After Putin's announcement on June 9 I was tempted to place another bet that accession would not take place either this year or next. However, Medvedev's recent intervention in the debate makes it far more likely.
Strictly speaking, Vladimir Putin's declaration that Russia would now be applying for admission to the WTO as part of a Customs Union with Belarus and Kazakhstan could hardly have been described as anti-liberal or harmful to the development of Russia's international relations. On the contrary, it was very much in tune with the world tendency towards strengthening regional trading links, as opposed to multilateral. The best example of this is the European Union. The creation of the WTO stimulated the growth of regionalism and the failure of the Doha Round further accelerated this process.
Why then has Prime Minister Putin's stance found no support among the experts, or at least those who do not have any special interests? The answer is that stressing regional links with Kazakhstan and Belarus to the detriment of developing multilateral links within the WTO is not actually in Russia's interests. Indeed it sworks against them.
The main victim of this decision will be the diversification of the Russian economy, the need for which has been discussed for a long time and in the highest places. To be more precise, not the diversification, but its frail green shoots. What is implied by diversification is the increase of the non raw-material sector in Russia's output: the priority development (or, in current conditions, the slower decline) primarily of the manufacturing industry and the service sector, as these are the areas where we can compete on world and domestic markets. In order for a sector to grow faster (or to slow down the decline) priority needs to be given to investment of both financial and human capital. What is needed to make a sector competitive is investment in three areas: new technologies, more qualified workers and management personnel. Omitting even one of these categories will render the others meaningless. Investing in general and professional education and new business schools is first and foremost a matter for Russian investors, but only foreign investments will enable Russia to acquire new technologies.
It seems to me that no right-thinking person in Russia, whatever their economic or political affiliation, can hope that new technologies will appear in Russia without foreign investment. But the last 50 years have revealed something else , which is less well known to the general public: the volume of direct foreign investment between two countries is proportionate to the volume of trade between them. Russia will acquire new technologies as she develops her trading relations with those partners who have those technologies. As with everything in economics, this does not guarantee the immediate arrival of new technology in the country, of course, but it significantly increases its probability.
The message of the government's new rhetoric would appear to be that Russia is banking on Kazakhstan and Belarus to provide new technologies. Unfortunately I can't recall anything particularly high-tech or competitive in the economies of these countries, which could contribute to the diversification of Russia's. But volumes could be written about new technologies developed by other countries, with whom trading relations have today been downgraded.
There are no grounds for hoping that the loss of investment potential will be compensated by Russian manufacturing successes in the wider reaches of the Belarusian and Kazakh markets. The industrial structure of these countries are much too similar - they have, after all, sprung from a single Soviet stem - and not one of the members of the future Customs Union can boast conditions favourable for business.
So from an economic point of view the idea of a custom union with Kazakhstan and Belarus should not regarded as a priority for Russia's trade policy at all. Strengthening Russia -EU trade relations and WTO accession are the instruments of trade policy that would help diversify Russia's economy and ensure its stable development.
Comments
Would it be right to presume that Russia's decision to seek WTO accession together with Belarus and Kazakhstan is motivated by a desire to delay the process without explicitly killing it?
It would be interesting to understand precisely who would be most hurt within Russia by WTO accession -- presumably there are all sorts of service sector interests related to the extractive industries that would need to open up to competition?
On the argument that WTO membership is needed for economic diversification --- isn't the much bigger factor in Russia a large-scale "Dutch disease", where it is very difficult to attract factors of production into sectors unrelated to the natural resource base? In other words, the ideal of the small country manufacturing economy which most of neoclassical trade theory seems to based around is so far from the reality in Russia that is this really the right framework to be thinking about trade issues for Russia?
Tony
Sure, the questions raised by Tony are the valid ones.
Tony is right - services around extraction sectors are very opposite to this accession. However this sector is absolutely nontransparent and we hardly can do any research about it. As far as other interests are concerned - I have some piece about it written some time ago. You can read it in the Russian Analytical Digest at: http://www.isn.ethz.ch/isn/Digital-Library/Publications/Detail/?ots591=0C54E3B3-1E9C-BE1E-2C24-A6A8C7060233&lng=en&id=32675
On Dutch disease - I am studing this issue over last 4 years - both in Russia and outside. I am not a fan of this theory. I do not see so called symptoms of Dutch disease in Russia and there are studies about other countries that also undermine this phenomenon. Contrary, in many cases there is a positive effect of short term increase in resource prices on the development of manufacturing. I have some ideas why it could be the case, but it requires further analysis.
I am in favor of so called Resource curse hypothesis - that relates the problems of resource rich countries to various institutional underdevelopment. My paper on human capitals studies one of the possible mechanisms. My colleagues Sergei Guriev and Konstantin Sonin studied other possible mechanisms and showed very interesting results as well.
Why Putin did this? I believe this was something very much spontaneous. Ironically, but his declaration was a big surprise to major people who deal with Russian WTO accession (they learned about it from journalists) . Not surprisingly it gave Medvedev the power to revert this declaration. By the way this is the first time he opposed to Putin. So there is a hope that changes are still possible in Russian politics.
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