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№ 2 (February 2012)

WTO Opens World to Russia. Though U.S. Trade Remains Hobbled by Jackson-Vanik

   It’s been a long time coming, but finally, Russia has been welcomed into the World Trade Organization (WTO). What will this mean in practical terms for the oil and gas industry? Not much for energy prices. But oilfield equipment producers will face more competition from imports; and Russian manufacturers will become more competitive and have an easier time exporting.

By Alexander Bratersky

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   Industry experts and analysts have agreed that Russia, whose economy is largely dependent on the oil and gas sector, has been maintaining the status quo by defending export duties for energy and keeping domestic prices low.
“In general, the WTO impact on the Russian oil and gas sector is actually fairly minor, despite the fact that oil and gas exports are Russia’s major means of contact with global trade,” Matthew Sagers, the head of IHS CERA’s Russian and Caspian Energy service told Oil&Gas Eurasia.

   The WTO had wanted Russia to end the practice of charging lower prices for natural gas consumed domestically, and higher prices for gas exports. But Russia won that agrument. Russia will be allowed to place a tax of up to 30 percent on top of the price at which it sells natural gas domestically for the foreseeable future, despite the fact that several government experts, working for the government Strategy 2020 economic plan wanted to abolish them to stimulate economic modernization.

   On the oil side, similar deliberations took place. At issue were fears that gasoline prices might rise and since the price of natural gas is tied to the price of oil, any adjustment to oil prices would affect natural gas.

    “The Russian Federation would continue to regulate price suppliers to households and other noncommercial users, based on domestic social policy consideration,” said the document on the Russian WTO agreement, published on the organization’s site.

   “The government will regulate gas prices for domestic consumption the way it wants. And we don’t have and will not have an obligation to make the internal gas prices conform to the export ones,” Maksim Medvedkov, the chief Russian WTO negotiator told the business daily Kommersant newspaper at the end of 2011.

   However, at some point, Russia will have to deal with the pain and politically unpopular move of forcing domestic gas producers and distributors to operate on a commercial basis according to WTO rules; just not now.

   “With oil prices (and oil-linked export prices for natural gas) being quite high, this would mean a fairly significant increase in domestic gas prices. The government is uncertain about how rapidly this convergence should take place now, but it is now being adjusted further with slower rates of regulated price increases,” Sagers, from the IHS CERA.

   The Russian gas monopoly won’t lose much from WTO accession, despite the organization’s rules that require that member countries create conditions for independent exporters to emerge. Analysts for Russia’s VTB bank believe that Russia will use domestic legislation to prevent independent exporters from emerging.

   “In terms of changing overall investment rules (reciprocity in investment conditions) and transparency in the sector, WTO is not really going to change the Russian oil and gas sector from current practices,” said Sagers.

   Even so, Russian producers of oil and gas equipment do worry that they will face greater competition from foreign manufacturers.  

   “We expect that the competition with foreign producers will be stronger. It will be tough for us, but we hope that, thanks to modernization, Russia’s pipe industry will remain competitive,” said Sergei Rybak, a spokesman for the Chelyabinsk-based CHTZ pipe producer.

   Russian manufacturers are sometimes at a disadvantage unless they have voluntarily adopted international standards to support their exports. Those that have adhered only to GOST are behind the times.

   Yet, a technical engineer from an Omsk-based oil equipment manufacturer expressed her hopes that Russian officials will indirectly support Russian companies by tightening technical regulations. “I don’t think that they would allow us to be ruined,” said the engineer who spoke on condition of anonymity as she was not authorized to speak to the press.

   According to The Promishlenni Vestnik industry magazine, 400 Russian companies produce oil and gas equipment. To survive, some may merge and others may create JVs with foreign firms. This won’t happen overnight as it will take years for Russia to fully adopt all WTO rules.

   Ironically enough, Alexander Romanikhin, head of the All Russian Oil & Gas Equipment Producers Union, said that domestic producers have nothing to loose, since they don’t have support anyway. “If there are no barriers what kind of danger are we talking about?” said Romanikhin.

   But the ultimate irony is that while the U.S. has supported Russia’s accession to WTO, U.S.-Russian trade will remain at a disadvantage until the U.S. Congress repeals the Brezhnev-era Jackson-Vanik amendment. The U.S. law passed in 1974 was to pressure the Soviet Union on human rights issues, particularly Jewish immigration. Twenty years after the collapse of the Soviet Union, it remains on the books and blocks the U.S. and Russia from agreeing “most-favored-nation” status in their trade relations. U.S. Presidents George W. Bush and Barrack Obama have backed the repeal of Jackson-Vanik, but it is up to Congress to actually act. In an election year, that, as one analyst said: “might be asking too much.”

Vladimir Milov, Institute of Energy Policy, General Director

   When it comes to the oil and gas sector, Russia’s accession to the WTO will not affect it, because the rules mostly apply to non-natural resources.

   As far as domestic natural gas fees are concerned, the issue was resolved back in 2007, when the government passed a resolution “On the Improvement of the State Regulation of Natural Gas Prices” (the document abolishes the state regulation of natural gas fees for all consumers, except for households, starting Jan. 1, 2007).

   We have no natural gas market, but the resolution has already resulted in an increase in natural gas prices to the U.S. level, reaching $130 per 1,000 cubic meters. There has been no price containment.

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