The United States Recognized Russia as a “Country With a Non-Market Economy.” What Does It Mean
The US Department of Commerce recognized Russia as a “country with a non-market economy”, explaining this by “large-scale state intervention in economic processes.” The change in status may affect exporters from the Russian Federation, who will face an increase in anti-dumping duties.
The US Department of Commerce announced Thursday that it has changed the status of the Russian economy from “market” to “non-market.” The move is aimed at further reducing bilateral trade and isolating Russia amid ongoing geopolitical tensions, experts say.
The decision follows a significant increase in Moscow’s interference in economic activity since the beginning of last year, the ministry said. This introduced an imbalance in the work of the sphere of foreign exchange markets, labor relations and foreign investment.
Russia has joined the list of 11 countries classified by the US as non-market economies: China, Vietnam and the former Soviet Union. Russia was excluded from this list in 2002 after taking measures to liberalize the economy.
Definition of “country with a non-market economy”
The Ministry of Trade takes into account a list of factors when making a decision whether the economy of a particular state is “non-market”:
- Convertibility of the national currency
- Wage setting mechanism in the country
- Openness to foreign investment
- The degree of government control over the means of production and the allocation of resources, as well as price fixing
- Other factors that the Ministry of Commerce deems necessary to take into account
The absence of thresholds and the ability to refer to unspecified “other factors” make the criteria for “countries with non-market economies” rather vague.
Compliance of Russia with the declared criteria
The Department of Commerce has changed the status of certain countries from “non-market” to “market” but this is the first time that a reverse reclassification has been done in history, said Jeffrey Kessler, a WilmerHale lawyer and former assistant secretary for law enforcement and compliance at the Commerce Department.
“This is a sign of Russia’s gradual withdrawal from the international community,” he said. “Countries are always striving to get the status of a country with a market economy.”
The ministry also noted the tightening of Russia’s policy in the field of currency convertibility and foreign investment in response to a large-scale anti-Russian sanctions campaign by the US and the EU.
The role of the public sector in the Russian economy
The Biden administration supported the initiative of lawmakers from both parties. “Putin’s government should not receive the privileges of a market economy,” said Senator Sherrod Brown, adding that the Russian government owns up to 70% of the country’s economy and “such an economy cannot be considered a market economy.”
“The share of the state in the Russian economy according to standard approaches is average for emerging markets. From this point of view, there is nothing extraordinary here. We also do not see that the situation has changed significantly compared to 2002,” said Sofya Donets, an analyst at Renaissance Capital.
According to the Accounts Chamber, in 2019 the public sector accounted for 53.1% of GDP. For comparison, in 2000 this figure was 31.2%. More recent data, according to official information, no.
Evgeny Mironyuk, stock market expert at BCS Mir Investments, notes that state control in Russia is lower than in China, Tajikistan, Turkmenistan, Uzbekistan, Belarus, Moldova, whose economies are also considered “non-market” from the US point of view.
As Sofya Donets noted, recently in Russia there are also characteristics of a mobilization economy, in which “state regulation and state decisions in some cases can go ahead of the market.”
Currency restrictions
In early March, the Central Bank of the Russian Federation decided to limit the circulation of cash currency in the country due to Western sanctions and volatility in the financial market.
“Of course, we currently do not have full currency convertibility, there are significant restrictions on capital movements and operations in foreign currencies,” Sofya Donets commented. “Naturally, they come not only and not so much from internal decisions, but from the imposed sanctions.”
- Until March 9, 2023, the ban on the withdrawal of cash foreign currency in the amount of more than $10,000 remains.
- The ban on banks from selling euros and US dollars to citizens until April 9, 2022 continues to be in effect (also until March 9, 2022).
- Russians can withdraw no more than $10,000 from foreign currency deposits opened before March 9.
- From March 2, 2022, Russia has a ban on the export of foreign currency in excess of $10,000 per person
- Until March 31, 2023, Russian citizens can transfer no more than $1 million to accounts in foreign banks, and no more than $10,000 through money transfer systems.
Foreign investment
Over the past decades, Russia has been actively accumulating foreign capital, therefore, in order to prevent a massive withdrawal of assets from the country by foreign investors, the government has prepared a number of legislative initiatives.
