Introduction

Companies in the American Southwest are likely to have a new business comrade soon: Russia. In August 2012, Russia acceded to membership in the World Trade Organization (WTO) after almost two decades of negotiations—a span of time marked by Russia’s two wars with Chechnya and one with neighboring Georgia, its emergence as a global energy superpower and ongoing political chess playing with the U.S. and Europe. By joining the WTO and lowering its barriers to trade, Russia, the current chair of the Group of 20 (G-20) and host of next year’s Winter Olympics, made the most significant impact on the international trade community since China joined the trade union in 2001.

The U.S., however, lagged in normalizing trade relations with Russia and seizing Russia’s untapped economic opportunity due primarily to an outdated, Soviet-era law, the Jackson-Vanik Amendment, which denied the Soviet Union favorable trade status because it deprived Jewish citizens of their right to emigrate. After the Obama administration and a conglomerate of U.S. companies like Caterpillar, Inc., Boeing Co., and General Electric Co. successfully highlighted the lucrative economic realities of a normalized U.S.-Russia trade relationship, the U.S. Congress repealed the Jackson-Vanik Amendment in December 2012.

Less than a year has passed since Russia became a card-carrying WTO member and normalized trade relations with the U.S., yet its broad economic imprint on several prevalent sectors in the American Southwest has already become apparent. From cattle farming to computer software, American companies in Arizona, California, Colorado, Nevada and Utah can take advantage of opportunities both to export their own goods to Russia and invest in the Russian economy.

Sector-Specific Opportunities

AGRICULTURE

Russian WTO membership opens dynamic and growing markets for American agricultural companies in the Southwest. While Russia imported less than $15.8 billion worth of agricultural goods in 2005, in 2010, the value of those imports jumped to $31.7 billion.[1] Moreover, in 2010, the United States was the third largest supplier of goods to the Russian agriculture market, with U.S. agricultural exports to Russia valued at $1.3 billion.[2] Russian retail food and beverage sales are forecasted to increase from $200 billion in 2012 to $240 billion in 2014, a 20 percent jump in two years.[3] Furthermore, given that Russian domestic nut production is limited to pine nuts, the Russian consumer market is entirely dependent on imports for tree nuts such as almonds and pistachios.[4] Indeed, the U.S. is a large exporter of nuts to Russia, with the California almond a particularly popular product in the Russian market.[5] American almonds currently constitute more than 90 percent of Russia’s almond imports, providing a potential springboard to meet growing Russian demand for pistachios, pecans and other tree nuts.[6]

Russian WTO membership allows U.S. companies to access these Russian agricultural markets more easily and cost-effectively. For example, as part of its WTO market access agreement, Russia will reduce its tariff on grapes from 10 percent to 5 percent, bind its tariff on almonds at 5 percent and reduce the tariff rate on certain commercially significant U.S. dairy products from 25 percent to 15 percent within three to four years. Russia will similarly decrease import duties on apples, cherries and soybeans.[7]

The integration of the Russian economy into the world trade market should also benefit American meat producing and cattle ranching states like Nevada, Utah, Colorado and California, which exported $500 million in beef and pork exports to Russia in 2012. This figure is set to rise dramatically in the coming years due to Russia’s implementation of a U.S. country-specific tariff-rate quota of 60,000 tons on frozen beef with an in-quota of 15 percent.[8] [9] Russia also agreed to bind its maximum tariff on live pig products at 5 percent, drastically reducing the pre-WTO tariff of 40 percent.[10] 

Despite Russia’s economic promise and trade liberalization, American companies must be wary of this new WTO member’s political posturing against the U.S. that can still create artificial barriers to efficient trade. In December 2012, for example, the Russian government stepped up enforcement of its zero-tolerance policy for residue of livestock feed additive ractopamine, and on February 11, 2013, the Russian government officially banned all U.S. meat imports on that basis.[11] While the Kremlin has insisted that the ban is based on health concerns, U.S. Agriculture Secretary Tom Vilsack and President of the American University in Moscow Edward Lozansky joined a chorus of scholars, policymakers and companies in accusing Russia of political protectionism.[12]

It remains to be seen whether the Russian ban on U.S. meat is legal under Russia’s WTO treaty obligations, which also provide the U.S., as well as all other WTO member states, with legal recourse before a WTO adjudicative body if the U.S. selects such a course of action.[13] It is worth noting that a WTO legal forum in which to adjudicate trade disputes is an alternative previously not available to the U.S. and the other WTO member states.

