Focus on Russia – Consumer sector to reap most from Russia’s WTO accession

A cheapening of imported goods as Russia finally enters the World Trade Organisation this Wednesday, after 19 years of negotiations, is likely to mean its consumer and services sectors benefit the most, according to Troika Dialog.

This is because these sectors use lots of imported goods, and Russia continues to have a strong culture of consumption.

In a review paper on the momentous moment on 22 August, Troika Dialog points to studies by the World Bank, which have shown that WTO membership usually drives wage growth among lower-wage earners, thus the spending power of Russia’s population can be expected to increase.

World Bank reports have shown consumption in Russia has been resilient in the face of the economic crisis to its west. The consumer index compiled by researchers Levada Centre has remained constant since December.

Some Russia-focused managers are already looking to profit from this trend. This month, East Capital revealed the launch of a fund focused on Russian domestic growth. Aivaras Abromavicius, partner and senior adviser at East Capital, said: “There is a lot of upside potential in companies serving the Russian domestic consumer.”

Evgeny Gavrilenkov, Troika’s chief economist, believes Russia’s WTO membership is a positive development in the long term, because it “creates regulatory pressures on Russian institutes to improve their operations.”

An example of this is an increase in privitizations.

The government has agreed United Grain Company must be sold by year’s end, and Rosagroleasing must be sold by the end of 2014. It has also promised to keep the WTO informed of progress in the privatization of other major state companies.

A number of industries are seeing increased government support, especially those in “social-economically sensitive sectors”.

Troika highlights here companies such as Sollers in the automotive sector, fertilizer producers in the agriculture sector and Pharmstandard in pharmaceuticals. They are all expected to become more competitive as a result.

The World Bank estimates that the Russian economy will benefit by the equivalent of 3.3% ($65bn) of GDP in the first three years of membership, while the New Economic School in Moscow estimates it will add 0.5% to annual GDP growth.

Yet Russia’s own government is concerned that if its WTO membership is not accompanied by accelerated reforms its economy may in fact lose 0.5% of GDP per annum.

Peter Westin, chief economist at ATON, comments: “WTO is a good feather in the hat for Russia, but it will only be a success if the government wants it to be a success.”

Troika says that although it “has become something of a cliché by now to state that accession to the WTO is not a magic wand”, it is important to realize that Russia’s business climate will not improve immediately.

Gavrilenkov adds: “I’m not convinced that joining the WTO will have a significant impact on the economy in the short run. The WTO is important for long-term development, but it is just one of the many steps Russia needs to make to development its economy and broaden the market.”

But experts agree that “it is nevertheless a game changer” and, like all other transitions economies that have joined the WTO, Russia willeventually reap the benefits.

To read Troika’s full paper entitled Russia: The Director’s Cut – Winners and Losers of WTO Entry, click here.

We will be covering Russia all week online as part of our regular series of thematic articles.


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