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Friday, 7 June, 2002, 22:19 GMT 23:19 UK
US calls Russia a market economy
Putin and Bush
Russian hopes of a speedy entry into the WTO have been raised

Russia President Vladimir Putin has been handsomely rewarded for his vocal support of the US military response to the 11 September attacks on New York and Washington.

The US Commerce Department has described Russia as a market economy, thereby raising high hopes of an early entry into the US markets and the World Trade Organisation (WTO).


The Russian economy is prepared to fully take part in the world economy

Vladimir Putin
Washington's move came just 10 days after the European Union had granted Russia market economy status during a summit in Moscow.

Russia welcomed the decisions that the country has completed its rocky and bumpy 10-year-long transition to a market economy from 70 years of communist rule.

"This decision ripened a long time ago. The absence of the market status of the Russian economy provided an opportunity for arbitrary interpretation of any commercial transaction involving Russia's commercial structures", said Mr Putin.

Fighting for the recognition

Without the free market status, Russia's companies have faced almost prohibitive taxes on their exports to the US and Europe.

The absence of the market economy status meant that in anti-dumping cases brought against Russia, the punitive tariff levels were determined by using surrogate figures based on a foreign estimates, rather that efficacies Russian prices.

Steel plant
Steel producers will be the main beneficiaries
According to Russian economy and trade minister German Gref, the country's exporters were loosing up to $1.5bn a year.

For years, US and EU officials were saying that hugely subsidised energy prices made Russia's exports of steel, fertiliser, nuclear fuel and chemicals too profitable, while Russia's own tariffs were protecting the domestic market from foreign competition.

The majority of the protective laws are still in place, however, so Washington's decision could be regarded more as a political prise for its pro-Western policy, than as a sign of an opening of Russia's markets.

"Ninety percent of the action is symbolic," said Vladimir Tikhomirov, senior economist at NIKoil investment bank in Moscow.

"Off the top of my head I would say it is worth close to zero in monetary terms."

Victory

The main winners are Russia's steel exporters.


It is best understood as a political gesture which helps the atmosphere of the WTO access negotiations for Russia

Christopher Granville
"We hope market status will help with anti-dumping investigations against Russian metal producers," said Alexei Mordashov, general director of Severstal steel mill, Russia's biggest exporter of steel to the United States.

"It will not take away all of our problems but it will be an instrument that will help us."

WTO entry hopes

The market economy status would also help Russia join the WTO.

Supermarket in Moscow
Russia's markets are flooded with foreign goods
President Putin said that the US decision has showed "that the Russian economy is prepared to fully take part in the world economy".

It is a clear sign that the Kremlin is happy to regard the decision as another step towards membership of the World Trade Organisation, which president Putin has made one of the country's top priorities.

Although Mr Putin has already made up his mind, the country's exporters have complained that the opening of the national markets to the foreign competitors would be immensely damaging to entire sectors of Russia's economy.

Many Russian economists have long argued that the country should not join the WTO until its economy had been granted market status both in the US and the EU.

Russia's ex-finance minister Alexander Lifshits and a deputy chief executive of Russia's largest primary aluminium producer Russian Aluminium told BBC Online that unlike China, which has joined the WTO without the market economy status and whose core exports consist of consumer goods, Russia - which exports mostly raw materials - would suffer from opening its markets while being punished by prohibitive tariffs abroad.

Political gesture

Market economy status will help both exporters to explore the western markets and the Kremlin to calm down the country's frightened industrialists and bankers.

"It is best understood as a political gesture which helps the atmosphere of the WTO access negotiations for Russia," said Christopher Granville, strategist at United Financial Group in Moscow, pointing out that the direct profit accounts for just 1.5% of the country's export income.

Challenges

But despite its newly won status, Russia does not ignore the need for further reforms and difficult negotiations going forward.

Russia has to reform its energy market, which allows exporters to enjoy low domestic prices.

It also needs to adjust foreign trade laws, remove tariff barriers and cut subsidies to the agricultural sector before joining the WTO.

All such measures will be tough to push through in a country where the average monthly wage remains around the $100 mark despite several years of stable, economic growth.

But Washington's decision, albeit politically motivated, would help Mr Putin push reforms a bit further and silence non-reformist critics.

This should help him translate political capital into profits.

See also:

30 May 02 | Business
24 May 02 | Business
25 May 02 | From Our Own Correspondent
14 May 02 | Business
29 May 02 | Europe
10 Dec 01 | Business
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