March 10, 2014 1:21 pm

New chill in Russia’s tepid economic ties with US

Barack Obama, Vladimir Putin©AP

Marcy Kaptur has no doubt that the US should consider trade sanctions against Russia over its intervention in Crimea.

“I do not believe in free trade with countries that are not democracies because all you do is empower exploitation,” says the Democratic congresswoman from Ohio and co-chair of the House Ukraine caucus. “If we had a complete trade embargo, it would hurt Russia more than us.”

The Obama administration has slapped visa bans on certain Russian officials and threatened further action, with asset freezes expected to be the next step. Trade sanctions might be on the cards if the crisis worsens and the US feels it needs additional measures to punish Russia, although it would be harder to get the EU on board and retaliation against US economic interests could follow.

A full-blown US-Russia trade war is unlikely. But the mere threat of it highlights how the Ukrainian crisis has brought a new chill to economic ties between Moscow and Washington, a relationship which failed to gather much momentum or breadth since the end of the Cold War.

“It’s a complicated relationship,” says Bill Reinsch, president of the National Foreign Trade Council. “Looks like it’s going to get worse before it gets better.”

Two-way trade in goods has grown over the past two decades, from $4.7bn in 1993, to $11.1bn in 2003 to $38.1bn in 2013. But these numbers pale in comparison to Russia’s much larger commercial ties with Europe, and are dominated by a few large industrial sectors.

Russia’s exports to the US – of $27bn last year – were led by petroleum, primary metals, and chemicals. America’s exports to Russia – worth $11.2bn – were concentrated in aircraft and other transportation equipment, machinery, and chemicals.

Just after President Barack Obama was re-elected in late 2012, Congress voted by large bipartisan margins to grant permanent normal trade relations (PNTR) with Russia in connection with its accession to the World Trade Organisation.

But it was accompanied by so-called “Magnitsky” legislation that restricted travel and froze the funds of officials accused of being behind the death of the anti-corruption whistleblower, angering Moscow.

Still, there were high hopes at the time that the PNTR vote would herald a new era in US-Russian economic ties that could transcend the frequent geopolitical disagreements between Moscow and Washington.

But that vision appears in trouble now. The US this week quickly moved to suspend economic “engagement” with Russia, including nascent talks over a bilateral investment treaty between the two countries.

Investment has been a brighter spot in the US-Russia relationship, with several large American multinationals enjoying generally good treatment after setting up operations in Russia, and several Russian companies making acquisitions in the US.

Having Russia in the rules-based WTO allows us to hold the Russian government accountable

- US trade official

But there is also a much deeper dissatisfaction in the US with the way Russia has conducted trade policy since joining the WTO, and patience with Moscow has worn thin even among supporters of trade liberalisation on Capitol Hill.

“Russia has repeatedly failed to abide by its international commitments,” says Orrin Hatch, a Republican senator from Utah and his party’s top member of the Senate finance committee, which will play a key role in weighing any trade-related sanctions.

Mr Hatch this month sent a letter to Jack Lew, US Treasury secretary, and Michael Froman, US trade representatives, with a litany of complaints about Russia’s behaviour.

With respect to Ukraine, it had recently blocked Ukrainian pork on “vague and unsubstantiated” sanitary grounds on top of threatening it with higher prices on exported gas. It had banned Moldovan wine and blocked Lithuanian dairy products. And it had discriminated against US meat imports shortly after joining the WTO, Mr Hatch wrote.

“Last year Russia did not do anything to improve the trading situation,” says Anders Aslund of the Peterson Institute for International Economics, citing a study by Global Trade Alert of Switzerland’s University of St Gallen, which found that Russia accounted for 30 per cent of all protectionist policies introduced in the Group of 20 in 2013, from foreign worker quotas to state subsidies.

Nevertheless, there are hopes that having Russia in the WTO could stop a trade war from becoming a feature of the Ukrainian crisis. “It’s good that Russia is a WTO member because, in times of political tensions, it’s a source of stability,” says Scott Miller, a trade policy analyst at the Center for Strategic and International Studies.

US trade officials agree and put a positive spin on US-Russia trade relations. “US. exports to Russia increased in the period following Russia’s WTO membership and US imports from Russia declined,” says one USTR official.

“In addition . . . having Russia in the rules-based WTO allows us to hold the Russian government accountable to a system of rules governing trade behaviour, and provide the means to enforce those rules,” the official adds.

But it is no wonder that talk of trade sanctions is louder in Washington than Brussels: the volumes are smaller, and with such dismay at Russia’s trade stance, there is a growing sense that the US has little to lose. “ It’s less costly to engage in symbolic acts,” says Philip Levy of the Chicago Council on Global Affairs.

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