Flourishing US-Russia economic ties over political rifts?

Flourishing US-Russia economic ties over political rifts?

The U.S and Russia are pursuing economic ties as Moscow finally joins the WTO and political rifts are put aside.

Last year, following eighteen years of harsh negotiations, Russia finally joined the World Trade Organization. A few months after this historic moment, the United States granted “permanent normal trade relations” to the country in repealing the famous Jackson-Vanik amendment – a bill that was created to restrict trade with the Soviet Union during the Cold War, and was continuously applied until now. While this landmark bill could have been a symbol of a greater understanding between the two former Cold War enemies, the growing political tensions between Russia and the US during the past few months raise doubts about reciprocal trade and investment opportunities.

Indeed, the abolishment of the trade restriction bill was linked to the US “Magnitsky Act”, which introduced new provisions relating to the respect of human rights in Russia. More precisely, it states that Russian citizens suspected to have played a role in the death of the lawyer Serguei Magnitsky in 2009 would have their US banks assets frozen and visas to the US denied. The Russian authorities promptly responded in adopting the “Guantanamo List”, naming Americans supposedly involved in human rights abuses in the infamous prison. They also passed the “Dima Yakovlev” Law, prohibiting adoptions of Russian children by Americans. Therefore, the repeal of the Jackson-Vanik amendment, far from improving relations between Russia and the US, appeared as a source of political tensions between them.

But the Magnitsky case is only one episode among many in a series of political disagreements that have erupted between the two states in the past year. Different views about potential engagement in Syria, the conduct of the Russian government towards NGOs, or the recent capture in Moscow of an alleged CIA agent suspected of trying to recruit an FSB officer, to name a few, have renewed tensions between the US and the Russian Federation. Since February, the Russian authorities also banned imports of American meat, evoking safety standards concerns. Some began to argue that this climate of mistrust could harm Russian-US trade and investment in general.

In a speech to the U.S. Chamber of Commerce last month, the EBRD President talked about the opportunities for US investors in Russia. Sir Suma Chakrabarti claimed, “This is not the easiest of times in the relationship between the United States and Russia. […] The recent history of bilateral relations demonstrates, however, that even when political interaction between Russia and America is troubled, business relations continue to expand.” Indeed, contrary to what these political tensions could suggest, trade and investment indicators between the two countries seem good.

The volume of mutual trade has been modest so far between Russia and the US, but economic ties are growing rapidly. According to the US Department of Commerce, the flow of goods accounted to around $40 billion last year. While this represents less than 1% of US annual trade turnover, it is still four times the amount exchanged a decade ago. US exports to Russia increased by 29% between 2011 and 2012, which represents six times the growth rate for total US exports.

These indicators are expected to grow even more now that Russia has become a WTO member and the Jackson-Vanik amendment has been abolished. Many big US companies invest billions of dollars in the Russian market and strike ambitious deals with their local counterparts. For instance, ExxonMobil recently agreed to collaborate with the Russian oil company Rosneft to explore the Arctic and develop offshore oil and gas fields. Other companies, such as Coca-Cola, General Motors, and IBM are also trying to develop their activities in the Russian market.

In order to develop their economic relationships further, the two governments signed an agreement in March creating a framework to promote bilateral trade and investment for the period 2013-2014. The action plan, called “Building a Foundation for Mutual Prosperity”, aims to “diversify two-way trade, increase economic growth in key industrial sectors and reduce market-entry hurdles affecting small and medium enterprises”, according the US Department of Commerce.

Therefore, chilling US-Russian relations are unlikely to hamper growing reciprocal trade and investment opportunities, and Americans who want to trade or invest in Russia should not worry about the impact of these political rifts. Technically, they had no concrete impact on the general climate for trade and investment in either country. The Russian Federation needs to promote FDI, and the US wants to double its exports by the end of 2014 (compared to 2010 level). The two states need each other to support economic growth and activity, and whatever political disagreement could arise between them, they will strive to maintain good economic relations.

At most, investors should look at these political tensions not as a possible cause, but more as a sign of the difficulty of doing business in Russia today. In particular, the Magnitsky case was a striking example Russia’s corruption and weak rule of law. According to Transparency International, Russia is ranked 133rd out of 176 countries in terms of perceptions of corruption. In the end, the biggest obstacle for investment may be located not at the international, but at the domestic level. Domestic issues could be far more harmful to the Russian business climate than any criticism from US leadership.

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