The Wall Street Journal
April 06, 2012

U.S. Risks Missing Boom in Russia

Russia is on the cusp of joining the World Trade Organization after a two-decade journey, a landmark move to integrate the emerging economy into the international trading system.

There's one problem for U.S. companies: They may be left out of the parade.

Election-year sparring could keep the U.S. from lifting long-standing restrictions on trade with Russia by the time the country joins the WTO this summer. As a result, U.S. companies wouldn't receive the same legal protections against Russian tariffs and other hurdles to business that companies from other countries would gain, putting the U.S. businesses at a competitive disadvantage, executives say.

The largest business groups in the U.S., including the U.S. Chamber of Commerce, say passing legislation to lift the U.S. restrictions is their No. 1 trade goal this year. Dozens of smaller organizations, including the National Chicken Council and the Toy Industry Association, are lobbying lawmakers too.

The U.S. will "stick out like a sore thumb" if it doesn't remove the trade restrictions, says Richard Holwill, vice president of public policy at Amway Corp. "All it does is hurt American companies." The direct-sales company is trying to ramp up sales of nutrition and cosmetics products in Russia.

The stakes are high for U.S. companies, which are eager for new markets amid slow growth in advanced economies like the U.S. and Europe. U.S. exports of goods and services to Russia could double over the next five years from $9 billion in 2010 if U.S. companies get full access to the market, according to economists at the Peterson Institute for International Economics.

At issue is the Jackson-Vanik amendment, a Cold War measure that restricts U.S. trade relations with nations that limit emigration. Congress passed the law in 1974 to ensure that Jews could leave the Soviet Union freely. That hasn't been a problem since the Soviet Union collapsed, and U.S. administrations have waived the measure's restrictions annually for Russia since the early 1990s.

U.S. companies are counting on WTO protections against legal or regulatory barriers in Russia's markets.

But unless the U.S. repeals Jackson-Vanik permanently for Russia—annual waivers aren't sufficient—Moscow still could maintain high tariffs on U.S. products and keep other hurdles against U.S. companies that want access to Russia's 140 million consumers. The WTO procedures also would give the U.S. a forum to address customs or intellectual-property disputes. In recent years, U.S. companies have turned to the WTO to rule on trade disputes with China over chicken, tires and rare-earth minerals.

At Amway, Russia accounted for about $550 million of the company's $10.9 billion in revenue last year. The Ada, Mich., company lost sales of some U.S.-made cosmetics in recent years when Russia imposed bans, a move that could be challenged under WTO rules after Russia joins the trade group.

Opponents of granting Russia status as a full trade partner "fail to understand it is protection for U.S. companies when we let Russia into the WTO," says Mr. Holwill, of Amway. "We will be seriously disadvantaged" if the U.S. stands alone.

President Barack Obama has called on Congress to repeal Jackson-Vanik, even though his administration has sparred with Russia recently over Syria and Iran.

His Russia policies have drawn criticism from the leading Republican president contender, former Massachusetts Gov. Mitt Romney, who last week called Russia "our No. 1 geopolitical foe."

Sen. Jon Kyl (R., Ariz.) said at a recent hearing that repeal of Jackson-Vanik "isn't a slam dunk" given the nation's track record on corruption and human rights. "Russia's blatant disregard for human rights and the rule of law is every bit as relevant today as it was decades ago," he said.

Russian officials dispute the allegations and maintain that U.S. officials need to move past their memories of Russia from the Cold War.

Sen. Kyl and other top Republicans are supporting legislation introduced by Sen. Ben Cardin (D., Md.) that is designed to punish Russian officials accused of human-rights violations. The bill was inspired by Sergei Magnitsky, a lawyer for investment firm Hermitage Capital Management Ltd. who died in a Russian prison in 2009 after accusing government officials of fraud.

Repealing Jackson-Vanik without replacing it with human-rights legislation would be "unconscionable," says Hermitage Chief Executive William Browder, once one of the largest foreign investors in Russia.

The Obama administration says it believes human-rights concerns should be addressed separately from the trade measure.

The tensions likely will push the trade bill past the summer—after Russia has joined the WTO—and into the lame-duck session of Congress in November. That would give non-U.S. companies a head start in the country.

"The U.S. voice is going to be very weak and in some cases absent" without the repeal of Jackson-Vanik, says Trevor Gunn, senior director of international relations forMedtronic Inc., a medical-device manufacturer. The Fridley, Minn., company entered Russia seven years ago and is fighting European rivals for business in Russia's fast-growing health-care market.

For executives at Caterpillar Inc., the trade battle has rekindled memories of the early 1980s, when the construction-equipment manufacturer held 85% of the Russian market. U.S. sanctions on Russia at the time forced the Peoria, Ill., company out of the country, handing its leading position to a Japanese rival.

"The U.S. government was purposely ceding an important export market and, in effect, turning it over to your top competitor," says William Lane, Caterpillar's Washington director. Russia has become one of Caterpillar's top 10 markets in recent years but should be even larger, he says, given the country's huge oil and gas resources.

"Our foreign competitors are eager to take advantage of any U.S. missteps," Mr. Lane says. "Our hope is that people understand the vast potential of the Russian marketplace and why it's important for the U.S. to be on an equal footing."

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