First some statistics from the World Bank to put the size of the opportunity in context. As well as being the world's largest county geographically, Russia is the world's 8th most populated country. With 143 million people, it has the population of the UK, Germany and the Netherlands combined. Of the 8 countries most populous countries, only the USA has a higher standard of living. Russian consumers are a large market and well off by world standards. As a consumer market it cannot be overlooked by any firm seeking to grow internationally.
Business to business companies may be more interested in the size of the total economy. Using World Bank figures for 2011 at Purchasing Power Parity, Russia is in sixth place, just behind Germany but ahead of France and the UK. If you are already in Russia but getting a Belgium sized result, your operations need review.
It is not just a matter of size. Economic growth matters too. Growth creates opportunities for new market entrants. In 2011, Russia with 4.3% GDP growth was the third fastest growing large economy in the world. Only China and India grew faster. It was also the fourth fastest growing manufacturing economy. In fact manufacturing and agriculture drove Russian growth not oil. In 2010 Russian imports grew by 26%. 2011 figures are awaited.
Russia's entry to the WTO makes this large growing market more accessible to international business at a time of decline elsewhere. The WTO agreement means that Russia must reduce tariffs, quotas and other barriers against foreign goods and services. Equally, foreign countries must reduce the same barriers against Russia.
The greatest initial impact will be a huge boost in demand for lawyers experienced in International Trade Disputes. Not all the changes Russia made on 23rd August will satisfy other countries that wish to sell goods and services to Russia. Equally, not all foreign countries will immediately lift barriers to Russian goods. In particular, non tariff barriers in service industries and government contracts will be hard to identify and remove. So, there will be a demand for lawyers to resolve these disputes. On the whole, compared to other recent WTO entrants like China, Taiwan and Saudi Arabia, Russia has had a favourable deal so in most cases, legal disputes will be limited. The exception will be the USA. It is a minor trading partner of Russia but it has not yet removed Soviet Era legislation that sets up barriers to trade with Russia. Important American politicians still speak of “The Soviet Union” rather than Russia.
The impact and opportunities of Russia's entry to the WTO will vary by sector. Important sectors in which Volga Trader has active experience are reviewed below.
Agriculture is heavily protected by most trading blocks. Russia and its trading block the Commonwealth of Independent States is no exception. The average tariff on agricutural goods was 13.2%. This will fall to 10.8%. Russia will be allowed a transitional period until 2018 to remove protection from agriculture including a $9 billion spend on price support. The most important issue for the world is Russian cereal production. In previous years, Russia has introduced an export ban on cereals to keep prices low for its pig farmers and other meat producers. This is not allowed by WTO rules. There will be no export ban. Access to high world prices will provide large profits to Russian commercial farmers (there are also many less than commercial farmers) who will have large sums to reinvest in production resources and new land. This an opportunity for suppliers of agricultural inputs such as machinery, fertilizers and seeds larger than any before. This may be moderated by a shortage of railway capacity to move all the available cereals to port to the advantage of local processors.
Meat is an area of change. Meat production is the most heavily protected sector of Russian agriculture, particularly pork production. The most immediate impact of removing trade barriers is that it has become possible to import live pigs into Russia without paying heavy import duties. This will assist the growth of slaughtering and processing industry which is also being assisted by direct government grants for modernisation. Tarriffs are also falling on pork from 15% to 0% for shipments inside quota but quotas remain until 2018. Outside quota, tarriffs are 65%. These measures will ensure that large Russian pig farmers have to compete at international prices while providing a spot market at higher prices for smaller producers. Not all large Russian pig farmers can match international prices and foreign suppliers now have a 15% advantage compared to previously.
Exports by the extractive industries are very important for Russia. Oil, gas, coal, mineral ores and lumber are all important. As the rest of the world wants these there are few barriers to Russian exports and no large change due to WTO membership is expected. The rush to extract gold which is fuelling demand for mining equipment will continue. The export duty Russia imposes on lumber to give local sawmills an advantage in material costs will be lifted. Protection did not grow the industry. Russia remained short of sawmill capacity.
The picture is different in metal processing. Russia is an important producer of metals such as aluminium, nickel, titanium and steel. These processed metals have faced barriers to export from other countries. These barriers must now be removed with immediate effect. This will deliver increased profits to the Russian metallurgical companies who will be able to continue their existing reinvestment. Most have already completed a recent round of reinvestment. The increased local smelting will also create additional demand in the mining industries. There will be new demand for mining equipment from grablines to washeries. The WTO lift to the smelting industry will keep the metals extraction sector dynamic in contrast to other extraction based economies such as Australia or Brazil where the top of the commodities cycle has been seen and who are now threatened by renewed Russian exports.
Manufacturing is largely a story of new opportunities for foreign suppliers, especially in engineering. Russia has protected its transport equipment manufacturing industry. Spacecraft, aeroplanes, ships, automobiles, trains, trams and trolleybuses have all received a measure of protection. Foreign assembly plants, such as Ford near Saint Petersburg where the Focus and Mondeo are assembled, were set up to avoid new car tariffs. The average tariff on manufactures is now falling from about 9.5% to 7.3%. However there are sectors where tariffs have fallen or are about to fall rather more substantially include: Aeroplanes and aero-engines, motor vehicles, construction equipment, agricultural equipment, medical devices, instrumentation, chemicals, advanced pharmaceuticals, heavy electrical engineering equipment and consumer goods from furniture to footwear are in this category. Russia has Europe's largest car market so the fall in duty on new cars from 15.5% to 12% will stimulate further significant volume growth not only for importers but also local assemblers as reduced prices stimulate overall demand. Aftermarket suppliers for foreign makes have renewed opportunities. Russia has a home grown IT and electronics industry that was protected by 5.4% tariff. This is dropping to about 2%. Most local manufacture is for the large home grown IT services industry and will be little affected. Electronics is driven by telecommunications where there already very little protection and defence which is outside the scope of the WTO. Russia has already embarked on a substantial programme to renew its energy infrastructure. The tarriff reductions will give suppliers of electrical generators, transformers, switches and other such equipment a new edge.
Changes in the ownership of service industries will have the biggest effect on the Russian economy. This will be overwhelming positive for both consumers of the services and company shareholders. The main measure now in place due to WTO membership is that complete foreign ownership of service industries such as banking, telecommunications, electricity generation and distribution is allowed. Russia's service industries are very inefficient by international standards and contribute to an overall lowering of efficiency in the Russian economy. Foreign owners will improve operational efficiency and enhance the whole Russian economy. In the medium term improved services are expected to provide 11% improvement in the output of the economy irrespective of other events. There are already strong effects. A wave of Russian service industry companies is heading for the London stock market in order to improve their costs of capital to resist foreign takeover. Initial Public Offers are already in progress for firms such as Megafon, a mobile phone network operator or a bank and Promsvyazbank. Sberbank is selling more shares in London. These are the first. Service companies that do not improve their cost of capital and operating efficiencies will be vulnerable to new owners who will.
Although the 6th largest economy with a 14 year record of rising imports punctuated only briefly by the credit crisis, Russia has a relatively low level of trade. It is the 12th largest exporter and 18th largest importer. The opportunity for trade growth, not simply economic growth is still very substantial. The story of exporters and investors exploding into an unfilled niche, such as Scottish and Newcastle with Baltika beer is not yet over. The prospect for businesses ready to build a position in the Russian market look good. Trade and investment consultancies like Volga Trader (http://www.volgatrader.com) can offer more detailed analyses of specific markets and help new entrants reduce the costs of learning about the Russian market and speed up the entry process.