16.11.2002
To Outmaneuver Competitors
№1 2002 December

Alexei Mordashov — General Director of Severstal Group and Head
of the Russian Union of Industrialists and Entrepreneurs (RUIE)
Working Group on Russia’s Accession to the WTO and Customs Policy
Reform.

Alexei Mordashov

Russia’s accession to the World Trade Organization (WTO) has
long been among the most contentious issues of public debate, yet
one should acknowledge that the discussion has been overdramatized.
The doubts and the reproaches have been so full of passion, as
though we are dealing with something revolutionary, something that
faces Russia with unpredictable and ungovernable consequences.

I maintain that there is nothing revolutionary in Russia’s
accession to the WTO. This step is fully in line with the logic of
the nation’s development over the past decade; it is to demonstrate
conclusively that Russia has become part of the global economy. We
merely have to learn how to use the WTO mechanisms in order to
benefit from the globalization processes.

The Russian business community has already undergone shock
therapy: it has encountered the realities of competition. We have
learned many useful lessons from that. I can judge this from what
happened in the steel-making industry. After we started to enter
foreign markets quite vigorously in the mid-1990s, we not only
realized that there was a demand for our products, but also saw how
tough one had to fight for one’s customers. The other side resorts
to competition investigations, dumping accusations and closing of
markets.

Some companies have encountered international competition
domestically. After the major international corporations began to
arrive in Russia, some of our producers were faced with a hard
choice – either fight them in order to retain the traditional
market, or cooperate. In any event, no one will question that, as a
whole, Russia is open to the world’s business community: foreign
trade has been growing from year to year and its structure
expanding. The nation wants to attract foreign investment, and our
companies are active on foreign capital markets. Yet, most
importantly, the Russian business community is now aware that
success can only be attained by those who have a role to play in
the world economy. That is precisely why Russian producers are more
actively concentrating on their export policy and attracting
foreign investment. The owners – mark my words – are now clearly
stating they are prepared to give up control of their companies in
exchange for foreign resources and further business development.
Everyone is aware of the need to command the expertise, know-how
and tools available to the world’s giants. Those aware of this
include Russian companies which, for the time being, cannot see
themselves as players on the global market.

Increased demand on the part of domestic consumers, now
expecting the latest technological solutions and the best possible
price-to-quality ratio, is another major indication of the fact
that Russia is now indeed part of the global economy.

Obviously, there is no universal recipe for the business
community to survive against today’s competition and be more
efficient. Yet, in order to effectively devise and implement a
strategy for success, we need a certain set of guarantees as
concerns economic regulation. In other words, we need equal
opportunity in protecting our interests both domestically and
externally. We need equal access to the mechanism of government
support for business, and for the government to take on a
reasonable burden of obligations.

So far, Russia has been lagging behind other countries in this
respect. Domestically, business is still suffering from excessive
regulation by the bureaucrats. On foreign markets, actions taken in
bad faith against Russian companies often remain unpunished. The
Russian businessman is compelled to bend over backwards, while his
foreign competitors resolve their problems making use of tried and
tested mechanisms. As a competitor on the world market, Russia
cannot close its eyes to this issue. Its accession to the WTO
should be viewed as a way of removing imperfections and lacunae in
business regulation that continue to persist.

The negotiations on accession have already begun to help us
resolve certain problems. In recent years, we have already
witnessed a sufficiently vigorous drafting and enactment of new
regulatory standards, which make it possible to bring Russian
practice into conformity with the rules accepted throughout the
world, and to make it more understandable and predictable to the
market players. Better than any high-sounding political
declarations, this will help integrate Russia into the world
economy.

By way of an example of such improvements, one should specially
note the resolution of two problems which have long presented an
obstacle for Russian and foreign business. I am referring here to
product certification and standardization procedures and to Russian
customs rules.

