President Joe Biden on Friday announced that the U.S. will seek to revoke “most favored nation” (MFN) status for Russia. If approved by Congress, the move effectively ends normal trade relations between the two countries and allows the administration to impose new tariffs and sanctions in response to the Kremlin’s invasion of Ukraine.
Biden is making the move in coordination with the Group of Seven countries (G-7) and the European Union, marking further escalation of economic pressure on Russian President Vladimir Putin.
“As Putin continues his merciless assault, the United States and our allies and partners continue to work in lockstep to ramp up the economic pressures on Putin and to further isolate Russia on the global stage,” Biden said in remarks from the White House as he outlined steps designed to “squeeze Putin and hold him even more accountable for his aggression against Ukraine.”
MFN status is given based on the non-discrimination principle enacted by 164 members of the World Trade Organization. WTO members commit to treating each other equally so everyone can benefit from lower tariffs, fewer trade barriers and higher import quotas.
Taking away MFN formally allows Western allies to increase import tariffs or impose quotas on Russian goods, or even ban them, restrict services out of the country and potentially sidestep Russian intellectual property rights. To enact it they must do so in accordance with their own national laws, which in the United States requires the approval of Congress.
In the U.S., MFN status is also referred to as permanent normal trade relations. Biden is likely to find bipartisan support in Congress as American lawmakers have already begun efforts to review and reduce trade relations with Moscow. Earlier this week a bipartisan group of lawmakers proposed legislation that if passed would ban imports of Russian energy into the United States and suspend normal trade relations with Russia and its ally, Belarus. The bill was on hold as the White House asked for more time to get allies on board.
Economic impact
Following U.S. sanctions applied to Moscow in 2014 to punish Putin for his annexation of Crimea, the vast majority of Russian exports to the U.S. are oil and gas. Washington had already announced a ban on Russian energy imports ahead of Friday’s announcement, which means stripping MFN may not affect much of the remaining bilateral trade.
The move is mostly about isolating Russia as much as possible in all international fora, Jacob Funk Kirkegaard, senior fellow at the German Marshall Fund, told VOA. “It’s not that this is ‘symbolic only’, but the effect on it is far less than U.S. oil sanctions or the financial sanctions imposed,” he said.
EU’s stripping of Russia’s MFN status will have a more significant impact as the bloc trades much more with Russia. But as the EU is also winding down energy imports from Russia, Kirkegaard pointed out, there may not be much non-energy sector left to punish. He said taking away Moscow’s MFN status also means that non-MFN tariffs will apply, which often is not much different from MFN levels.
Ending MFN would also be much more impactful if the West can galvanize more countries to join, said Claude Barfield, senior fellow at the American Enterprise Institute, speaking with VOA. The Biden administration is already pushing for a broader coalition of WTO members beyond the G-7 to announce their revocation of Russia’s MFN status.
An important question will be whether Russia retaliates by banning G-7 exports to Russia.
“If so, Russia would ironically be helping isolate itself further and reduce trade with the West,” Kirkegaard said.
In addition to stripping Moscow’s MFN status, the U.S. is also banning imports of goods from several signature sectors of the Russian economy, including seafood, vodka and diamonds. The G-7 is also trying to deny Russia the ability to borrow from leading multilateral institutions such as the International Monetary Fund and the World Bank.
Unlike the ban on Russian oil imports which affect what Americans must pay at the gas pump, the impact of further limiting trade with Moscow on the U.S. economy is likely very limited due to the small amount of trade affected.
Companies take action
Beyond steps taken by Western governments, multinational companies are also reexamining their ties with Moscow. Under pressure from stakeholders, many companies including Starbucks, McDonalds, Coca-Cola and Nike have shut down operations and ended sales. Financial entity Goldman Sachs is winding down its investments in Russia, while energy companies including Shell, BP and Exxon Mobil Corp. are reducing business ventures there.
Barfield said these actions hit the Russian psyche more than its economy as they negate Kremlin propaganda that the invasion is intended to liberate Ukraine from Nazi oppressors. “It’s a way of showing the Russian consumers that something else is involved here,” he said.
Moscow is planning retaliatory steps against companies leaving the country. Earlier this week, Putin said he would find legal ways to seize the assets of these international firms by introducing “external management.” The Russian economic ministry said it could take temporary control of some of these departing businesses.
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