LONDON — The accession of Russia to the World Trade Organization (WTO) earlier this week as its 156th member opens up new possibilities in trade and investment cooperation not only with markets in the European Union, the US and China, but also with the Islamic World especially Saudi Arabia, Malaysia and Turkey.
Just as the Kingdom and China had a phased-in transition period after their accession to the WTO, Russia similarly will have a grace period of a number of years to comply with the various trade liberalization, dispute resolution and procurement provisions which are a condition of its membership of the world trade body, which in turn in many respects is trying to re-invent itself in the wake of the impasse in the last Doha Round of trade liberalization negotiations.
Whether Russian accession gives a much-needed boost to the Doha Round, albeit psychologically, remains to be seen. But Russia was the only G8 country which was not a member of the WTO, and is the 9th largest economy in the world totaling US$1.9 trillion which until now was not a part of the world trade club.
It is no secret that Riyadh’s current relations with the Kremlin are strained over the latter’s unwavering support for the beleaguered regime of Bashar Al-Asad in Syria and the remarks made by senior Russian officials about the recent death of a Shia cleric in the Eastern Province.
In fact, this overspilled into the realm of trade and investment when in June this year the Riyadh Chamber of Commerce and Industry and other Saudi trade bodies snubbed an official Russian trade delegation on a visit to Saudi Arabia.
The irony, of course, is that Saudi Arabia was the last WTO member with whom Russia held bilateral negotiations on market access in June 2008, which indeed paved the way for the completion of the multilateral negotiations leading to this week’s formal WTO accession.
Under the bilateral WTO accession agreement, Riyadh gave consent for Russia to become a WTO member, while Moscow agreed market access for Saudi exports of dates, cement, oil and oil products, fertilizers, plastics, carpets, glass and cables.
But a week can be a long time in politics. Given the fact that Russia and Saudi Arabia are two of the world’s largest producers and exporters of crude oil and natural gas, and because of manifold other reasons, it may be inevitable that their paths will become more entwined irrespective of whether they intend for it to happen or not, especially in a post-Asad era.
The business case is there. In terms of proven crude oil reserves, Saudi Arabia, according to OPEC, boasted 265,405 millions of barrels at the end of 2011, while Russian had 77,403 million of barrels. The figures are reverse when it comes to proven natural gas reserves for the same period, with Russia totaling 46,000 billion standard cubic meters of natural gas reserves compared with Saudi Arabia’s 8,151 billion standard cubic meters.
Russia is the world’s largest producer of crude oil with a daily average of 9.9433 million barrels per day in 2011 compared with Saudi Arabia’s 9.311 million of barrels per day. Similarly Russian marketed natural gas production in 2011 totaled 629,003 million standard cubic meters compared with 92,260 million standard cubic metres for Saudi Arabia.
The Kingdom, however, is the world’s largest crude oil exporter with exports in 2011, according to OPEC, averaging 7.218 million barrels per day, compared with Russia’s 5.786 million barrels per day. The Kingdom exported 4.487 million barrels per day of crude oil to the Asia Pacific region, especially China, Japan and South Korea, and 1.313 million of barrels per day to North America.
As such it is only natural that the two countries may seek to cooperate in this vital sector, which may lead to similar cooperation in other areas such as aluminum where Russia’s Rusal is one of the world leaders and Saudi Arabia’s Alujain is a relatively newcomer, as both countries seek to diversify their economies away from oil, gas and petrochemicals.
Temporarily strained political relations are not enough of a barrier in the above respect. The old Soviet Union, for instance, used to have clandestine contacts in the 1980s with apartheid South Africa to discuss mutual interests in managing world diamond production and trade, of which they were the two largest producers.
Accession is not going to change much in the short-term, in which investors and the ordinary Russian consumer will be the biggest beneficiaries as tariffs start to be lowered on various goods with the aim of eventual elimination, and foreign companies and institutions have greater access in the wake of greater market liberalization.
After 19 years of negotiations, the knee-jerk reaction of some Russian companies suddenly faced with the prospect of competing with cheaper and perhaps better quality products from abroad, will inevitably question whether accession is really worth it.
But these are only natural reactions. The real challenge is whether the Russian economy can change its mindset — both at a policy, public and private sector level — to accommodate the challenges and vagaries of a liberalized market which WTO accession ultimately aspires to and forces upon members.
New WTO accessions usually bring high expectations of a surge in foreign direct investment (FDI). This was indeed the case when Saudi Arabia became the 60th member and China acceded to the WTO in 2001.
