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Accession to the WTO in 2013 and beyond: What consequences business and expert communities perceive ahead? Moscow, January, 2013

Prepared and published by Grayling

Bld. 3, Krasnoproletarskaya str. 16, 127473 Moscow Tel.: +7.495.788-67-84 © 2013 Grayling

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Content

Opening remarks .................................................................................................... 3

Executive Summary ................................................................................................ 4

Methodology of Research ...................................................................................... 9

Research .............................................................................................................. 10

Life after the WTO Accession: Performance of Dispute Settlement Body ............. 31

Afterword ............................................................................................................. 33

Annex 1. The WTO in Facts and Figures ................................................................ 35

Annex 2. Brief Information: Russia and the WTO ................................................. 36

Information on Grayling ....................................................................................... 40

Information on Law Firm ‘Muranov, Chernyakov, and Partners’ .......................... 41

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Opening remarks

The goal of the WTO is free trade across the globe. The main objective of the organization is to promote free trade of goods and services and intellectual property products among WTO members by removing all barriers set up by states to protect their national manufacturers. In this regard, the WTO is an instrument promoting unified and general standards among WTO members’ in terms of approaches to internal controls in trade of goods and services by foreign entities and their imposition and removal. Thus, the world is witnessing emerging economic areas with their own boundaries, possibly not corresponding to the political boundaries of states. "The age of complex boundaries” is indeed becoming a reality. WTO procedures also promote development of a network society and network economy based on the system of electronic networks. It becomes a center of other effective "horizontal" communication channels as opposed to hierarchical or "vertical" ones that are more typical for governmental bodies. This is perhaps one of the most important consequences of Russia's accession to the WTO. Russia gained access to the complex, contradictory, evolving (according to non-linear rules), and multidimensional body of global trade, regulation of which varies with the rapidly changing world. For Russia, this may make real time practical integration in trade and economic regimes on more or less equal terms with other countries, a new reality, with the existing system of checks and balances facilitating further development of Russian business and its transition to a completely new, more competitive level. Business and expert communities’ perception of the consequences of Russia’s access to world trade, which is presented in this research,1 gives plenty of food for thought. And who said that it would be easy? Alexander Muranov, Managing Partner of the law firm ‘Muranov, Chernyakov & Partners’

1 This research is the second part of the joint project of law firm ‘Muranov, Chernyakov & Partners’

(www.rospravo.ru) and communications agency Grayling (www.grayling.com) aimed at analyzing the

consequences of Russia’s accession to the WTO for business. The information on the first part of the project with

the legal analysis of Russia’s commitments in 14 sectors of services can be found at www.russia-wto.ru

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Executive Summary

“Accession to the WTO in 2013 and beyond: What consequences business and expert communities perceive ahead?”, January, 2013

The majority of participants think that the WTO will retain its positions in the international arena for at least another decade, and its institutional basics will not undergo substantial changes.

The WTO effectiveness is accounted for by its working mechanisms: dispute settlement, trade policy reviews, internal market protection and new members’ accession mechanisms.

Interestingly, when the research was started in May, 2012, with Russia still not a WTO member, most respondents were more critical in their assessments of the situation and agreed to be cited. However, just four months into WTO membership, when the country is facing regime tightening measures, most businessmen agreed to take part in the research only on condition of anonymity and offered much softer statements. Some businessmen refused being cited and opted for non-participation in principle.

Experts have confirmed that Russia joined the WTO knowing in advance that it may well go beyond the WTO limits, the same way as China does.

The shift of financial and trade flows toward developing countries and their rapid growth in contrast with developed countries will be a challenge for the WTO as an international organization.

In general, the research has revealed that the expert community cannot reach a consensus in evaluating such an important step for Russia as the accession to the WTO.

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Expert opinions concerning Russia’s accession to the WTO and their evaluation of the delegation performance during the accession talks differ.

A US government source believes that everybody has achieved the best possible results.

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The primary question, according to the experts, is how the accession to the WTO will be implemented in legislative and law-enforcement practices.

One of the experts believes that Russia’s WTO accession was not a part of Russia’s development strategy as we do not have one. Some experts pointed out the political reasons for the accession.

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The majority of experts believe that the role of the Eurasian Economic space (Customs Union) as an international organization will slowly decline and finally will be dissolved within the WTO, it being the more powerful organization.

The Eurasian Economic space regulatory framework is being adjusted to WTO requirements, which should facilitate negotiations between Kazakhstan, Belarus and WTO members. To join the WTO, Kazakhstan will need another six months or a year, while Belarus is barely half way there.

Some experts predict multilevel conflicts aimed at protecting Russian interests. Different levels of customs control, different interests with regard to tariff protection and different standards in pharmacopoeia may lead to conflicts in the Eurasian Economic space. And these future conflicts will show who is who.

The state management system has not been completely formed with regard to WTO issues, and even responsibilities of the Eurasian Economic space.

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Expert opinions are deeply divided over the role of the Russian accession for certain industries and business as a whole:

o One group of experts expects negative consequences from the

accession for the light industry, agricultural industry, agricultural machinery, machinery engineering, pipe industry, aviation industry, and machine tool engineering.

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o Another group of experts argues that companies exporting raw materials and processing industries are comfortable with the WTO conditions and that their interests will not be jeopardised.

o Gas companies will have potential problems as there is some

pressure on prices due to ongoing processes going on in parallel with WTO accession such as the emergence of LNG and shale gas, and diversified European gas sources.

o Steelworkers are scared of the tightening of the situation and

requirements on them in international markets.

o The legal consulting market will become more competitive.

o The Russian software market will hardly be affected by the WTO accession and the intellectual property protection market will lose certain attention on the part of the government.

o There are sectors, like fishery, where the consequences vary

depending on the business specialization and interpretation. For instance, the WTO accession is beneficial for enterprises selling fish but not beneficial for enterprises catching and processing fish.

o Some experts point at increasing competition and transparency, as

well as lesser corruption and GDP growth.

Experts argue that the first consequences may become apparent within the first year after the accession. Other experts expect the first consequences in 2 to 10 years.

One group of respondents considered first results could have been expected in the form of customs duties by the end of 2012. Allowing parallel imports may be one of the negative consequences of the accession for businesses. There also will be good consequences, i.e. the simplification of customs rules.

A gradual reduction of aviation prices as airplanes can be bought abroad at a cheaper price.

Nevertheless, some predict no results in several years and no visible results in a decade as the Russian production protection by tariff methods remains a priority for the government aiming at retaining business and jobs.

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Some experts criticize the government for poor information support of the business society and State Duma representatives regarding the future changes. Other experts disagree with this opinion.

One of the most serious issues in this regard is lack of established channels for bilateral dialogue among business and the authorities and no initiative on the part of business.

Head of Department of Trade Negotiations under the Ministry of Economic Development, Maksim Medvedkov provided no answer regarding the participation in this research.

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There are few companies which are actually preparing strategies to adapt their businesses to the WTO requirements. The reason for this is the fact that everything is changing rapidly in Russia, the environment is unstable and few people think several years ahead.

Business received ambiguous signals that Russia was really willing to join the WTO.

Experts believe that foreign competitors are better prepared for Russia’s membership in the WTO. The U.S. Department of Commerce has prepared a special section on its website dedicated to this issue. The Department analyzed the terms and conditions of Russia's accession to the WTO for American businesses, and gave an overview of the opportunities for businesses in terms of improved access to the Russian market.

Producers of meat and poultry products from the EU prepared too and will also benefit from Russia's accession to the WTO, as their products will no longer be discriminated against.

Some businessmen think that it is not necessary to prepare for the WTO until 2015. The strategy will be prepared when customs officers, tax inspectors and the Finance Ministry publish legislation and legal framework changes, which will have an impact on business.

