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Hecker: Russia's Entry to WTO Will Show Its True Promise

AP

How long has Russia been seeking World Trade Organization membership?

When Russia made its first entreaty, it was 1993. To put this in perspective, the world was only two years removed from the disillusion of the Soviet Union, while over 20 percent of Russia’s 143 million people hadn’t even been born yet.

Since then, an entire generation has been raised in Russia, while the world negotiated. Now it’s imminent, as Russia’s President Vladimir Putin in late July signed the protocol of Russia's WTO accessionafter receiving approval of the Russian parliament.

Russia has quietly nurtured a surprisingly diverse economy with a robust consumer class.

Though plagued by many shortcomings inherent in developing economies, the country remains dependent on oil and gas as it supplies Europe with roughly 50 percent of its energy needs. But leveraging this and other endowments, Russia has yielded many leading industrial companies that rank among global leaders in mining, metallurgy, petrochemicals and telecommunications. Despite the rapid development of the regional economy and the strides made over the past 20 years, WTO membership promises to be an important catalyst for growth in the Russian market.

Foreign companies have prospered in the Russian market. While fashion houses, watchmakers and restaurateurs have long hawked their wares on trendy Russian streets, the burgeoning consumer class attracts more attention. Global carmakers build and assemble automobiles for sale in Russia in factories from Kaliningrad in the Baltic to Vladivostok in the Pacific. Meanwhile, companies like PepsiCo , active in the Russian market since the 1970s, has invested to the point where Russia ranks as its second-largest market in terms of sales. A tour of any of the region’s shopping malls will yield the same brands, styles and designs readily available throughout the Americas, Europe and Asia.

WTO membership will instantly make Russia more attractive for other companies as well. Unlike their counterparts in other markets around the globe, Russia’s consumers remain relatively unburdened by debt; consumer debt accounted for a paltry 10 percent of GDP in 2011. According to a recent report by the World Bank on the economic impact of Russia’s WTO accession, the average Russian household would experience a gain of 7.2 percent of its income each year, which translates to higher disposable income. Combined with mandatory reductions and elimination of many tariffs on certain goods and services, customer segments will become much more accessible.

WTO membership will help liberalize the Russian economy with manufacturers and other producers — like their consumer counterparts — having access to less expensive inputs, which will help them better manage costs.

An improving internal economy will also allow Russian export industries to benefit from lower inputs and improved quality among its suppliers and workforce. Additionally, Russian companies will possess greater rights under WTO guidelines in defending themselves against accusations of dumping.

According to the World Bank, nearly 100 percent of the Russian population is literate, and over half of its citizens hold college degrees. And despite its absence from the WTO, Russia can boast a more connected populace than any other BRIC country (explain this), with 227.6 million active SIM-cards and more than 42 percent of its households wired for the Internet.

To accommodate rising demand for the Internet, MTS, the leading telecommunications provider in Russia and the CIS servicing over 100 million mobile customers, has built, acquired or leased more than 100,000 km of fiber optic lines. In 2011, mobile data usage grew by 270 percent. To meet this demand, the market’s leading operators have installed over 60,000 3G-enabled base stations Mobile data usage is expected to increase eightfold by 2016.

Driving social network usage, which ranks among the highest per person in the world, are innovative properties, like Odnoklassniki and vKontakte, and Russia is one of two markets where Google does not lead the market in search. In Russia, the market for IT services is expected to further build on its 20+percent growth rate in 2012. The government too is supportive, having injected billions of dollars to promote R&D in sectors like nanotechnology and infrastructure for IT companies.

Though there are no restrictions on capital in Russia and regulation is liberal in comparison to our peer markets, the government continues to support efforts to normalize Russian corporate and securities law to push Moscow’s development into a top global and regional capital market. Spurned by the merger of two of Russia’s largest exchanges, RTS and MICEX, efforts are underway to improve laws governing corporations, lift restrictions on capital-raising abroad, and enhance local capital markets.

Though long in the making, WTO membership is coming at an opportune time for the world’s largest country by geographic size and ensures that all areas of the economy will benefit from liberalization, higher competition and increased connectivity both within Russia and beyond. Not since China’s accession to the WTO has the world seen an economy the size of Russia’s, ranked sixth globally, come online. In the five years following China’s membership, its GDP nearly doubled. While the current global macroeconomic environment will accommodate such growth, we can be sure Russia’s newest generation of citizens will ultimately enter a much more dynamic, more integrated and more welcoming economy.

Dr. Michael Hecker, Vice President of Strategy and Corporate Development, Mobile TeleSystems. Hecker joined MTS in May 2006. Prior to joining MTS, Mr. Hecker worked at A.T. Kearney Europe from 2000-2006, focusing on strategy, marketing and finance in European telecommunications and consumer goods industries. Prior to that, he worked as a Junior Lawyer in Berlin and Brandenburg (Germany).