World Trade Organization – the hottest foreign policy issues in Russia

Topic: BusinessComparative Analysis
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Last updated: April 19, 2019

Over the past year the subject of WTO accession has become one of the hottest foreign policy issues in Russia. It is clear from Russia’s long history, the size of its internal market, and its importance in the shaping of world politics that the process of Russian economic reform will have wide-ranging political and social implications.Now Russia is going to become one of the members of the World Trade Organization (WTO). It not only gives lots of advantages to the Russian company, but also some negative problem.

After joining the WTO, there will be lots of foreign investment in Russia. Whether it’s environment suitable for foreign investors? In this article, I will analyse the economic, political and culture environment in Russia.Economic environmentRussia has made great progress in achieving macro-economic stabilisation and is currently pursuing a successful transition to a market economy.

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* IncomeThrough out twenty years of development, the Russian income level has increased constantly. We can conclude this by the GDP and GNP. .Over the last few years, the annual Gross Domestic Product (GDP) growth 6% in Russia.Moreover, we can see at the figure of Gross National Product (GNP), which was 8,660 US dollars, rank 79 in the world. Here, we should notice that in 2001 the GDP went up 5.

1 percent, which is one of the best figures in the world. Furthermore, Russia’s GDP grew 4.2% 2002 and GNP grew by approximately 4% in the first half of 2002. Rapid Russian real GDP and GNP growth both has benefited from rapid rise of net exports and domestic demand.

On the other hand, according to a forecast released by the Russian Economic Development and Trade Ministry, growth of real incomes reduced the share of the population below the subsistence level to 33% in 2002, and this figure is extremely high by international standards. In 2002, the number of citizens with income below the subsistence level was registered at 27 percent, and this figures expected to go down to 26 percent in 2003, 25 percent in 2004 and 24percent in 2005. Generally, that means Russian has high level of purchasing power.* InflationInflation in Russia was 15.1% in 2002. Inflation rates have stabilised by compared 19%in 2000 and 19.

4%in 2001. Consumer price rises have settled near annual 15%, while composite producer prices are rising even more slowly. Stabilisation of inflation rates followed stability of money supply.

According to the Central Bank, monetary policy will be tightened at the end of the year to prevent a seasonal jump in monetary base and to minimize monetary factors of inflation.* InfrastructureOne of the troubles with Russian infrastructure is the deficient in of long-term financing. For example, Russian oil is more expensive because lack of transportation infrastructure: pipelines, port facilities, and so on. All the issues that have taken place by now have been by major oil companies. Also, important questions remain about the nature of the Russian infrastructure market and pace of regulatory change. Obviously, Russia’s infrastructure needs are enormous. In order to meet those needs for Russia, there is a growing aware the importance of private sector role.

* Natural ResourcesRussia is one of the world’s richest countries in raw materials, most of that are the main inputs for the industrial economy. Russia accounts for around 25 percent of the world’s production of oil and natural gas and possesses large reserves of both fuels. Furthermore, Russia is the second largest energy consumer in the world. That indicates that there are huge investment opportunities for foreign companies upgrading its oil and gas production, exploration and transportation infrastructure in Russia’s oil and gas industry.* Export and ImportThe stability of exports was due to the warped structure of Russian foreign trade.

With regard to the oil industry,exports of crude oil and oil products were practically the same in 2002 as in 2001 ($27.0 bn, or 36% of Russian exports), and their further expansion is likely to come up against obstacles bring about by pipeline capacity limits. From Russia’s point of view, the recent economic worsening in industrial countries is well compensated by higher crude oil prices in the short term, as income generated by crude oil exports are very important for Russian firms.The share of energy and fuel exports in total exports is a bit more than half. The main direct benefit of oil exports for the economy is simply improved terms in foreign trade because of higher oil prices.* Stock marketThe Russian stock market opened lower today.

On the whole the market reacted calmly to a noticeable decrease in US stock indices. At the same time after the data on US fuel reserves was released, oil prices surged considerably, and this situation can support securities of Russian oil companies. However, today the Russian stock market will probably ease back, as the correlation between the dynamics of the share price and US markets is quite strong. The activity at today’s trade is unlikely to advance, as the seasonal factor still influences the market.Political Environment* GovernmentIn Russia, local governments have typically stood in the way, be it through taxation, regulation, or corruption. There are two main reasons appears to behind the behaviour of local governments in Russia. Firstly, capture by old firms, leading local governments to protect them from competition by new entrants. Secondly, competition for rents by local officials, eliminating incentives for new firms to enter.

* Socio-economic reformsThe Government adopted in socio-economic reforms on July 2000. The main focal points are the reform of the social, health and education sectors, and the improvement of the business and investment climate. For instance, a significant re-organisation of the social safety net and a radical simplification of the taxation and customs systems.* Legislative reformBe compare with other east European countries, Russia `s FDI situation is getting worse, so the government is trying to best to push through legislative reform programme in order to cut red tape. In anticipation of WTO accession, The Russia government may exempt its import tax to increase investment in Russia’s economy.Take china for example: In anticipation of WTO accession, China brought its weighted average tariffs down from 40.6% in 1992 to 18.

