Russian Machinations and the WTO

Russian Prime Minister Putin has apparently conditioned Russia’s entry into the World Trade Organization on the approval of its participation in a trading bloc with Belarus and Kazakhstan.  Frankly, I have never fully understood why Russia would ever want to join the WTO.  The Russian economy is largely dependent on the export of raw materials, and despite putative industrial diversification efforts, this is unlikely to change for the foreseeable future.  WTO membership principally benefits countries that export services.

Other than receiving a “good housekeeping seal of approval” and possibly to reassure foreign countries and corporations that it’s approach to international commerce is “heading in the right direction,” nothing precludes Russia from adopting laws under which it would unilaterally adopt WTO obligations and concepts that are consistent with its national interests.  Of course, prestige, ego and tradition enter into the equation, which in part explains why Russia is invited to G-8 (as opposed to G-20) meetings.

Perhaps Russia is seeking to maintain its central role in the Belarusian and Kazakhstani economies (and limiting their freedom to pursue independent policies in the process).  Of course, Kazakhstan has significant energy reserves and seemingly good relations with many Western states and corporations.  While largely being a “pariah state” under Mr. Aleksandr Lukashenka’s rule, Belarus in recent years has been successful in reorienting its foreign trade away from Russia and towards the European Union member states.

The Russian leadership has made it a top priority for it to preserve the EU countries’ dependence on Russia (as was the case for the Soviet Union) for their energy supplies.  It does not want Kazakhstan to undermine this situation by building a natural gas pipeline to Western Europe that bypasses Russian territory.

For many years, Belarus (and perhaps Belarusian companies owned by Russians) has provided significant “value” in the process of transshipping weapons and other items to countries and organizations, which Russia does not want for political reasons to export them directly.  The closer Russian-Belarusian ties, the more difficult it is for Belarus to pursue an independent foreign policy – something that Belarusian citizens have increasing indicated in polls.

Contrast the WTO’s approach with that of The Financial Action Task Force (FATF).  FATF has allowed Russia and other countries to join it largely for political reasons and perhaps thinking that the other FATF members may accrue some benefits as a result.  Of course, having laws and procedures on the books is quite different from having an effective anti-money laundering policy. See Ethan S. Burger, “Only Following Some of the Money in Russia,” Demokratizatsia, Vol. 17, No. 1, at 41–70, (Winter 2009).

For world trade to flourish, parties from different countries have to be convinced that their counterparts believe in the sanctity of contract, that the semblance of the rule of law exists in the countries of the legal entities with which they do business, and that international arbitral awards pursuant to the New York Convention on the Recognition and Enforcement of Arbitral Awards are honored.  With respect to Russia, this is not the case.

Another reason it is questionable is debatable whether Russia should be allowed into the WTO is that it severely restricts foreign investment when compared with the rules applicable in most OECD countries.  In July 2008, Russia adopted its Law on “Foreign Investments in Legal Entities of Strategic importance to the National Defense and State Security of the Russian Federation.”  The law introduces restrictions on foreign investment in 42 sectors that the Russian government has deemed strategically significant.

Last year, Toby Gati of Akin Gump offered a cogent evaluation of the law.  For convenience sake she grouped these sectors into 15 industries:

1. Defense industries; 2. Cryptographic industry; 3. Security activities; 4. Aerospace industry; 5. Aviation industry; 6. Nuclear industry; 7. Production and sales of goods and services related to natural monopolies; 8. Geological research and/or exploration and extraction of natural resources; 10. Production and sales of metals and alloys; 11. Television broadcasting with access to 50+% of viewers; 12. Radio broadcasting with access to 50+% of listeners; 13. Telecommunication services where the company has a dominant position in the Russian market; 14. Publishing; and 15. Printing for a mass audience.

While the law also provides for detailed procedures and allows for exceptions under special circumstances, the manner in which the law is being implemented is being uncertain.  For example, what roles do political influence and corruption play?  Most energy companies have discovered, one needs tremendous leverage to prevail against the Russian government and its instrumentalities in the event of a dispute in Russia.

Whether the situation is that much different in Russia than most countries in the world is uncertain.  Nonetheless, Russia as an energy superpower with nuclear weapons as well as the principal successor state of the Soviet Union and thus cannot be ignored.  It also has the ability to undermine the foreign policy goals of the world’s major international powers.  This largely explains why it (like China) would be considered for WTO membership, despite its behavior abroad and the absence of legal protections at home.

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[1] Toby Gati,”Russia’s New Law on Foreign Investment in Strategic Sectors and the Role of State Corporations in the Russian Economy,” Akin Gump Paper for the U.S. Russia Business Council, October 1, 2008, available at https://www.usrbc.org/pics/File/Member%20Contributions/legal/Foreign_InvestmentInStrategicSectors.pdf (Last Visited June 10, 2009).

2 Responses to "Russian Machinations and the WTO"

  1. Guest   June 11, 2009 at 8:53 am

    completely incoherent. Are you suggesting that OECD countries have no restriction of foreign ownership of strategically important companies?

  2. Ethan S. Burger   September 3, 2009 at 12:34 pm

    Greetings:In light of the comment above, I fear that I may have not been clear. Of course, when people write anonymous comments, it always raises the issue of motivation.All OECD countries have rules limiting foreign ownership of assets in certain sectors, but to my knowledge none have restrictions as extensive as Russia.Furthermore, there is a huge problem in determining the “nationality” of both legal entities and individuals — particularly given the wide-spread use of shills and the ease of setting up companies (including pre-existing ones — for example, just look at the classified advertisements in the Economist).