INFORMATION TECHNOLOGY

Information technology (IT) is another sector that stands to grow in parallel with U.S.-Russia trade relations because of Russia’s WTO membership. The Russian market for IT products is growing, especially since the Russian government under former President Dmitri Medvedev devoted significant resources and capital to tap into Russia’s highly educated, tech-savvy workforce by developing Russia’s IT infrastructure, entrepreneurial climate, and educational opportunities through such initiatives as the Skolkovo Innovation Center.[14] Russia’s annual IT spending is forecasted to grow to $39 billion in 2016.[15] Though yet to be ratified, Russia has also acceded to the Information Technology Agreement, committing itself to lowering tariffs on information technology products to zero within three years.[16] After full implementation of Russia’s WTO accession commitments, Russia’s tariff on all IT products will be bound at an average rate of 4.0 percent, down from the current average tariff of 6.7 percent.[17] With the U.S. exporting an average of $733 million in IT-related products a year from 2008-2010,[18] Russia could provide new economic avenues for technology companies in California, Arizona, and Colorado in the form of knowledge transfers and a relatively cheap, yet highly skilled software coding force.[19]

The promise of Russia’s IT sector, however, can be overshadowed by Russia’s difficulties with enforcement of intellectual property rights, which presented a point of contention in WTO negotiations. As a result of bilateral negotiations with the United States and other WTO Working Party members, Russia has made commitments to improve its intellectual property rights enforcement regime, and has brought Russia’s laws in compliance with the WTO’s Trade-Related Intellectual Property Rights (TRIPS) agreement.[20] Russia has also enacted legislation to impose criminal penalties to deter piracy and counterfeiting, and it has been shutting down websites that illegally distribute copyrighted works. However, it remains to be seen whether Russia will sustain and improve upon its efforts to enforce its intellectual property rights obligations for domestic and foreign owners of intellectual property,[21] an uncertainty highlighted by the Office of the United States Trade Representative consistently identifying Russia as a “priority watch list” country.[22]

Thus, while obstacles to IT market penetration in Russia remain, companies in the American Southwest may find navigating these obstacles a small price to pay to access the increasingly open Russian IT markets and its skilled labor force.

AEROSPACE

In addition to agriculture and IT, Russia’s mature aerospace industry presents yet another potential business market for aerospace companies, avionics suppliers and distributors and electronics suppliers and distributors in the American Southwest. While the Soviet Union gave rise to a formidable Russian space program and domestic aerospace industry that manufactured commercial airplanes, much of the Russian aerospace industry today is in need of modernization and investment. To that end, over the next two decades, Russia is expected to need more than 1,000 new passenger airplanes valued at approximately $95 billion.[23]

As the Russian aerospace industry modernizes its capacity to manufacture locally, U.S. aerospace manufacturers, suppliers and distributors in Arizona, Colorado and California, among others, will be able to export to Russia large civil aircraft, aircraft engines, small civil aircraft, helicopters, navigation equipment and radar equipment, in addition to smaller aircraft components that would feed authentic parts into the Russian supply chain.[24] This export potential is especially true given Russia’s agreement under the WTO guidelines to reduce and bound its tariffs on aerospace products from as high as 20 percent down to a less cost-prohibitive 8.3 percent.

Conclusion

Russia’s membership in the WTO and the normalization of trade relations between the U.S. and Russia present new market potential and investment opportunities for companies in the American Southwest. Although politically motivated trade barriers and weakness in the rule of law persist in the Russian economy, there is no doubt that Russia’s rapid trade liberalization as a result of WTO membership has set the stage for greater bilateral trade between the U.S. and Russia. Thus, companies in the American Southwest should assess the market potential created by lower Russian tariffs and other WTO trade measures in sectors ranging from agriculture and aerospace to IT and natural resources.