Breaking the Barrier

Breaking the Barrier

The article is published in: September 2012

Last year, the volume of trade between the USA and Russia reached a historic level of $43 billion. Even with these astonishing figures, Russia still isn’t one of America’s top twenty trading partners – but according to experts, Russia’s accession to the WTO and the abolition of the Jackson-Vanik amendment will radically change those numbers.

As Alexander Shokin, the President of the Russian Union of Industrialists and Entrepreneurs, noted, the current level of economic and trade activity, as well as mutual investment activity, doesn’t correspond with the potential trading level between Russia and the United States. According to Shokhin, one of the main reasons for this situation is the acting Trade Relations agreement between the USSR and the USA from 1990, which needed to be updated desperately. James S. Turley, the Chairman and Chief Executive Officer of Ernst & Young, believes that both the USA and Russia need to move forward, the sooner the better.

“When we look at the trade between our two countries, especially when we compare those levels with our levels of trade with Turkey or Poland, it is a shame and unpleasant for both parties involved,” Turley says. Of course, the countries are trying to work together and more forward – as part of the “reset” of Russian-American relations initiated by President Barack Obama, the Russian Union of Industrialists and Entrepreneurs and the U.S. Chamber of Commerce hold regular consultations under the leadership of the American-Russian Business Dialogue (ARBD). Hundreds of professional associations are now representing business interests on both sides of the Atlantic, including some of Russia’s partners in the Customs Union, such as Belarus and Kazakhstan.

Despite the fact that the USA is one of Russia’s leading trading partners, the current volume of bilateral trade does not correspond to the combined economic potential of the two countries. According to the figures from January to June of 2011, the bilateral trade has increased by 40% when compared to the same period in 2010, or 9.7 billion dollars to 13.6 billion dollars.

About half of the American investments in Russia are in the energy sector of the economy. In fact, one of the biggest deals in the Russian energy sector over the past ten years has been the agreement for strategic cooperation between “Rosneft” and “Exxon-Mobil” on the development of resources in the Kara and Black Seas and in Western Siberia, as well as the establishment of research in the Arctic, the design of the offshore development center in St. Petersburg, and the implementation of other joint projects in the US and other countries.

The interaction of Russian and American companies, when it comes to projects such as space launches, the production of aircraft engines, and the development of new aircraft models, is also interesting to note. Among these is the agreement between the Russian Technologies State Corporation, “Aeroflot”, and “Boeing”, in which both countries agreed upon the delivery of 50 planes from the “737NG” series (with another 35 planes potentially on the way) and 8 planes from the “777” series within the next decade.

According to the Ministry of Economic Development of the Russian Federation, US companies are actively involved in the development of the “Skolkovo” project. One example is Cisco, which is going to be investing $1 billion over the next ten years to help Skolkovo become Russia’s first “intellectually connected” city. Companies such as Cisco, Dow, Almaz Capital Partners, IBM, Intel, Google, and Microsoft have also settled upon cooperation agreements with the “Skolkovo” project in the fields of software development and information infrastructure development. Boeing is planning to build a center for the development of new commercial aircraft in the industrial park, a project that will employ 300 programmers, engineers, and scientists. And the American private equity fun, Siguler Guff, is willing to invest 250 million dollars to focus on the development of digital infrastructure and IT services.

Russian businesses also take an active part in the American market. According to the Minister of Foreign Affairs for the Russian Federation, “Lukoil” owns more than 2,000 gas stations spread across 13 states, “Severstal” has formed a production base within the existing facilities from the “PB Coals” coal company, and “Rouge Industries”, the ex-factory, joined force with “SeverKor” to contribute to one of the most modern and hi-tech steel production methods in the United States. On top of that, the “Novolipetsk Steel Plant” owns three companies that produce flat steel, and the “Evraz Group” owns steel, reinforced sheets, and tubu product production facilities. The North American division of “TMK” consists of 11 enterprises specializing in the manufacture of welded and seamless steel pipes. And among other major business projects, there is a joint venture between the wood companies “International Paper” and “Ilim Pulp”, and a new construction project in Ohio that both “Magnitogorsk Iron” and “Steel Works JSC” will oversee.

According to experts, Russia and the United States will begin to actively promote cooperation in the near future, potentially becoming each other’s most important trading partners. As the First Deputy Foreign Minister of the Russian Federation, Andrei Denisov, noted, the main problems with the trade relations between Russia and America are the lack of consistency, the extremely low level of participation of small- and medium-sized business, and the existing legislative barriers in place. Hans-Paul Burkner, the President and Chief Executive Officer of the Boston Consulting Group, believes that the effectiveness of government in Russia has increased considerably over the past few years, and Russian business is expanding and investing abroad, in the United States as well. However, the expert also commented that the Russian government needs to actively work to attract foreign investments, as they play an important role in the economic growth of both countries.

The biggest problem that stands in the way of the further development of bilateral business relations is still the Jackson-Vanik amendment. According to Shokhin, this amendment will just be a historical relic after Russia’s official accession into the World Trade Organization, but it will still be a serious stumbling block for American businessmen in Russia.

In late July, the House Committee of the U.S. Congress dealing with income and expenditures supported a bill to grant Russia a normal trade relations status – the final decision will be made by the Committee of the Whole United States House of Representatives. At first, the government planned to abolish the amendment, which will be 40 years old come September, completely, but according to experts, the process could be delayed for another six months until after the parliamentary recess, the work of the districts, the U.S. presidential election, and the presidential inauguration.

If the amendment were not in place, the volume of U.S. exports (which reached $11 billion in 2011) could double by 2017 upon Russia’s accession to the WTO, according to experts. However, the delay in the abolition of the amendment has simply shut down the Russian market for U.S. companies. As Miriam Sapiro, the Deputy U.S. Trade Negotiations Representatives said, business leaders from both the United States and Russia demonstrate a commitment to mutual trading and investing, and are eager to promote economic growth and create jobs. But above all, Shapiro names Russia’s accession to the WTO the biggest incentive for U.S. exporters and workers.

Text: Anastasia Yakovleva