C O N F I D E N T I A L MOSCOW 002434

SIPDIS

STATE PLEASE PASS USTR (BHAFNER)

E.O. 12958: DECL: 08/14/2018
TAGS: ETRD EINV ECON EAGR GG RS
SUBJECT: TFGG01: IMPACT OF GEORGIA CONFLICT ON RUSSIA'S WTO
ENTRY

REF: A. MOSCOW 2410

B. MOSCOW 2316

Classified By: DCM Eric S. Rubin for Reasons 1.4(b/d).

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Summary
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1. (C) Foreign Minister Lavrov stated August 14 that Western
threats over WTO contradicted previous promises and that
Russia was now convinced it would never be accepted into the
WTO. These comments track with what GOR officials have told
us privately (reftels). Local experts believe WTO accession
is no longer a &priority8 for the GOR. They contend,
however, that accession is still in Russia's best interests
and that failure to enter would have a long-term negative
impact on the competitiveness of Russia's economy. Russian
accession is also in our long-term interest, speeding greater
economic interaction and a more diversified, modern Russian
economy. The GOR will likely seek to portray the U.S. as
responsible and seek to delegitimize the WTO and perhaps the
broader international financial architecture. End Summary.

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Lavrov's Comments on WTO Accession
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2. (SBU) Foreign Minister Lavrov told Russian radio station
Ekho Moskvy August 14 that Western "statements that our (WTO)
accession should be delayed because of events in Georgia
sound strange" and "contradict basic logic, common sense and
promises that were given by the governments of Western
countries to Russia." He said Russia was in any event
already frustrated with delays in WTO negotiations even prior
to the Georgia conflict and was becoming convinced that it
would never be accepted into the WTO.


3. (C) Lavrov's public comments track with what other
government officials have told us privately (reftels). In a
meeting with the Charge August 14, Presidential Assistant
Arkadiy Dvorkovich said the GOR expected to be denied entry
this year and implied the GOR would look to cast blame on the
United States and others. Even prior to the outbreak of
hostilities, Finance Minister Kudrin's Staff Assistant, Vadim

Grishin, was pessimistic and complained about the absence of
an agreement with the United States on state-owned
enterprises. Both Dvorkovich and Grishin said the failure of
Russia's WTO entry along with the collapse of the Doha round
would call into question the legitimacy of the WTO, a line
which Lavrov also echoed.

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Accession No Longer a GOR Priority
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4. (C) Igor Nikolayev, Strategic Analysis Director for the
business consulting firm FBK, told us the Georgia conflict
meant that WTO accession would no longer be a critical
objective for the GOR, even though the economic benefits of
accession were clear. The chances of resolving Russia's
bilateral differences with Georgia at the WTO would be
incredibly complicated in the aftermath of the conflict.
Ukraine might also now display solidarity with Georgia and
ask for bilateral market access negotiations with Russia,
further dimming Russia's hopes for a near term accession, in
Nikolayev's view.


5. (C) Deutsche Bank Securities Chief Economist Yaroslav
Lissovolik said that the Georgia conflict had strengthened
the hand of hard-liners in the GOR at the expense of economic
liberals, and that WTO entry, as well as needed tax, pension
and other reforms, would no longer be GOR priorities in the
near term.

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But It Still Should Be
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6. (C) Russian experts agree, however, that WTO entry would
benefit Russia. Just before the conflict began, former

Economic Development Minister and Higher School of Economics
Academic Adviser Yevgeniy Yasin told us August 7 that the
benefits of WTO entry for all parties were obvious. The
United States, EU and other WTO members would gain greater
access to the Russian market, while Russia would become more
integrated into the world trading system, and its domestic
economy would develop and diversify.


7. (C) Yasin said the fear of some Russians that domestic
industries such as agriculture would be harmed by WTO
accession was exaggerated. Many Russian industries were
already insulated from competition, either because of
geography or because of a lack of competitors. Yasin said
the Higher School of Economics had conducted a study with the
World Bank that concluded that 20 percent of Russian
manufacturers enjoyed a monopoly position in the Russian
market, while 30 percent faced competition only from other
Russian producers. WTO entry would help reduce Russia's
economic isolation and hold out the prospect of bringing a
healthy dose of competition to many industries.


8. (C) New School of Economics Professor Konstantin Sonin
told us August 14 that with sales of commodities like oil and
gas making up most of Russia's exports, Russia probably had
less to gain immediately from WTO entry than most countries.
However, Sonin said Russia would benefit over time from
greater access to new markets, as Russia's economy
diversified toward the production of more value-added goods.


9. (C) FBK's Nikolayev noted that the economic advantages of
accession for both Russia and the rest of the world were
obvious. For Russia, Nikolayev agreed with Yasin that a more
competitive environment had to be created in many sectors of
the Russian economy to improve its performance. FBK had
recently conducted a poll in which 40 percent of Russian
businesses stated that they had no commercial competitors.
Clearly, WTO would help develop a more competitive economy.

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Comment
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10. (C) WTO accession likely has little short-term value as
leverage with Russia over the Georgian conflict. The GOR has
already accepted failure and is preparing to place the blame
on us, the Georgians, and anyone else who makes a politically
appealing target. In fact, it has been apparent for some
time that Russia suspected it might not accede this year and
responded with protectionist measures on poultry imports,
among other products, with threats of more to follow. The
Russians are quite likely to seek allies in a concerted push
to delegitimize the WTO and other IFIs, where they have been
seeking a larger say for themselves and other emerging
markets.


11. (C) That said, longer-term, Russia,s economy would
suffer, as needed modernization would be slowed and Russia
would likely remain an exporter of resources rather than
become a producer of value-added goods. Unfortunately, this
might very well serve the interests of much of the governing
elite, who are more interested in short-term gains and
political and economic control than they are in growing and
diversifying the economy. A more prosperous and integrated
Russia is one that would have much more to lose.
BEYRLE