In a recent interview with Bloomberg TV, Pascal Lamy, the Director General of WTO, confirmed: “If you look at WTO accessions over the last 10 years, starting of course with China, Ukraine, Vietnam, Saudi Arabia, Cambodia — in all these cases, accession to the WTO has been followed by a clear increase in foreign direct investment flows and for a simple reason, which is that once a country joins the WTO, it sort of gets a quality label which investors value and it immediately reduces the risk premium. It’s a sort of guarantee that if you invest in this country, you will be treated according to normal modern market economy conditions.”
Crude oil refining is one area where there could be further synergies. Russian refining capacity in 2011 totalled 5.4309 million barrels per day, compared with Saudi Arabia’s 2.107 million barrels per day. Russian oil infrastructure desperately needs inward FDI , and Saudi entities such as Saudi Aramco and SABIC may well consider selective and strategic joint ventures with Russian counterparts if largely for diversification purposes.
The two countries also have a shared interest in cooperating especially as the anti-fossil fuel renewable energy lobby, especially in the West, gains momentum.
With Russia having several autonomous Muslim republics; an estimated Muslim minority population of between 30 million to 50 million; and bordering Azerbaijan and Kazakhstan and in close proximity to several others including Turkey, which has the largest army in NATO, it becomes incumbent on Riyadh to promote the interests of Muslim minorities abroad as one of the stated objectives of Saudi foreign policy.
In a recent statement, Ekmeleddin Ihsanoglu, Secretary-General of the Organization of Islamic Cooperation (OIC), following on from a recent visit to the Kremlin, reiterated the importance of OIC relations with Russia, which in fact became an observer member of the organization in 2005.
“Everyone knows that Muslims in the era of the former Soviet Union, which spanned nearly 70 years, were subjected to harsh conditions because of their faith and suffered intense persecution and repression. However, they held fast to Islamic civilization, culture and values in their daily lives. Conditions have changed radically since the 1990s, but they still suffer from tremendous pressure. We seek to overcome such pressure through our good relations with the Russian government. We have also prepared a plan to serve the interests of Muslims in Russia.”
With financial liberation on the cards as a result of Russian membership of the WTO, the country could potentially also become an important new market for Islamic finance, especially as both Russia and the autonomous Muslim republics seek to raise funds to finance infrastructure and other development. Already the state government of Moscow has indicated that it is interested in issuing Sukuk to finance infrastructure projects in the capital. Russia’s largest investment bank VTB is also in the throes of finalizing its debut Sukuk issuance. But the best potential comes from Tataristan, where the state government has already set up a technical committee which includes banks from Malaysia and elsewhere to advise it on the issuance of its debut Sukuk issuance. The Islamic Development Bank Group is also very active here and set up in 2011 the Tatarstan Islamic Investment Company with the state government.
With China, the similarities however end there. Russia may not be as equipped as China was to reap the benefits of WTO membership in 2001. China has since then become the manufacturing sweathouse of the world. But they may have been due to the fortune of good timing and a strong global economy.
In today’s difficult global economic and financial climate even the Chinese economic miracle has been stalled and WTO accession has not done much to transform the structural deficiencies of the Chinese economy. In fact, one can argue that it may have unwittingly delayed much-needed reform of the Chinese economy and financial sector. So much for China’s supposedly ‘Big Bang’ accession to WTO.
Russia, like China, also has a reputation of being a difficult place to do business – where there is a lack of a world class regulatory and legal framework, and a lack of transparent recourse to the law through the courts process.
President Vladimir Putin also has potential problems at home, for dismantling protective barriers means that large sectors of Russian industry may struggle to compete because of outdated technology, inefficiency, poor marketing, inferior products and lack of investment.
But, in joining the WTO, Russia has committed to non-discriminatory treatment of imports of goods and services; reducing tariffs and binding tariff levels; ensuring transparency when implementing trade measures; limiting agriculture subsidies; enforcing intellectual property rights (IPR) of foreign holders of such rights; forgoing the use of local content requirements and other investment measures that limit imports; accepting WTO dispute settlement procedures; and opening government procurement contract opportunities to foreign firms.
In the short term Russian exporters stand to gain up to an estimated US$2 billion a year from the dismantling of foreign barriers. The World Bank estimates that Russia will eventually gain between US$53 billion and US$177bn per year because of WTO membership, reducing poverty and raising the living standards of millions.