Low cost of energy resources and labor, backed up by a recent ruble devaluation will enable Russian processing companies keep up relative competitive edge for the next three years, but hardly more, says a report entitled “Challenges to competition in the context of Russia’s membership in the World Trade Organization” and prepared by the World Trade Center Moscow (WTC). If no qualitative shifts are made in the nation’s economic and financial policies, the year, when most safeguards approved by the WTO expire, will become “a moment of truth” for many businesses.

A collection of analytical articles entitled “Challenges to competition in the context of Russia’s membership in the World Trade Organization” was presented at the St. Petersburg International Economic Forum (SPIEF). The WTC analyzes in depth competitiveness of Russia’s key sectors in the domestic and external markets, reviews institutional and structural measures to enhance competitiveness in the context of the country’s WTO membership, and also regional and national experiences in application of such measures.

The conclusions made by the authors of the report are in many ways unfavorable. Relatively cheap primary production factors — labor and energy — that ensured quick economic growth in the early 2000s have been de facto exhausted. In 2014, workforce productivity across the Russian economy was on average 40% of the level achieved in OECD countries (44% in the metallurgic sector, 25% in machine-building), whereas average pay was 40% of what developed countries have. In certain sectors (e.g. in machine-building), unit labor costs have exceeded the level of moderately developed East European countries — Russia’s key competitors aspiring to the same international investments. The ruble devaluation helped slow down the dynamics, which reduced costs in dollar terms by 43% earlier in 2015. But demographic woes that the country is going to confront in the near future will drive costs up again in a major way, expect the authors of the study.

Similar situation is observed in the energy resource sector. While internal gas and electricity prices have been growing faster in Russia that in the EU and the U.S. since 2009, they still remain the lowest among BRICS and OECD countries. Unit energy costs in the basic industrial sectors remains several times as high as in the U.S. Compared to the average level of OECD countries, Russia produces 40% less added value per 1 kW in agriculture and 92% less in the pulp and paper industry. Just like in the case of labor costs, industrialists were able to improve dollar-denominated competitive edge extensively because of the devaluation. But that effect, with the real effective ruble rate strengthening and tariffs outperforming inflation, will make industrialists lose that edge in three years, analysts point out.

However, a weak ruble does not boost upgrade of production facilities, which has been virtually halted now because of high internal interest rates and lack of access to external loans. It will be impossible to lower rates to an acceptable level in the foreseeable future, and the reason for that is not so much significant inflation but high loan risks and lack of proper competition between banks.

In that environment, relative competitive positions of the Russian processing industries remain low in the global market (See the chart), and in the domestic market, “the competitive failure" is observed in machine-building (imports account for 62%), manufacture of clothes and shoes (70%), electronic and optic equipment (53%). Only the food industry holds a rather firm ground (20% of imports). However, in 2018 already, level of tariff protection in agriculture and industry will have to be slashed by half on an average, according to an agreement with the WTO, which will become “a moment of truth for many enterprises.” De facto, the government has three years to tune quality tools of financial, trade and budget backing for the economy, experts conclude.