For a long time, Russia’s system of product standards and
certification, something we inherited unchanged from the Soviet
decades, impeded foreign investment and hogtied Russian producers.
For example, the foreigners that came to Russia were severely
shocked to learn that, as they produced their goods and presented
them on the Russian market, they were expected to comply not only
with their customary safety standards but also with requirements
dealing with product form, color and smell. In other words, they
were to standardize things which, in essence, were the individual
choice of the businessman and the subject of the company’s research
and creative effort designed to attract the consumer and
outmaneuver the competitor. One can understand the disgust of the
producer barred from using his competitive advantages and forced to
toe the line. Russian manufacturers of finished products were just
as incensed. Tied hand and foot by the domestic standards, they
could not fully assert themselves on foreign markets. True, one
must acknowledge that in certain cases the toughness of the
domestic standards made it possible for Russian companies to simply
sail through the certification procedures on the international
market. Still, this particular advantage could not even begin to
compare to the difficulties created by the old system – to say
nothing of the fact that the mandatory certification procedures (to
verify compliance with our standards) bred corruption among those
who performed such certification. It is obvious that, as we
gradually brought Russian standards into conformity with their
corresponding international regulations, we had to radically change
the system as such, too.

That is the objective of the new bill currently being discussed
by the State Duma – “On Technical Regulation,” which is to abolish
the all-out certification system and to leave only the safety
standards as mandatory. The business community will also be able to
take part in the drafting of the statutory standards.

The government began to discuss the ideas underlying the
technical regulation law as far back as the mid-1990s: the
importance of the issue was already evident at that time. Yet
tangible results have started to appear only now that the WTO
accession talks are being seen as an impetus prompting progress in
this direction.

Another important move made possible largely by the WTO
accession process is the increasingly vigorous effort by the
government and business community to draft a new version of the
Customs Code. It is no secret that the protracted, extremely
complicated and sometimes unpredictable customs procedures have
long been among the most widely cited complaints against the
government on the part of those engaged in foreign trade. Finally,
we now have a chance of adopting a code which will contain direct
action standards, describe the customs procedures in detail,
strictly delineate the powers of customs officials, and be clear to
Russian and foreign companies. I hope the code will reflect the
proposals put forward as a result of the document’s consideration
by the Russian Union of Industrialists and Entrepreneurs (RUIE)
Working Group on WTO Accession and Customs Policy Reform. These
proposals were drawn up with the participation of officials
representing the government and the State Customs Committee. Among
other things, the proposals set forth clear-cut criteria for
decision-making by customs officers on specific matters, an
exhaustive list of documents a customs officer may require, and
many other parameters. The fact that work on the code is finally
about to be completed is also due to the incentives created by the
WTO accession process.

Other direct results include new and more equitable principles
for the determination of the customs value of goods; I hope these
will feature in the Customs Code chapter on customs duties. The
same is true of the new law on protective antidumping and
countervailing measures which will enable Russia to protect itself
from unfair competition by importers on our domestic market.

These tangible moves are in fact a clear signal to the world
market that Russia wants to and can change to become a full-fledged
and efficient member of the world economy. It is particularly
important that these changes concern not only government regulation
– the most conservative sphere by definition – but also the
principles governing business as such. The record of the RUIE
Working Group indicates that businessmen are ready to discuss the
WTO accession problem not only from the angle of what they want
from the government, but also in terms of what they can do for
self-improvement and for exchanging experience for greater
competitiveness. Whether Russia should join the WTO is not a
question for the Russian business community. The biggest question
is what should be done to be prepared for it. This awareness
prompts one to give up any illusions and to take a more pragmatic
look at the prospects for one’s business. For example, these days
Russian car-manufacturers openly admit that they cannot, going it
alone, create a competitive Russian car of their own. They see
their future only in partnership with the world’s leading companies
– although merely a few years ago it would have been unthinkable to
acknowledge that Russia should orient itself on the manufacture of
foreign makes.

It is no accident that the negotiations on accession to the WTO
picked up speed when our companies began to work on an improvement
of their image in the eyes of the world community. This is also
borne out by recent developments – the adoption by the RUIE of a
Charter of Corporate and Business Ethics, and the first steps
toward the establishment of an adjudication commission for settling
corporate disputes. This means that the moves to improve the
regulatory basis and to enhance the responsibility of the business
community can now be seen in terms of domestic gains from the
negotiations on accession to the WTO and Russia’s involvement in
the globalization process.

