By Dmitriy Belyanin
When the door to the WTO finally swings open, who will gain the most?
Introduction
All three members of the regional customs union -- Russia, Kazakhstan and Belarus -- have expressed their intention to join the World Trade Organization (WTO) once all legal procedures for forming the union have been settled. Due to economic differences among the three countries, the accession will affect each of them differently.
The WTO promotes trade among its members and forbids many of their trade barriers. The impact of accession on a country depends partly on whether it has much experience with markets. Of the three countries, Belarus has the most regulated economy, followed by Russia. Kazakhstan has the least. For this reason, I hypothesize that WTO accession will benefit Kazakhstan the most. The country partly overcame the drawbacks of trade liberalization and economic restructuring in the 1990s, when declines in its industrial production forced it to substitute imports for domestic output. Russia and Belarus too may benefit in the long run, but they are more likely than Kazakhstan to experience increases in unemployment, decreases in output, and instability in the exchange rate in the short run.
Impact on Output and Employment
WTO accession will enable exporters in Kazakhstan, Russia and Belarus to gain from increased export revenues, which will raise output and employment over time. The benefits of this increase will vary from country to country and will depend on the external environment.
With current estimated unemployment rates of 7.8% of the labor force in Kazakhstan and 7.5% in Russia, some workplaces may be created in sectors benefiting from oil revenue increases. During the late 2000s, both countries restricted exports of grain and oil products to hold down food prices. While they succeeded in doing so, they also hindered the creation of workplaces in the associated sectors. Potential jobs were also lost because consumers had less export income to spend on domestic goods. Many industries that could have developed in these countries did not.
On the other hand, Kazakhstan and Russia suffer from dependence on exports of raw materials, and eliminating export restrictions will divert even more resources into these already developed industries. Producers of import-competing industries will suffer from the removal of tariffs and import quotas, since their goods will have become cheaper than before the WTO accession.
The benefits of WTO accession for Belarus are much weaker than for the other two countries. Belarus had one of the lowest unemployment rates in the Commonwealth of Independent States (CIS) during the 2000s, and it continued to decline even during the global financial crisis, reaching 0.9% in 2010, according to estimates from the International Monetary Fund. Hence, the economy is already running at nearly full full employment. On the contrary, the removal of trade barriers and other forms of state support may expose the lack of competitiveness of Belarussian production. In the long run, however, Belarus, too, may benefit from new industries in place of the economy that it inherited from the Soviet Union, which had emphasized military production and heavy industry.
Exporters may also benefit from the removal of trade barriers by countries importing Belarussian goods.
Impact on Financial Systems
Joining the WTO will increase investment in many sectors of all three economies. Under freer trade, increases in oil prices will increase the attractiveness of securities markets for foreign investors. Bank deposits, of individuals and legal entities, may also increase. The growth of funds available for loans may reduce interest rates on deposits and loans. On the other hand, demand for credit would also increase, tending to increase interest rates.
WTO accession could create economic growth and thus develop capital markets, especially in Russia, which has MICEX, the largest stock exchange in Europe. Options and futures markets will develop as well, since there would be more exchange rate fluctuations to hedge against, due to removal of internal tariffs.
Freer trade would generate pressure for more flexibility in exchange rates. This pressure would grow as more trading partners enter the scene. Russia has allowed its currency to fluctuate since mid-2009, while Kazakhstan returned to a managed float this year. Such decisions reflect high oil prices, which enable exporters to lose less from domestic currency appreciation than would have occurred under lower oil prices. (In the short run, oil demand is not sensitive to price changes. So, when oil prices rise, oil revenues increase even though a few buyers balk at the price increase.) Allowing a more flexible exchange rate policy would enable the member states of the customs union to enjoy lower inflation, since central banks would no longer increase money supply so much in order to hold down the exchange rate. Nevertheless, exporters’ pressures on the central bank can make this effect negligible.
Belarus has a system of multiple exchange rates, so it will have to liberalize its currency exchange regime to enjoy the benefits of freer trade. Since it has been receiving oil and gas products from Russia at artificially low prices -- a prime factor in the country’s prosperity relative to the CIS -- conflicts of interest are likely.
Movement of goods and people may drive up transport costs as well as prices and land rents. On one hand, demand for real estate will increase. On the other hand, the commercial, industrial, and residential sectors will compete more vigorously for real estate. Unfortunately, the price increases of real estate can make housing unaffordable for the poor. Risk management will become more important, since avoiding a new crisis will become crucial.
Conflicts of Interest
Russia and Belarus have sparred over transfers of oil. Belarus depends heavily on imports of oil and gas from Russia, which has subsidized their prices. Since 2006, Russia has been rolling back its subsidies. A schedule of gradual price increases was agreed upon. Also, Gazprom – a giant energy firm owned by the Kremlin -- would gain a 50% stake in Belarussian Beltransgaz. New prices were supposed to take effect in 2011 but now have been delayed until 2014-2015.
