The U.S. Commerce Department recently made a decision to classify Russia as a non-market economy, after last year finding that it was a market economy. I have posted the executive summary of the Commerce memo below (the full memo is 101 pages!).
When reading through the Commerce reasoning, it strikes me that maybe having just two all or nothing categories -- market economy and non-market economy -- misses some nuance here. Should there be multiple categories? Could there be a neutral body that assigns a rating based on degree of market orientation?
Also, could governments agree to WTO rules that guide national decision-making on which countries are non-market economies?
I suspect the answers to both are that it is not politically possible, but I see potential value in both.
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Executive Summary of Commerce Department Memo on "Reconsideration of Russia’s Status as a Market Economy Country"
The Department of Commerce (Commerce) finds that the market-oriented economic reforms that have unfolded in the Russian Federation (Russia) since Commerce’s 2021 Review of Russia’s Status as a Market Economy Country (2021 Review) have notably and significantly backtracked. At the time of the 2021 Review, which captured economic developments that unfolded between 2002 and 2021, the growth in Russian government involvement in its economy brought the country close to the threshold of non-market economy (NME) status pursuant to the standard statutory criteria. Russia’s market-oriented economic reforms have backtracked even further since the publication of the 2021 Review, however. Accordingly, Commerce finds that Russia can no longer be considered a market economy (ME) country and should therefore be reclassified as an NME country for purposes of U.S. antidumping duty (AD) law.
Commerce’s new designation of Russia as an NME country is based on evidence of expanding government activity that has both widened and deepened its impact on the domestic market. As prices and costs in Russia are no longer predictably set by free-forming supply and demand factors, the accompanying economic distortions render any cost or sales information that Commerce could use for AD investigations unrepresentative of market-determined outcomes. Despite the backtracking in certain areas of economic reform, Commerce’s 2021 Review ultimately found that Russia should remain an ME country for purposes of U.S. AD law. This was justified by the fact that the backtracking of reforms at the time was at least partially offset by some market-oriented measures, such as the lifting of currency convertibility restrictions and the general improvements Russia made with respect to foreign investment conditions.
Following the publication of the 2021 Review and the launch of Russia’s war in Ukraine, Russia’s prior liberalization initiatives on currency convertibility and foreign investment have notably reversed course. Moreover, the backtracking of some economic reforms identified by Commerce in 2021 have continued unabated. This backtracking has included a demonstrable aggrandizement in government control over the economy; an increase in government control over prices; a deterioration in rights associated with freedom of information; and the ability of workers to bargain freely with management for wages. When considered in totality, the developments that have unfolded since the publication of the 2021 Review have indicated that the Government of Russia (GOR) has increased its control and influence over Russia’s economy. As such, Commerce now determines that for purposes of U.S. AD law, Russia should no longer be considered an ME country.
With regard to the first of the six statutory conditions that Commerce uses to assess market economy status for purposes of U.S. AD law (hereafter referred to as “Factor One”), Commerce determines that, since the 2021 Review, the Russian ruble has no longer been freely convertible. Since 2021, the GOR has implemented numerous capital controls and currency conversion requirements (e.g., the requirement that purchases of natural gas exports to certain countries be ruble-denominated) and intervened in the foreign exchange markets. All these measures have had the effect of stimulating demand for the ruble, which has in turn appreciated the value of the Russian currency. The appreciated currency helps the GOR maximize its earnings on Russia’s top exports, oil and gas, as these commodities are primarily owned by Russian state-invested enterprises (SIEs). As such, the earnings the SIEs receive on energy exports that are associated with an appreciated currency have a direct and substantive effect on the GOR’s fiscal revenues, which is especially important now given Russia’s military incursion into Ukraine.
While it is true that governments of market economies, including the United States, have intervened in foreign exchange rate markets to influence the value of their currencies, such measures are very rare and typically reserved for stabilizing economic conditions following external economic shocks. Moreover, the intensity and combination of measures the GOR has taken to influence the value of its currency (e.g., foreign reserve intervention, surges in interest rates, and the requirement that gas exports be ruble-denominated for certain countries), has been dramatic and possibly unprecedented. These measures were taken following the sudden fall in the ruble’s value, when fleeing foreign investment from Russia after its invasion into Ukraine put downward pressure on the currency. To stem the effects of a depreciating currency, the GOR introduced the above-mentioned capital controls. These measures initially offset the effects of currency depreciation, but ultimately overcompensated for them as the ruble is now traded above its pre-war levels.
With regard to Factor Two, since the publication of the 2021 Review, Russia’s Labor Code has been amended to allow the GOR to set terms and conditions (e.g., required overtime) of public and private sector workers. This provision indicates that the GOR has increased its legal ability to control the labor market on a firm-specific basis and has therefore constrained the ability of workers to bargain freely with management regarding wages. Concerning developments in the economy, Commerce has not yet observed notable developments that would influence the ability of workers to bargain freely for wages in Russia since the 2021 Review was published.
