19 November 2012

Africa: Russia-Africa Trade - Set for a WTO Boost?

analysis

With Russia finally joining the World Trade Organisation, the country's economic ties with Africa could advance. But the continent faces competition from other developing nations

After nearly 20 years of wrangling, Russia joined the World Trade Organisation in August, becoming the 156th member to sign up, and the last in the G8. Some predict the country could enjoy a rise in growth akin to China after its 2001 entry, after which its exports quintupled.

There will be winners and losers aplenty in Russia's $1.9tn economy. Exporters will gain $1.5bn to $2bn a year from the dismantling of barriers, and the World Bank predicts economic gains of between $53bn and $177bn for the national economy overall. But uncompetitive industries, notably automobiles, may shut down.

Exporters around the world are eyeing Russia's opening with interest. The average import tariff on goods entering Russia will now drop from 10 to 7.8 percent, allowing greater access for foreign manufactured goods and agricultural products. Lower tariffs cheapen products, boosting Russian spending power. Raised limits on foreign ownership in telecommunications and banks will attract Western companies, and developing countries are poised to capitalise, especially Brazil, which expects to increase exports of coffee and meat.

Developing countries' share of Russian trade has already risen from around 15 percent in 2000 to 21 percent in 2010, with developed countries' share falling from around 69 percent to 55 percent. While Russia is a major producer, it remains a net importer of food and agriculture products. Meat, dairy and sugar are all sensitive to import competition, and have been kept out over the last few years by a range of tariff and non-tariff measures.

"This accession is good news in terms of having a common set of rules with Russia," says Guillermo Valles, director of the UNCTAD division on international trade. "Previous to this, all countries would have bilateral treaties granting Most Favoured Nation treatment reciprocally and having their own set of rules through these agreements. Carrying a common set of rules for everyone makes sense in terms of predictability, in particular on food products."

As protections dissolve, Africa's trade relationship with Russia may shift. Russia's economic ties with Africa have been weak to date - the continent accounts for just 1 percent of Russia's world trade. But in part, that is a result of a lengthy disengagement following the breakup of the Soviet Union. Over the last decade, there have been efforts - from the top - to re-start. Vladimir Putin visited Thabo Mbeki in 2006, predicting Russia and South Africa would pursue big projects "worth billions of dollars". The likes of De Beers and Alrosa signed contracts soon after.

Former President Medvedev, with a more economically liberal mindset than Mr Putin, highlighted a 'new dynamism' to Russia-Africa relations during a 2009 visit, with ministerial get-togethers with South Africa, Kenya, Cameroon, Gabon, Madagascar, Angola, Guinea, Namibia, Nigeria and Ethiopia, although collaboration on terrorism intelligence has often been a higher priority than trade and investment. But, between 2002 and 2010, the compounded growth of Russia's total trade with Africa increased by 16 percent, with imports and exports increasing 19 percent and 14 percent respectively.

Russia's investment interests are not inconsiderable. It has $480bn in foreign exchange reserves, and an increasing outwards direct investment stock (from $3bn in 1995 to $249bn in 2009). Following an initial investment focus in the Commonwealth of Independent States, its overseas FDI has increased, focused on mineral fuels and resources as well as finance, telecoms and retail trade.

Its Africa presence is growing in step. Alrosa, Gazprom, Lukoil, Rusal, Renova, Gammakhim, Technopromexport and VEB and VTB banks are all engaged in large-scale investment on the continent. Russian companies sank over $5bn into Africa between 2000 and 2007, excluding oil exploration deals. Moscow-based Renaissance Capital is developing services to funnel billions of dollars more investment into the continent.

On the trade front, Russia's WTO accession could be a game changer, but only in selected areas, and there is stiff competition from other developing countries to sell into the country's 142 million population. Russia's import trade from Africa is concentrated in South Africa (22 percent), followed by Morocco (19 percent) and Egypt (13 percent), with exports mainly flowing to Egypt (48 percent), Morocco (16 percent) and Tunisia (12 percent).

Guinea, Côte d'Ivoire and Algeria are also trade partners. Most of Russia's Africa imports are in foods (29 percent), cocoa (16 percent) and tobacco (9 percent), although ores, uranium and iron are of growing importance as extractive sectors and related infrastructure improve in Africa, and Russia's own resource base declines.

"Mostly, accession is good for North Africa because there are commitments on export bans," says Sergey Kiselev, professor and head of the department of agricultural economics at Lomonosov Moscow State University and author of a leading study on Russia's accession, published by the International Centre for Trade and Sustainable Development in Geneva.

The likes of Egypt and Tunisia have proved vulnerable to such bans from Moscow previously, with price impacts that contributed to unrest and demonstrations. "After accession it is possible to impose export bans, but it should be from consultation, not the same way it was done previously, which was quite sudden," Mr Kiselev adds.

Accession creates new opportunities for exporters. Reduced tariff duties, trade facilitation, and improved transparency of Russia's non-tariff regulations will ease trade. Coffee imports have increased gradually over the past decade, and while to date Russia's coffee imports have been dominated by Sri Lanka, Indonesia, China, India and Brazil, producers like Ethiopia and Kenya could capitalise. Rwanda, another producer, sent 855m tonnes of coffee to Russia between 2005 and 2008, significantly below its exports to the likes of Germany and Belgium, suggesting growth potential.

The same is true in sugar. While Brazil accounts for around 85 percent of Russia's sugar imports - Russia is the country's biggest market by a long way - there may be prospects for Africa's sugar producers. Again, South Africa is best positioned as the region's biggest producer. Its exports to date have been volatile, earning R179m ($20.5m) in 1998 and nothing in 2004, in part due to import restrictions in Russia. Wine is South Africa's other key export to Russia which could benefit from reduced import duties, although exports from Australia, Chile and Europe will all have the same advantage.

Ultimately, though, the trade impact does not depend just on Russia's commitment to the WTO "but on the compatibility of particular products", points out Mr Kiselev. But while he believes bigger emerging economies like Brazil are best poised to take advantage, it is the framework of the WTO which most helps Africa.

"Small exporters could be less exposed to asymmetry in their power of dealings with Russia because they will have the protection of WTO settlement, and be playing by the same rules as big countries and having the defence of the institution," says Mr Valles at UNCTAD.

He adds, though, that several African countries are not yet in the WTO, which "nullifies a little bit this question [about Russia's accession]. That is something very particular you have in Africa and not in other parts of the world." Most prominent is Algeria, which has been negotiating its entry for over 25 years. But for those that have joined, the WTO framework could help.

Russia's liberalisation, meanwhile, has been a stop-start affair. Although it provided the classic 'shock therapy' test case, and perhaps because of that, the government's approach to economic reform has become gradualist, or perhaps simply indecisive. The government was widely expected to sell its interests in Sberbank last September but opted not to due to market conditions. There are perceived differences between President Putin and Prime Minister Medvedev, the latter of whom is thought to favour a swifter liberalisation process.

But WTO accession is harder to backtrack says Mr Valles. "The fact that they enter the WTO has a kind of lock-in effect. This means that whatever open policies they have in all sectors they won't roll back to a pre-WTO time."

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