7% in 1998 for all products and reduced dispersion of tariff rates from 32.1 percent in 1992 to 13.1 percent in 1998.* Fiscal policyTax collection remains unstable and oil price dynamics is a key element of fiscal policy in Russia.

Although favourable oil price dynamics are not likely to induce radical increases in Russian oil exports, they continue to affect fiscal policy in Russia. (Nilola,2002) On September 13, 2002, the Government raised export duties on crude oil to $26.2 per tonne. Crude oil export duties in Russia are based on monitored Urals crude oil prices on Mediterranean and Rotterdam markets. The recent increase in export duties was motivated by the fact that during the last two-month monitoring period (July-August 2002) the average price of crude oil rose to $184.

354 per tonne, which is equivalent to $25.4 per bbl (Urals).However, top oil executives have lashed out at the government for hindering their ability to cash in on skyrocketing crude prices and endangering production growth by failing to unclog export routes.

(Catherine & Simon, 2002)Since oil and politics tend to flow in the same direction, the rise of Russia’s oil industry will have major strategic impact. It will also transform global business, as Russian oil companies such as Lukoil and Yukos join the likes of Exxon-Mobil and BP among the “super-majors.”Foreign InvestmentOn a level consistent with Russia massive investment need, it has so far not been able to attract foreign direct investment (FDI). Main foreign investors in Russia are the following: Germany (18.8% of the total investment), USA (14%), Cyprus (12.6%), United Kingdom (11%), France (8.

8%), Netherlands (6.9%) and Italy (4.2%).

Compare by the first six months between 2001 and 2002. The specific weight of direct investment declined to 22.4% in 2002, from 37.5% in 2001.

While portfolio investment declined to 2.4 %, and other foreign investment grew up to 75.2 %. The excess of other investment as compared to the amount of direct and portfolio investment is a negative factor.

The sectored structure of foreign investment is characterized by a growth in investment in industry at the background of declining investment in other aspects of economy. In the first six months of this year, the rates of growth in foreign investment in industry (+ 30.5 %) exceeded the similar indicators of growth of aggregate amounts of foreign investment in the Russia’s economy. At the same time, the direct investment in industry increased by 6.7 % as compared with the figures registered in the first six months of 2001 and made US $ 887 million (47.4 % of the aggregate foreign direct investment in the RF economy).

Other investment in industry made in this period increased by 48.1 % and reached US $ 2.26 billion (36 % of the aggregate foreign direct investment in the RF economy). The decline in the amount of portfolio investment made 26 %.Therefore, boosting FDI is a key priority of the Russian Government. On this part, the EU has been stressing the need for Russia to provide a stable and reliable legal and institutional framework, which would encourage foreign investor confidence in the Russian market. in perspective Russia’s ratification of the WTO accession, Energy Charter Treaty, would also contribute prominently to boost FDI inflows.

Foreign companies` opportunities and threatsWhen a foreign company consider invest in Russia, both the economic growth and the reform policies about the country are thought by the investor. Nikola (2002) stated that while the prospects for Russia’s oil industry look bright in the medium term, should be warn that Russia’s precarious legal system — its lack of transparency and widespread corruption — are keeping away many potential long-term foreign investors.As for oil industry, a major problem for Westerners in Russian is a sharply different perception of what constitutes an “oil field. The Russians tend to view this as an asset, which must be valued, and if there’s investment in the field, it’s viewed as a sale of the asset. A foreign investor, though, looks at it more as a rate-of-return issue — not so much as an asset to increase in value but rather a project that will produce a certain amount of income over a certain time. However, lower growth in countries of the Organisation for Economic Co-operation and Development and increased risk perceptions will dampen FDI inflows into the transition economies in the near term. But, this will be offset by the increased relative attractiveness of the region compared with most other emerging markets, a politically-driven positive impact of recent events on FDI prospects for Russia and Central Asia, large sales of state assets, and increased cost-cutting pressures on Western companies that will enhance the attractiveness of relocating operations to Eastern Europe.WTO entryA WTO membership is one of the prerequisites factor for getting foreign investments.

After enter in WTO, import tariffs and service market entry restrictions will be reduced, and domestic energy tariffs rose, to acceptable levels. In domestic economics, the accession provides a clear and predictable legal framework that will encourage foreign investment and provide a stable and effective market mechanism. It will create a satisfactory competitive environment.

