Russia's accession to the WTO: likely impact on the Abkhaz economy

Beslan Baratelia

Dean, Faculty of Economics, Abkhazian State University

The broad context

After a series of compromises on a number of contentious issues, the long and difficult process of talks on Russia’s accession to the World Trade Organization (WTO) has finally concluded. Russia signed agreements with the United States in 2006 and the European Union in 2010, leaving Georgia’s objections as the only remaining obstacle. Russia and Georgia hold diametrically opposing views on the political status of Abkhazia, preventing the two countries from coming to any agreement and delaying Russia’s accession to the WTO. In the end, it took active international efforts and Swiss-led mediation before they agreed on a compromise. In November 2011, Russia and Georgia finally signed off an outline agreement on a customs administration and trade monitoring mechanism.

In Abkhazia, the subject of Russia’s accession to the WTO was, until recently, simply not on the agenda and was not discussed at any level until the signing of the agreement between Russia and Georgia. However, as soon as the information appeared in the media, there was a flurry of interest in this issue which found expression at times in heated public discussions.

Many people were outraged, but not at the signing of the agreement between Russia and Georgia, since this was the prerogative of the two sovereign states neighbouring Abkhazia. In itself, Russia’s forthcoming accession to the WTO is generally viewed within Abkhazia in a positive light, as a strategic partner joining a community of countries playing by set rules. Indeed, the growth of the Russian economy, which is after all the purpose of WTO accession, may also have a positive effect on the Abkhaz economy.

Rather, what particularly incensed a large section of society was that:

1. the agreement was signed on Georgia’s initiative;
2. Russia did not hold prior consultations with the Abkhaz side;
3. territory of the Republic of Abkhazia is referred to in the document as “a predetermined trade corridor”;
4. the agreement allows for inspection and marking (labelling) of cargo in transit to Abkhazia by international observers;
5. Georgian officials are granted access to complete, detailed statistical information on all economic and trade relations on the Russian-Abkhaz border.

Interest in the event also increased following repeated comments by Georgian officials and experts referring to the agreement as a ‘victory of Georgian diplomacy’,[1] the ‘reinstatement of control over the lost territories’, etc. This was not helped by the fact that the Abkhaz administration had no official text of the agreement or even complete information about its contents. The idea that Russia ‘has betrayed us’, ‘has exchanged us for the WTO’, ‘sold us down the river’ and other comments of a similar vein were increasingly voiced in Abkhazia. Calls were made on the Abkhaz government to take ‘effective action’ to protect Abkhaz sovereignty.[2]

The absence of the text of the agreement fuelled wild speculation. This included claims that, under the agreement, Georgian customs and border officials would be located on the Abkhaz side of the border, at the maritime port and at the airport. Moreover, they would have the power not only to monitor, but also to refuse entry at the border. All of this spurred the Foreign Ministry of the Republic of Abkhazia, which itself had no official text of the agreement, to issue a statement that the presence of any observers, including foreigners, on the territory of Abkhazia would be unlawful. The Russian President, Dmitry Medvedev, also issued a statement that Russia did not intend to pay for the accession to the WTO by changing the political realities in place since August 2008: ‘If under the brand of WTO accession someone is trying to push through changes to the political situation, then we certainly will not agree. That is a price we cannot pay, even for the WTO.’[3]

Potential concerns

Public discussions in Abkhazia currently focus not only on the political consequences for the country of Russia’s accession to the WTO, but also on its economic aspects. The Abkhaz economy is small (its gross domestic product (GDP) is approximately US$800 million). It is therefore open to and dependent on external markets (the country’s international trade is over US$400 million).[4]

Due to economic and geopolitical factors, Russia is Abkhazia’s main trading partner. A major proportion of Abkhazia’s total exports and imports crosses the Russian-Abkhaz border on the Psou River. Thus, the new mechanisms established under the agreement signed between Georgia and Russia one way or another affect the majority of Abkhazia’s external trade flows.

It is still too early to say whether Abkhazia will win or lose from Russia’s accession to the WTO. It would be a brave commentator who would quantify the benefit or cost in terms of a cash equivalent. But one thing is clear: Abkhazia will shortly be surrounded by WTO member countries. Moreover, although Abkhazia is unlikely to become a member of this organisation in the short or medium term, Sukhum will shortly have to play by new rules even if it has not approved them.

What are the potential risks of the new arrangements for Abkhazia? The first risk relates to the presentation of detailed information, including to the Georgian government, on the structure of trade turnover on the Russian-Abkhaz border and, particularly, on the suppliers of goods. By itself, information on imports into Abkhazia is not exactly confidential even now. The Georgian Deputy Minister of Foreign Affairs, Sergi Kapanadze, even confirms this: ‘…this kind of statistical information has no value. It is not difficult to obtain this kind of information today.’[5] Nor will the requirement for electronic seals and GPS tracking of goods change much.

