial institutions foreign
will shrink the Russian share of these markets substantially and small
will die first. Consumers’ ’s gain is dubious, as only small fraction of
actually uses bank accounts and insurance, though business will benefit
Agriculture support
Here much more pressure comes from CERN group insisting on lowering of agriculture
support by all countries. Members of this group have the most competitive agriculture in
terms of climate and technologies, in particular they export cereals and, of course, have
powerful agricultural lobbies. Russians in their WTO application insisted on the right to
support agriculture on up to $13.2 billion annually and subsidy exports on up to $300
million, as well as limit imports of a number of products and increase binded average
tariff level. Problem here is that CERN group is negotiating mainly with US, EU and
Japan, and until the new standard is not set, CERN group won’t probably even listen to
Russian arguments. From the other side, overcoming agricultural lobby in Russia is very
difficult as we saw in section on Russian internal equilibrium.
Opening the civil aviation market
US demand from Russia to sign voluntary for WTO members “Agreement on Trade in
Civil Aircraft”. This agreement envisions zero tariffs on civil aircraft and other import
excises, like VAT. In this case Russia will lose price advantage on its own market (used
aircraft from developed countries is considerably inexpensive cheap). Boeing and
European aircraft makers are powerful lobbyists and though Russian market is very
small, the industry has possible future and destroying it now is very convenient moment
for prospective competitors.
We can see that there is a significant pressure to trade Russia’s accession for favorable
concessions for Quadra and CERN countries’ producers in several important industries,
as steel and metals, banking and insurance, aviation and agriculture. Why then has
Quadra agreed to intensify negotiations during 2001-2003? The answer probably again
lies in the political dimension. After the start of the anti-terrorism war Russia became a
valuable and appreciated security partner for the US and EU, and negotiations themselves
were not a big deal. But after Russia did not support US- led incursion into Iraq it
became harder to expect an attitude of cooperation from the Bush administration. Though
the EU might become more positive, for accession unanimous voting of all interested
countries is necessary, thus decrease in support from one member cannot be easily
compensated by increase in support by another.
13
Conclusion
Russian negotiation team took a solid position on accession- “only on common terms”,
i.e. without specially made up for Russia requirements in energy, services, agriculture
and aviation markets.8 This is a stuck position as Quadra and CERN countries have no
incentives to make concessions too, because they loose nothing if Russia stays out of the
WTO in short or medium-term (in contrast with China, which kept many of their
prospectively huge markets quite close before to be accepted to the WTO) and may lose
if Russia enters (especially on the metal markets). It is rather a reality, than Quadra
negative attitude, that there can be no “common terms” for Russia, because Russia is a
special country and it is trying to enter the WTO in a special time of active negotiations
on the new more liberal rules of trade within WTO. At the same time, internal politicaleconomic equilibrium towards accession in Russia is fragile and offered by US and EU
special terms or new more liberal common rules to come after the current round will shift
internal equilibrium in Russia against accession and will demand much more time and
effort from the government to accumulate support.
Thus we may expect no accession in the short run 1-3 years and low probability of it in
the medium-term (3-10 years). Of course, if Russian energy monopolists and metal
producers manage to find a compromise and build a powerful coalition to push for
accession on Quadra and CERN terms, the process may speed up, but for now there is no
sign of such compromise. Another possibility is the direct intervention of the president
after coming elections. It is a common opinion in Russia that Putin will win and stay on
the second term, which will allow him unpopular moves at the beginning of the term, but
not before elections. So far he supported government position.
Developed countries also are unlikely to change their positions unless something
extraordinary happens. Metal industries in Quadra countries need to secure protection in
any form. Unless they find new sources of cheap energy, their position will be firm.
Future work may be done in quantifying actual lobbying powers of the industries and
political demands of populations to calibrate trade policy reaction functions for each
party in negotiations and study possible equilibrium set of this two-level bargaining
game.
8
Interview with deputy prime minister, Alexey Kudrin, http://www.opec.ru/news_doc.asp?d_no=37972 (in
Russian)
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