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Russia is expected to be a defendant in cases connected to anti-dumping, sanitary, and phytosanitary measures and intellectual property rights (TRIPS).

In practice, an applicant usually wins a case. However, about 70 percent of Dispute Settlement Body’s decisions on dispute resolution is appealed as appeals are free, help delay decisions, and provide local politicians with the opportunity to ‘save face’ in their respective countries.

A country, which is found guilty as a result of the dispute resolution process, is expected to amend its legislation to remove or change its aspects that are at odds with the WTO.

Meanwhile, the US most often acts as an applicant as well as defendant.

During the whole period of the commission activity since the formation of the WTO in 1995, there have been 454 disputes brought to the WTO; however the volume of appeals has been decreasing recently.

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The mobilization of legal and governmental relations consultants by Russian and foreign companies in order to develop adaptation strategies for their businesses to meet the WTO rules will allow the prediction of potential risks and prevent real ones. It will also provide a basis for favorable conditions for business in order to respond to future regulatory requirements and establish long-term relations with key state representatives responsible for trade and investments.

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Methodology of Research

Global communications agency Grayling (www.grayling.com) conducts research on various topical issues2; and the issue of Russia's accession to the WTO was chosen precisely because of its ambiguity. The research is based on more than 20 in-depth interviews with heads of Russian and foreign companies operating in Russia, experts and state representatives who analyze the WTO. Grayling interviewed CEOs of Russian aviation and steelworkers companies and heads of foreign energy equipment companies, discussed the issue with experts from the Russian scientific community and consultants working with the Chinese government, spoke with representatives of the Russian Ministry of Agriculture, the Eurasian Economic Commission, and the US government. To get the most discreet answers, our respondents were given an opportunity to remain anonymous; some of them enjoyed this right. The research was conducted during 6 months from May to December, 2012. We sought to analyze the period prior to and after the WTO accession on August 22, 2012 to confirm or refute some of our assumptions not only in experts’ answers but also in practice.

2 The Realization of the Farma 2020 strategy: Challenges from the Perspective of Russian Manufacturers and

Meaning for Foreign Investors (June, 2010); Reassessing Investments to Russia (June, 2011) and other research

that you can receive by sending a request to pavel.melnikov@grayling.com

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Research

Russia joined the WTO against a background of economic and political problems. In economy, we have witnessed the second wave of the financial crisis, large financial outflow from the country (USD 84.2 billion in 2011 and USD 56.8 billion in 20123), large social obligations taken by Vladimir Putin as a presidential candidate as well as the lower tax collection rate due to the increased tax rates in 2011 and the growing pension fund deficit. In politics the new president has to consider the awakening middle class challenging Mr. Putin’s abilities to implement drastically new policies to modernize Russia. The reform on establishing new strong institutions in society is long postponed and there is no real dialogue between state, business, and society on urgent issues. To implement a new economic strategy, the new government needs significant resources to develop and maintain the aging infrastructure and fulfill budget obligations in the social area, military rearmament, and strengthening of the law enforcement system. Given the abovementioned problems, the attraction of foreign investments is vital for the new government as well as for the whole Russia. Thus, in theory, the government is interested in more favorable conditions for business and an improved investment climate. Nevertheless, the implementation of the strategy faces serious limitations, namely the unique features of private property in Russia implying that more powerful people or organizations can capture the property of others using political and administrative pressure; prevalent informal economic relations and the powerful role of the state significantly reducing potential investments; the specific character of the legal system dependent on the executive power or influence groups; and indeed, widespread corruption linking all these elements together are also significant obstacles for investors.4 Despite all the limitations, the WTO accession will increase business transparency for foreign companies and investors that in their turn will make them feel more 3 Central Bank Data

4 Twenty Years of Reforms – Midterm Results? (Russian Society as a Process). G.A.Yavlinsky, A.V.Kosminin. Mir

Rossii. 2011. № 2

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comfortable in the Russian market in the long run. At the same time, the international nature of the agreement will ensure equality for Russian and foreign companies in the Russian market. The latter will be able to use a lot of leverages to protect their interests in many ways, namely via WTO dispute settlement mechanisms, pressure on Russian investment bodies and the international mass media. 5 The research shows how business and expert communities perceive the WTO and consequences of Russia’s accession to the international organization.

What is the future of the WTO mechanism? Will the WTO keep its position as a global regulator in the next decade? Most respondents believe that the WTO will retain its positions in the world arena for at least another decade. At the same time, "the WTO is not a usual administrative regulator. In legal terms, the WTO system is a multilateral contract, a package of bilateral agreements." (Evgeny Zverev, Executive Secretary of the Commission for the textile and light industry, Russian Union of Industrialists and Entrepreneurs) "Today the WTO is one of the most efficient international organizations. Having 157 members, the WTO ensures the execution of its decisions by all member states through interstate mechanisms, namely dispute settlement, trade policy reviews, domestic market protection, and new members’ accession mechanisms. The first one is vital for ensuring the fulfillment of commitments by member states and, therefore, for retaining the efficiency and safety of the WTO multilateral trading system." (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS) On the one hand, the internal consensus-building mechanisms play a positive role, as they help reaching a consensus and take balanced decisions. On the other hand, these mechanisms have a reverse side, for instance when an organization may be affected by policies of several member states whose national interests may go against the interests of the WTO.

5 For more information see our research on foreign direct investments “Reassessing Investments to Russia” (June,

2011). You may have the research by sending a request to pavel.melnikov@grayling.com

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"The problem is that other WTO members do not know what policies Russia is going to pursue as a WTO member, since there is a conflict between the WTO interests and rules and Russia’s own interests." (Executive Director of a large American company) Another Russian expert also agrees with him: "The WTO is like the World Health Organization (WHO) for me. We signed conventions, but it does not mean that Russia executes all WHO decisions. Perhaps we implement only 5% percent of the decisions. I think that it is also the case with the WTO." (David Melik-Guseinov, Director of Cegedim Strategic Data, Cegedim). This contradiction will be apparent when Russia starts implementing standards opposing and undermining the WTO system, which will weaken the organization: "In the future, the WTO may lose its influence because its member states will actively use hidden subsidies, especially in agriculture." (Vyacheslav Pronin, Deputy Director of analytical center WTO-Inform) This practice already exists. In June, 2012 during parliamentary hearings Minister of Agriculture Nikolai Fyodorov said that the USA spends billions of dollars on its Agricultural Support Program. The following discussion was dominated by the idea that since the USA provided such support in the form of hidden subsidies, Russia would also be able to pursue similar polices after its accession to the WTO. Arkady Dvorkovich, Vice-Premier of the Russian government, substantiated this thought in an interview given later: “All WTO members violate rules. They usually do things that are on the fringe and even beyond the fringe, and then litigate against each other. It is essential. Indeed, we knew in advance that we would also litigate and exceed the WTO limits and then gradually adjust to the respective rules6.” The shift of financial and trade flows toward developing countries and their rapid growth in contrast with developed countries will be an additional challenge for the WTO as an international organization. "This international trade club is changing, and the needs of its members are changing as well. The WTO is becoming less important for international trade because trade is no longer organized between the North and the South, but between the South and the South, i.e. within the southern hemisphere. China7, for

