would suffer the largest decreases in the same technology-intensive products that had gone up when sheltered by the artificial competitive advantage granted by the CET. Thus, this result mainly reflects the elimination of trade diversion as competitive pressures emerge from more efficient third-country suppliers of the goods for which the previous tariffs in ECU markets would drop; the tariffs Russian exporters face would be unchanged at zero.

The fact that Russia’s trade outcomes depend much more on the WTO than on the ECU follows directly from Russia’s geographic pattern of trade. Only 8 percent of Russia’s exports are destined for Belarus and Kazakhstan ( **Error! Reference source not found.** ). Even if the ECU were to expand to all 12 CIS members, it would still account for just 14 percent of Russia’s exports. Thus, Russia’s ability to be competitive in the entire world market will always be more important than its ability to take advantage of opportunities afforded by the special circumstances of the ECU. When considering non-oil exports, the role of the CIS is somewhat more important. In total, 15 percent of Russia’s non-oil exports are destined for Kazakhstan and Belarus, while the entire CIS absorbs 28 percent of Russia’s non-oil exports (Figure 2).

# **Methodology, Data and Baseline**

The analysis was based on the SMART model—a market access simulation package included in the World Integrated Trade Solution (WITS) software. As a partial equilibrium tool, SMART considers the effect of a given policy in the market that is directly affected and ignores what happens in other markets (see Annex B for a description of SMART). Consequently, to obtain simultaneous impacts of various policy reforms in different markets the estimations from each simulation must be summed up. Throughout the analysis, we decomposed trade effects into trade creation and trade diversion. Trade creation in SMART is defined as the direct increase in imports following a reduction of the tariff imposed on good _i_ from country _j_ . If the tariff is a preferential reduction then imports of good _i_ from country _j_ will increase due to the substitution away from imports of good _i_ from countries that become relatively more expensive as a result of the preferential tariff. SMART defines this as the trade diversion effect.

To perform the simulations we used the Harmonized Commodity Description and Coding System (HS) product classification at the 6-digit level using bilateral import data from United Nations Commodity Trade Statistics Database (UN Comtrade) for Russia, Belarus, and Kazakhstan. Although Russia’s bound tariff commitments are specified at the HS 10-digit level, averages are taken across HS 6-digit product groups. Whenever information on applied MFN tariff rates was missing at the 6-digit level,<sup>6</sup> MFN rates based on the average of the HS 4-digit group to which 6-digit products belong were used as proxies for missing values. Information on the applied CET and Russia’s schedule of accession commitments (tariff bindings) was taken from Shepotylo and Tarr (2012). Information on Russia's tariff preferences on imports from CIS countries and GSP beneficiaries was taken from the United Nations Conference on Trade and Development (UNCTAD) Trade Analysis and Information System (TRAINS).

The study makes use of two baselines. A baseline of 2012-20 is used for the analysis of Russia’s tariff

> 6 This is the case in 3,047 partner-product flows representing 2.87 percent of total observations in a given year.

RUSSIA’S TRADE POLICY CHALLANGES – THE WORLD BANK GROUP 5