RF Trade Policy between protectionism and liberalization

Vladimir Zuev,
Higher School of Economics Moscow – National Research University,

Academic Director,
Master in International Trade Policy,
Higher School of Economics Moscow – National Research University,

  1. Russian trade potential

Russia is the largest country in the world. It occupies more than 17mkm² of land. An estimated 22-25% of the global mineral resources belongs to Russia. Russia has an enormous trade potential, at least in resources needed at the global markets. On top of that, Russia is the second most important country in the world by natural water deposits with the biggest natural water lake Baikal. Russia has the largest surface of the extremely fertile land, where fertilizers are hardly needed to get a good crop. Territory, together with the natural water resources, provides an exceptional opportunity for Russia to become a global food power. However, despite this exceptional nature-based potential, the current Russian share in the total world exports remains quite modest – less than 2%. Thus, the general ambition for the Russian trade policy could consist in developing its trade links on a par, or at least somehow up to a high level of its resources potential.

  1. Difficult path to trade liberalization

In 1991, when the Russian Federation was set up, the stance of the reformers, headed by E. Gaydar, was very liberal towards many economic policy issues (privatization, market reforms and trade liberalization). In 1991-1994, while negotiating the Partnership and Cooperation Agreement (PCA) with the EU, Russian side proposed to establish an FTA. This idea was part of the concept advanced by the intra-ministerial Commission to deal with the EU, headed by I. Ivanov.[1] The EU was hesitant to accept this gracious offer as Russia was on its way to a market economy without an appropriate set of institutions. An agreement to sign an FTA was not reached. However, negotiators agreed to come back considering the feasibility of the FTA at a later date. In 1994 the PCA was signed at Corfu. In 1998 the deep economic crisis hit the Russian economy hard and it went from liberalization towards a hard protectionism of the national economy, including by high tariffs. Receipts from import tariffs started to account for 30 to 40% of the state budget revenues. Russian average trade tariff protection started to be three times higher than the EU average. And the Russian government said a long time good-bye to the idea of introduction of the FTA as a mean to liberalize trade with its main trading partner.

  1. Russian way to trade liberalization in the long-time romance with the WTO

A milestone change in the Russian trade policies occurred at an entry into the WTO. The Russian Federation became the 156th WTO member in August 2012. That was not an easy decision both for Russia and the WTO members. The fact that negotiations lasted 18 long years is revealing in itself. For Russia that was a hard choice between coming back to trade liberalization as at the start of reforms or continue protectionism as usual. Global financial and economic crisis was another serious test for a Russian move for trade liberalization, as for many other states.  Russia was hit hard by the global economic crisis with a GDP loss of 9%.  Nevertheless, the choice was made in favor of joining the WTO, aiming to make national companies work harder to lower costs down and upgrade their competitiveness. However, the reaction from the national industries was to seek governmental protection and to look for a compensation from the state for the lost protection of the domestic market. The increase in production efficiency to sustain higher competition was the least thing business community thought of as a measure to adapt their policies to the WTO entry.

  1. Trade policy under economic sanctions

Ukrainian crisis and economic sanctions against Russia from the Western states that followed and further counter- sanctions from `Russia were another serious test on the Russian way to trade liberalization. A lot of experts outlined a relatively low efficiency of economic sanctions. However, the effects of sanctions should not be found only as a direct impact on a particular industry. Sanctions change the whole climate for economic relations. Countries stop relying on a partner under sanctions, which prevent them from concluding contracts, investing capital, etc. Intensification of the EU energy security policies to pass on to renewables in a faster way was clearly fostered by deterioration of economic climate between the fossil fuels dependent EU and fossil fuels abundant Russia. Energy prices could have been much higher, energy infrastructure could have been more developed, including a faster approval of the Nord Stream 2nd line, diversification of energy supplies to the EU away from Russian sources would not be that intense. Overall, the greatest loss from sanctions for Russia comes from the lost energy incomes, which are difficult to evaluate. And more effects are yet to be felt. On the Russian side, we witness an increased support for the national industries and bankers under sanctions, import substitution and a growing agricultural production to the joy of agricultural producers, that were not that much favored before the sanctions.

  1. Russia in the EAEU

Eurasian Economic Union (EAEU) Treaty, operational since January 2015 was another milestone change in Russian trade policy meaning the transfer of the national sovereigntyt to master the external trade policy to the common EUAE authority level. Setting up the EAEU was both the reflection of the global trend of the new regionalism on the rise and a manifestation of the Russian wish to safeguard former partners and attract the new ones by the solid regional initiative, the way other countries in other regions are doing it. Within the Union the level of trade liberalization started to be much higher than it used to be, irrespective of the persisting problems and frequent exemptions from the established common trade rules. That is already a great achievement. However, at the time of digital transformation and an increased technological competition, Russian partners in the EAEU can not boast to be among the most tech advanced economies of the world. Thus, a digital transformation challenge is standing high on the EAEU agenda, that implies an appropriate liberalization, this time of the e-commerce, assuring free flows of information and tech ideas, safeguarding intellectual property rights, etc. Stakes of not meeting these new challenges are high. To wake up one day among the losers in that battle, behind the line of digital divide will mean putting your economy decades behind the leaders.

  1. Russia in the EAEU joining the global FTA trend

Relatively low energy prices (oil at around $60/bl) for a relatively long period of time (last decade) made it more difficult for Russia to ignite growth from the energy exports receipts. It pushed the country searching new growth stimulus. External trade is an important driver of sustainable development in many countries from the EU to South Korea. And FTAs are universally considered as useful tools to foster trade and development. According to the WTO, more than 300 FTAs are in active use around the globe to stimulate trade and investment flows. Until recently, this was not the case for Russia. The situation is undergoing a radical change. FTAs with Vietnam, Iran, Serbia and Singapore are the first ones for Russia in the EAEU. Some 30 (!) new RTAs are under consideration with different countries from Egypt and Israel to India and the New Zeeland. Concluding an FTA is a trend and a fashion. Every country is doing it. Russia in the EAEU is joining the global trend of RTAs multiplication. That is a new form of trade liberalization. How numerous and how deep the new EAEU FTAs will be? A lot will depend on the outcomes of the first RTAs. The one with Vietnam (2015) had a relatively low initial impact on Russian exports. Subsequent developments demonstrated a much faster trade growth both for Russia and Vietnam. Whether this new form (for Russia) of trade liberalization will cover advanced economies is another key challenge for the national trade policies. So far, only minor percentage of Russian external trade falls under the FTAs regime, which means that Russia remains on the test ground for this instrument of trade liberalization. Thus, it is too early to come to a conclusion of a new period of trade policy liberalization, building up in Russia. The preferred scenario for Russia would be definitely on the liberalization track to benefit the national economy and make it work efficiently for sustainable development in the longer term.

[1] I assisted the work of the Commission from the academic community, representing the major Russian think tank at that time – IMEMO of the Academy of Sciences.



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