Yet the advantages we can gain from the outside are just as
important. As Russia becomes a more open country with a liberal
economy, we automatically gain broader access to the world market.
This is being made possible as a result of political moves, too. A
most vivid illustration is the U.S. acknowledgment that Russia is a
market economy country – something our nation has been working hard
for years to achieve. The improvement in our economic situation is
reflected in Russia’s growing credit ratings.

Therefore, everything we have by now managed to secure should be
complemented with the tools we will acquire as we join the WTO.
Most importantly, this is the opportunity to protect our interests
on the world market and resort to the smoothly functioning WTO
mechanisms to state our case. It is already obvious that, while not
being a WTO member, Russia is acting in good faith as a player on
the world market. In some fields, our attitude is even more liberal
than that of WTO members. For example, compared to Russia,
agriculture in the European Union member countries is a pampered
child enjoying far more direct government support. Besides, the
recent wave of antidumping investigations on the steel market of
the United States and other countries calls into question their
commitment to the principles of free trade. Under these
circumstances, the Russian market appears to be the least protected
in the entire world.

This is where the other side of globalization makes itself felt:
the interconnection of the world’s economies makes someone’s local
decision a headache for all. This calls for an integrated approach
which can be formulated using the WTO mechanism of multilateral
consultations. Besides, large corporations that play a major role
in the economies of their countries often influence the adoption of
non-market administrative decisions in their favor. Under such
circumstances, it is pointless for Russian companies – or Russian
officials or diplomats – to try and cope with the situation on
their own. Such problems can only be tackled effectively if one
resorts to the authority of international organizations and makes
use of the mechanisms they offer.

At the WTO, this is its specialized agency on the settlement of
commercial disputes. Each member-country can lodge a complaint with
it against the actions of another country taken beyond the accepted
boundaries of commercial regulation. The WTO verdict may oblige the
offender to rescind the unlawful measure; those affected will be
entitled to take countervailing steps or obtain other compensation.
That is what the EU did in response to the March decision of the
United States to introduce protective measures with respect to
steel products. Largely thanks to the unfavorable verdict of the
WTO, the United States has already begun to drastically cut the
list of steel products subject to prohibitive duties.

Generally, the practical record of the WTO agency on the
settlement of trade disputes shows that it can be used to curb
non-market protectionist ambitions. Yet Russia, while in fact
observing the WTO trade rules, cannot make use of the advantages
offered by this procedure. This is all the more unfortunate because
our exporters are increasingly exposed to such unfair claims. Aside
from the traditionally penalized steel producers, such problems
arise for textile, auto, chemical and fertilizer manufacturers and
even farmers. Suffice it to recall the recently imposed EU quotas
on Russian grain. To many companies, the loss of export earnings
means serious financial setbacks; this affects, to varying degrees,
salaries, jobs and tax payments. It follows that the ousting of our
goods from foreign markets or the impossibility of selling abroad
creates an integrated adverse economic effect. Therefore, it is now
extremely important for Russia to uphold its interests abroad using
every means available.

Another important advantage Russia is so far deprived of is a
chance to take part in the establishment of world trade rules. It
is absurd for Russia, a major player on the world market, to
observe rules established without its involvement. True, we can
affect decision-making with respect to the development of the world
economy by taking part, say, in the G-8 summits or in the
deliberations of UNCTAD. Still, the WTO remains the forum that
establishes not only the rules of trade but also the basic rules of
business; and the scope of its powers and regulatory discretions
keeps expanding.

I particularly felt that the role of an outsider on the world
market was no longer enough for us at last year’s WTO conference in
Doha that decided to launch a new global round of negotiations on
free trade. Russia was only allowed brief five-minute slots to make
its statements but, more importantly, we could not vote on matters
of considerable concern to us, such as prospective support for
agriculture. It would be even more unfortunate if the final
decisions in this round of talks are made without us: the new round
is to include further liberalization of access to the service
markets and regulation of investment. The objective is to improve
the operation of the current antidumping agreements and the
arrangements on subsidies and countervailing measures. Besides, the
WTO member-countries will begin discussing attitudes to the
regulation of the energy market. It is essential for the voice of
Russia on these matters to be heard and taken into account. Yet how
can this be achieved while we are not yet a member of the WTO?
Obviously, our desire to take part in the new round of negotiations
should not mean that we are to join the organization in a hurry, on
the terms so far offered by our negotiating partners. WTO
member-countries sometimes present Russia with demands which are at
odds with the organization’s basic market-economy values. The
reason is simple: our partners’ claims are put forward by
particular business interests. In some cases, this results in
outright pressure being brought to bear on Russia in order to
weaken it as an effective competitor on the world market. There are
examples galore.

