"One must probably join any international organization, including the WTO, knowing that Ukraine will benefit from it. At least, it will not lose." \nVolodymyr Lytvyn, broadcast on the "1+1" TV channel, 20.11.2005. \n \n"If Russia joins the WTO before Ukraine, then Ukraine will never join this organization." \nYuriy Yekhanurov, speech at the Carnegie Foundation, 02.11.2005. \n \nStatements by Volodymyr Lytvyn that the very raising of the question about Russia obstructing Ukraine's accession to the WTO is absurd, and that Ukraine should better use the "huge prospects of the SES," indicate that support for the scenario of another sharp turn to the East is turning into a winning theme of the parliamentary election campaign. \n \nThe failure of the Ukrainian president's plans to ensure accession to the World Trade Organization by the end of the current year has become perhaps the main political achievement of the opposition. \n \nThe CPU, the Party of Regions, the SDPU(o) and the SPU not only "protected the domestic producer" but also consistently worked toward "rapprochement" with Russia. It is obvious that as soon as the "WTO question" becomes an election "chip," the voting on the relevant laws will be postponed until the period after the formation of a new government. \n \nAs during the presidential campaign, the change of priorities from WTO accession to SES accession during the parliamentary race will be explained by the "new pragmatism" in Ukraine-Russia relations, dictated by the demands of "economic growth." \n \nHowever, real pragmatism and so-called economic egoism suggest that, by letting Russia go ahead on the path to the WTO, Ukraine loses more economic opportunities than it gains. \n \nNow the Kremlin has a chance not only to avoid difficult negotiations with Kyiv within the WTO Working Group but also, through controlled factions in the new parliament, to "push through" the dragging of Ukraine into the orbit of the Single Economic Space. \n \nWhy Russia is rushing to the WTO \n \nIn general, there are two views on the question of "why Russia needs the WTO." On the one hand, representatives of big Russian business demand that the state support their expansion into foreign markets and at the same time ensure protection for industries that are losing competitiveness on the domestic market. \n \nAlexei Mordashov, owner of Severstal and head of the RSPP Working Group on Russia's WTO accession, names three main arguments. \n \nFirst, it is additional protection from anti-dumping investigations when accessing foreign markets. Moreover, Mordashov believes that not only metallurgists but also the rest of export-oriented producers such as agrarians and chemists are interested in this. \n \nSecond, WTO accession should increase the capitalization of large companies. According to the head of Severstal, the growth of foreign investment in general and in individual companies in particular will cause economic growth and allow the state to take on greater social obligations to the population. \n \nThird, Russia, that is, the authorities and big business, will be able to participate in shaping the rules of world trade, which today are developed without taking Moscow's position into account. \n \nHowever, Mordashov's economic arguments look unconvincing given the real economic situation in Russia. \n \nAccording to the forecast of Maxim Medvedkov, deputy minister of economic development and trade, the growth of industrial production in the period up to 2010 under all scenarios (joining or not joining the WTO) amounts to extremely close values that are within the margin of statistical error. \n \nMoreover, the growth will be ensured not by the production of raw materials but by machine building (94%–79% depending on the profile of enterprises), instrument making (74%), and automobile manufacturing (35%). \n\nAs for investment growth, Medvedkov notes that WTO agreements do not regulate the investment climate as such. The deputy minister forecasts that after WTO accession and changes to a number of legislative acts, a noticeable increase in investment may occur in the automotive sector. \n \nHowever, the share of foreign investment invested in these projects, according to the ministry, has never played a significant role in the total volume of investment in the Russian Federation. \n\nAccording to experts, Russia loses 2.5 billion dollars annually from being outside the WTO. At the same time, in just six months of 2005, 5.7 billion dollars "fled" from Russia due to the unfavorable investment climate, but this did not greatly upset the country's leadership. \n \nObviously, the reliance primarily on domestic investment obtained from oil and gas sales explains Vladimir Putin's position on state policy in the area of stimulating investment. \n\nDuring his stay in Japan, the Russian president stated that Russian legislation in the investment sphere needs not improvement but "stabilization." That is, Russia will adapt to investors' demands only in the part that does not contradict plans for further strengthening of state capital. \n\nThus, Russia as an economic power feels quite confident both outside the WTO and inside the organization. Therefore, it is worth considering the political and geopolitical reasons for accelerating accession to the organization. Here there are short-term and long-term calculations. In the near future, Russia seeks to avoid claims from its largest trading partners in the CIS.\n\nBack in 1998, Kyrgyzstan joined the WTO, which took on high obligations to importers and became in fact a re-export point for a whole group of goods into Russia. Given the insignificant volumes of bilateral trade between the countries, this did not lead to a noticeable negative effect. However, in Moscow the precedent itself was remembered for a long time.\n\nA different situation developed with Moldova, which joined the WTO in 2001. It was the time of the "honeymoon" in relations between the Kremlin and Chisinau. Moldovan President Vladimir Voronin could not even have thought of using the organization's levers against Russia. \n\nHowever, three years later the situation became qualitatively different: a trade war unfolded between the states over Transnistria. The Kremlin decided to introduce prohibitive import duties on Moldovan goods (the Russian market absorbs about 60% of Moldovan exports). In response, Chisinau openly threatened to block Russia's WTO accession. \n\nIn Moldova's case, dependence on Russia is too asymmetric, and even activity within the WTO cannot compensate, for example, for electricity cutoffs (as RAO UES did on November 2). \n\nUnlike Moldova, Ukraine is capable of using the organization's mechanisms specifically to gain economic advantages. Hence Russia's tactical goal is to prevent the rest of the former Soviet republics from dictating conditions regarding the opening of the domestic market for their producers.