TCS Daily

An Anti-Growth Pact?

By Alan Oxley - May 26, 2004 12:00 AM

Russia announced at its summit with the EU last Friday that it will speed up its accession to the Kyoto Protocol in return for Brussels' support for Moscow's bid to join the World Trade Organization. The deal represents another dismal indicator that the European Commission is increasingly indifferent to the condition of those beyond the borders of the EU. There is an even grimmer implication: the Kremlin might believe the deal is good for it.

Following the summit, Russian President Vladimir Putin told the media: "The EU has met us halfway in talks over the WTO and that cannot but affect positively our position on the Kyoto protocol. We will speed up Russia's movement toward the Kyoto protocol's ratification."

Russia's shift on Kyoto is grabbing the news. But the deal on the WTO potentially tells us a lot more. What "half" has the EU conceded? Free marketeers cheered when Putin stated after he became president that Russia should join the WTO because its economy needed to be "civilized". Evidently not everyone in Moscow agreed. Negotiations in the WTO have been dragging on since 1993. And even after Putin wanted them sped up, it has not been smooth sailing. What is the problem?

First, cheap Russian energy. The European Commission has been insisting that Russian domestic energy prices are too low. Russia would have a competitive edge over EU industry. Are they serious in Brussels? Russian industry is not a competitive threat. Abundant and cheap energy is about Russia's only economic advantage. Using comparative advantage in a free market economy to spur growth is the whole point of membership of the WTO. As the Russians have correctly pointed out, nothing in the WTO rules out low energy prices.

So what did the EU get from the Russians? First, a commitment to raise energy prices in Russia over a ten-year period so they would be half, instead of the fifth they are today, of EU energy prices; second, a commitment to halve tariffs; and third, some commitments to open services sectors. Oh, and something else. The EU will not object if Russia seeks the right to increase agricultural subsidies after it joins the WTO. Surprise, surprise.

Is that a good trade deal for the EU? It is modest. Russia does not have much industry and does not offer much competition. EU producers would be able to supply the Russian market even if tariffs were not cut. But a rise in Russian energy prices is attractive. The EU is about to increase its own energy prices to meet the targets in the Kyoto Protocol to cut greenhouse gases. The EU has committed to make those cuts even if the Protocol does not come into effect.

Is it a good trade deal for Russia? It depends whom you ask. This is the second problem in the WTO negotiations. Other WTO members have told Russian negotiators for years that they have to accept the same commitments to join the WTO as everyone else -- to reduce tariffs within a reasonable period, to make laws transparent, to introduce competition in services and to strengthen intellectual property law. To date Russia has sought softer terms of accession. The EU has softened.

So the WTO refuseniks in the Kremlin would probably think the EU deal is smart. Russia is committed only to limited liberalization and it retains the right to keep energy cheap. The Kremlin's WTO negotiators now probably think that with the EU sown up, the bargaining power of other WTO members is reduced. The WTO does not work that way. This something that took China years to work out. The US and other WTO members are still to have their say.

By any objective standard, the EU terms are a bad deal. Russia's economy is in danger of falling into the hands of monopolist enterprises, like Gazprom, the energy giant, which are resisting competition. Note that the EU preferred a commitment from Russia to raise energy prices rather than to open Gazprom to competition.

Brussels is more interested in curbing Russia's principal economic advantage, cheaper energy, than in using the WTO accession process to strengthen the hand of Russian economic reformers. This is worse than uncharitable. The dalliance by the European Commission with green politics has moved EU international policy to such a point of self absorption that Brussels would prefer Russia to be green and poor. It even seems incapable of acting in rational self interest. Consistent, low growth would make Russia a surly and unpredictable, if not dangerous, neighbor.

The Kremlin is playing games with the EU over Kyoto. The final terms of accession to the WTO are not likely to be the same as those settled at the EU-Russia summit. As noted above, others are yet to have their say. What would be the status then of Putin's commitment to progress ratification of Kyoto? The commissioners who did the deal anyway only have a few months left in office. No wonder Greenpeace is wary. Maybe Moscow's next ploy will be to seek billions of euro in assistance from the next European Commission. Russia will need something to compensate the cost to its economy of ratifying Kyoto.

So who benefits from the game-playing? Not the people of Russia and not the people of the European Union. At least the latter have the wealth to squander when growth slows. The worst of this is that they don't seem to care that the Russians do not.


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