Suffice it to recall the familiar demand that domestic and
international energy prices be evened out. Today Russia is getting
ready to reform its energy sector. The ultimate objective is to
arrive at a normal price shaped by the market. The demand that
domestic energy prices be hiked arbitrarily cannot be justified by
any principles of civilized international trade. Still, some
countries maintain this is a sine qua non.

Or take the position of the EU and some other countries that
Russia should accede to the so-called optional Agreement on Civil
Aviation Hardware which provides for duty-free trade in aircraft
and components. Under the WTO standards, accession to this
agreement is strictly voluntary. Each country decides on this
matter guided primarily by its own economic interests. Russia will
not benefit from such accession. Yet some WTO countries would
profit from our signature, and their negotiators insist that we
accede. This can hardly be interpreted as an effort to promote the
liberalization of the Russian economy. Rather, it resembles unfair
measures against competition.

The persistent marshaling of such demands is all the more
strange given the rhetoric of the WTO member countries’ leaders to
the effect that they want Russia to accede and are ready to do
anything to help. It is time our negotiating partners backed their
policy declarations with tangible steps. After all, Russia is
joining the WTO to be among its equals. Our country’s future role
in this organization and the degree of our influence on the
processes under way in international trade will largely depend on
how well we succeed in safeguarding our economic interests in the
current negotiations and in demanding equitable relations and
respect. Today, Russia’s foremost task is to pass this test and
prove that we are ready to compete on the world market exercising
the same rights and opportunities as are available to others.

The existing obstacles in the negotiations can be overcome. Both
Russia and its partners are able to tap sufficient resources and
demonstrate enough flexibility to unravel the knotty negotiating
issues. Why not start admitting that the delay in Russia’s
accession to the WTO harms not only us but also the organization’s
members? The economic map of the world still features a nation
which has an enormous potential but which, according to one of the
criteria, is yet to meet the expected standards of reliability and
investor appeal.

Will the WTO countries really benefit from forfeiting – because
of a number of unacceptable demands in fact at odds with the
principles of the organization – the chance of having Moscow
undertake firm obligations in many important spheres? After Russia
assumes WTO membership obligations, foreign companies wishing to
operate in our country will obtain new opportunities. Delayed
accession will mean that we will still lack clear-cut deadlines for
the liberalization of specific sectors of the economy. Western
companies will remain hogtied in their long-term plans for economic
operation in Russia. I think it is time for us to present our
partners with a full list of risks involved in having the
negotiations mark time.

What will be Russia’s contribution to the world economy after
accession? So far, we have demonstrated that we are a reliable
supplier of high-quality raw commodities and power resources. In
all probability, we will continue to play such a role in the near
future, too. Pessimists say we will never be able to succeed in
anything else. Nevertheless, I believe that Russia can assert
itself on the world market as a producer of finished goods. We have
several key prerequisites for that. First and foremost, there are
our human resources – a well-educated and hard-working labor force.
There is also our science and technology capability: despite the
slump of the past decade, these opportunities are still to hand.
Our natural resources and our generally favorable climatic
conditions are another important factor. Finally, our low
production costs – those of raw materials and labor – remain our
obvious advantage.

Yet for this potential to be realized, we should master new
technologies, improve product quality and seek unconventional and
innovative solutions to problems still baffling the world’s major
producers.

By precisely identifying such niches and by tapping our
remaining opportunities we will be able to outmanoeuver our
competitors and gradually increase the added value of our products.
Against the background of a global economy, development based on
innovation is of vital importance to Russia. The business community
and the authorities are becoming aware of this. When the strategy
of innovation really gets underway and begins to bear fruit, we
will appreciate and properly use the tools of protecting and
furthering our interests offered by the WTO.