- In March, Russia announced restrictions on the exit of foreign investors from assets in the country against the backdrop of a massive withdrawal of foreign companies from the Russian market.
- The Central Bank temporarily banned transactions for the sale of securities by non-residents. On September 8, the ban was relaxed - non-residents from friendly countries received access to the Russian stock market
“Recent restrictions on the free conversion of foreign currency and foreign investment contribute to the development of non-market mechanisms in the economy, but it is worth remembering that this measure is purely forced,” says Yevgeny Mironyuk. “That is, with a change in foreign economic / political factors, the “market character” of these mechanisms will be restored.”
What can this lead to
The change could affect tariffs on some Russian exports, making it difficult for Russian companies to sell steel and aluminum to the US. However, the impact will be limited given the sharp drop in U.S. imports from Russia due to sanctions and trade restrictions.
“A change in Russia’s status is unlikely to have a big impact on Russian trade, as the US accounts for only 4% of Russia’s foreign trade compared to about 40% that goes to the EU,” said Yaroslav Kabakov, director of strategy at Finam Investment Company. - The main groups of goods belong to the raw materials sector: mineral fertilizers, oils, products of primary oil refining. However, it is worth noting that mineral fertilizers, with which the anti-dumping investigation began, were withdrawn by the United States from restrictive sanctions.”
The role of this decision, however, should not be overestimated, Sofya Donets believes, referring to the fact that Russia’s status of a market economy “absolutely did not prevent” the imposition of sanctions against it either in 2014 or in 2022.
“In my opinion, this is just a formal decision, which was also reflected in the media. Now Russia’s lack of the status of a market economy will also change little. These are individual cases when it can decide something, but against the backdrop of the already implemented sanctions and the high uncertainty of their development, in my opinion, this factor is simply lost.”
Between January and September, the United States imported $12.5 billion worth of Russian goods, half as much as in the same period last year. Imports from Russia accounted for less than 0.5% of total US imports during the reporting period.
It is unlikely that at the moment any exporters of the Russian Federation will experience strong pressure, but in the future, the restoration of trade between the United States and Russia will be difficult, Yevgeny Mironyuk believes.
The status of a country with a market economy significantly complicates the introduction of anti-dumping duties against Russian exporters. Having lost this status, exporters from Russia will not be able to appeal against the actions of the United States in the event of anti-dumping measures being taken against them.
Dumping is the sale of goods abroad at a price below its fair value.
One of the goals of assigning the status of a country with a non-market economy to a state is the opportunity to increase the size of the dumping margin, that is, duties on products.
The dumping margin is the difference between the export price and the price of the good within the exporting country. However, for countries with a “non-market economy”, the American Tariff Law of 1930 establishes a special procedure for calculating it: instead of the internal price of a product in the exporting country, the regulator is required to take as a basis a surrogate price, which is determined by the cost of the factors of production of this product in third countries with market economy. Such a price will obviously be higher than the domestic one.
“US actions are aimed primarily at excluding Russia from the WTO, where Moscow could theoretically object to the US decision to deprive it of its market status. Russia’s withdrawal from the WTO will lead to the destruction of part of the supply chains of export-import operations. In this regard, it is difficult to assess the damage to the Russian economy, but new barriers will arise within the framework of Russian exports,” Yaroslav Kabakov believes.
In this context, Yevgeny Mironyuk gives the example of China, a country whose status as a “non-market economy” does not prevent it from remaining the largest trading partner of the United States. In his opinion, granting any state the status of a country with a non-market economy allows the United States itself to apply strict non-market methods of regulating international trade.
It is worth noting that the World Trade Organization (WTO) does not operate with the concept of “country with a non-market economy”, the rules of which Russia is subject to. Sofya Donets believes that Russia will be able to challenge the introduction of anti-dumping duties on its products in each individual case, if the change in the status of its economy is continued in the form of WTO decisions.
“WTO members may not react in any way to the change in the status of the Russian economy: this is not their initiative,” she concludes.
Yevgeny Miryunyuk adheres to the same position: “The consequences will be more significant if the United States, by analogy with the introduction of secondary sanctions, begins to demand the same measures against Russia from its partners. What will actually mean the principle of extraterritoriality of the embargo on Russian goods. He emphasizes, however, that so far the United States does not have enough leverage on countries that are actively developing trade with the Russian Federation.