WASHINGTON — Russia is set to be cleared to formally join the World Trade Organization this week, creating new investment and export opportunities for U.S. retailers and apparel brands that see the largely untapped market as a new frontier for business, but with caveats.
As one of the four largest high-growth emerging economies, known as the BRIC countries — Brazil, Russia, India and China — Russia’s entry into the WTO will mark a milestone for what was the heart of the former Cold War superpower capping 18 years of often bitter negotiations to become part of the global trading body.
Trade ministers are expected to formally approve Russia’s accession to the WTO at an annual trade summit in Geneva this Thursday to Saturday. Russia’s National Assembly must ratify the accession package, which will pave the way for Russia to become the organization’s 154th member.
In order for U.S. companies to gain the full benefits of Russia’s WTO accession, Congress must also grant permanent normal trade relations status to Russia. U.S. lawmakers have already expressed concerns over rampant intellectual property rights violations, which could make for a contentious vote in the House and Senate, expected early next year.
Analysts said the recent civil unrest over Russia’s disputed parliamentary election this month will not likely block Russia’s WTO accession.
“The setback that [Prime Minister Vladimir Putin] received, getting less than a majority vote for his party and how he and [President Dmitry] Medvedev orchestrate that in terms of whether there will be more stiff arming, will be closely watched,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics. “This will have little or nothing to do with the [WTO membership]. The WTO will almost certainly invite Russia in and Russia’s membership will be approved at the ministerial.”
U.S. retailers and apparel brands stand to gain from Russia entering a global rules-based system and its commitment to lower tariffs on imports and easing of direct investment opportunities. Under the terms of its WTO accession package, Russia has agreed to reduce tariffs on some women’s and men’s apparel imports to 15 percent from 20 percent by 2015 and tariffs on textile materials, such as synthetic yarns or cotton fabrics, will be reduced to 8 percent from 10 percent by 2014.
Russia also agreed in its bilateral market access agreement with the U.S. in 2006 to allow foreign distributors to operate as 100 percent foreign-owned enterprises upon its entry into the WTO. The bilateral pact will also allow U.S. distributors to distribute most products with “minimal limitations” and provides for direct sales by individual commission agents.
Lowering trade barriers in Russia provides a strong market-opening opportunity for such European luxury companies as Salvatore Ferragamo, which currently has seven stores in Russia, and U.S. companies such as the Estée Lauder Cos. Inc., which has seen sales grow in the double digits in Russia, according to Cedric Prouvé, group president of international for the company.
“Retail has actually been a very active area of foreign investment already, but it has been largely European retailers that are going in,” said Charles Movit, senior principal economist, Europe, and CIS Economics at IHS Global Insight. “Certainly in Moscow and Saint Petersburg, there is a lot of interest in upscale apparel. In general, I think there is feeling among Russian consumers that foreign goods are more attractive, stylish and prestigious.”
Movit said Russian consumers look primarily to Europe for designer brands because of its proximity and destination as a vacation spot for the upper-middle class in the country.
As for U.S. companies, Movit said: “I could see a company like Wal-Mart moving into Russia, but I don’t see a Macy’s or an Ann Taylor opening there.”
Wal-Mart has monitored the Russian market for several years, but it closed its Moscow representative’s office in February, according to Kevin Gardner, senior director for international corporate affairs at Wal-Mart Stores Inc.
“Since there is no clear acquisition partner in the near term, there was not a business reason to continue our Moscow representative office,” Gardner said. “We still believe the Russia market has promise and we’ll continue, as we do in markets all over the world, to watch for the right market entry opportunity.”
Erik Autor, vice president and international trade counsel at the National Retail Federation, said: “American retailers are discovering they need to get into big, emerging consumer markets simply because those are the future avenues of growth, especially with U.S. consumer spending still a question mark.”
He said some NRF members have shown a mild interest in the Russian consumer market, but the majority of companies remain wary of investing because of pervasive corruption.
“One of the biggest issues is the operation of the rule of law in Russia and rampant corruption is a real problem,” Autor said. “I think WTO membership will help in the sense there are very good commitments from Russia and there will now be a way to enforce through the rules of the WTO dispute settlement and that is definitely a positive thing.”
Casey Chroust, executive vice president of the Retail Industry Leaders Association, said: “Russia will dismantle its tariffs according to international rules on trade or be subject to actions by the WTO and tariffs have a major impact on a retailer’s cost of goods sold, not only on operating expenses but also on profit margins. Any time they can reduce tariffs where they export product or import product, it is a win for retailers.”
But Chroust also warned of challenges of operating in Russia, including corruption, political instability, infrastructure deficiencies, supply chain challenges and customs issues, which cause delays.
Apparel brands are eyeing the Russian market as it joins the WTO to take advantage of potential export opportunities, said Stephen Lamar, executive vice president of the American Apparel & Footwear Association, which is hosting a seminar on Jan. 3 called “Retail Hotspots: Developing a Strategy to Globalize,” focusing on market entry, operation models and consumer demographics in the BRIC nations.
“We’ve had some companies express an interest in being able to increase their exposure in Russia,” Lamar said. “That doesn’t mean they will export from the U.S. to Russia, but they might ship from where they are producing to Russia.”
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