Study Foresees Modest Impact for Russian Industry Under WTO; NIC Leaders Call for More Activist National Industrial Policy

The following release was issued Wed (July 10) by the National Investment Council of Russia, disclosing findings of a major study of the national and sectoral impacts of Russian accession to the WTO. The study, the first detailed scientific assessment, was conducted by a research team representing five leading Russian Academy of Sciences-affiliated research institutes, and led by Academy Vice-President Alexander Nekipelov, who is also co-chairman (with ex-President Mikhail Gorbachev) of NIC.

Moscow, July 10, 2002 -- Results of the first major scientific analysis of the consequences of Russian accession to the World Trade Organization point to neither boom nor bust for Russia, under free trade, but suggest a need for much greater preparation by both industry and government.

The research was conducted at the initiative and with the support of Russias National Investment Council (NIC), which represents leaders in Russian business, finance, science and government. The study reflects the work of policy and economics experts representing five of Russias leading research institutions, all affiliated with the Russian Academy of Sciences (RAS), and led by Academician Alexander Nekipelov, vice president of RAS, and co-chairman of NIC.

The research employed advanced econometric modeling, with the Russian Inter-industry Model (RIM) developed by the Institute for Economic Forecasting of the Russian Academy of Sciences, to measures impacts of WTO accession on an extensive list of economic sectors.

The model allowed a quantitative assessment of the overall effects of import tariff changes on the economy in general, as well as the impacts on individual industries and regions.

Two scenarios of accession were measured: A moderate" scenario, allowing for gradual transition and the phased removal of protectionist barriers, and a worse-case" scenario implying faster tariff reductions than Russia is currently proposing. In its submission to the WTO last year, Russia proposed transition periods of from three to eight years until final import tariff bindings will come into effect. Somewhat surprisingly, the NIC research team found little difference in the impacts between fast convergence and phased convergence.

Commenting on the overall effect of WTO accession, Prof. Nekipelov said, Russias WTO membership will not have any fatal or overly negative effect on the domestic economy although the impact is very differentiated depending on the sector and region. But in the light of the need to modernize the national economy, it is important that the country develops a distinct industrial policy, especially vis-à-vis high-technology industries, and project this policy in the course of WTO negotiations."

Speaking at a special public meeting of NICs presidium in Moscow Wednesday, Prof. Nekipelov called for specific governmental support measures to develop certain critical sectors.

NIC President Alexander Lebedev called in particular for efforts to support Russia's struggling civil aviation industry.

The NIC study stresses the importance of appropriate preparatory legal work and of properly educating relevant personnel in WTO-related issues.

On the whole, the study establishes that there would not be a major negative effect on the national economy. In the worst case, the research found that any negative impact on gross national product would be held to less than one percentage point.

However, impacts within specific sectors and specific regions could be significantly more dramatic. For instance, the study highlights risks to what in Russia are termed city-forming enterprises" -- i.e., industries which are the sole economic basis for the existence of an urban centre.

The study points out that for a number of sectors, non-WTO issues are likely to have more important impacts. For instance, Russias aircraft industry is depressed by lack of orders, nearly all of which would have come from the state in the past. Without government orders, the survival of Russias civil aircraft building industry will be at risk regardless of WTO accession.

Likewise, WTO is unlikely to have any serious impacts in the transportation sector.

In the metals sector, tariff changes at home and abroad are likely to have less impact than will liberalization of currently regulated rates charged by domestic energy and transportation monopolies. On the other hand, metallurgy stands to benefit from any review of anti-dumping sanctions.

The research does point to positive impacts of import-substitution opportunities arising from the transitional measures proposed for the initial 2-5 years. If these initially higher import tariffs are accepted, import substitution could raise wine production by 25%, and poultry production by 12.4%. Other sectors which stand to benefit include: footwear (1.3%), garments (1.6%), television sets (1.7%), and strong alcoholic beverages (11.6%).

The level of duties for food imports suggested by Russia are being resisted by foreign competitors. But the NIC study points out that the crucial issue for the Russian agricultural sector is not the level of government support to agriculture, which is very much lower than in the EU and the US.

Accession to WTO also should lead to increased competition in a number of sectors, where Russian producers are actively winning market niches from foreign manufacturers. Such sectors include pharmaceuticals, furniture, and certain parts of the chemical industry.

Recent attempts by the government to support the domestic automotive sector with increased duties and foreign investment promotion are outside the framework of conditions offered by Russia to the WTO and will be difficult to negotiate with major trading partners.

Russia stands to benefit from WTO membership through integration into the international legal framework, which would contribute strongly to Russias development of a coherent system of laws and regulations. As international law and treaties take precedent over national and local law in Russia, a host of new laws and amendments will need to be enacted to ensure legal conformity.

Among the positive implications of this will be an improvement in Russias investment climate, observed NICs president Alexander Lebedev. Dr. Lebedev is chairman of the National Reserve Bank, a leading financial institution. Clearly, this is one of the side effects the National Investment Council looks forward to," he said.

Until now WTO was a topic of interest for a very limited circle of people. When Russia becomes a WTO member thousands of people will have to face new realities and they need be educated in how to deal with these realities. Hundreds of legal norms will also have to be harmonized with international standards. This is very major work."

The study forecasts a mix of winners and losers when it comes to investment. For instance, Russias telecommunications industry stands to benefit from an expected inflow of foreign capital.

Russian capital dominates the retail sector, although in large cities it is facing challenges from international retail chains. The NIC study predicts stronger competition with WTO accession.

In the financial services sector, the domestic insurance industry, in its current form, might face stiff foreign competition as a consequence of WTO rules.

About the National Investment Council:
The National Investment Council (NIC) was created in Moscow in May 2000. Many of Russias largest industrial, commercial and financial organizations participated in its formation. The Councils mission is to support civilized business and help improve the investment climate in Russia, as well as to help integrate the Russian economy into the global economy, promote the development of the domestic economy Mikhail Gorbachev, former president of the USSR, was elected chairman of NIC Board of Trustees in March 2001, and Academician Alexander Nekipelov, vice-president, Russian Academy of Sciences, was elected co-chairman of the Board. Alexander Lebedev, Chairman of the board of National Reserve Bank, is President of the National Investment Council.

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Further information and interview possibilities:

Russia: Alexander Goldin, +7 095 204 8311, agoldin@ansdell.ru
Western Europe: Fred Harrison, +44 (0)20 7907 4763, fharrison@ansdellconsult.com
United States: David Rowell, +1 206 338-3381, drowell@ansdellconsult.com

[Note: for a comprehensive summary of the study findings, in English, please email requests, or fax to +44 (0)20 7794 6282.