6 Kommersant, November 22, 2012 available at http://www.kommersant.ru/doc/2072722?isSearch=True

7 China became WTO member on December 11, 2001.

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example, is probably the world’s fastest growing economy, thus predetermining the changes in the world order. China can buy debts of developed countries and thus influence them, using this instrument.” (Laurence Brahm,8 Founder of NGO Himalayan Consensus, China) Experts also believe that the WTO institutional framework will not undergo significant changes in another decade. Yet, given that the role of many international organizations is changing as a result of the ongoing global shifts and the global financial crisis, it is time to start WTO organizational reforms as well. "The WTO decision-making mechanism has its shortcomings. When the WTO consisted of dozens of member states, it was easy to use the consensus mechanism. But now there are 157 members; so reaching consensus is much more difficult. Some possible reforms of the WTO are discussed and will be discussed in the future, but the WTO will retain its role, and there are no plans to significantly change its framework." (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS) At the same time, "the WTO perpetuates the current economic situation, i.e. the strength of the strong and weakness of the weak, and preserves the domination of transnational corporations both in politics and in the economy. I think that the neo-liberal economic model will be hit by a crisis, but the WTO blocks the transition to a new model. The WTO will retain its role as long as a new model to replace the existing one is defined in the future." (Pavel Kudyukin, Associate Professor at the Higher School of Economics (HSE), Analyst at the Institute of Globalization and Social Movements) What is your perception of Russia’s accession terms and the performance of the Russian delegation during the negotiations? Was it possible to negotiate more favorable terms? If yes, in which areas? Briefly summarizing the results of Russia’s accession to the WTO, we can highlight that Russian companies got non-discriminatory access to international markets; meanwhile foreign businesses have been granted with reduced tariffs for a more active entry into the Russian market (one-third of tariffs was reduced on August 22, 2012, a quarter of them will be decreased in 2015, and the remaining tariffs will be reduced in 2018). These reductions are expected to drastically increase

8 Laurence Brahm is an economist, advisor of the Chinese Prime Minister Zhu Rongji on China’s preparation for the

WTO accession.

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import of goods. The European Union as a main Russian trade partner assesses that reduced tariffs will save European exporters USD 2.5 bln on import tariffs only. It will allow the European Union alone to export additional goods in the amount of EUR 3.9 bln annually.9 At the same time Russia has taken on commitments on 116 out of 155 services listed in the WTO services nomenclature, including banking and other financial services, all insurance and insurance related services, accounting and audit, telecommunication services, etc. According to the World Bank experts, the consumption of services in Russia will increase by 5.3 percent after the WTO accession.10 "Russia's accession to the WTO was an economic priority for US foreign policy toward Russia. The lead Russian negotiator, Max Medvedkov was highly respected by the US officials. These were long and difficult negotiations but everybody got the best possible deal” . (US Government source) "Russia's accession to the WTO was supported by the European Union and the United States." (Art Franczek, President of the American Institute of Business and Economics) The primary question, according to the experts, is how the accession to the WTO will be implemented in legislative and law-enforcement practices. The experts who believe that the accession will bring positive results for Russia also positively assess entry terms and conditions and the Russian performance during the negotiations. "Russia has bargained reasonable terms and conditions. For example, for the automotive sector, the transition period is 7 years. In agriculture the terms could have been better. But it is usual practice for negotiations, and concessions create a kind of balance." (Head of a company protecting intellectual property rights)

9 Europe Portal (2011), EU welcomes Russia's WTO accession after 18 years of negotiations. Available at

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/906&format=HTML&aged=0&language=EN&guiL

anguage=en

10 Thomas Rutherford, University of Colorado and David Tarr, The World Bank. Russia’s WTO Accession: What are

the macroeconomic, sector, labor market and household effects?, Available at

http://siteresources.worldbank.org/INTRANETTRADE/Resources/Topics/Accession/Rutherford-Tarr_russia-macro-

effects.pdf

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In general, some experts positively evaluate the performance of the Russian team during the accession process. "99 percent of citizens know nothing about either Russia’s or China's entry terms and conditions, which are commonly used as an example. How many people, in your opinion, have read fifteen hundred pages of a complicated text on Russia's accession to the WTO? China’s entry terms and conditions were less favorable than ours. For example, China was not recognized as a market economy for 15 years. Other WTO members have noticed that over the last 10 years China has been violating its commitments very often, and there are a lot of complaints about it. Russia’s entry terms and conditions can be considered as balanced and optimal." (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS)) "Everybody knows that the negotiations have turned into a long-term process aimed at harmonizing controversial issues. Reaching the agreements was not only an economic, but also a diplomatic success. As for concessions made by Russia, I do not think that they were significant. Coupled with the effective administration, Russia's accession to the WTO is a great opportunity to develop competitive industries without governmental support and focus on the export of raw materials.” (Alexey Misailov, Managing Partner, Parkline Group) Other experts are critical about the WTO accession terms. Interestingly, some oil and gas companies told us prior to the accession that in their opinion the WTO accession was wrong but after the accession asked to remove their statements. Several respondents suggested constructive comments and ideas on the accession preparation. "Before signing the protocol, Russia could have conducted a thorough analysis on about 200 sectors to divide them into three groups with Group A including priority sectors that need to be supported; Group B consisting of industries that are doing well; and Group C comprising the remaining sectors, where we would lose competition in any case. Then it was necessary to develop specific strategies for each group, and then we might have obtained different results and conditions." (Vyacheslav Pronin, Deputy Director of WTO-Inform Analytical Center) Perhaps, these questions should have been addressed; however, by an economic team in the government rather than by negotiators.

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"I believe that Russia's accession to the WTO at some point was considered as goal itself. At the same time our government has no clear development strategy, except formal papers such as "Russia – 2020." (Pavel Kudyukin, Associate Professor at the Higher School of Economics (HSE), Analyst of the Institute of Globalization and Social Movements) We need a valuable, measurable and explicit strategy (and not a ‘paper plan’) with governmental activities seeking to achieve final goals rather than resolve unpredicted popping issues as the case is now. "They could have done more. I believe that in this case, the key performance indicator is the preparedness of industries for joining the WTO. If we are not ready, then we did not work efficiently enough. For example, the pharmaceutical industry was not prepared." (David Melik-Guseinov, Director of Cegedim Strategic Data, Cegedim) "The negotiators were instructed to protect national interests and "not to bow." Overall, Russia's accession to the WTO was a political decision, not an economic one." (Executive Director of a large American company in Russia) "To understand the situation, we should examine the following questions: In whose interests were they negotiating? Did they act in the interests of the Russian oil and gas elites or farmers? Was it done in the interests of the business elite, or 99 percent of Russian people?" (Laurence Brahm, Founder of Himalayan Consensus NGO, China) "It is hard to assess the performance of the delegation during the talks. The information on its work was limited; and it was hard to monitor the negotiations. In any case, taking into account the duration of the negotiation process, I had an impression that it was possible to finish the negotiations earlier. I cannot assess the entry terms and conditions because there is no information about them, except for general phrases, such as "consumers will benefit from the WTO", "some manufacturers will have to compete for a market share after the accession to the WTO”. (Representative of a large European company) Several businessmen indicate negative practical aspects that are yet to emerge. For example, the WTO accession process may follow the path of the Customs Union establishment: they still cannot lift a strange rule regulating the entry of personal belongings for foreigners working in Russia who have to pay 4 euro per kg for import of personal belongings and luggage.

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Russia joins the WTO, and at the same time it forms the Customs Union-Eurasian Economic Space11 with states outside the WTO. What is the most likely outcome of this collision? And the most desirable one?

