U.S. Business Opportunities from Russia's Accession to WTO Depend on U.S. Congressional Action

July.17.2012

​Russia is expected to join the World Trade Organization (“WTO”) later this summer. This development should introduce a new era in U.S.-Russia trade and business relations, promising U.S. companies increased access to one of the largest economies in the world. But realizing these opportunities will require the U.S. Congress to pass legislation, and the U.S. legislative initiative has encountered impediments and complications.

Russia’s WTO Accession

Russia having negotiated accession protocols with leading WTO members, including the United States, the WTO process for admitting Russia is complete. Furthermore, one house of Russia’s Federal Assembly has passed a proposal to approve Russia’s entry into the WTO, and enactment of this legislation is expected to be completed soon.

Russia’s WTO accession should, among other things, result in considerably lower Russian tariffs and elimination of other import restraints applicable to most goods from the United States and elsewhere. Russia has committed to WTO tariff ceilings or “bindings” that are generally at levels considerably below those that Russia has been applying. Especially large tariff reductions are scheduled for merchandise in the aviation, chemicals, plastics and heavy machinery sectors. Also, for example, Russia’s import treatment is expected to become better and more predictable for meat products – an area of particular sensitivity and uncertainty – as Russia committed to observe international standards for regulating meat imports. Furthermore, as a condition of its WTO entry, Russia has committed to join the WTO Information Technology Agreement, which requires zero duties on a range of IT, communications, and other high-tech goods.

WTO-mandated liberalization of Russia’s financial sector should result in increased access for U.S. financial institutions in the form of foreign direct investment, access to financial services, and internal securities trading. Russia’s WTO accession should also result in expanded market access for other service sectors, including telecommunications, computer services, audio-visual services and e-commerce, under the General Agreement on Trade in Services.

There are concerns, however, that WTO membership will not resolve some important market access issues in Russia. Inadequate protection of intellectual property rights has been a longstanding issue in Russia for U.S. investors. Russia has agreed to adhere to the WTO’s Trade-Related Aspects of Intellectual Property (“TRIPs”) Agreement. In light of experience with WTO Members’ erratic TRIPS Agreement compliance, however, questions will continue about IP protection in Russia. In addition, concerns remain over entry barriers that Russia maintains against certain U.S. goods, including automobiles and agricultural exports. In particular, unpredictable application of Russian standards and regulations relating to imports in these areas is likely to continue.

United States Implementation

To take full advantage of Russia’s WTO membership, the United States must grant Russia permanent normal trade relations (“PNTR”) status – the status enjoyed by most nations and that brings relatively low U.S. tariffs. But establishing PNTR status for Russia will require a change in U.S. law. Today, the so-called “Jackson-Vanik” amendment of the Trade Act of 1974 forbids U.S. authorities to accord Russia PNTR status. The Jackson-Vanik amendment denies certain countries, including Russia, eligibility for NTR status as long as the country denies its citizens the right of freedom-of-emigration. Adopted by the Congress in the 1970s, the Jackson-Vanik amendment was intended to help Soviet Jews safely emigrate from the Soviet Union.

Many now consider this legislation obsolete and a relic of Cold War U.S.-Soviet relations. Nevertheless, many in the Congress are reluctant to repeal this legislation without addressing human rights and democracy issues in Russia.

A plan has emerged in the Congress that could result in approval of PNTR for Russia based on companion legislation bearing on human rights matters. The leading candidate to serve as companion legislation is the Sergei Magnitsky Rule of Law Accountability Act of 2011 (“Magnitsky Bill”), which the U.S. Senate Foreign Relations Committee unanimously approved on 28 June. The Magnitsky Bill, named in honor of the attorney who died in Russian police custody for allegedly exposing fraud and corruption, would require the Secretary of State to produce a public list of individuals believed to be responsible for the detention, abuse, or death of Sergei Magnitsky or believed to be responsible for “extrajudicial killings, torture, or other gross violations of human rights.” Listed individuals would be ineligible to receive visas to enter the United States. The bill would also direct the Secretary of the Treasury to investigate money laundering allegations relating to the Magnitsky case and “block” property of individuals on the State Department’s list. In accordance with normal U.S. asset-blocking practice, U.S. persons would be forbidden, directly or indirectly, to transaction with these individuals. The bill would require financial institutions to (1) perform an audit of the assets within their possession or control to determine whether the assets are frozen, and (2) submit a report to the Treasury Secretary containing the results of the audit and a certification that all assets subject to the Magnitsky legislation have been frozen.

The Senate Finance Committee, which has responsibility for legislation related to trade, will meet this week to mark up legislation giving Russia PNTR status and removing it from Jackson-Vanik. Senator Max Baucus, the Chairman of the Senate Finance Committee, has indicated that the committee will also consider the Magnitsky Bill during the mark up of the PNTR legislation. Meanwhile, Russia has warned of retaliation if the Magnitsky Bill becomes law. The Obama Administration seems unenthusiastic about the Magnitsky Bill, but has urged the Congress to repeal Jackson-Vanik before the August recess.