Russia and WTO: This Is Going to Hurt

The last time Russia was knocking on the door of the World Trade Organization was at the very beginning of the decade. Most people then had only a hazy idea about what the WTO was, so there was no public alarm. Major corporations, however, were strongly opposed, which might be why the accession process has taken so long.

Last week we heard that Moscow and Washington had reached a deal, and that the path to the WTO was open. But attitudes toward membership have changed. Looking to attract capital and gain global access, corporations are now sanguine about the WTO. It’s the general population that is nervous – and not without reason.

Of course Russia’s entry into the Organisation is not yet decided. First, US Congress with a recently elected Democratic majority can create a few problems. Second, the process can be slown down by Moldova and Georgia, two former Soviet republics which have political and commercial disputes with Moscow. Trying to put pressure on their governments who do not exactly follow every order issued in the Kremlin, Russian government decided to practice a policy of commercial boycott, blocking their traditional exports to Russian markets. That was a severe blow to these economies which can hardly sell anything anywhere except their wines and mineral water, which were part of Russian consumption for already two centuries. Now both republics can retaliate. As WTO members, they are quite able to make noises and to try to block Russia’s entry demanding fair treatment of their products as a condition of Moscow’s WTO membership.

This will not become a major problem however. The Kremlin is quite determined to seek “international mediation”. In practice that will mean asking United Stats and European Union to put pressure on Georgia and Moldova and force them to shut up with their complaints. If Western powers really need Russia as a new WTO member, this will really be the case.

The mood of government officials in the Kremlin is really triumphant. They seem to be close to their goal, becoming “a country as any other”. So far Russia was the only major economy outside the WTO. This must be corrected! Russian companies reached the stage when they can go global. WTO membership is good for their expansion. That’s why corporate opposition to WTO is over.

Not so simple with the general public.

Liberal economists are once again acting as psychotherapists and trying to calm us. Russia is already acting as if it were already a WTO member, they say, so it can’t get any worse. There will also be a transition period, lasting until about 2012, so there will be time to adapt.

At the beginning of the decade, protectionist measures generated rapid growth in automobile, food processing and home-appliance production by Western companies in Russia. All famous automobile brands are now producing in Russia: Volkswagem and BMW, Ford and GM, Toyota and Hyundai, they are all here. However everyone knows: without protectionist tariffs, Moscow’s Fords and Hyundais wouldn’t come from St. Petersburg and Taganrog in the Rostov region, but rather from Turkey or China.

Import substitution was sparked by the ruble’s crash in 1998. When imports collapsed, foreign companies that wanted to keep their share of the market had no choice but to move production into the country. With Russian wages being at the lowest point that was not such a unattractive perspective. The years since have also witnessed growth in middle-class incomes and consumption.Workers wages started to grow as well, thus fueling continuing consumer boom and helping to sustain demand, keeping these new enterprises growing. But to maintain increased production within WTO after the transition period, competition would also have to rise. This means reducing wages.

This is only part of the problem, however. Russian economic growth, consumer boom and wage increases are all based on high oil prices. Will these prices las forever? This is not self-evident. World oil prices historically follow a 10-year to 12-year cycle. This means that the inevitable fall in the flow of petrodollars will most possibly arrive at the same time that WTO requirements are coming into full effect. There will be no soft landing.

Ford labor union leader Alexei Etmanov told me that wages account for about 2.5 percent of production costs for the company, which is low even by Latin American standards. But people will work for even less in Africa or parts of Asia.

Ford is known as a success story of Russian labor movement. After a few strikes and labor disputes workers managed to improve their conditions. What if the workers at Ford manage to drive the wage portion of costs up to the astronomical level of 3 percent? You would think that management would remember Henry Ford’s dictum that its workers should be its main customers.

But the WTO’s principle aim is to break these connections. The growing demand from the middle class will be met through the exploitation of what amounts to slave labor in poor countries. The gains for our workers will be stripped away under the threat of closing down production. Today, if Ford, Hyundai or BMW want to sell in Russia, they have to produce in Russia. But once the WTO rules come into effect, this will change.

Earlier Russian liberals like Sergei Witte and Pyotr Stolypin followed protectionist policies because they understood that their abandonment meant death for Russian industry. Protecting domestic markets was also an integral part of industrial growth in Japan and, later, South Korea. Historically, in the United States industrialisation was based on protectionist policies as well.

Industrial development in these countries has generally been accompanied by a rise, not a fall, in living standards, and higher wages usually accrue from a stronger labor movement. The main principle of the WTO, conversely, is to reduce wages and social “benefits” in the name of competitiveness. WTO is not just an institution, following a certain economic policy, it is a key element in a Class War.

What’s good for elites is often not good for society as a whole. Natural resource monopolies lead in Russia to the development of the bourgeoisie, whose ties with officialdom form the foundation of an oligarchic system of government. But this ruling class has little interest in national culture or even industry. The national culture will be replaced by expensive restorations to the Bolshoi Theater, and the industry will be given to foreigners. If conditions change and those foreigners then close their factories and transfer production to China, then fine. Let them go

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