Russian Trade Policy: Veering Off the Rules of the Road

When Russia joined the World Trade Organization in 2012, observers hoped it signaled the start of a process that would bring Russia closer into the rules-based trading system that the WTO oversees and the market-based economic principles that underpin it. But four years on, it has become increasingly clear this has not happened. In fact, Russian President Vladimir Putin has turned away from the WTO to pursue mercantilist and protectionist policies as part of misguided and costly industrial development strategies.

Two clear examples from the past year were a compulsory data localization policy that forces digital service providers to store data on Russian citizens inside the country’s borders and a discriminatory industrial policy that favored domestic pharmaceutical and medical device producers over imports. These two policies earned Russia the dubious distinction of being one of the few countries with more than one listing on the Information Technology and Innovation Foundation’s list of the top 10 worst innovation mercantilist policies of 2015.

Russia’s new Data Localization Law acts as a barrier to cross-border data flows as it prevents many data-intensive firms—whether in social media, financial, medical, or other service sectors—from transferring data to servers anywhere else in the world. As the United States Trade Representative (USTR) points out, this policy breaches Russia’s WTO accession commitments not to inhibit cross-border services, such as for cloud computing.

Many technology-driven and Internet-based firms rely on cross-border data transfers to operate as efficiently and securely as possible in international markets. Despite the fact that it makes little or no economic sense to do so, many companies, such as Apple, Google, Samsung, Uber, and E-Bay, have indicated they plan to comply by setting up their own servers or moving data to Russian data centers.

The government suggests that this law is needed to protect privacy and security. The claim is that if a nation requires data to be kept inside its physical borders, then it will somehow be more secure and governments will be better able to prosecute those who violate privacy laws. But neither assertion is true. What matters is the strength, quality, and enforcement of cybersecurity and privacy rules. Local authorities still have legal jurisdiction over companies that have Russian personal data, no matter where the data is stored, as the Information Technology and Innovation Foundation has written in, “The False Promise of Data Nationalism.”

What forced localization does accomplish, however, is raising the risk of security breaches as companies are forced to use local data service providers that may not be best-in-class. Furthermore, any notion that this policy will spur data center-related jobs and investments ignores how these limited and short-term benefits are easily outweighed by the overall economic costs from lost productivity and growth. A study by the European Centre for International Political Economy shows this: Based on 2015 figures, Russia’s data localization policies will reduce its GDP by 0.27 percent and reduce investment by $2.6 billion.

As for Russia’s mercantilist “Pharma 2020” plan to replace imports with domestic production, as well as coerce foreign companies to shift research and development work to Russia, this will raise costs for Russians and act as a further drag on growth. Pharma 2020 gives a 15 percent price preference for domestically produced pharmaceutical goods in public procurement and limits state and municipal government purchases of foreign-made medical devices. Russia has turned to these sorts of misguided industrial development policies as part of a nationalistic effort to support and protect uncompetitive domestic sectors.

Pharma 2020, and other policies like it, show that Russia is not truly committed to further liberalization and integration with the multilateral trading system, despite its commitment to join the WTO’s Agreement on Government Procurement by August 2016. Even if accession negotiations do start, it will be of small consolation to AstraZeneca, Novartis, Bayer, Abbott, and others foreign pharmaceutical firms, which have opened local facilities that would likely never have taken place without such discriminatory policies.

As USTR notes in its latest report on Russia’s WTO compliance, the benefits of having Russia in the rules-based WTO system are starting to fall away. With limited bilateral options, the United States, Europe, and others need to use the WTO’s disputes system to hold Russia accountable. Russia needs to see that to benefit from the system it needs to abide by the rules. The risk is that other countries (like China, unfortunately) see what Russia is able to get away with and copy its approach, further undermining the rules-based trading system and the open nature of the Internet.

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