Most experts believe that the role of the Eurasian Economic space (Customs Union) as an international organization will slowly decline and finally will be dissolved within the WTO, the latter being a more powerful organization. “The Customs Union is a relic of the Iron Curtain era. The whole world is moving towards minimizing customs formalities; thus, it will be good to simplify customs procedures not only for the Customs Union, but also for all other countries." (Former Regional Director of a British company in Russia) “In May 2011, it was agreed12 that the WTO rules will prevail over the rules of the Customs Union." (Art Franczek, President of the American Institute of Business and Economics) Some experts predict multi-level conflicts aimed at protection of Russia's own interests. "There will be a conflict between the Russian national interests which Russia will protect on the one hand and the interests of the Union and the WTO on the other hand. The reasons for this conflict are hidden in geopolitics: Russia is not a NATO member, and it never will be, but it needs some allies among CIS countries, this zone of influence being a state priority. Following the rules of the WTO is not among Russia's interests, because it runs against the interests of its allies, i.e. the CIS countries. The WTO wanted Russia to join the organization, but Russia wants to act as an equal partner abroad and maintain its own production, so the future conflicts will show who is who.” (Executive Director of a large American company in Russia) Experts expect that Belarus and Kazakhstan will benefit rather than lose from Russia's accession to the WTO. "Russia is the locomotive that drags both Belarus and Kazakhstan into the WTO. By adjusting the legal framework of the Customs Union and the Eurasian Economic Space (which derives from the commitments of the Russian Federation to the WTO) to the WTO norms and rules, we challenge claims by WTO members on the non-compliance of the Kazakh and Belarusian 11

The Customs Union is currently transforming into the Eurasian Economic Space starting February 2012 and is

intended to be reorganized into the Eurasian Economic Union by 2015.

12 Agreement on the Functioning of the Customs Union in the Multilateral Trade System (signed on May 19, 2011

in Minsk)

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national legislations with the WTO rules in the areas of the Commission’s jurisdiction. This, in turn, should greatly facilitate negotiations on their accessions to the WTO on systemic issues." (Vitaly Aristov, Head of bilateral and multilateral cooperation of the Department of Trade Policy of the Eurasian Economic Commission) To join the WTO, “Kazakhstan will need another six-twelve months, while Belarus is barely half way there.” (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS)) For Russia, it could well lead to negative consequences. "In the area of counterfeit goods, the customs control on the border of China and Kazakhstan is weak and less efficient. If such goods are imported to Kazakhstan, they can be easily imported to Russia, which poses a threat to the industry of trademarks and their protection." (Head of a company protecting intellectual property rights). "Kazakhstan planned to join the WTO in autumn 2012. However, Kazakhstan does not produce agricultural machinery or mechanical engineering. Therefore, we have different interests: they will decrease their duties to import Western machinery; but it is not beneficial for Russia.” (Vyacheslav Pronin, Deputy Director of WTO-Inform Analytical Center) "The global pharmaceutical industry is deeply integrated, there are no borders. Russia is trying to build factories at home and distinguish between overseas and its own production. Yet, the location of drugs production is not important for the pharmaceutical industry. What really matters is where patent holders are registered. Moreover, the production of drugs in Russia, which only focuses on Russian customers, is not modern anymore. At the moment both in terms of the economy and logistics the planning of business operations is conducted based on large regional sectors. On the other hand, Belarus and Kazakhstan are already enjoying the standards of the European Pharmacopoeia. Yet, Russia has its own system that is not harmonized with the European one. If we want to access the global market, we will need to resolve this issue. If we continue the same strategy, either our goods will be uncompetitive in the world market, or our services will not meet the international standards and requirements." (David Melik-Guseinov, Director of Cegedim Strategic Data, Cegedim)

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"Practical issues associated with cooperation in the framework of the Customs Union will be addressed through bilateral channels between the U.S. and Russia. Thus the USA will address issues directly with Russia, Kazakhstan and Belarus. Businesses are now feeling that there are some tensions between the Ministry of Economic Development and the Eurasian Economic Commission in terms of policy coordination and practical work related to Russia’s WTO obligations. Both agencies are sending contradictory signals to the business community, and each of them says that “you should work with us and not with them." (US government source)

What are the consequences of Russia’s accession to the WTO for various industries and for business in general? What are the consequences for your sector? When can we expect the first results of the accession?

Experts were seriously divided over the role of Russia’s accession for certain industries and business as a whole: "Light industry will have to put up with increased competition, but it is already under great pressure from producers, primarily from Asia. Things will get worse, if the issue of "gray imports” is not resolved in the near future. It can be tackled by improving domestic tax legislation. In addition, joining the WTO is not only about customs tariffs. We should understand that being a WTO member means a new life in a completely new legal framework." (Evgeny Zverev, Executive Secretary of the Commission for the textile and light industry, Russian Union of Industrialists and Entrepreneurs) "A software license is sold in the international market with no borders, so it’s unlikely that Russia’s accession to the WTO will affect the software industry. In the legal sphere, many regional, Eastern European law firms are entering the market now, because prior to the accession to the WTO it was dominated by international giants or Russian companies, and now it is becoming more competitive. The WTO accession is conducive in terms of legal protection of companies’ interests, and greater enforcement of other international legal acts. In fact, nobody knows the consequences of Russia’s accession to the WTO, so legal and consulting companies benefit from this uncertainty; as it creates new business opportunities.

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At the same time, many people are concerned about the possible weakening of governmental efforts to protect intellectual property rights compared with the previous years of active work. The WTO used to be a compelling political argument, a trump card for the legislation development and law enforcement. It set the direction and pace of development, and provided a powerful argument in international negotiations. Now, when the legislation has been adjusted to international rules and certain results have been achieved in law enforcement, the government pays less attention to protect intellectual property. With the main goal having been achieved, intellectual property protection is no longer on a top priority list for the government, so everyone pays less attention to the issue." (Head of a company protecting intellectual property rights) "Overall, both Russian businesses and domestic fishing industry will benefit from the accession. With regard to increasing competitiveness and adjusting numerous regulatory bodies and administrative barriers to international norms, it will greatly release an average fisherman from the existing bureaucratic burden and corruption-related “costs” of business. In the fishing industry, Russia’s accession to the WTO is currently beneficial for enterprises selling fish but not beneficial for enterprises catching and processing fish. They bear risks (wear navy, outdated processing technology, poor logistics, etc.); but it is possible to minimize them during the transition period, including via subsidies. The Russian economy today is quite open to international competition, but the level of its own protection mechanisms is extremely low. A significant part of the domestic export-oriented companies have long been competing with foreign companies under WTO rules, but they do not use their rights under it to the full extent.” (Anna Gornova, aide to an or a Member of Parliament - a member of the State Duma Committee on natural resources, natural management, and the environment; Vice-president of National Prestige foundation13, Head of the oceanic fishing department). "The industries that will be badly affected by the WTO are the light industry, agriculture, agricultural machinery, heavy machinery, and pipe industry. It is impossible to say that some industries will definitely benefit. We can only say that there are industries that will not ‘lose’: oil and gas industry, primary processing

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The National Prestige Foundation was established in 2009 to facilitate the development of social projects,

support of national art, and popularization of national culture. The foundation places specific attention to the

development and popularization of basic principles of the national industrial policy, which in the globalization

conditions is understood as the creation of an optimal and comfortable environment on Russia’s territory.

