BRUSSELS—Russia's membership in the World Trade Organization will be a central item on the agenda when Prime Minister Vladimir Putin sits down with European Union leaders in Brussels on Thursday—but the country is still seen facing a rocky road to secure entry.
Mr. Putin will tell the EU "that Russia hopes to finalize WTO accession in the next few months, and certainly by the end of 2011," Vladimir Chizhov, ambassador to the EU, told reporters Tuesday.
However, despite their formal declarations of optimism about its prospects, business leaders and trade officials from the U.S., EU and the WTO say Russia's entry is far from a foregone conclusion.
If it does get in, it could also struggle to meet WTO requirements, they say. Among the problems: a complex customs union with Kazakhstan and Belarus, steep tariffs, controversies over how to value imported goods, and corruption.
"The business community is still skeptical," says Anka Schild, an analyst with Business Europe, the Brussels-based alliance of industry lobbies.
The issue is of big importance to global trade because Russia is the only major economy in the world not bound by the WTO's limits on import tariffs and its legal system for adjudicating trade disputes.
With a gross domestic product of $1.48 trillion in 2010 and a trade surplus of $137 billion, the world's biggest after China and Germany, Russia would be a more attractive market if it were more open, say Western officials.
Formally, Russia has been a candidate since the WTO's inception in 1995. However, Moscow has never pushed hard to join, because its biggest exports, oil and gas, are tariff-free, and cutting import tariffs could threaten jobs and factories.
That has changed, Russian officials say, because the country badly needs to integrate more with the global economy. Foreign investors want more guarantees. "Without WTO access, modernization and innovation will be very difficult," Deputy Prime Minister Igor Shuvalov said in Brussels last year.
Foreign companies are enthusiastic. Consumer-goods giant Procter & Gamble Co. has four plants and 4,000 employees in Russia, and imports raw materials and ingredients. "Market barriers would be substantially lower," says Scott Miller, the company's director of global trade affairs. Tariffs would also come down and be more "predictable," he says.
Another winner: Boeing Co. Russia is expected to buy more than 1,000 new commercial aircraft over the next two decades if it joins, as tariffs on wide-body commercial aircraft would fall to 7.5% from 20%.
Political issues remain. Each one of the WTO's 153 members has a veto. For example, Georgia, which fought a 2008 war with Russia, could block membership, although it has said it won't. Other complications: The U.S. Congress hasn't repealed a 1974 law imposing higher tariffs on Russia for restrictive emigration policies on Jews and Moscow must eliminate fees on foreign airplanes flying over Siberia.
Once in, WTO members have to comply with a voluminous rule book. China, which joined in 2001, "was far ahead of Russia at the same stage in its accession," says an EU official.
After the financial crisis, Russia increased tariffs on a range of factory-made goods. The tariffs are costing EU companies $820 million a year, according to Business Europe.
Russian diplomats say they will reduce the tariffs, but only after the country joins. Until then, "Russia is by no means obliged to bind its import tariff duties," the Russian Trade Ministry wrote in response to questions from The Wall Street Journal.
Before 2009, Russia was the U.S.'s second-biggest export market for big combine harvesters, trailing only Canada. In 2009, the tariff was hiked to 25% from 5%. U.S. exports of combine harvesters fell to $2.9 million in the first 10 months of 2010 from $93.3 million in 2008. The big beneficiary: BelAZ, a Belarussian combine manufacturer.
Western companies also complain that Russian customs overbill them on tariffs.
Russian officials say importers cheat by underestimating the value of their shipments. Two-thirds of customs violations, "are accounted for by fraudulent customs declarations that indicate lower customs value of imported goods," the Russian Trade Ministry said.
In response, customs sometimes sets the value of products higher than listed, so they can charge a higher tariff—setting off regular conflict with importers. "There are court disputes over this all the time," says Vladimir Tchikine, a Moscow-based trade lawyer with Berwin Leighton Paisner LLP.
Since Russia started a customs union with Belarus and Kazakhstan, two other non-WTO countries, not all the tariffs, rules and regulations have been harmonized among the three countries, say EU and U.S. trade officials. That means products can be routed among these countries to minimize tariffs.
Russia also caps the quantity of some imports to protect domestic producers. On Nov. 11, Livingston, N.J.-based Myperfectcolor LLC, a family-owned business, received a $1,500 order from a U.S. State Department contractor based in Russia for four small barrels of gray and white-tinged spray paint.
Director Jason Shaw shipped the paint via FedEx on Dec. 10. It was rejected because it exceeded a limit on paint imports. "This is the first international trade issue we've had," says the 42-year-old.
The government contractor who is Mr. Shaw's customer confirmed the latter's account of the event. FedEx declined to comment, as did Russian trade officials.
"A lot of rules are interpreted in arbitrary fashion by Russian authorities," says an EU official.
Russia ranked 154th out of 178 countries surveyed in Transparency International's 2010 corruption perceptions index. "Exporting to Russia is legally simple," says Mr. Tchikine. "It's in the application of the rules that you can sometimes encounter problems."
If Russia wins entry and doesn't fix these problems, trade partners could win the right to hit its exports with retaliatory sanctions. "You want to clean up these problems before you get in," says Iain MacVay, a London-based trade lawyer with Steptoe Johnson LLP. That could cause delays.
Still, Western businesses say WTO membership for Russia remains compelling. "Isn't it better to have [Russia] attached to these rules and constrained by this system?" asks Randi Levinas, executive president of the Russia-U.S. Business Council.
Write to John W. Miller at john.miller@dowjones.com
european union leaders, industry lobbies, vladimir putin, formal declarations, import tariffs, wto requirements, mr putin, customs union, world trade organization, business europe, deputy prime minister, western officials, foregone conclusion, attractive market, foreign investors, trade officials, russian officials, global economy, trade disputes, rocky road
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