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Economic Forecasts

Russia's More-Open Economy
Will Lead to WTO Membership

Changes will provide a boost for the U.S. economy as well.

Russia is getting closer to joining the World Trade Organization. During President Dmitry Medvedev’s June visit to Washington, he and U.S. President Barack Obama set a target of Sept. 30 to resolve outstanding disputes over intellectual property rights, food safety, animal and plant health, encryption technology and the behavior of Russia’s state-owned enterprises. That deadline will almost certainly slip. The State Duma, the lower house of Russia’s parliament, won’t take up the necessary legislation on intellectual property rights until the fall. But by early 2011, the last barriers to Russia’s entry into the WTO will be removed.

Russia’s WTO membership will help the U.S. by slashing tariff rates and increasing market access. Goods exports that stand to benefit include autos, aviation, chemicals and chemical production equipment, power generation machinery, security equipment, chicken and pork. Over the longer term, gains in services exports -- particularly banking, investment services and insurance -- will prove even more significant.

Medvedev is also opening the doors wider to foreign direct investment (FDI). Speaking at the St. Petersburg International Economic Forum shortly before his U.S. trip, the Russian president announced that he would slash by 80% the number of strategic firms in which the Kremlin limits FDI, along with plans to abolish capital gains taxes on long-term FDI in 2011. The aim is to reduce Russia’s economic dependence on oil, natural gas and mineral exports.

As part of these efforts, the Russian government is collaborating with a number of foreign firms and institutions to launch a high-tech innovation cluster in the Moscow suburb of Skolkovo. Cisco, Google, Boeing and the Massachusetts Institute of Technology are among the early American collaborators on the project.

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The shift toward greater Russian openness in trade and investment follows a decade-long trend toward state capitalism under former President Vladimir Putin, who is now prime minister. Signature elements of Putin’s economic policy included consolidation of national champions run by Kremlin loyalists, the reassertion of state control over natural resources, especially oil and natural gas, and lukewarm enthusiasm toward WTO accession. Medvedev has taken a more economically liberal tone, with calls to reduce the influence of state corporations. But until recently, he has been reluctant to challenge Putin directly.

That may be changing as Russia gears up for a 2012 presidential race. Putin looks increasingly determined to reclaim his old job, but Medvedev shows no sign of going quietly. Anders Åslund, senior fellow at the Peterson Institute for International Economics, categorizes the economic policy dispute between the current and former presidents as one of the most important policy disputes in Russia today. “It’s bizarre that people still argue that Putin and Medvedev still want the same thing, because it’s obvious that they have totally opposite objectives,” says Åslund.

Russia’s poor showing during the global financial crisis may have strengthened Medvedev’s hand, according to Toby Trister Gati, an assistant secretary of state in the Clinton administration and an international adviser to the law firm of Akin Gump Strauss Hauer & Feld. Most ordinary Russians didn’t think the crisis would affect them, a view Putin encouraged. That it did left many in shock. “Medvedev is reflecting what many people have been thinking,” says Gati, noting that the president’s comments give cover for other Russians to criticize government management of the economy.

For the moment, though, the odds are on a Putin election victory. He remains immensely popular and retains a strong base of support, particularly in Russia’s security services. Business leaders who might otherwise be inclined to support Medvedev are reluctant to stick their necks out. Among Putin’s most dramatic business policy moves was his crackdown on Yeltsin-era oligarchs who defied his edict to keep out of politics. It included the deliberate destruction of Yukos, at one time Russia’s largest and most successful oil company, as well as the imprisonment of its CEO, Mikhail Khodorkovsky, on tax charges.

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If Putin unseats Medvedev, it’s likely the pace of economic reform will slow. But that risk alone won’t deter FDI, says Gati. “When you invest in Russia, you don’t invest because you want a good night’s sleep every night.” Even if Medvedev wins a second term, he’ll have an uphill struggle to root out endemic corruption and strengthen the rule of law.