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industries, chemical industry. Some steelworkers, for example, are also scared of the WTO accession, in particular of the tightening of the situation and requirements on them in international markets." (Vyacheslav Pronin, Deputy Director of WTO-Inform analytical center) “Everyone understands that Russia’s accession to the WTO will affect the whole economy, including agricultural sector. I have an indefinite opinion. I think the consequences will be negative. Some sectors of Russia’s agriculture are technologically outdated compared with other countries. Due to the lack of division of labor in a number of industries our prime cost is high, and the quality is worse than the quality of foreign companies. If we do not overcome this gap, we will be flooded with imported products after joining the WTO.” (A source in Russian Ministry of Agriculture) "The first results will be visible immediately after Russia's accession to the WTO, and we can expect a lot of complaints filed with the Dispute Settlement Body within WTO. The World Bank estimates that Russia can expect an annual GDP growth rate of 3.3 percent in the short term and 11 percent in the long term as a result of its accession to the WTO. These growth estimates are based on World bank studies, I would add that other analysts believe that the short term impact of WTO will be minimal in fact some analysts believe the short term impact may have a negative effect on GDP.” (Art Franczek, President of the American Institute of Business and Economics) "The first consequences may become apparent very quickly, and we will see them in the form of duties change. Allowing parallel imports may be one of the negative consequences of the accession to the WTO for businesses. There also will be good consequences, i.e. the simplification of customs rules.” (Representative of a large European company) "Joining the WTO will facilitate further integration of Russia in two ways: the inflow of capital to the country and domestic companies’ expansion overseas. This will accelerate the integration of Russia into the world economy. In my opinion, one of the factors that may affect foreign companies’ entry into the Russian market is careless attitude to intellectual property rights in Russia, due to which companies usually do not bring technologies to Russia that can be copied (for example, Boeing). There is yet another issue. Buying the aircraft abroad including customs duties and VAT was 40 percent more expensive than its original cost. Thus, most companies leased an aircraft and few people bought it, and the costs were passed on to final

22

consumers, seriously increasing the price of airplane tickets. After the accession, this situation is expected to gradually change for the better." (Former Regional Director of a British company in Russia)

"The first results will be visible in six-twelve months, and there will be a clearer understanding of the situation in two years.” (Laurence Brahm, Founder of NGO Himalayan Consensus, China)

"We can expect first consequences in about two years in the pharmaceutical industry if there are no major changes and disturbances in the Healthcare administration. If the leadership in the Ministry of Healthcare is changed, the process will slow down." (David Melik-Guseinov, Director of Cegedim Strategic Data, Cegedim) "The negotiations on Russia's accession to the WTO were conducted with the aim to prevent crisis situations in all industries after the accession. We should understand that we are consciously moving towards greater competition in the domestic market. It is impossible to promote further economic development and gain access to foreign markets without this strategy. The WTO also benefits from Russia’s modernization of its production and more export of finished products. And then we will be competitive in international markets. All in all, it will be possible to see the first positive results in five years at least.” (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS) “Results are expected in 3-5 years. We can predict the increase of cheap products import into Russia, and also an increasing volume of non-raw material exports from Russia. However, over the next 2-3 years, which is during the transition period, significant changes should not be expected. As a customs broker our company is not afraid of the entry of new players into the market. And the particularity of our business hardly allows foreign companies to compete with the Russian ones. Yet, mergers and acquisitions are possible.” (Alexey Misailov, Managing Partner, Parkline Group) "They say that the economy will be more transparent, less corrupt and more open, but it is just good PR. Upon accession to the WTO, Russia reduces tariffs only in those sectors of the economy where it does not have its own production, and not where it has strategic local factories. Russia wants to keep them in order to retain

23

business and jobs. The key question is how the accession will be implemented, so there will be no results for several years and no visible results in a decade." (Executive Director of a large American company in Russia) "Companies exporting raw materials and processing industries are comfortable with the WTO conditions. Oil companies did not have problems in the international market, but steelmakers faced some problems, for example in the USA. We expect that gas companies will have potential problems as there is some pressure on prices associated with the processes going on in parallel with Russian WTO accession such as the emergence of LNG and shale gas, and diversified European gas sources. Agriculture and a major part of the manufacturing industry (machinery, aircraft industry, machine tools, and agricultural machinery) will be among the losers. Is it possible to take necessary measures to protect the domestic industry during the 7 year transition period? Negotiations on Russia’s accession to the WTO lasted 18 years. We could have prepared for the accession during this time, but in reality nothing had been done. How can we assume that the government will achieve more during the transition period?" (Pavel Kudyukin, Associate Professor at Higher School of Economics (HSE), Analyst of the Institute of Globalization and Social Movements (RAS)) To what extent are you informed of Russia’s commitments to the WTO and changes that will take place? "We all saw the text of the accession only on December 16, 2011, and the document in Russian became available only from February 1, 2012. Yet, according to Medvedkov, all the rules were agreed in 2006. We knew nothing about terms and conditions, and we could not reasonably prepare for the accession, and government officials did not listen to us. There is an answer to the question "Why did businesses keep silent?" The business community just knew nothing about the WTO entry terms and conditions." (Vyacheslav Pronin, Deputy Director of WTO-Inform Analytical Center) "Business is poorly informed about the future developments. In particular, it is not clear how the customs tariffs will be changed. The website describing the accession process and all materials are only available in English. New customs tariffs were published on the eve of its entry into force on August 23, 2012, and it is not clear what duties will be changed after January 1, 2013." (Representative of a large European company)

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"Businesses in the pharmaceutical industry are not very well informed about the consequences of the accession to the WTO. We’re running educational programs for pharmaceutical companies. The Ministry of Healthcare has other problems, namely standards and quality of treatment. The Ministry of Economic Development has other priority areas. The Ministry of Industry and Trade keeps silent. The government has not prepared even a road map of the process» (David Melik-Guseinov, Director of Cegedim Strategic Data, Cegedim) However, some experts disagree with the abovementioned opinion: "In 2001 the Ministry of Economic Development launched a large information campaign on the accession to the WTO among businesses; and Russian Union of Industrialists and Entrepreneurs, Chamber of Trade and Industry, the State Duma actively participated in it. As the organizer and participant of this campaign, I can say that overall, it was successful. We held more than 150 seminars, conferences, round tables in 64 Russian regions and conducted about 350 meetings on the accession in total. Those companies and businessmen who wanted to get the necessary information and prepare for the WTO, managed to do this. In some regions, for example, several research studies on the possible consequences of joining the WTO have been conducted. But not everybody was equally active in this regard. Most people were sitting and waiting for the decree from Moscow: "Right, we are on our way to join the WTO, do this and do that." Some, roughly speaking, “overslept" and now feel uncomfortable. After Russia’s formal accession to the WTO on December 16, 2011 the "critics" claimed that documents on the accession to the WTO were not translated into Russian. It's not true; the translation was available on the Internet. However, it should be taken into account that the authentic text is in English.” (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS) "The business community has been informed about ongoing developments. The Russian Federation carried out tremendous work in order to provide all the experts concerned (I would like to emphasize this word) with the information about the norms and rules of the WTO. We will see how wisely businesses use the acquired information." (Vitaly Aristov, Head of bilateral and multilateral cooperation of the Department of Trade Policy of the Eurasian Economic Commission)

25

"Those who work with foreign customers and suppliers are aware of Russia’s commitments. The government, its ministries and agencies publish all the requirements and necessary information. The fishing industry cannot ‘feel’ most of the changes concerning the WTO yet because it requires some time and statistics. There are pros and cons, but it will take some time to see them." (Anna Gornova, aide to an MP who is a member of the State Duma Committee on natural resources, natural management, and the environment; Vice-president of National Prestige foundation, Head of the oceanic fishing department). "Large companies are well informed about the WTO. The Ministry of Economic Development has had dialogue with the business community, has held conferences and has given briefings, and also has provided full access to the information. It is willing to respond to any requests. We also provide our clients with analytical materials and prepare a selection of the materials that have practical value for our customers. Therefore, both Russian and international companies represented in the Russian market are aware of the main trends and know how to develop their business in the future." (Alexey Misailov, Managing Partner, Parkline Group) "We are very well informed about the situation in copyright protection." (Head of a company protecting intellectual property rights) "Textile and light industry enterprises are aware of tariff concessions, but there is a lack of information on possible compensation measures and procedures for anti-dumping investigations under WTO rules." (Evgeny Zverev, Executive Secretary of the Commission for the textile and light industry of Russian Union of Industrialists and Entrepreneurs (RSPP) There are also conflicting points of view. "Business associations are better informed than specific companies. Yet, a large number of companies are not affiliated with business associations. Our society, including the business community, is not prone to self-organization in principle. First, our business community does not have its own social identity, a “business” social group is non-existent, and this is an indicator of their weak ability to organize themselves. Second, there are no established channels for bilateral dialogue among business and authorities and no initiative on the part of business." (Pavel Kudyukin, Associate Professor at the Higher School of Economics (HSE), Analyst of the Institute of Globalization and Social Movements) With regard to the practical aspects of the preparation for the WTO accession that are available for the general public, the Ministry of Economic Development

26

has developed a separate section on its website14 containing an overview on articles published on Russia's accession to the WTO and a number of documents on this topic. Head of Department of Trade Negotiations under the Ministry of Economic Development, Maksim Medvedkov provided no answer regarding the participation in this research.