The entry of Russia into the WTO would increase demand for Russian products, making them more expensive for Belarussian importers. This could trigger more negotiations by Belarus to receive oil and gas at prices below the EU market price. Economic growth in Belarus may be affected as well; some analysts argue that growth in the late 2000s might be attributed more to cheap oil and gas than to domestic factors.
Another risk associated with WTO entry relates to food security. Due to growth in food consumption in China and India, global food prices have been rising. To the extent that Russia and Belarus export food, freer trade may benefit food producers at the expense of their domestic consumers. In turn, consumers may push for more effective stabilization and welfare policies. At the same time, however, freer trade will lower prices of imported food.
Would a joint WTO accession be more beneficial than separate entries? A joint accession would push the three countries to coordinate their policies, but it would also slow down the accession. In June 2009, Vladimir Putin, prime minister of Russia, announced that the three states of the customs union would seek joint membership in the WTO. However, the WTO members disapproved, since it was unclear how the accession would work, other than that it would work more slowly. Hence, the three states have had to pursue separate membership. This approach, however, could enable smugglers in nations belonging to the WTO as well as to the customs union, to re-export foreign products to other member states illegally. Retaining high tariffs would discourage legal imports, reducing government revenues, as was the case for Kazakhstan when it re-exported imports from Kyrgyzstan, a WTO member. To prevent smuggling, strict customs regulations are vital.
Impact on Political Stability
Since WTO entry will benefit some interest groups at the expense of others, many leaders will seek to slow down accession until the worldwide political situation stabilizes. This is particularly true for Belarus, which loses as an importer from high world prices of oil and gas. On the other hand, Kazakhstan, which lacks strong opposition to the ruling regime, is unlikely to re-consider the terms of accession.
WTO accession can be unpopular amid economic instability resulting from high world prices of food and energy that force importers to consume less. A steep fall in oil prices may trigger devaluation in Kazakhstan and Russia. Previously, these countries would have had the option of increasing import tariffs and decreasing export taxes rather than devaluing their currencies. The WTO accession would restrain such protectionism. Devaluation is much less popular than protectionism and may result in protests.
In Belarus, Russia and Kazakhstan, political risks are high. Alexander Lukaschenka, President of Belarus, has been following a policy of authoritarian market socialism and has been criticized in the West. Protests followed the December 19 election in Belarus. Though these protests were suppressed, more may occur if the economy in Belarus destabilizes. Furthermore, WTO accession may inspire Belarussian citizens to demand more liberalization, economic and political, since the inflow of imports will increase the movement of people as well. (For example, workers in industries threatened by imports may seek jobs elsewhere.)
In Russia, political risks are evidenced by separatist movements in the Caucasus, an oil-rich region in southern Russia, as well as by the precedents of riots by activists. Political risks in Russia contribute to the already unfavorable business climate, which is apparent in Russia’s comparatively low rank on the Heritage Foundation Index of Economic Freedom.
Nursultan Nazarbayev has been in power in Kazakhstan since 1989. The opposition is too weak to revolt. Nevertheless, the future of Kazakhstan after Nazarbayev leaves office is uncertain. The absence of a clear successor is the single most important political risk and may affect the government’s bond ratings. However, as long as Nazarbayev stays in power, the country is unlikely to reverse its economic liberalization, which is substantial by CIS standards. Kazakhstan will most likely enter the World Trade Organization in two or three years.
Conclusions
Accession into the WTO will enable gains from increasing exports, such as growth in gross domestic product and new jobs. These benefits will be larger for Kazakhstan and Russia than for Belarus, which already has one of the lowest unemployment rates in the CIS. However, eliminating export restraints may slow economic diversification in Russia and Kazakhstan, since more resources will be diverted into already-developed industries.
WTO entry may accelerate financial development in all three countries. Securities markets may become more attractive, bank deposits may increase, and supply of and demand for loans will increase. More flexible exchange-rate policies will have to be implemented, and markets for derivative securities will have to develop. Freer trade will also increase real estate prices. Risk management may become crucial.
Conflicts of interest may arise between Belarus and Russia, since the former has been receiving oil and natural gas at artificially low prices from the latter. The prices of Russian-made products may increase, pressuring importers in Belarus of these products. Conflicts of interest may also arise between consumers and producers of food, since food export prices will increase.
WTO entry may be unpopular during periods of economic instability. The lack of opportunity to set export subsidies may make devaluations more common when commodity export prices decrease. These factors will aggravate political risks inherent in all three countries of the customs union.
Dmitriy Belyanin received an honors degree, as a Bachelor of Arts in Economics, from KIMEP in 2008. He received a Master’s of Business Administration degree from the Institute in 2010. He often writes and participates in conferences about finance and economics in Kazakhstan. He now assists research for the Bang College of Business.
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