It will afford integration with the world economy, which will facilitate Russia’s overall economic and social progress. The vice president stressed that the accession to the WTO would speed up economic reforms in the country and enable Russia to participate in the process of forming rules of world trade. The vice president stressed that the accession to the WTO would speed up economic reforms in the country and enable Russia to participate in the process of forming rules of world trade.Russia companies views and their prospectJoining the WTO means that country should open markets to new members as well as a country’s products can be more easily exported, without any trade barriers. By contrary, by joining the WTO, members should open their domestic markets, including the fields of goods and services to foreign competition. Russia applied to join the WTO in 1993 and its accession is now making rapid progress, whereas, it success in joining that, it will bring lots of effects for its economy, especially Russian company.

It is please the see that there is on the whole a growing awareness in the Russian society of that to spoil the underdeveloped competition on the domestic market in its current state would lead to stagnation and further falling behind of domestic production. Most companies think Russia accession WTO is inevitably. However, the Government has a long-established practice of holding regular consultations with the business community. Every essential decision affecting the interests of economic operators is made subject always to consultations with Russian companies and their opinions.

In general, Russian companies have two different responses:* SupportOne of the main views put forward by supporters of Russian accession to the WTO has been the financial gains which Russian companies will get as a result of the removal of, or substantial reduction in, import duties on goods produced by WTO member countries. Trade openness is probably to have a positive influence on the total factor productivity (TFP) of Russia firms.* Increasing trade flows imply an increase in competition, which in turn can force Russian firms to restructure faster.* Increasing imports, at the same time, it also means increasing information about foreign goods and technologies, which can have positive effects on domestic firms, this throry has confirmed by experiential papers on developing countries. For example: china.* Increasing imports of foreign inputs can have an indirect effect on the total factor productivity of domestic firms.

The experience of some other countries has shown that the positive effects of trade policy reforms often dominate in the medium and long run.Furthermore, A new study shows most Russian companies are improving their corporate management – while envisages the WTO.* OpponentOpponents talk about the threat to the domestic Russian market from the major international corporations.

* It means the domestic Russian market from the major international companies. Customs duties will be lowered, and markets have to be opened up to foreign companies. However, with the sharply reduce import duties on some categories of goods then the competition will increase quickly, and the domestic market may collapse easier.* Another threat is relates to the agricultural sector.

European countries subsidise their own agriculture, while at the same time the US and Canada demand that Russia cuts back on its own subsidies.CultureDifferent country has different culture and custom, when you are doing business or making marketing or human resource management strategy, you should understand their ethic culture differences and consider what strategy you should use when facing this people.Russia’s unique and lively culture developed, as did the country itself, from a complicated interaction of natives Slavic cultural material and borrowings from a vide variety of foreign cultures.

* LanguageThe Russian language is the country’s language and it is the most commonly spoken in business, government, and education. Ethnic Russians speak their native tongue almost exclusively. More than 100 languages are spoken in Russian. Some of the ethnic republics have declared official regional languages, but millions of non-Russians have adopted Russian as their mother tongue. Hence, foreign companies should pay more attention to the difference languages of difference regions.

* The colourWhen we look at a colour a whole spectrum of thoughts, feelings and emotions are evoked in our minds. For international markets this nation is particularly pertinent. Most of Russian prefers the colour is blue, they always believe that blue can bring perfect felicity for them. On the contrary, the colour that they do not like is yellow; because they think yellow always bring them bad luck.

* The numberRussian likes the number of seven, because they think that seven is the symbol of lucky and success. For example, when you give flower to your friends or just for a present, they prefer odd number. Russian does not like the number of thirteen, just like the western people, because they think that number means danger and death.* Business amenityIn Russia most of businessmen will prefer dressing in grey or cyan colour.

They would avoid black cloth. Dressing good or not is very important for Russian, because it not only presents your standing, but also represent that you have been concerned of this business or not.Some recommendations to the companies for the HRM strategyAccording to the cultural differences, foreign companies want to enter the Russia’s market that they must pay more attention on human resource activities, such as equal opportunities, health and safety, training and development.Firstly, consider different language. I suggest that when organisations recruit people, the language should be considered.

Because the Russian language is the most people language, so, recruit the people speak this language is better for the business communication.Secondly, because the colour preference, I recommend the companies can choose the lucky number to promote their products. For example, use number 7.Thirdly, if the foreign companies want to cue the Russia’s customer into positioning their brand in a certain way, the colours and the logos used in the design, packaging and advertising of a product can send very powerful message about the personality of their brand.Fourthly, be aware the dress. Concerning the business amenity in Russia, the investors should avoid dressing black suit when the business men take part in the business occasions.

ConclusionOn the whole, Russia economy future is positively despite some aspects insufficiency. For example, a lot depends on the bureaucrats. As far as WTO accession is concerned, it could boost restructuring by Russian firms. With increased international competition and better access to imported components and foreign consumer markets, Russian firms will become more productive and efficient. For foreign investors to come, Russian needs to have a normally functioning legal system and legislate understandable taxation system to foreign investors.

Besides, a normal banking system is needed.

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