Are you aware of Russian businesses developing any special strategy on the adaptation to WTO membership? Are you developing such a strategy? If yes – what is it focused on? According to opinion polls, most companies have not given too much attention to Russia’s accession to the WTO. For example, Strategy Partners and Delovaya Rossiya in their survey of top managers of Russian companies carried out in December, 2011 – January, 2012 stated that only 6 percent of the respondents had developed an adaptation strategy. Another 11 percent were planning to develop such a strategy and 48 percent said that "perhaps, some measures will be taken." 34 percent of surveyed companies claimed that they were not planning to introduce adaptation strategies or measures. Twenty two percent of the companies think that Russia’s accession to the WTO will have a minimum impact on the Russian economy whilst 52 percent believe in the "positive" and "extremely positive" impact of this process. Twenty four percent of the companies claim that it will have a "negative" or "extremely negative" impact. Yet, the respondents are more pessimistic when it comes to evaluation of the impact on their own businesses. Forty eight percent of the respondents are sure about the "positive" and "very positive" impact of the WTO regimes on their companies, while 46 percent predict a negative impact.15 The research prepared by Grayling confirmed the opinion poll results. Apart from stating that it should be done, few entrepreneurs are really preparing strategies to adapt their businesses to the WTO requirements. Our expert reflects on the reasons for this approach. "Few people think a few years ahead. This is a too distant future for Russia because everything is changing

14

http://www.economy.gov.ru/minec/activity/sections/foreignEconomicActivity/wto/index

15 Kommersant-Online dated February 14, 2012. Available at

http://www.kommersant.ru/doc/1873544?isSearch=True

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rapidly, and the environment is unstable." (Head of a company protecting intellectual property rights) "I did not come across these strategies. Both corporate and government management are at a low level in Russia, thus it is difficult to talk about any strategy. Upon Russia’s accession to the WTO something will start to collapse, and something will be done in haste to save the economy." (Pavel Kudyukin, Associate Professor at the Higher School of Economics (HSE), Analyst of the Institute of Globalization and Social Movements)

"There are no adaptation strategies in the automotive engineering industry. There is a general development strategy until 2020 – 90 percent of the measures that need to be taken to support the economy are prohibited by the WTO. We will not be able to develop light industry, furniture and clothing production, metal products manufacturing, and electronics.” (Vyacheslav Pronin, Deputy Director of WTO-Inform Analytical Center)

However, this opinion is not supported by all the respondents.

"Our business has already adapted to the WTO." (Alex Misailov, Managing Partner, Parkline Group)

"Since 2012 the Government of the Russian Federation has paid great attention to reducing risks for individual industries and sectors under the WTO framework. It has already taken some specific measures. I should note that businesses could have prepared better for the new terms and conditions, but, unfortunately, during the negotiation process, business received ambiguous signals from the government about whether we were really willing to join the WTO. Thus, many believed that the issue was not resolved and it was pointless to prepare for the accession. Business sensed the doubts. This was especially true at the beginning of the global economic crisis. For example, in September 2011 top governmental officials claimed that businesses had to be prepared for two scenarios: "Russia is in the WTO and Russia is not in the WTO." Of course, everybody interpreted it as “the accession has been postponed indefinitely." (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS) Businesses have started to respond to Russia's accession to the WTO only now. Experts believe that in contrast to Russia, foreign competitors are better prepared

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for Russia’s membership in the WTO. The U.S. Department of Commerce has prepared a special section on its website dedicated to this issue. The Department analyzed terms and conditions of Russia's accession to the WTO for American businesses and how it would affect them. The Department also selected 17 priority sectors and gave an overview of the opportunities for businesses in terms of improved access to the Russian market. This analysis was carried out not only by industry, but also in the context of the potential applicability to each of the 50 states. "Businessmen are implementing such changes partially. We are trying to help them as far as we understand the situation ourselves. We explain processes, try to interpret them. Nobody has got a pattern and it makes it difficult for companies to prepare for the risks that may be incurred by the industry and also get ready for the work under the WTO." (David Melik-Guseinov, Director of Cegedim Strategic Data, Cegedim) "We know that Boeing will significantly benefit from Russia's accession to the WTO in the next 7 years, since the customs duties on commercial aircrafts will be decreased from 20 to 7 percent. And Russia is expected to have a need for about 1,000 airplanes in the next 10 years. Boeing has definitely such a strategy. Producers of meat, chicken poultry products from the EU will also benefit from Russia's accession to the WTO, as their products will be no longer discriminated”. (Art Franczek, President of the American Institute of Business and Economics) "Businesses need an adaptation strategy for WTO requirements only if these requirements have become tougher. If they are favorable, there is no point in developing such a strategy. Adaptation is necessary for those industries that were once protected by customs duties, for example, the aircraft industry. The government thought that it protected domestic producers, but they should not have imposed high import duties, and should rather have made its own production more competitive. Instead of improving aircrafts, raising competition, and reducing prices, they protected the aircraft industry." (Former Regional Director of a British company in Russia)

"It's hard to prepare for accession to the WTO, because you must have government support and protectionist measures. What will Russian regions do, will they be supported by the federal government? It’s important to see how the local practice will be used, how local authorities will handle this.” (Laurence Brahm, founder of Himalayan Consensus NGO, China)

Interestingly, only one participant mentioned the regional aspect of the WTO accession. This may be explained by the fact that this aspect concerns

29

government and society rather than business; but in any case Russia’s imbalanced regional, social, and economic development is one of the main difficulties that needs to be addressed during the WTO accession process as, according to social scientists, Russia represents four different countries:16

1. “Big cities Russia” – 12 cities with population exceeding 1 million and cities with population exceeding 500 thousand people (30 percent of the country population).

2. “Medium industrial towns Russia” with the population from 20 thousand to 250 thousand, sometimes including big towns with the population from 300 thousand to 500 thousand (Cherepovec, Nizhny Tagil, Magnitogorsk, Naberezhnye Chelny) and even Tolyatti with the population of 700 thousand (25 percent of the country population, 10 percent of them living in single-industry cities).

3. “Peripheral Russia” consisting of 38 percent of the country population living in villages and small towns.

4. “Northern Caucasus and Southern Siberia Russia” (The Republic of Tyva and Altay) composing 6 percent of the country population.