\n\nIn the long term, in the process of WTO accession, Russia seeks to preserve preferential trade relations with CIS countries—primarily with partners in the Eurasian Economic Community (EurAsEC) and the Single Economic Space.\n\nIn principle, according to Art. XXIV of GATT/WTO, the possibility of WTO members having a preferential trade regime is allowed, and accordingly the possibility of exceptions from the most-favored-nation regime adopted within the WTO, in particular for participants in agreements on the creation of a free trade zone or customs union.\n\nAs the head of the Russian Union of Industrialists and Entrepreneurs (RSPP), Arkady Volsky, acknowledges, the creation of the Single Economic Space as a customs union looks problematic due to the simultaneous conduct of WTO accession negotiations by the SES member countries. \n\n"At this stage it is difficult to predict what the final agreed conditions of tariff protection of national markets, restrictions for foreign service providers and a number of other factors included in the WTO 'package' will be for each of the four countries," Volsky believes. \n\nThe simplest path for Russia to dictate favorable trade conditions to Belarus, Kazakhstan and Ukraine is to get ahead of them in joining the global trade organization. \n\nThis includes, in particular according to Volsky, the unification of customs rules, acts on the provision of state subsidies, harmonization of legislation in the field of intellectual property, as well as the unification of principles of tax policy, currency regulation and currency control.\n\nAs a "carrot," Kyiv may be offered lower oil and natural gas prices than for other countries. However, decisions on changing tariffs and prices will be made in the SES by the same supranational body, and Ukraine will essentially have no opportunity to influence price policy. \n\nThus, the following situation can be modeled. Russia joins the WTO within 2006, getting ahead of Ukraine, whose parliament spent three months after the elections on forming a majority and a government. \n\nNext, Kyiv will be faced with a choice: either join the WTO while simultaneously signing agreements on the creation of a Customs Union within the SES, or surrender the CIS market (which absorbed 30% of all exports in the ten months of 2005) due to the uncompetitiveness of products in connection with the introduction of new SES customs tariffs, rising energy prices and the arrival of competitors from Central Europe. \n\nIt is worth recalling that according to the Ministry of Economy, the competitiveness of Ukrainian goods deteriorated by 14% over 9 months of this year. Investment in fixed capital fell tenfold—from 34% to 3.4%.\n\nUnder these conditions, the expected drop in trade turnover with traditional partners could further deepen pessimistic sentiments among investors. And ultimately, the decline in production, capital flight and reduced competitiveness could end with the easy purchase of semi-bankrupt Ukrainian enterprises by their Russian partners.\n\nWhy Ukraine is in no hurry to join the SES \n\nIt is possible to prevent the pessimistic scenario of the gradual absorption of Ukraine's economy and consequently its politics by Russia under two key requirements. First, the adoption by the Verkhovna Rada of the remaining eight laws mandatory for WTO accession. \n\nThis is a question of the Ukrainian president's ability to engage in dialogue with parliamentary factions. If Ukraine is granted market economy status by the US and the EU, at least in January 2006, the head of state will have arguments in negotiations. \n\nSecond, the completion of negotiations with the US and Australia and the preparation by the Yekhanurov government of clear demands on Russia after WTO accession. The first to benefit from this will be the same domestic producer whose interests the opposition hides behind. \n\nThus, at present, the following Russian trade restrictions apply to Ukraine: anti-dumping duties on galvanized rolled steel (24.3%), special duties on caramel (21%), ball bearings (0.35 euros per 1 kg), countervailing duties on rebar for reinforced concrete structures (21%). Quotas remain on the export of large-diameter pipes, metallurgical products (galvanized rolled steel), poultry meat, sugar, and alcohol. \n\nBeing in the WTO, Ukraine can remove all these restrictions outside the SES and de facto receive most-favored-nation treatment from Russia, which is one of the organization's principles.\n\nThe negotiation process within the WTO can also become another powerful lever in negotiations on energy carriers. If Russia manages to join the WTO before Ukraine, Kyiv will be forced to agree to the transit conditions laid down in the Memorandum of Understanding between Russia and the European Union of 21.05.2004. And this means that gas prices are set during bilateral negotiations with each consumer separately. \n\nThe key issue with which Kyiv could put Moscow in an "awkward position" is the differentiation of gas prices. Belarus receives gas at 48 dollars per thousand cubic meters, Turkey at 75 dollars, while Ukraine is demanded to pay 150 while maintaining lower-than-European gas transit tariffs. \n\nIn this case, Ukraine could calmly agree to conclude a kind of "non-aggression pact" with Russia: softening its position in WTO negotiations in exchange for a gradual transition to monetary settlements for gas.\n\nAnd for now, lacking a political base for negotiating from a position of strength, the Yekhanurov government is trying to minimize the negative consequences of Ukraine's possible exclusion from the bilateral free trade regime between Ukraine and Russia. \n\nTo this end, a maneuver is being carried out to prepare the maximum number of documents on the Single Economic Space that do not concern the introduction of a Customs Union.\n\nIn parallel, negotiations were underway on eliminating exceptions from the free trade regime. \n\nHowever, the Russian government demonstrates readiness for tough measures: introducing new exceptions for Ukraine, opening new and renewing old anti-dumping investigations. The fact is that it was on November 23, during the canceled visit of Russian Prime Minister Mikhail Fradkov, that the Ministry of Economy planned to sign a bilateral protocol on the abolition of exceptions from the free trade regime until 2009. \n\nObviously, the Kremlin is not going to cooperate on terms acceptable to both sides, not only in the energy sphere. In Ukraine, there are actually not so many levers to bring Russia back to the negotiating table on its own terms. With the loss of the prospect of quickly completing WTO accession, there is a threat that Kyiv will have to bargain not about quotas and tariffs but about the degree of concession of sovereignty within the SES.\n\nVadym Sheleshko