Let’s hoist a glass of Stolichnaya to some of the top Fortune 500 industrial giants in a Russian mood these days. Boeing, BP, Cargill, Caterpillar, Chevron, Cisco, Dow Chemical, Exxon Mobil, Ford, General Electric, General Motors, International Paper, Medtronic, Microsoft, PepsiCo and Procter & Gamble all are considering investment projects in Russia now that it has joined the World Trade Organization.
Their goal, of course, is to kick their way through the door to the “R” in the BRIC upstarts of emerging nations and its rapidly expanding $400 billion import market.
It’s certainly not a done deal, and even when the U.S. and Russia clear away the political hurdles that block normal trade relations, endemic Russian corruption and poor infrastructure won’t be solved overnight. But the establishment of normal trade relations with Russia could mark one of the most significant steps in U.S.-Russian commercial relations since the end of the Cold War.
“The step to join the WTO was a signal to the world and within Russia, too, that the reformers have taken a step forward and won the battle with the hard-liners,” said Randi Levinas, executive vice president at the U.S.-Russia Business Council. “So now the challenge is to keep strengthening their hands within Russia.”
Any progress on boosting U.S. exports to or investment in Russia depends on congressional passage of permanent normal trade relations, or PNTR, a bill already marked up by the Senate Finance Committee and the House Ways and Means Committee in July, but awaiting further action in the jam-packed session leading up to the election.
“None of Russia’s service commitments under WTO apply to U.S. companies and firms until we have PNTR,” Levinas said. “Without it, as former Ambassador to Russia Susan Schwab said, we don’t have much street cred.”
Lauren Airey, director of trade facilitation policy for the National Association of Manufacturers, said exporters of all sizes would benefit from PNTR with Russia. “More than 80 percent of the approximately 5,000 U.S. companies that currently export to Russia are small or medium-sized firms,” she said. “Small and medium-sized businesses account for nearly half of all U.S. exports to Russia. These businesses exported $2.1 billion of goods to Russia last year.”
Larger U.S. companies such as PepsiCo and International Paper, which already have investments in Russia, are solidly behind passage of PNTR because it will help them export more from the U.S. “They are all geared up to get PNTR,” Airey said. “U.S. exports are drawn by U.S. investment overseas. It enables open markets more than just exporting from here. That’s one of the important ways to increase our exports to those markets.”
The investment-hungry industrial companies listed above are all members of the Coalition for U.S.-Russia Trade, affiliated with the business council, which, along with the NAM and other U.S. companies, is pushing hard for PNTR passage. “Our ability to engage with Russia on a multilateral and bilateral basis depends on removing them from Jackson-Vanik and keeping our businesses on a level playing field with others. This will strengthen and encourage them to move forward with more reform in Russia,” Levinas said.
Jackson-Vanik is a Cold War relic passed as part of the Trade Act of 1974 to punish the Soviet Union for restrictions on the emigration of Jews. While long outdated, it requires annual certification that Russia does not restrict emigration as a condition of conducting normal trade relations. That process itself violates WTO rules, which require unconditional trade relations.
Congressional inaction on PNTR would give Russia an excuse to postpone lowering tariffs or removing non-tariff barriers on imports from the U.S.
Congress is likely to further complicate progress toward normal trade relations by coupling passage of PNTR with another provision called the Magnitsky bill, which would punish Russian officials allegedly involved in the death of Sergei Magnitsky, a tax lawyer working for the Hermitage Capital investment company, who died in custody in Russia in 2009, sanctions that have outraged Russian government officials.
“The Senate and House versions of the PNTR bill will have to go to conference and be paired with the Magnitsky bill,” said Anders Aslund, senior fellow at the Peterson Institute for International Economics. “My guess is that everyone has accepted that there will be PNTR and the Magnitsky Act.”
However Russia responds to passage of the Magnitsky bill, Aslund predicts passage of PNTR this year could result in a doubling of U.S. exports of goods and services to Russia from $11 billion in 2011 to $22 billion in 2017.
Unlike China, which joined the WTO in 2002 to gain access for its low-cost goods to markets in the developed world, “Russia is a high-cost producer and now a manufacturer, so it wanted to join the WTO in order to import more efficiently,” Aslund said. “The big gain for the Russian economy will come from more foreign direct investment and basic competition, in particular.”
Because of its oil and gas exports to Europe, Russia has a massive and persistent current account surplus of more than $100 billion, so it’s eager to enable more imports from Europe and Asia, its two largest trading partners — and the U.S., if politics permit. “They already have larger (foreign exchange) reserves than they really want at around $500 billion, so they are happy to reduce them.”
The U.S. runs a trade deficit with Russia — $26.3 billion in 2011, according to the U.S. Census Bureau — so WTO membership and passage of PNTR could help rectify the imbalance. U.S. exports of goods to Russia in 2011 totaled only $8.3 billion, but were up 37.9 percent from 2010. The U.S. imported Russian goods worth $34.6 billion in 2011, up 34.6 percent year-over-year.
The main U.S. exports to Russia last year consisted of nuclear equipment, 26 percent; frozen meats such as poultry and pork, 16 percent; and vehicles, 14 percent. Russia exports little in manufactured goods to the U.S., which mostly buys its oil, aluminum, iron ore and steel and uranium.
Passage of PNTR also would help pave the way for the bilateral investment treaty with Russia that the Office of the U.S. Trade Representative negotiated in April and that has received preliminary approval from the Obama administration. “When you have these new bilateral agreements, you do see new investment, because that’s a way for companies to get their products into that market,” Airey said.
After stagnating for two years in 2009 and 2010, the number of foreign direct investment projects in Russia grew by an estimated 16 percent last year, representing an increase in the value of FDI to $43 billion, according to Ernst & Young.
U.S. companies view Russia’s requirements under the WTO to open its import market to U.S. goods as the step toward pursuing more investment. “What you are looking at in terms of FDI is certainty, transparency and accountability,” Levinas said. “WTO membership is a first step to that.”
Still, Russia faces a significant hurdle in meeting WTO requirements for free trade because of the long-accepted practice by its customs officials of seeking bribes in order to not hold up import shipments. “In the beginning, it’s going to disrupt the bribe system, especially with customs,” said one shipping executive who requested anonymity out of fear of retaliation. “They can hold up a shipment for as long as they want to for an infraction or a theoretical infraction.” Over time, WTO rules will take hold, “because people will be going to jail, in addition to fines,” he said.
Russia will have to enforce WTO rules because the growth potential of its import market is so large that many exporters will be able to bring them to the attention of their Russian trading partners or file complaints with the WTO’s dispute-settlement mechanism. If Russia does not move to enforce the WTO rules, other countries can retaliate.
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“There will be a lot of cases against Russia in the WTO dispute-resolution settlement,” Aslund said. “This is the very point of WTO. There will be suits about property rights and probably about state enterprises. These cases will force Russia to become more law-abiding.”
The effort to enforce the new trade rules will be worth it for U.S. companies, “because Russian growth is stronger than in many emerging markets and certainly stronger than in our traditional markets,” Levinas said. “You’ve got a highly educated population, and great infrastructure and industrial needs.”
The Russian consumer market also offers an enormous opportunity for U.S. consumer-products companies. “P&G already does a huge business in Russia, a country where incomes are rising, and you’ve got consumers that are very choosy and do their homework,” Levinas said. Russia’s middle class, she said, represents a far larger share of the population than in other emerging markets such as China or India.
In addition, Russian demographic changes present a growing market for U.S. health care and pharmaceutical firms. “Look at the aging population and what that means for companies like Medtronic, which has made huge inroads into the import market,” she said.