Balancing between the interests of the four Russias, minimizing negative consequences, and using new opportunities related to their accession to the WTO is a serious challenge which, according to the experts, has not been addressed yet on either regional or federal levels. However, some business representatives do not see any point in preparing for Russia’s accession to the WTO. "It is too early to develop a strategy. You can start doing that not earlier than 2015. No one knows yet how to work in the framework of the Customs Union, let alone the WTO. The WTO is a kind of a «rocket science». At the moment we’re waiting, looking, observing and enjoying the show. The strategy will be prepared when customs officers, tax inspectors and the Finance Ministry will publish legislation and legal framework changes, which will have an impact on business. Until we get customs rates for the relevant product codes from customs officers, the WTO remains on paper. Until the speed of customs clearance changes and we see the results of this in profit and loss statement, all the changes have an indirect impact." (Executive Director of an American company in Russia)

16

Natalia Zubarevich, Four Russias. Vedomosti. December 30, 2011. Available at:

http://www.vedomosti.ru/opinion/news/1467059/chetyre_rossii

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"Those companies that were actively involved in the preparation to the WTO and were interested in receiving information were the first to start preparing adaptation strategies. Many businessmen pointed out that the biggest issue related to the WTO accession is our bureaucracy, namely how fast and in what way state representatives respond to the enquires and complaints of businesses. Indeed, large companies have started to develop such strategies. As always, there are better performers and laggards hoping that the government will help and save them in critical time.” (Alexey Portansky, Professor of the Department of World Economy and International Affairs at the Higher School of Economics (HSE), Leading Research Fellow of the Institute of World Economy and International Relations of the Russian Academy of Sciences (RAS).

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Life after the WTO Accession: Performance of Dispute Settlement Body17

The performance of the Dispute Settlement Body is not in the scope of our research of WHO. Nevertheless, as it was already mentioned, the dispute settlement mechanism of WTO is one of the most effective in the international arena, and Russia will probably start its work within the WTO facing dispute settlement. Russia is expected to be a defendant in cases connected to anti-dumping, sanitary, and phytosanitary measures and intellectual property rights (TRIPS). Therefore, this section is devoted to the most interesting issues related to dispute settlement and the performance of the Body. About 70 percent of the decisions taken by the Body on dispute settlement are appealed as appeals are free, help delay decisions, and provide local politicians with an opportunity to ‘save face’ in their respective countries. In practice, an applicant usually wins a case. Dispute settlement remains confidential during the whole process until the official result of the Body and the appeal committee of the WTO is publicly announced. Since disputes are not discussed in public (except for dispute initiation), the image of a defendant country is usually negatively affected. If a state is found guilty of violating the WTO rules, it should amend its national legislation to remove or change all aspects that are at odds with the WTO. Monetary compensation for damage is not used to settle disputes. Meanwhile some sort of compensation (additional favorable conditions offered by the side which was found guilty) could be temporarily used as a legal remedy before proper amendments to the legislation are introduced. The compensation could also be legalized as reimbursement (suspension of favorable conditions); however, this practice needs a special approval of the Dispute Settlement Body. A country that was found guilty is expected to fulfill the decision of the Body promptly. As it is not always possible to do it promptly, it needs to be done in a reasonable period of time. The Body considered 26 disputes in 2011 alone, which is a significant amount for one year. Most disputes were about trade protection measures, namely use of anti-dumping and compensation measures and guarantees, as well as services (GATS) and investments (TRIMS). 17

Materials for this section are provided by the Senior Lecturer, City University London, David Collins.

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Interestingly, the US has most often used the trade settlement mechanism and it most frequently acts as an applicant as well as a defendant. During the whole period of the Body’s activity since the WTO establishment in 1995, there have been 454 disputes brought to the WTO; however the number of appeals has been decreasing recently.

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Afterword

According to the research, the discussion about Russia’s accession to the WTO and its consequences has led to a serious division within the expert community, similar to the one that used to be between the “Westerners” and the “Slavophils” on Russia’s development. In our opinion, reasons for this division are hidden in culture and the doubts of experts concerning the need to join the WTO are based on the following. Russian18 (Российская), and previously Soviet and Russian (Русская) cultural traditions implied binary (dual) world perceptions: white against black, good against bad, ours versus alien. In our case black-white responses to Russia’s WTO accession are predetermined by our historic and cultural traditions. The lack of serious and substantive discussion on this and other topics urgent for Russia’s development in practice leads to ‘bad’ – expensive and not most optimal – decisions and unpredictability of the government’s actions for business and society when such decisions have to be developed and revised and mistakes have to be corrected on the run. Meanwhile the development of the civilization entails Russian society shifts from binary (dual) to the ternary (triple) cultural paradigm, which is more common for most Western cultures. The western cultural tradition implies that the world is diversified and oriented more on the evolutionary consciousness and development. Russia’s accession to the WTO helps us engage more not only in trade relations but also in further cultural dialogue with the rest of the world to preserve the opportunity for further evolutionary development of our country. Russia’s participation in such organizations as the WTO is also important from the perspective of a constructive dialogue aimed at reaching reasonable compromises with the rest of the world without ignoring national interests. “Transition from the thinking of revolutionary explosions to the philosophy based on evolution gains a special meaning, because all our previous cultural patterns tilted to polarity and maximalism.” “The current cardinal change in relations between Eastern and Western Europe may be an opportunity to switch to the European ternary (triple) cultural paradigm and abandon the idea to completely

18 For more details on binary and three side cultural paradigms read Lotman Y. The point of turn // Literature newspaper. June 12, 1991. № 23.

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destroy the past to build a new future. It would be a disaster to miss this historic momentum.”19

19 Lotman, Culture and Explosion, 2009.

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Annex 1. The WTO in Facts and Figures

World Trade Organization (WTO)20

A global organization regulating trade relations between its member states;

Is established on January 1, 1995 based on the Uruguay Round of negotiations taking place from 1986 to 1994 and the 1947 General Agreement on Tariffs and Trade;

157 member states;

The WTO headquarters is situated in Geneva, Switzerland;

Director General — Pascal Lamy;

Budget is EUR 163 mln as of 2012;

640 employees;

Official languages: English, French, and Spanish. WTO and Russia

Full member sinсe August 22, 2012;

Unprecedented 18-year accession negotiations from 1993 till 2011. During this period the Working Group conducted 29 regular sessions to harmonize accession terms;

After Russia’s accession the WTO controls about 95-97.1 percent of world trade (different estimates);

Some consequences of Russia’s accession: o Equal access to the economies of 156 states in the world; o Gradual reduction of average customs tariffs from 10 to 7.8 percent

(average?); o Up to a 11 percent GDP growth rate in the long term (World Bank

estimates); o Removal of export restrictions amounting to $ 2 bln annually

(estimate by the Ministry of Economic Development of Russia).

20

Data as of January, 2013. Details are available at the WTO official web-site www.wto.org

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Annex 2. Brief Information: Russia and the WTO

The longest negotiations on Russia’s accession to the WTO had been conducted for 18 years, from 1993 till 2011. Russia is the last member of the Group of twenty major national and EU economies (G20) and the last member of the five BRICS emerging economies to become the 156-th WTO member. It officially joined the WTO on August 22, 2012.21

Chiedu Osakwe, Director of the WTO Accessions Division, said that with Russia the WTO would regulate up to 97.1 percent of world trade.22

Underlying Principles and Rules of the WTO

Provision of mutual most favorable treatment regime in trade;

Provision of mutual national regime to goods and services of foreign origin;

Trade regulation predominately by tariff means;

Removal of quantitative and other restrictions;

Transparency of trade policies;

Dispute settlement through consultations and negotiations, etc.

Main Functions of the WTO

Liberalization of trade regimes and removal of barriers in trade between

member states;

Multilateral trade negotiations between member states concerned;

Trade disputes settlement;

Monitoring of national trade policies;

Technical assistance and training for developing countries within the WTO

jurisdiction.

