Monday 10 October 2016

Russia in a Post-sanctions Era

Later this year EU leaders will be sitting together to discuss the Russia sanctions. Some countries are in favor of dropping these sanctions, others want to stick to the current approach. At the same time, according to this source it seems EU member countries are willing to nonetheless explore “other ideas for improving ties with Moscow including encouraging more trade”. This idea seems nice for European exporters, but if such statement also aims at helping Russia to develop it can really only do so much.

Although the EU is Russia’s most important trading partner, most of trade policies that helps Russia to develop would need to come from inside. Moreover, Russia is hyper-dependent on oil and gas and other raw materials. This pattern as such does not necessarily need to be bad for economic development, but if Russia had any intention to sophisticate its export to profit better from trade, it would have to start thinking about becoming (a) more globalized, (b) improve its services markets, and (c) develop its domestic institutions.

On the first point, a recent World Bank study that examines Russia’s performance across its regions shows that those Russian regional areas which have most open trade and investment policies are also the ones having higher economic performance. In fact, Russian regions have very unequal development levels which is in great part explained by their very uneven degrees of foreign orientation. Hence, one development strategy for Russia is to lower its investment policy. Currently, Russia ranks above the non-OECD average in terms of FDI restrictiveness. Russia would also need to respect its WTO commitments.

On the second point, those richer regions are dependent on mineral exports. If Russia wants to diversify into other (sophisticated) industries, moving away from this one-sector dependency would be a prerequisite. One way to do that would be through opening up its services sectors as another World Bank report argues. However, today Russia’s services policies are clearly less trade-friendly. In particular, some business services that are so important to differentiate into other sectors such as banking, telecom or insurance are still highly restricted.

On the third point, if Russia decides to capitalize on becoming more globalized by receiving more investments in other areas than oil and gas and / or through opening up its domestic services markets, it might as well improve its domestic institutions such as rule of law. There is vast evidence that economic development through services depends on strong institutions so that contracts of the many services that function as inputs in to Russia’s value chains are guaranteed, enforced and ensured.

In short, although potential bilateral trade policies between Russia and the EU can certainly help stimulate trade on both sides to some extent, most of the work for Russia to develop really would have to come from Russia itself. 

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