With respect to Factor Three, the extent to which joint ventures and foreign investments are permitted in Russia, Commerce has observed a marked worsening of conditions since the 2021 Review. Specifically, since that time, the GOR has codified restrictions on company investments from countries deemed “unfriendly” by the GOR and has prohibited the sale of Russian company shares through depository receipts. In addition to formally restricting foreign investment, the GOR has also implemented laws which have deterred foreign investment, including a law that has legalized intellectual property theft of inventions from “unfriendly countries.” As a result, many foreign-owned companies have left Russia since its 2022 invasion into Ukraine, either permanently or temporarily. While some of the largest reductions in FDI have been in the energy sector, others have been derived from autos, aviation, big tech, consulting, finance, food and beverage, hospitality, industrial production, manufacturing, and other sectors.
Concerning Factor Four, the GOR has a high degree of ownership and control in the Russian economy. Since the publication of the 2021 Review, the GOR has drafted a law allowing for government expropriation and nationalization of foreign enterprises that left Russia, and these practices have already materialized. Moreover, the GOR continues to use SIEs to pursue economic and political objectives. For example, the GOR requires Gazprom, a Russian SIE, to stem natural gas supplies to countries that refuse to comply with the GOR’s mandates on ruble-denominated payments. In addition, the choice the GOR has made to launch and sustain its war against Ukraine, despite domestic firm-level concerns about effects on their global outreach, is suggestive that the economic priorities of the private sector are subservient to the GOR’s political objectives.
It should be noted that the extent of government ownership and control within the Russian economy at the time of the 2021 Review were significant and did not weigh favorably in Commerce’s analysis of market conditions at the time. In 2021, Commerce determined that the size and growth of the state sector since the 2002 Review hindered Russian economic growth and opportunities, and represented signs of an encroaching GOR footprint in economic activity that warranted continual monitoring by Commerce.
With respect to Factor Five, evidence suggests that the extent of government control over price setting in Russia has continued to grow since the 2021 Review. This is exemplified by the dichotomy between export and domestic natural gas prices, which the Russian government is known to influence. In addition, the GOR has directed steel companies to lower domestic steel prices.
The growing GOR influence over prices and resource allocation on its domestic market was of central concern to Commerce in its 2021 Review. As highlighted in that memorandum, Commerce found that state ownership in the banking sector was not only high in Russia but growing. Specifically, Commerce found that government-owned banking sector assets as a share of total banking sector assets grew from an estimated 35 to 40 percent range in 2002 to nearly 75 percent as of 2020. Given the special role of the banking sector and its effect on lending and borrowing conditions that help allocate resources, this large and growing increase in government ownership in the banking sector had noteworthy economy-wide ripple effects.
The increasing role of GOR industrial policy and strategic planning was another important source of concern that Commerce identified in its 2021 Review. With respect to such issues, market-determined outcomes had begun to give way to government interests, including those associated with GOR support for certain “winner” firms at its discretion. While some price liberalization measures did transpire in the natural gas, electricity, and rail cargo transportation industries, the same areas of the economy were also subject to a greater degree of government price controls. Such GOR practices remain important to this analysis since the pricing decisions of goods and services in upstream industries affect market conditions across a wide variety of sectors in the Russian economy.
Concerning Factor Six, Commerce has found that all elements addressed in the 2021 Review, including corruption, the rule of law (including intellectual property right protection), and freedom of information have continued to worsen in Russia. Quantitative measurements published by the World Bank, Transparency International, and the World Justice Project indicate that corruption and the rule of law have deteriorated since the period evaluated in the 2021 Review. Moreover, new legislation has worsened protection against intellectual property right theft in Russia as it relates to patented inventions from “unfriendly” countries. A current draft law, if passed, will legalize the expropriation and nationalization of foreign firms that have left Russia. Finally, Russia was expelled from the Council of Europe for its violation of the council’s principles of rule of law connected to its aggression against Ukraine.
Since the 2021 Review, rights associated with freedom of information have also markedly deteriorated. Recently, the GOR has passed laws which criminalize independent journalism in Russia for reporting information that contradicts the government’s version of events. Independent reporting on Russia’s invasion of Ukraine is punishable by up to fifteen years in prison. Market economic conditions are ultimately dependent upon the free and unrestrained access to information. As such, deteriorating access to such information in Russia is impeding market actors from making informed decisions.
Given the deteriorating market conditions since the 2021 Review summarized above and
described in the body of this memorandum, Commerce determines that Russia has continued to backtrack on its reform efforts, in some areas more than others. While offsetting measures helped Russia maintain ME status in the last review conducted by Commerce, the discontinuation of those offsetting measures, coupled with exacerbating government influence over its economy, have all been factored into Commerce’s new determination that Russia should be considered an NME country for purposes of U.S. AD law.