21

Federal law ‘On Ratification of the Protocol on the Accession of the Russian Federation to the Marrakesh

Agreement on the Establishment of the World Trade Organization dated April 15, 1994’ was adopted by the State

Duma on July 10, 2012, approved by the Federation Council on July 18, 2012 and signed by the President July 21,

2012. Russia has become a full member of the WTO on August 22, 2012.

22 Director-General’s Statement on Russia’s Accession, December 16, 2011// Available at

http://www.wto.org/english/news_e/sppl_e/sppl213_e.htm

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Russia’s WTO obligations are enshrined in the Protocol, List of Commitments on Goods, and List of Commitments on Services that are part of the Protocol as well as the Report of the Working Group on Russia’s WTO accession. The rights and commitments to WTO members will affect Russia in three main ways. First, its membership will influence the goods exports and imports, second, commitments will impact the services market, third, and they will concern investments and intellectual property. As a result of Russia’s accession to the WTO customs duties of imported goods should be reduced from the current average 10 percent rate to the new 7.8 percent rate. In specific sectors such as machinery customs duties rates should be reduced from the current average rate of 25 percent to the new 15 percent rate. Import customs duties rates on 1/3 of all goods are expected to be reduced starting from 2012, on another 1/3 of all goods – starting from 2015, and on a final 1/3 of all goods – starting from 2018. These reductions are expected to cardinally increase import of goods. The European Union as the main trade partner with Russia assesses that reduced tariffs will help European exporters to save EUR 2.5 bln on import tariffs only. It will allow the European Union alone to export additional goods in the amount of EUR 3.9 bln annually.23 Russia has taken on commitments on 116 out of 155 services listed in the WTO services nomenclature. These services include banking and other financial services, all insurance and insurance related services, accounting and audit, telecommunication services, etc. The World Bank estimates that the consumption of services in Russia will increase by 5.3 percent after the WTO accession.24 Within the WTO framework, Russia takes on commitments ensuring national treatment (NT) for foreign services providers, i.e. the application of the same rules for both foreign and Russian services providers. Russia also provides access to Most-favoured-nation (MFN) treatment implying that if Russia provides favorable legal treatment for foreign entities from one WTO member this treatment is also extended to all other WTO members.

23

Europe Portal (2011), EU welcomes Russia's WTO accession after 18 years of negotiations. Available at

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/906&format=HTML&aged=0&language=EN&guiL

anguage=en

24 Thomas Rutherford, University of Colorado and David Tarr, The World Bank. Russia’s WTO Accession: What are

the macroeconomic, sector, labor market and household effects? Available at

http://siteresources.worldbank.org/INTRANETTRADE/Resources/Topics/Accession/Rutherford-Tarr_russia-macro-

effects.pdf

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The WTO is based on the system of agreements in six main sectors. Russia’s current status with regard to them is as follows:

Trade in Goods (regulated by the Agreement on Goods)

Reduced imports customs duties rates: on 1/3 of all goods starting from

2012, on 1/3 of all goods starting from 2015, on final 1/3 of all goods

starting from 2018.

Trade in Services (regulated by the Agreement on Services)

Russia has taken on commitments on 116 out of 155 services listed in the

WTO services nomenclature.

Investment (regulated by the Agreement on Trade-Related Investment

Measures (TRIMS)

With regard to the obligations on investment programs in the automotive

industry Russia has retained the right to introduce temporary measures

inconsistent with WTO rules.

Intellectual Property (regulated by the Agreement on Trade-Related

Aspects of Intellectual Property Rights (TRIPS)

It sets the conditions for extending the 1994 GATT regime to results of

intellectual activities, defines rights and obligations of Russia as a WTO

member in intellectual property protection for trade in goods.

Dispute Settlement Mechanisms (regulated by the Understanding on rules

and procedures governing the settlement of disputes (DSU)

Trade disputes are settled in the WTO in different ways. Settlement of

national trade disputes through consultations and negotiations is

preferable; and this procedure is obligatory at the initial stage of disputes;

but it is not always effective. Access to the WTO dispute settlement

mechanism ensures the protection of Russian interests if they are impinged

on by its partners (see more on this in a section p. 31)

State Procurement (regulated by Trade Policy Review Mechanism (TPRM)

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It regulates rules and procedures on tenders in conducting state

procurement of goods and services. Government agencies will conclude

agreements based on transparency under the published laws, regulations,

and recommendations. The Russian Federation submitted an application of

the observer status under this Agreement after its WTO accession and has

started negotiations on joining this WTO Agreement.

Russia in its commitments has made several reservations with regard to foreign

partners, they include:

Pricing (a transition period to harmonize railway rates meanwhile they

discriminate import of goods);

Special economic zones (transition periods for the Kaliningrad and

Magadan SEZs);

Technical regulation (the permission to keep All-Union State Standards that

are incompatible with WTO rules if they are not challenged by WTO

members);

Agriculture (the permission to increase federal government’s aid to

agriculture);

TRIMs (as concerns the obligations on investment programs in the

automotive industry Russia has retained the right to introduce temporary

measures inconsistent with WTO rules).

Following Russia’s accession to the WTO Russian entities may enter foreign

markets in line with commitments made by the respective WTO members. Such

commitments may be more favorable for Russian entities than their treatment

prior to Russia’s accession.

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Grayling Russia has a long experience in crisis management and the established methodology that we propose to our clients in training on crisis and media communications.

Our team on government relations is effective and compliant with all the ethical standards. We have a deep understanding of the federal government and parliament work. We also have developed a unique and detailed regional and federal methodology to support large foreign direct investments, including the search for construction sites and license obtainment.

In 2008 Grayling Russia was praised as the best agency in government and public relations in Europe, the Middle East and Africa, according to the Holmes Report, a leading international PR-magazine, and in 2009 was awarded with the international Stevie award for the “Communication campaign of the year in Europe.” In 2011 Grayling achieved European Excellence Award as the best European agency of the year. Grayling’s PULSE project received Holmes Report Silver SABRE Award in 2013.

Contacts Pavel Melnikov, Vice-President on Public Affairs and Crisis Communications, Grayling in Russia Office: +7.495.788-67-84; Mobile: +7.963.963.19-29; pavel.melnikov@grayling.com www.grayling.com

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Information on Law Firm ‘Muranov, Chernyakov, and Partners’

Established in 2003; the geography of activities covers Russia and CIS countries, Western Europe, and the US.

More than 30 high-quality attorneys and lawyers work in the firm; and it provides legal services to a wide range of clients, including Russian and international companies, financial institutions and governmental agencies.

The firm is annually included in top ratings of international legal guides such as Chambers Global, Chambers Europe, The Legal 500, Who's Who Legal, Best Lawyers; the lawyers of the firm are rewarded by such international awards as Corporate International Global Awards 2012, The Lawyer European Awards 2012, ILASA Awards 2012, Legal Success 2012, The British Legal Awards 2011, etc.

We represent the interests of clients and consult them in litigation and international commercial arbitrage and provide legal services in the WTO legislation, antimonopoly laws and corporate laws.

Sectoral specialization: banking, real estate and construction, energy and natural resources, communications and telecommunications.

Experience in the WTO legislation

We consulted international and Russian companies with regard to Russia’s commitments to the WTO, positive and negative consequences of the WTO accession for oil, banking, steelworkers companies, alcohol and food industries.

We presented the interests of the group of 131 Russian MPs in the Russian Constitutional Court concerning the possible unconstitutionality of the then non-ratified Protocol on Russia’s accession to the WTO.

We represented the Federal Chamber of Attorneys in the WTO context in its relations with governmental agencies (The Ministry of Justice of Russia and the Ministry of Economic Development of Russia).

We conducted a basic analysis of the legal consequences of Russia’s WTO accession for various sectors of economy (these reviews are available at www.russia-wto.ru) as well as an analysis of the consequences for the Russian legal business; the work was followed by the project www.wto-legalservices.ru.

Contacts Alexander Muranov, Managing Partner, Head of the WTO Legislation Practice +7.495.783-74-50; a.muranov@rospravo.ru www.rospravo.ru www.russia-wto.ru