The Future for Russia’s Energy and Commodities Industries after WTO Accession

March 22, 2012. Machinery, metallurgy, chemicals and energy are some of Russia’s most important sectors. How will they be affected by the country’s accession to full fledged membership at the World Trade Organization (WTO)? What lies ahead for Russia’s key trading partners in the EU and other foreign players? The upcoming GIA webinar on “Russia’s Accession to the WTO and its Impact on Her Energy and Commodities Industries” seeks to answer this question and more.

We ask Timo Maisila, a consultant at GIA, and presenter of the webinar, for his insights into this topic.

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Why is Russia’s WTO Membership Important?

“Russia is actually the last significant industrialized country outside the WTO. The country has 140 million people, a skilled workforce, unique natural resources and superb logistic connections. In addition, Russia is today able to provide a sound political system and attractive incentives for foreign investors.

These intellectual, physical and political resources can now finally be fully utilized, once the WTO agreement comes into force, most likely this summer. The bottom line is that the accession will provide a working framework for multilateral trade and breeding ground for Russia’s modernization. Russia’s key trading partner, the EU27, and Russia’s largest export sectors such as oil, gas, and other commodities will have strategic roles in the process.”

Which sectors in Europe are mostly to benefit? Which ones will be under threat?

“European exporters in general will benefit. The lower import tariffs for Russia will lower the threshold for exporters to enter or increase their presence in new regions or new business sectors within Russia. The growing middle class as well as the B2B (business-to-business) buyers in Russia generally perceive foreign brands as higher quality, so these exporters’ products and services are likely to be received relatively positively.

Many countries source raw wood, metallurgy products, chemical intermediates and above all, oil and gas, from Russia as energy or raw materials for value-added products, and they too will benefit. Russia’s strategy for export tariffs has historically encouraged exports of energy feedstock. This approach will most likely remain and even increase as Russia invests heavily in supporting infrastructure such as gas pipeline routes to Europe. In the case of other commodities, such as industrial intermediates, there may be some further relief for the European importers. Lower tariffs and new tariff quotas can help make their sourcing and investments easier.

The foundation of Russia’s export, energy and commodity sectors’ infrastructure is in need of modernization. Foreign companies such as Enel, E.On and Fortum have participated in the modernization of the power generation industry. Then you have Nord Stream and South Stream in gas pipelines and Shell in oil exploration. However, due to the risks in doing business in Russia and the government’s drive to protect its share of the profits in various sectors, most foreign companies have hesitated to invest in Russia. For example, even if 20% of the worlds’ forests grow on the Russian taiga, foreign investments in paper and pulp production in the country have been minimal. The situation for foreign companies is not about to change significantly, but the two main benefits of WTO membership will be lower export tariffs and clearer guidelines on where and how foreign companies are allowed to invest.

For manufacturing companies already in Russia, the lower import tariffs may become a risk factor in the long term, but this does not actually affect a very large number of companies.”

What hidden costs need they need to beware of?

“Once the membership comes into force, new tariff quotas will be implemented. Over time and according to set timelines, the tariffs for goods, barriers for selected business services and agricultural subsidies will change. Customs processes may become more complicated, particularly within the EU. A clear understanding of such changes will be important.

Take for example, bilateral agreements between Russia and the EU for Russian raw wood. Each business agreement between a buyer and a seller will need to be reported to the EU Commission and the respective Russian authority, in order for them to track when the quota level is reached. The increase in bureaucracy involved in the cross-border transactions may drive smaller and less experienced companies out of the market.

The foreign companies that are willing to expand in Russia will also need to study the WTO text about services. During the transition period, there will still be special limitations on certain sectors such as telecommunication, insurance, banking and transportation. Foreign subsidiaries may not be able to enter the market without partnering with a Russian player. In the midterm, this may still create additional costs for foreign companies.”

In which areas should companies need to invest in market intelligence for?

“Many western companies use rather sophisticated tools to understand the Russian market. Local Russian players do too, but they tend to have smaller budgets for market intelligence. As a result of the WTO deal, companies should monitor the upcoming changes in regulations and the strategic moves of the state-owned companies in Russia. As the framework for the WTO membership is quite clear and documented, we should focus on the implications to each sector, company and partnering country in the mid-term. It will also be essential to monitor the moves by industry players as they respond to the phase-by-phase implementation of the agreement.”

What will this webinar teach/demonstrate? Who should attend?

“We’ll present the facts and the drivers behind Russia’s accession process that everyone should be aware of. This is a good opportunity for business decision makers and experts who wish to understand the potential scenarios following Russia’s WTO membership. The attendees will leave the webinar with an understanding of the most important immediate and long term impact of the WTO deal on the energy and commodities sector.”

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