Despite its size and limited ability to manufacture consumer goods and other products, Russia was only the U.S.’s 37th largest export market in 2010. Yet, it was our 17th largest source of imports. Why? What’s with the disparity? Well, it mostly comes down to trade barriers. The Russian Government has maintained barriers to imports for years such as a lack of transparency, discriminatory procedures and regulations, high tariffs and tariff-rate quotas, prohibitive charges and fees, and burdensome licensing, registration, and certifications requirements. These conditions make it difficult to and frankly often not worth selling U.S. products on the Russian market. But it looks like things are about to change.
For 18 years Russia has been vying for a seat in the World Trade Organization (WTO). In December of 2011 it was finally approved and invited to join. Once Russia domestically ratifies its accession (which must be done by July 23, 2012) it will become a full-fledged member of the WTO thirty days later. This means if all goes well, Russia should be a WTO member before the fall. Sounds good for Russia, but what does this change mean for US exporters?
It means that if Congress can permanently normalize US/Russia trade relations, US exporters could stand to make some serious money. Estimates state that US exports to Russia could double in the next five years and the USG is already encouraging exporters to consider this upcoming market. For instance, the US Small Business Administration published an “Exporting to Russia” podcast outlining upcoming changes and opportunities. Once Russia is a WTO member, it will have to implement many trade liberalizing obligations that will allow U.S. exporters to more easily enter the Russian market including:
- More certain and predictable market access
- Lower tariff rates
- Enforceable market access
- WTO dispute settlement mechanisms
- Reduction of agricultural subsidies
- Enforceable intellectual property rights
- Reduction of non-tariff obstacles to trade and investment
This sounds like a great opportunity for US exporters, but there are still risks. First, before American businesses can take advantage of a newly liberalized trade regime in Russia, Congress must vote to remove Russia from the Jackson-Vanik Amendment – an amendment that conditions “normal trade relations” and Most Favored Nation (MFN) tariff rates on emigration policies. Under the WTO rules, this type of condition is not allowed, which means keeping Russia on the list could limit U.S. companies’ economic opportunities. If the US conditions Russia’s trade status, the WTO rules allow Russia to implement discriminatory trade measures against the US. The problem is that some members of Congress are hesitant to remove Russia from the list unless Russia agrees to other human rights protections.
Second, practically speaking, WTO membership can’t fix all of the problems overnight. Bureaucracy, corruption, and other issues will continue to plague the Russian market during the transition. Some believe that corruption will remain the largest obstacle for US exporters. See the Wall Street Journal’s Corruption Currents April 24th blog. Recent reports explain what John Deere experienced when opening a facility outside of Moscow. Although it only took nine months to get the facility up and running, there were over 240 required certifications and inspections which means that there were thousands of opportunities for corruption. And, as if the process wasn’t difficult enough, now the Security and Exchange Commission (SEC) is investigating the company for possible FCPA violations. Russia ranks number 143 out of 183 countries (1 being the best, 183 being the most corrupt) on the Transparency International Corruption Perceptions Index. In comparison, the US ranks number 24.
So should you forget about Russia? The reality is that Russia is one of the 10 biggest economies in the world with a population of over 140 million people. That’s a huge market for American companies. The real question is how do you export to Russia, expand your sales, and reduce your risks? General Director of John Deere Russia, David Larson, explained, “As long as you know what needs to be done, the bureaucracy here is pretty effective.” See NPR story From Iowa To Russia, Tractors Build Economic Bridge. I say don’t give up on the market because of the risks, but if you are not a company like John Deere you need to do more than learn what needs to be done. You must ensure that all your employees, partners, subcontractors, distributors and agents understand your company’s ethics. You must establish a “tone at the top” that exudes a no tolerance policy and ensure that everyone you deal with, and I mean everyone, gets the message and is on board with the no tolerance program. After joining the WTO, Russia’s overwhelming bureaucracy should become more manageable but do your research, find out what will be expected, and include the time and cost into your expansion plan. As always, a comprehensive FCPA compliance program can protect your business and company management. Institute a thorough compliance program including procedures, training, a compliance officer, and an ongoing review process of your Russian activities. FCPA violations abroad always are a liability to your U.S. persons and your U.S. company. Proactive measures now means less risk and liability in the future.