The risk to Abkhazia is that a large number of serious, including transnational, companies might be reluctant to trade with Abkhazia due to concerns that Georgia might directly or indirectly apply pressure and sanctions. This applies to representatives of the real economy, but also to the financial sector (commercial banks, investment companies, etc.). However, fears voiced by some commentators that implementing the Georgian-Russian agreement itself will cause damage to the Abkhaz economy on a par with sanctions are simply scare-mongering.

Implementation of the agreement may, however, firstly lead to a rise in transactional delays and an increase in the cost of imports for Abkhazia, since it may partially be contracted out to intermediaries. Thus, new players in Abkhazia’s external trade may emerge and may squeeze out some currently active players.

Secondly, implementation of the Russia-Georgian agreement may also deal a blow to so-called “shuttle trade” and “small speculators” – domestic economic actors operating on an illegal or semi-legal basis. Russia’s accession to the WTO will require the situation on the border to be regularised. Requirements will be tightened up in relation to the quality of products exported from Abkhazia and the conditions of transit of goods. Full customs documentation will also be required.

Thirdly, given Georgia’s claim on Abkhazia, Georgia might use the various dispute resolution mechanisms under the WTO to lodge a series of objections.  Citing the Georgian law “on the Occupied Territories”, Georgia might submit complaints to countries and companies collaborating with Abkhazia without official permits from Tbilisi. This may lead to claims for payment of taxes and customs duties to the Georgian treasury. This is already happening, but these claims are largely symbolic since Georgia has no real enforcement mechanisms.

An optimistic scenario

Despite the potential difficulties, we should not over-dramatise the situation. The signing of the disputed agreement and Russia’s accession to the WTO do not revoke Russia’s Presidential Decree “on the recognition of the independence of the Republic of Abkhazia” or agreements previously signed between Abkhazia and Russia, including those relating to economic issues. The WTO’s jurisdiction does not extend to the political and legal relations between Abkhazia and Russia. Russia has recognised the independence of Abkhazia. Consequently, even following its accession to the WTO, it will continue to develop economic and trade relations with Abkhazia as an independent country.

We should also note that the agreement signed between Russia and Georgia relates exclusively to the movement of goods across land borders. This could mean that maritime and air borders will remain outside the control of the Swiss observers. The Georgian administration may therefore have no access to information on companies engaged in maritime export and import. If problems arise on the land border with Russia, imports could potentially be shifted to maritime routes or perhaps even to air routes.   

The reluctance of many large companies to engage in cross-border trade with Abkhazia due to the risk of claims by Georgia may lead to a change in exporters and importers on the border with Abkhazia. This could in turn act as a stimulus to Abkhaz entrepreneurs and companies unconcerned by any outrage by the Georgian government or the threat of sanctions.

Russia’s accession to the WTO may have one more positive effect for Abkhazia. The liberalisation of external trade and the reduction or abolition of import tariffs and quotas planned after Russia’s accession to the WTO could lead to a reduction in prices for certain categories of goods imported into Russia. Where these arrive at the Abkhaz market through the Russian-Abkhaz border, they will be that much cheaper for Abkhaz consumers.

There is some cause for optimism over the presence of international observers. Some experts believe that this might make the work of the Russian customs more transparent, reduce the number of cases of abuse of office, and limit the scope for corruption and smuggling on the Russian-Abkhaz border. External monitoring on the Russian-Abkhaz border will also allow Abkhazia to demonstrate to the international community that it is undergoing dynamic development and is trading in a transparent and civilised manner rather than being portrayed as the “occupied territory” or “black hole” referred to by the official administration in Tbilisi.  

By way of a conclusion

The WTO is expanding geographically. More and more countries are starting to play by agreed rules, a process in which Abkhazia is being left behind. Its key trading partners – Russia and Turkey – are now WTO members. This means that Abkhazia must accept some of this organisation’s rules if it wants to increase its trade with them – and the sooner the better. It needs to work seriously on improving external trade legislation of all kinds to bring it into line with that of its foreign partners. Above all, a large-scale programme must be launched on modernising Abkhazia’s national economy, increasing its international competitiveness and expanding Abkhaz exports to global markets. Here too “the WTO factor” could prove very useful.

Beslan Baratelia

The Georgian perspective [1]on the same issue from, Vladimer Papava, Senior Fellow at the Georgian Foundation for International and Strategic Studies