To Outmaneuver Competitors
No. 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.

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.